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Employee benefits contracts-read and understand prior to signing! June 19, 2012

Posted by medvision in health data, Healthcare Costs, Healthcare Reform, Insurance Plans, Uncategorized.
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Employers sponsoring self-funded health benefit programs typically make vendor decisions based upon proposals submitted in a “request for proposal” (RFP) process. A decision is made to contract with, for example, ABC administrator/pharmacy benefits administrator, an application is signed and a contract returned for execution. I’m always amazed when I ask a client employer for a vendor contract and initially receive the actual proposal, instead of the contract. Why? Because proposals show clients what they think is being purchased on behalf of members but executed contracts rule the process. Typically, disputes don’t come from the benefits delivered but from the pricing methodology/price the client thought was agreed to.

As an example, many managers believe with self-funded arrangements they are paying a fee in return for service. Some plan sponsors exhibit shock when they learn their vendors are enjoying additional profits by spread-pricing products purchased via their administrative services only, (ASO) agreements.

One of the great puzzles associated with the employee benefits arena is how a large employer’s legal team can hold up a contract to purchase “trucks” for months, on intricate contract details, but then blindly provide authority to sign employee benefits contracts which run counter to the proposals used in the decision process. The following represents contractual clauses from a prescription benefit management company. I have underlined a few provisions which should provide anxiety to the individuals preparing to sign this contract.

Why worry about this? In many instances these practices unnecessarily increase the fixed cost of programs. For example, the contract below may increase cost of prescription drugs to members by $10-$15 PEPM. If this amount were reallocated to provide additional health services possibly employer paid health care inflation could be eliminated?

 

FINANCIAL DISCLOSURE TO DEN INDEMNITY SCRIPT COMPANY PBM CLIENTS

 

This disclosure provides an overview of the principal revenue sources of Den Indemnity Script Company, Inc. (DISCO) and does not supersede any of the specific financial terms and conditions between DISCO and an individual client. In addition to administrative and dispensing fees paid to DISCO by our clients for pharmaceutical benefit management (PBM) services, DISCO derives revenue from other sources, including arrangements with pharmaceutical manufacturers, wholesale distributors, and retail pharmacies. Some of this revenue relates to utilization of prescription drugs by members of the clients receiving PBM services, DISCO may pass through certain manufacture payments to its clients or may retain as payments for itself, depending on the contract terms between DISCO and client.

Network Pharmacies— DISCO contracts for its own account with retail pharmacies to dispense prescription drugs to client members. Rates paid by DISCO to these pharmacies may differ among networks and among pharmacies within a network, and by client arrangements. DISCO agreements generally provide that the client pay DISCO for ingredient cost, plus dispensing fees, for drug claims at a uniform rate. If the rate paid by client exceeds the rate contracted with a particular pharmacy, DISCO will realize a positive margin on the applicable claim. The reverse may also be true, resulting in a negative margin for DISCO. DISCO also enters into pass-through agreements where the client pays DISCO the actual ingredient cost and dispensing fee DISCO pays the pharmacy. In addition, when DISCO receives payment from a client for payment to a pharmacy, DISCO retains the benefit of the use of funds between these payments. DISCO may charge pharmacies transaction fees to assess this goes pharmacy claims system and for other related administrative purposes.

Brand/Generic Classifications— Prescription drugs may be classified as either a brand or generic however, the reference to a drug by its chemical name does not necessarily mean that the product is recognized as a generic for adjudication, pricing or co-pay purposes. DISCO distinguishes brands and generics through a proprietary operating algorithm that uses certain published elements provided by First Databank including price indicators, generic indicator, generic manufacturer indicator, generic name drug indicator, innovator, Drug Class and ANDA. The proprietary algorithm uses these data elements in a hierarchical process to categorize the products as brand or generic. The proprietary algorithm also has processes to resolve discrepancies and prevent hopping between branded generic status price fluctuations in marketplace availability changes. The elements listed above and sources are subject to change based upon availability of specific fields. Updated summaries of the proprietary algorithm are available on request.

DISCO Subsidiary Pharmacy Discount Arrangements— DISCO subsidiary pharmacies purchase prescription drug inventories, either from manufacturers or wholesalers, for dispensing to patients. Often, purchase discounts off the acquisition cost of these products are made available by manufacturers and wholesalers in the form of either upfront discounts or retrospective discounts. These purchase discounts, obtained through separate purchase contracts, are not formulary rebates paid in connection with our PBM rebate programs. Drug purchase discounts are based on the pharmacy’s inventory needs and, at times, performance of related patient care services and other performance requirements. When a subsidiary pharmacy dispenses a product from its inventory, the purchase price paid for the dispense product, including applicable dispensing fees, may be greater or less than that pharmacies acquisition cost for the product net of purchase discounts. In general, are pharmacies realize an overall positive margin between the net acquisition cost any amounts paid for the dispense drugs.

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