At least one PBM is acknowledging that WAC/AWP pricing will fade. JoAnn Reed, CFO and SVP of Finance of Medco Health Solutions (MHS), made the following comment on Medco's November 1 earnings conference call:
"On the WAC-based [sic], what we're hearing more is that it's going to AMP not to WAC, but the consultants are just making estimates. Right now no one has come up with the new benchmark, so we don't know where it's headed but for us as you know it's really no real impact to us because of our contractual language and there has been talk that it might happen in the latter part of 2008."
There are three significant points embedded in her comments:
- AMP is likely to become the new pricing benchmark.
- The AWP-to-AMP switch may begin in the second half of 2008.
- PBM contracts will protect them if the benchmark changes.
Point 3 is more important because she implies that contracts will be renegotiated or adjusted to preserve the original dollar-cost economic arrangements for the PBM. Thus:
PBMs will still get paid for the services they perform even if the specific compensation model changes. You can remove an intermediary but not the services provided by that intermediary. Hence, I'm skeptical of the “PBMs add no value” critics because it's at odds with the marketplace realities. The PBM’s business success reflects many individual business decisions by payers and insurers. If PBMs really added “no value,” then sophisticated payers would simply bypass them and perform the activity themselves. There are situations where this has occurred, but there has been no rush for the exits.
As long as the market for PBM services remains competitive, then the form of compensation is essentially irrelevant. PBMs are only a mild oligopoly today, at least judging by the 4-firm concentration ratio. In a June 2007 Drug Benefit News article (sorry, no link), the top 4 PBMs had 45% of total PBM covered lives. That's relatively low compared to more familiar oligopolies.
The advantages of greater PBM transparency are overrated. Consider an analogy: Imagine you are shopping for a car. You find two dealers, each of which will sell you the car for $20,000. Do you know or care if (a) dealer #1 earned its profit by marking-up the car over their cost or (b) dealer #2 earned its profit from a rebate paid by the manufacturer after the sale is made? No, of course not. You only care about the cost of the car. In other words, healthy competition about the dealers (intermediaries) provides the customer with the benefits of "transparency." (See my comments on Monday's AWP post for more on the drugs vs. cars analogy.)
I'd welcome any comments from PBM fans or critics.