GLG News by Michael Berman

Implications: The United States has very limited price transparency for medical providers and facilities. The lack of price transparency artificially raises costs in the United States because there is very little price competition for services.  This is true even in areas where there is excess capacity.

Analysis: The lack of price transparency in the United States has resulted in a lack of competition among health care providers and facilities. I feel this is a large part of the reason our cost structure is so high.

In general, if their are multiple facilities where I can have a specific medical procedure performed my health carrier will not tell me which facility has a lower contracted rate. This makes it impossible for me to consider price in my choice of a facility. The situation is not really any different for providers. I feel this artificially raises prices since there is not a lot of price competition.

For medical procedures abroad there is significantly more price transparency. Cost certainty is important to consumers.

Implications: Contingent commissions, if not disclosed, can result in brokerage clients not knowing how much they are paying for the services they receive from their risk brokers. A commission should be viewed as just an alternative to fee-based consulting.  In theory the amount of commissions received should equal fees a client is willing to pay as commissions are built into insurance premiums.

Analysis:  All commissions (explicit or contingent) are theoretically part of a insurance premium's retention and thus paid for by policyholders.  I feel that if brokers accept commissions but do not disclose them to clients, clients end up not knowing how much they are actually paying for the services they receive from their broker/consultant.

Clients need to know how much their broker is being compensated to be able to determine if they are receiving fair value for the commissions they are paying.  Some client's have more complex needs and should pay more in commissions than other clients with less complicated needs.

The best way to honestly deal with brokerage clients is to simply tell them how much you are being compensated for the services you provide.  If a broker chooses to accept contingent commissions, they should find a way to allocate the commission to each client so the proper disclosure can be made.

Implications: It is universal that the mail order distribution channel has lower generic utilization than the retail channel.   PBM pricing is always better for mail order scripts versus retail.  In addition, plan design is a major component of net claim costs.

Analysis: Generic utilization for the mail order channel is always lower than the retail channel because of the mix of drugs dispensed at mail.  Only maintenance drugs are dispensed at mail and there are not as many generic substitutes for these drugs as exist for acute drugs, which typically are dispensed only at retail.  

Regarding cost per days supply, it is true that plan sponsors sometimes pay a higher claims cost per days supply of drug but it is because of the underlying plan design.  PBM's always offer greater AWP discounts, greater rebates, and generally zero dispensing fees for mail order scripts.  What can create a higher net cost per day for the plan sponsor is if the employee copay is not set high enough for mail order scripts.  My point is that the PBM does not control employer plan design; employer's can remedy this by adjusting their copays/coinsurance.

Implications: Outsourcing won't work well until the Indian outsourcing firms develop the core competencies of key insurance operations.  

Analysis:  I agree that some insurance operations appear that they could be outsourced; however, I don't think that any outsourcing firms are going to perform most functions without "missing a beat".

For example, medical claims processing could potentially be outsourced but inevitably there will be quality problems that could cause service issues with customers, providers, etc.

Word can travel quickly in the broker/consultant community. If an insurer trys to outsource and has customer service issues because the outsourcing firm does not have enough experience. it would hurt the reputation of the insurance company.

Implications: This article discusses transparency in the context of retail pharmacies; however, PBMs are most profitable in the mail order distribution channel.

Transparent PBM deals have more guarantees than implied by this article.

Analysis: This article discusses transparency in a retail pharmacy context; however, PBM profits are driven primarily from the mail order distribution channel. This is important because PBMs typically won't offer transparency for mail order scripts; especially not for generic scripts.

The article is incorrect when it implies that retail transparent PBM deals do not offer guarantees for discounts, dispensing fees, and rebates. Transparent deals do have guarantees, though they generally are more conservative than for traditional PBM deals. AWP discount guarantees are about 1/2% lower than for traditional deals.

I don't agree with the demography/geographic argument that for younger and/or more rural employer groups, traditional deals may be better. I don't agree because the PBMs will incorporate the demography and geography into the deal itself. The PBM uses a census in its pricing process; if the group is located in an area where its retail pharmacy contracts are not as good as in urban areas then the guarantees in the deal will be lower.

Implications: One product the major healthplans are starting to sell are benefit plans (HMO's/PPO's) that utilize a high performance network (HPN).  The HPN is a more limited network of doctors who have shown that they are providing quality service and good value from a cost standpoint.

Analysis: High performance networks are not dominant yet but I think the concept is good.  As always there can be disagreements over how to determine provider eligibility for the networks.  I think it's important for the healthplans to not just look at cost but also develop outcomes based metrics to use when evaluating providers.

Implications: Many people with health insurance have pharmacy plans with generic copays with flat dollar minimums of at least $5.

Walmart may gradually expand the program or add additional pricing tiers.

Analysis: It's possible that Walmart could eventually take volume from PBM's because among most people with insurance, the generic copay minimums for their Rx plan are higher than $4.  Flat copay plans are generally set at a minimum of $5 with many plans at $10.  In addition, even coinsurance plan designs usually have minimum copays that are in the $5 to $10 range.  As a result, Walmart's program could save money even for those with insurance.

A logical next step for Walmart would be to expand the number of drugs in the $4 tier and/or to establish different tiers such as a $10 tier of drugs.

Implications: HMO Plans have become very similar to PPO without an out-of-network benefit.

Member cost sharing is typically lower than PPO plans making them more expensive.

Analysis: The first point is that HMO plans have evolved to look like PPO plans without an out of network benefit.  Instead of cost sharing in the form of flat copays, deductibles and coinsurance are now common.

The lower levels of cost sharing have made HMO's more expensive than PPO's.  In most employer plans the HMO option is most expensive because of lower cost sharing by members.  While there is no out-of-network benefit, frequently the networks are so large that the difference between HMO and PPO networks is not great.

I think the lower member cost sharing also has resulted in some anti-selection where those who are less healthy gravitate towards HMO's which is contributing to their cost increases.