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One of my mentors often said price is irrelevant. He said he would sell anything for any price as long as he could define the terms of the deal. During this conversation today with Scott Haas about PBMs, that quote was playing in my head like an earworm.

I\u2019m henceforth gonna struggle with the term rebate to define dollars that the PBM gets back from Pharma, because, according to my guest in this healthcare podcast Scott Haas, it turns out \u201crebates\u201d comprise only about 40% of those back-end dollars that some PBMs manage to score from pharma manufacturers. I don\u2019t have any insight really into this, but Scott Haas certainly does\u2014and this is the average that he has seen in his work and that we\u2019re going to dig into today. But in sum \u2026 wow! Let me just repeat that a mere 40 cents on the dollar of the gross amount that PBMs take in \u201crebates\u201d from Pharma these days winds up going back to plan sponsors, even plan sponsors who are getting \u201c100% of the rebates.\u201d

If you didn\u2019t understand what I just said, no worries. I\u2019m gonna explain it right now. If you did and you know the why behind all of this also, you could probably skip ahead about five minutes.

Here\u2019s the backstory on this whole rebate fandango. Let\u2019s start with part one of what is a two-part transaction.

So, part one: the deal between pharma manufacturers and PBMs. In general, a pharma manufacturer signs a deal with a PBM to give back whatever percentage of their gross sales revenue to the PBM at the end of the year, say. It\u2019s along the same lines as a cash-back coupon for the PBM.

Why would a pharma company be up for giving cash back like this? Well, to get on a PBM\u2019s formulary, giving cash back is like the price of admission. PBMs have a lot of leverage, after all\u2014at least the big ones. They control access to millions and millions of patient lives. So, if Pharma wants their drug to be accessible to those millions and millions of lives, they have to play the cash-back game, otherwise known as the rebate game. They have to agree to give back to the PBM a certain amount of cash on the back end.

So, PBM pays Pharma\u2019s list price up front\u2014that\u2019s the gross amount paid, based on the list price of the drug\u2014and then after all the cash back gets toted up at the end of the year, there\u2019ll be a net price. List price or gross price minus the cash back equals net price. It\u2019s this net price that\u2019s the true kind of final price which the pharma company gets paid per script by said PBM at the end of the day.

These days, most everybody pretty much knows that PBMs are getting these so-called rebates\u2014this cash back from pharma companies that I just explained. And it\u2019s pretty common knowledge the so-called gross-to-net bubble (the gross-to-net dollar amount) is pretty huge, meaning the rebate or cash-back amount is pretty huge. And many have also noticed that the gross-to-net dollar amounts seem to be growing bigger and bigger every year. I mean, for one insulin manufacturer, consider this: Their list price, their gross price, is $350 per script. And their net price after cash back/rebates was $52 this past year. Wait ... what? After all the cash back to the PBM, the insulin manufacturer got paid 86% less than their list price\u2014$350 went down to $52 per prescription. The PBM vacuumed up 86% of the dough for every script written for this particular brand of insulin. \xa0

OK \u2026 so, say Pharma gives $100 back to the PBM based on the terms of their deal. Call that part one of this example transaction.

Here\u2019s part two: the deal between PBMs and health plans or self-insured employers. Health plans and self-insured employers are customers of the PBM. They hire PBMs to manage the pharmacy benefits for their members or employees.

So, because everybody knows this whole rebate thing is going on, as part of the contracts that the PBMs put in place with their customers (meaning the health plans or employers), the PBMs tell their customers that they\u2019re going to give 100% of the rebates back to the plan/employer. So, you\u2019d think that if the pharma manufacturer paid $100 to the PBM, that the customers of the PBM (the plan sponsors) would get the $100 back then, right? The PBM would pass on 100% of the savings, as it were, if they\u2019re saying that they\u2019re gonna give 100% of the rebates. I mean, if this is actually true, that $100 in and $100 out, then the PBM is potentially performing a useful service, right? They\u2019re lowering drug costs for their customer, the plan sponsors for their members and employees.

Except \u2026 turns out, not so much. Because what is a rebate, really? A rebate can be anything the PBM defines as a rebate. And it turns out that, on average, as I said before, according to those in the know, something like $60 of that $100 is not a rebate. It\u2019s an administration fee. Or a data fee. Or an education fee. A clinical program fee. Some other name that is not rebate.

As my guest Scott Haas says, the term rebate is meaningless because it can mean whatever the PBM wants it to mean. It\u2019s like inconceivable from The Princess Bride. I do not think that word rebate means what you think it means. \xa0

Now it is a tangled web we weave here, and for more on why I say that, listen to the episode with Chris Sloan (Encore! EP216) entitled \u201cHow Medicare Part D Plans Became Addicted to Drug Rebates.\u201d There\u2019s also a show with Pramod John (EP353) where we dig into, specifically, specialty drugs and rebating and so-called rebate walls. \xa0

But net net, all of this probably myopic focus on rebates means that you have to keep an eagle eye out for so-called exclusions in contracts if you are a plan sponsor. So, what are exclusions?

This is that whole thing where some cheap generic is excluded from a PBM formulary while some expensive brand for the same condition is on formulary. Why would a cheap generic be excluded from a PBM formulary? Simple. Cheap generics don\u2019t have rebates. PBMs lose a lot of money when some high-priced specialty drug, for example, goes generic. They might have made thousands of dollars per script on that high-priced brand by collecting its rebate. Think about that insulin example. The rebate is 86% of the cost of the drug. And everybody wonders why some cheap generic insulin or biosimilar or whatever isn\u2019t on formulary. It is not a mystery when you\u2019re dealing with for-profit enterprises built around a model of revenue maximization.

So, given all this, what\u2019s my guest Scott Haas\u2019s bottom-line advice in this whole thing? If you\u2019re a health plan or employer and you\u2019re trying to negotiate a PBM contract where your spend is predictable and your contracted price promises have any meaning whatsoever, Scott Haas\u2019s advice is, you have to ensure that the contract defines the actual prices for the drugs in the contract. With absolute numbers. Not percentages off or weird formulas or the empty promise of getting an AWP or a WAC (which means average wholesale price or wholesale acquisition cost) or any of the other various acronyms for some drug pricing schema. All of these are basically shorthand for \u201cthis price could change at any moment.\u201d

There\u2019s a reason in-the-know people say AWP stands for \u201cAin\u2019t what\u2019s paid,\u201d meaning ain\u2019t what\u2019s ultimately going to be paid by plan sponsors. What is necessary in PBM contracts is the final price\u2014that number. Some digits with a dollar sign in front of them and a \u201cper unit\u201d after them. No acronyms and no percentage signs.

Whoever gets to define the terms ultimately controls the price. So, get the price up front.

As mentioned several times already, I am talking to Scott Haas, who is a senior VP over at USI Insurance Services. He\u2019s speaking today from the perspective of a plan sponsor, meaning from the point of view of a health plan, including those health plans managed by and paid for by a self-insured employer and their employees.

For more information on PBMs and how drugs get adjudicated, listen to the show with AJ Loiacono (Encore! EP231), which was one of the most popular episodes over here at Relentless Health Value. Somebody on a LinkedIn post the other day commented on how much she appreciated AJ Loiacono\u2019s frank assessment of things and how she would love to go to a meeting with more people similarly telling it like it is. That\u2019s pretty much what we aim to do at every episode over here at Relentless Health Value, and AJ nails it on that objective for sure in this episode. \xa0

One last thing, also on the show: Scott Haas brings up GPOs that the Big Three PBMs have been spinning up to aggregate and maximize all of those rebates that we just talked about. I discuss this exact topic at some length in another incredibly popular episode with Mike Schneider (Encore! EP288). \xa0

Scott Haas has over 38 years of employee benefits experience. His background includes the development and validation of care management programs; prescription benefit management solutions; provider network evaluation, valuation, and negotiation; and underwriting.

Scott started and operationalized a third-party administrator (TPA) and a pharmacy benefit manager platform from scratch. He has worked in the arena of alternative funding for most of his career. Scott\u2019s primary focus is in the area of alternative delivery and financing of healthcare other than fee for service, along with prescription benefit and healthcare risk management consulting.

Scott has held officer-level positions within Blues plans and TPAs as vice president of sales and marketing, vice president of underwriting, and president. Scott has also served as a trustee for both union and non-union health and welfare and pension plans.

Scott frequently shares his consulting expertise speaking at national events hosted by organizations such as Health Rosetta, the International Foundation of Employee Benefits, the Health and Welfare Plan Management Conference, the Western Pension and Benefits Conference, and the Self-Insurance Institute of America (SIIA). Scott has authored and coauthored articles on various topics over his career.

Scott earned his bachelor\u2019s degree in business administration and economics from the University of Nebraska at Kearney. Scott also holds Chartered Life Underwriter (CLU) and Registered Health Underwriter (RHU) designations.

10:29 What\u2019s the major flaw with the buyer-seller relationship between plan sponsors and PBMs?
12:04 What are the five things that need to be considered in order to get a fair price from a PBM?
13:16 Why does using average wholesale price cause problems for plan sponsors?
15:05 What does it mean to put the network risk on the PBM?
17:10 What\u2019s happening with drugs moving from specialty brand to specialty generic?
19:14 \u201cA generic is a generic; in our world, it\u2019s binary.\u201d
23:31 \u201cThe term 100% of rebates is really irrelevant.\u201d
23:54 What does it mean to have a minimum guarantee in drug rebates?
26:39 \u201cWhen you do a line-item assessment \u2026 is it producing an optimal result in comparison to competitively achieved \u2026 pricing for generics \u2026 and for specialty?\u201d
27:52 \u201cPlan sponsors need to grow a backbone.\u201d
28:36 EP342 with Christin Deacon.
29:05 Why do you need to understand your consultant\u2019s process as a plan sponsor?
29:30 Why do you need to understand formulary exclusions as a plan sponsor?
29:41 Why is it important to create a more equal PBM contract?
30:52 \u201cRebates inure to the benefit of the plan sponsor; they don\u2019t necessarily benefit the consumer.\u201d
31:45 What does Scott do at USI?

Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

What\u2019s the major flaw with the buyer-seller relationship between plan sponsors and PBMs? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

What are the five things that need to be considered in order to get a fair price from a PBM? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

Why does using average wholesale price cause problems for plan sponsors? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

What does it mean to put the network risk on the PBM? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

What\u2019s happening with drugs moving from specialty brand to specialty generic? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

\u201cA generic is a generic; in our world, it\u2019s binary.\u201d Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

\u201cThe term 100% of rebates is really irrelevant.\u201d Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

What does it mean to have a minimum guarantee in drug rebates? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

\u201cWhen you do a line-item assessment \u2026 is it producing an optimal result in comparison to competitively achieved \u2026 pricing for generics \u2026 and for specialty?\u201d Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

\u201cPlan sponsors need to grow a backbone.\u201d Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

Why do you need to understand your consultant\u2019s process as a plan sponsor? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

Why do you need to understand formulary exclusions as a plan sponsor? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

Why is it important to create a more equal PBM contract? Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

\u201cRebates inure to the benefit of the plan sponsor; they don\u2019t necessarily benefit the consumer.\u201d Scott Haas of @USIIns discusses #PBMs and #drugrebates on our #healthcarepodcast. #healthcare #podcast

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