Evergreen PBM contracts sap your savings

By Chris Hanson-Ehlinger
Tue, Jul, 22, 2014 @ 08:07 AM

contractMost PBM contracts begin with a 3-year commitment and then are considered “evergreen” for successive one year periods. While convenient in contract management, annual evergreen renewals are not in the plan sponsor’s best interests. Even if pricing modifications are offered by the PBM, it’s important to evaluate the entire contract and any amendments and conduct a marketplace assessment.

PBMs incur the majority of their costs when they implement a new plan, add services or make significant benefit changes to an existing plan. After a plan or plan changes are implemented, PBMs are efficient transaction processing engines, data repositories, mail and specialty providers and negotiators of pharmacy network and pharmaceutical manufacturer rebates. As a result, the cost of maintaining your plan declines over time, particularly as contract terms age beyond two years. That gives you leverage to seek incremental savings.

For the above reasons, it is important—and a fiduciary responsibility—for plans to aggressively review and manage their contractual relationship at least annually. While pricing terms are typically represented as an exhibit, they can be dramatically impacted by definitions, inclusions/exclusions, calculation methodologies and other limitations buried within the body of the contract. It is important to obtain experienced and independent assistance to ensure everything is current, in the plan sponsors’ best interests and competitive.

Even when service levels, programs and operational performance are going well, it’s critical to revisit the market and ensure financial expectations are current and being met. PBMs are not bad guys but they do hold most of the cards with respect to financial outcomes. There is nothing wrong with seeking independent audit, contract review or negotiation assistance to stay competitive with your pharmacy program. In some cases, this may lead to a change in PBM vendors, however, there can be significant value in simply reviewing and renegotiating existing relationships.

Don’t fall prey to auto-renewal

Consider any of the following factors a trigger to review your PBM contract, amendments and performance:

  • Market check, renegotiation or termination notice periods. If you miss the window of opportunity allowed under your PBM contract, you may get stuck with an auto-renewal.

  • Changes in membership or benefit design. Use such opportunities to renegotiate contract terms.

  • Changes in distribution channels (retail, mail, specialty). Changes that impact the dynamics of your pricing guarantees may provide negotiating leverage.

  • Performance against current pricing guarantees. Take advantage of independent audits to verify actual performance.

  • Any network or formulary restrictions should drive better pricing terms.

  • Significant service or operational deficiencies or gaps may necessitate changes to overall performance standards and guarantees.

Bottom line

Do not assume your PBM is providing you with the most competitive deal! Monitor performance, be aware of contract clauses and ask questions.


Kevin Waite, RPh, is a managing consultant at The Burchfield Group. He works with national health plans to develop PBM compliance, assessment and strategic management plans. For more information, please call us at 800-778-1359 or send a note to http://www.burchfieldgroup.com/contact/.

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