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It’s Time More States Try the ‘eBay’ Approach to Managing Drug Costs

By Mark Blum September 28, 2018


The debate over skyrocketing health care spending in America won’t end anytime soon — nor should it.


Within the next decade, health care will be nearly 20 percent of the U.S. gross domestic product. Across our health care system, it’s clear that we’re on an unsustainable fiscal track that warrants practical and achievable solutions.


While innovation in technology is changing the way we live, travel, shop and communicate, somehow it hasn’t succeeded in helping manage spending on prescription drugs — until now. To see the potential, one need only look at how New Jersey deployed innovative, 21st-century technology to save taxpayers $1.6 billion dollars (that is,18 percent of the state employees’ drug spend) over the course of three years. With clear focus and a little bit of willingness to update archaic state procurement practices, other states can realize savings of similar magnitude.


New Jersey, like many states, hires pharmacy benefit managers, third-party entities, to navigate and negotiate the purchase and pricing (and everything in between) of prescription drugs for public employees. Like any complex, opaque transaction, it took some time for it to become apparent that some PBMs were not acting in good faith, structuring deals that were guaranteed money-makers for themselves at the expense of public employee health plans — taxpayer interests be damned (not to mention sound, ethical business practices).

But, with just a handful of PBM “middlemen” to choose from — not to mention the difficulty of understanding, let alone measuring and comparing, the cost of complex PBM pricing schemes without the aid of cutting-edge drug price analytics technology deployed universally by PBMs — states have been routinely outgunned, outmaneuvered and cornered into accepting raw deals.


So last year, New Jersey took a page out of the playbooks of some innovative Fortune 100 companies and the massive University of California system. New Jersey drafted its own PBM contract terms, including detailed drug-pricing rules, standardized drug classifications and definitions. The state government acquired use of state-of-the-art drug-pricing analytics technology that enabled it to project how much PBM bids would actually cost New Jersey over the term of a three-year PBM contract.


Here’s where the eBay comparison comes in. New Jersey used its own, technology-enabled pharmacy cost projections to create competition between PBM bidders vying for the state’s business. The state created a transparent, online “reverse” auction marketplace in which PBMs would compete to underbid one another in order to win the contract to manage prescription drug benefits for New Jersey’s 750,000 public employees and dependents. 

After the reverse auction winner was awarded the contract, New Jersey applied its newly acquired big data analytics capabilities to keep PBM billing practices in check by redeploying the same technology to conduct, within a few hours, fully automated, electronic reviews of PBM invoices, each one often amounting to tens of millions of dollars. 


It’s hard to overstate just how pioneering this approach to prescription drug plan bidding and contract adherence really was. For the first time, the PBM selection process did not just begin with a fair public posting of a request for proposals and then descend into an opaque black-box PBM selection process that nobody fully understood or trusted. Remarkably, the process put the state (really, the taxpayers, when you get down to it) in the driver’s seat. New Jersey now conducts ongoing, real-time PBM performance reviews to assure compliance with its new contract.


The fiscal result: $1.6 billion in savings for taxpayers. The fact that a court recently ruled that New Jersey has to redo the bidding process due to the winning PBM hedging its contract shows that the days of “gaming” the system through backdoor deals, complex formulas or political threats are over. New Jersey is now able to hold PBMs’ feet to the fire.


Leaders in other states, including California, Ohio and Pennsylvania, are taking note. Recently, Pennsylvania’s auditor general, Eugene DePasquale, in a rather bold assertion, indicated the benefit managers used by the state were in for quite a review after discovering some reimbursement irregularities had been cropping up. DePasquale noted “[we] … are just beginning to understand the ramifications of relinquishing to PBMs the power to set drug reimbursement rates for pharmacies … the state has zero oversight.”


There is simply no faster, more efficient way to rein in state health care costs than by leveraging new technology to transform drug-pricing data into meaningful cost comparisons that can guide informed decision-making by state purchasers. But best of all, it sheds light on actual costs and saves a heck of a lot of money. Money — billions of dollars, in fact — that can be saved or reinvested to help provide care for Americans who depend on it.


Mark Blum is executive director of America’s Agenda: Health Care for All.

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