Questions to ask to help your business manage prescription drug costs

Federal regulators and states are scrutinizing the opaque business practices of pharmacy-benefit managers (PBMs) like never before.

That's because there's a growing concern these middlemen of the pharmaceutical supply chain are fueling our nation's runaway drug costs.

They sit at the center of a complex web of stakeholders, directly negotiating with drug companies, wholesalers, pharmacies, insurers and employers.

While many smaller PBMs use this position to bring down the cost of drugs, more than 70% of the marketplace is dominated by three large companies. And these companies are increasingly on the hot seat.

The Federal Trade Commission was considering an investigation into PBMs' business practices as recently as last month. That probe appears to be stalled for now, but some of the most egregious, self-dealing tactics used by PBMs continue to be debated by state legislatures and courts.

Michigan, for example, just passed a PBM reform law to increase drug pricing transparency. And Ohio's Medicaid department is auditing the pharmacy billing practices used by PBMs in that state.

Any savvy employers that offer health benefits to employees would be wise to review its pharmacy benefits with similar attention to detail. They'll likely determine all that glitters is not gold.

Here are four questions that business owners, benefits managers, human resource officers and financial officers should use to evaluate the performance and value of their pharmacy benefits management:

Are the pharmacy-benefit partners truly objective? Ask the PBM for the total revenue they are receiving from drug manufacturers on your company's account and how much of that will be returned to your company. It is common for PBMs to keep undisclosed portions of the earnings for themselves.

Also ask the PBM whether they pay pharmacies a different amount than you're being billed. This is called spread pricing, a lucrative tactic that more than doubled PBMs' income between 2014 and 2016, according to Pew Charitable Trust.

Michigan's recent legislation outlawed this practice among PBMs. Usually, spread is not fully disclosed either. But if there's a spread, you should know how much it is and where it goes.

If you're working with brokers or consultants, ask them if they have any financial relationships with a PBM or groups of PBMs. It is not uncommon for PBMs to incentivize brokers for placement of business.

When a formulary is designed to earn high rebates, it is pursuing the use of high-cost brand-name drugs instead of lower-cost generic drugs. Although rebates sound attractive, the overall expense of using costly brand-name drugs far exceeds the value of any rebates earned.

Ask the PBM if the formulary's most expensive drugs earn high rebates, what those drugs are costing the plan net of the rebates and if there are lower cost alternatives that are required to be used first.

Remember, if your company is guaranteed high rebates, that means high-cost drugs will be dispensed.

What's being done to ensure high-cost drugs are being dispensed only when medically necessary? Ask the PBM about generic-use rates and prior authorization approval rates. Often PBMs will quickly approve high-cost drugs, which typically benefit their bottom line more than their customers. Generic-use rates — sometimes referred to as GURs — should be at least 90%.

According to our data, a 1% increase in generic usage reduces per-member per-month pharmacy costs by 5%. Applied across a company with 50, 100 or 1,000 employees, this figure helps illustrate why rebates aren't nearly as valuable as they might appear at face value.