Maximize Pricing Leverage Using a Comprehensive PBM Contract Strategy

By Steve Baumgardner
Tue, Aug, 27, 2019

Health plans that implement a long-term PBM contracting strategy are very successful at maximizing leverage and securing favorable pricing throughout the entire term of a PBM contract life cycle. PBMs negotiate every day. PBMs know when they have leverage and maximize this knowledge to their advantage. Therefore, it is very important to be proactive and manage a PBM contract strategythat maximizes your leverage and keeps you in control.

Health plans that are not prepared are at a disadvantage when it comes to securing PBM pricing. Whether it is timing or resources or any number of reasons, health plans that do not follow a multi-phased plan will lose leverage against a PBM that can exert control over the negotiations.

With a well thought out PBM contract strategy over the next 3-5 years, health plans are positioned to maximize leverage to secure the best pricing and level of services now and in the future. The strategy should cover your next two contracting initiatives and include an RFP, interim year market checks and/or renewal negotiations with your PBM.

Here are some best practices to consider as you develop and implement an effective PBMcontracting strategy:

  • Allow sufficient time: Always allow sufficient time in an RFP initiative to maximize your leverage. PBMs will focus their resources, pricing and effort on opportunities that are well planned and issued by a health plan, allowing enough time for transitioning to a new PBM. Ideally, start an RFP process at least 18 months before the new contract start date. Anything short of 18 months means your current PBM will see less risk that your plan will transition away, while other PBMs will not see your plan as a serious opportunity. This is the exact opposite of what you want to occur.
  • Expand your PBM network: Establish and build relationships with multiple PBMs. Have at least one contact at each, even those PBMs with which you have never done business. Keep tabs on market events and meet at least once per year with each PBM contact you establish. Spend time understanding each PBM’s differentiating value to your plan. Have these conversations and gain these insights long before you issue the RFP. A PBM that knows you will respond favorably in an RFP.
  • Plan ahead: Know your next move. If you are executing an RFP initiative, make sure your new contract allows you to execute on your next initiative. For example, if you plan to do an RFP for the next three contract years, then make sure you plan accordingly for a market check mid-term. Some plans prefer formal market check language that ensures a formal process to negotiate new pricing mid-term. Other plans will insist on including “term for convenience” language and use this as leverage to negotiate mid-contract pricing (see below).
  • Build in leverage: As part of the RFP, negotiate a “term for convenience” provision to be included in your PBM contract. This maximizes leverage at all times especially while negotiating pricing mid-term or attempting to renew a PBM contract. If the PBM does not offer competitive terms, then you have the right to term and go out to full RFP prior to contract termination.
  • Expect the market to change: If you are not able to secure ‘term for convenience’ language, then make sure a market check provision is included in your PBM contract.A PBM market check allows the health plan to compare their current PBM contract’s financial arrangements against prevailing current market conditions, including prices and rebates. If the market check reveals that the health plan’s prices aren’t competitive with current market rates, the health plan can often obtain significant price concessions from the PBM for the remainder of the contract. The beauty of a market check is that it allows plans to take advantage of the rapid and often significant price fluctuations that occur in the PBM market without always having to go out to bid. In general, a market check should be performed during the second year of a three-year contract to improve the pricing of the third year.
  • Control the process: If you include market check language in your contract, make sure the language keeps you in control. Too many times we see market check language that puts the leverage and control with the PBM through a PBM-friendly process.
  • Choose the right partner: Consider working with an experienced outside firm that has the right expertise to help you avoid common contracting and procurement pitfalls. An outside firm should fully understand and be abreast of the latest market pricing fluctuations. It should know how to factor in such variables as changes in drug utilization, specialty drug use, and inflation in order to establish accurate baselines for measuring against future costs – not just look at claims history.

Given today’s rapid market pricing fluctuations, taking a strategic approach to your PBM relationship to obtain the best overall pricing and levels of service is your best offensive move.