Newsroom

07/15/20

Incentives Matter

Dickon Waterfield - Chief Commercial Officer @ WithMe Health


Follow the money…How a PBM makes money influences how it acts.


“Show me the incentives and I will show you the outcome.” - Charlie Munger, vice chairman of Berkshire Hathaway


If you’re a manager or a parent, you probably spend a lot of time thinking, how do I get someone to do what I need them to do? What will make them do it even when I’m not there?

More often than not the answer is: the right incentives. For example, there’s a good chance a three year old will clean up his or her toys if the reward is screen time. Or that an employee will actively mentor junior team members if it impacts their compensation. In this regard, companies behave like individuals. They are more likely to do something if it means they will be rewarded with something they value.


Why do a PBM’s incentives matter?

Pharmacy benefit management decisions are increasingly high-stakes and urgent.

New treatments costing millions of dollars are regularly approved by the FDA, each requiring employers to formulate a response that balances complex financial and human costs. Do you purchase stop-loss insurance, not cover the new treatments, or wait and see? How do you prevent waste while still providing resources for those in need?

The latest National Business Group on Health survey found that fewer surveyed employers were taking a “wait and see” approach to managing their benefits. The cost has become too high for employers to wait and see how well new solutions work for other companies before implementing them. Instead, employers are increasingly deferring to their partners - health plans and PBMs - and adopting their recommendations.

In this kind of fast-moving environment, employers need to trust their PBM will respond to new developments quickly and with their best interests in mind. Employers need to trust this will happen with or without their involvement. We’ve said it before, but it bears repeating: the best guarantee that someone will do what you want is that their incentives are aligned with your goals.


Aligned vs. misaligned incentives: follow the money

We believe employers care about a few things. Your bottom-line, because you are, after all, running a business. But also member outcomes and experience, because pharmacy benefits are just that - a benefit for employees. They should be valued by employees as something that makes their health and quality-of-life better, not cause additional aggravation.

Your PBM’s success should be linked to helping you optimize these things. Like motivating a three year old to clean up toys or an employee to be a mentor, your PBM should get what they want from doing what you need.

Traditional PBMs are structured to earn revenue through a variety of mechanisms and relationships. The nature of these income sources matters, because they influence PBM priorities and behavior. To understand who you are working with, you need to understand what actions they profit from. Here are some of the most common ways that PBMs make money today:

The Spread

It’s common knowledge that, in the traditional contracting model, PBMs profit from the “spread” between the lower price they pay the pharmacy and the higher one which they charge back to employers.

But it may be a surprise that traditional PBMs are also capturing this “spread” profit when executing pass-through contracts.


In this case, there’s a complicated mechanism in play that allows the PBM to technically pass-through to the employer the same prices the PBM has paid the pharmacy while actually, at an aggregate annual level, still maintain a profit margin. Go behind the scenes of pass-through contracts here.

The main downside of spread-pricing is that a PBM earns more when pharmacy spend rises. If the PBM makes a 20% margin on your pharmacy spend of $10M, they make $2M; if your spend is $15M, they make $3M. That’s material. In this arrangement, PBMs have little financial incentive to help employers optimize utilization. Perhaps then it’s not surprising that pharmacy spend, and consequently PBM revenue (typically a fixed percentage of pharmacy spend) have vastly outpaced inflation over the last twenty years.


Rebates

Love them or leave them, they’re a fundamental piece of the pharmaceutical value chain. And despite their reputation, they’re not all bad. They result in net lower pricing, which is almost always good for the buyer. But rebates are bad when they influence PBM behavior in ways that are inconsistent with your goals as an employer.

When a PBM earns revenue from rebates, the PBM benefits financially from driving volume towards some medications over others. As a result, comparative effectiveness and total cost of care bear little to no weight in formulary placement, as rebates become the key driver for formulary decisions. This is not only harmful to members but also to employers responsible for both pharmacy and medical spend. When it comes to formulary placement, the PBM that does not profit from rebates has simpler incentives: to manage the employer’s pharmacy benefits.

It’s old news, but it’s worth restating: traditional PBMs profit both from actions that benefit the employer as well as ones that don’t.


A better way

Since pharmacy spend, member experience, and outcomes are three things that a PBM can influence for the better, we think PBMs should be incentivized to do so.

We founded WithMe Health on the belief that our incentives should be aligned with yours.


Our business model is based on a simple PMPM administrative fee, and we put a significant portion of our fees at risk to guarantee that we will achieve pre-agreed financial, health and experience outcomes. We pass 100% of rebates straight through to you, the employer, and we eliminate spread pricing by paying the pharmacy the exact amount we charge you for each prescription. As a result, we are free from undue influence when it comes to important decisions, such as formulary placement.

We only succeed when you succeed, so we work tirelessly to improve the health of your population.