A primer on brand-name prescription drug contracting – Healthcare Economist

The above is the title of a useful manual of Kenney and Keast (2024). I summarize some key points below.

Provide an overview of pharmacy contracts between healthcare ecosystem stakeholders.

How has the rise of health maintenance organizations (HMOs) affected pharmacy contracting?

The Health Maintenance Organization (HMO) Act of 1973 spurred the growth of comprehensive health plans, such as the Kaiser Foundation Health Plan, the Puget Sound Group Health Cooperative, and the Greater New York Health Insurance Plan. York. 3 It also required employers who offered insurance and had 25 or more employees to offer a federally qualified HMO if it was available in their market, which led to further expansion of HMO plans.

Interesting points, but how are HMOs now related to pharmacy contracts?

Although pharmacy was not a standard part of benefits in early HMO programs…some plans offered prescription drug coverage as an added benefit to attract members. HMOs that provided drug coverage adopted formulary programs modeled after hospital systems and created preferred drug lists with tiered copayments.

How are discounts incorporated in practice?

The following table summarizes these calculations where brand A is a high-cost product but with high rebates and brand B is a low-cost product but with low rebates.

The net price calculation begins with the reimbursement amount contracted between the PBM and the pharmacy, where the reimbursement amount is typically a percentage of the wholesale acquisition cost (WAC). Any out-of-pocket costs (copayment, coinsurance, or deductible) paid by the health plan member are then subtracted. Finally, rebates paid by the manufacturer to the PBM are subtracted to arrive at the net price paid by the PBM.

What types of contracts exist?

  • Purchase discount agreements. This agreement is a negotiated contract for a drug that health plans pay for when they buy it directly from the manufacturer, rather than through a PBM. If a wholesaler is used, the wholesalers use a “chargeback method” in which the manufacturer authorizes the wholesaler to sell the product to the health plan at the contract price and the wholesaler simply charges the manufacturer back the difference between the WAC price and the contract together with an administrative fee.
  • Refunds. A rebate is a retroactive discount that manufacturers offer to PBMs. after A medication has been purchased and dispensed. In this process, the manufacturer pays a percentage of the drug price (the rebate) to the PBM, and the PBMs share all or a portion of the rebates with the health plans. Types of rebate agreements include an access agreement (rebate based on any form location), a market share rebate (rebate based on market share or volume), or a preferred form status agreement (rebate based at the form level).
  • Value-based contracts. Payment for the medication depends on the “value” of the product. Value could include patient-specific outcomes, whether patients adhere to the medication, CMS’s cell and gene therapy models use value-based contracts.

You can read the full article which includes a discussion of the best price for Medicaid. here.

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