Understanding Cost-Plus Pharmacy: A Guide for Employers

What is Cost-Plus Pharmacy?

Cost-plus pharmacy is a pricing model that allows employers to pay a transparent markup on the actual cost of prescription drugs. Instead of relying on traditional pharmacy benefit managers (PBMs) who often use opaque pricing structures, cost-plus models provide clear visibility into drug costs and markup percentages.

How It Works

1. Cost Identification: The pharmacy identifies the actual cost of a drug, which includes the price they paid to acquire the medication.
2. Markup Application: A predetermined percentage is added to this cost. For example, if a medication costs $100 and the markup is set at 20%, the total price for the employer is $120.
3. Transparency: Employers receive detailed invoices showing the cost of drugs, the markup applied, and the final price, allowing for better budget management and cost control.

NADAC-Based Pricing Explained

NADAC stands for National Average Drug Acquisition Cost. This price represents the average cost that pharmacies pay for drugs, based on data submitted by pharmacies to the Centers for Medicare & Medicaid Services (CMS).

1. Using NADAC: Employers utilizing NADAC-based pricing can expect to pay closer to what pharmacies actually spend on drugs. This can result in significant savings compared to traditional pricing models.

2. Savings Potential: According to the Pharmacy Benefit Manager Transparency Report from 2023, employers using NADAC pricing reported savings of up to 30% on certain medications compared to traditional PBM pricing.

3. Benchmarking: NADAC can be used as a benchmark to negotiate prices with PBMs. If a PBM proposes a price significantly above NADAC, employers can challenge these rates based on the actual costs reflected in the NADAC data.

Evaluating PBM Alternatives

When considering alternatives to traditional PBMs, self-insured employers should evaluate the following factors:

Pricing Transparency

• Cost Structure: Understand how the PBM calculates drug prices. Look for clear information on the cost of drugs, any markups, and additional fees.
• Access to Pricing Data: Ensure the PBM provides access to real-time pricing data, including NADAC rates.

Contract Terms

• Termination Clauses: Review the terms for ending the contract. Look for flexibility to switch providers without incurring significant penalties.
• Transparency Requirements: Contracts should include stipulations requiring the PBM to disclose pricing, rebates, and discounts to employers.

Performance Metrics

• Claims Processing: Analyze how quickly and accurately the PBM processes claims. A delay in processing can lead to higher costs for employers.
• Customer Service: Evaluate the support provided to employees and HR teams. A responsive PBM can help resolve issues faster, reducing employee frustration.

Drug Formularies

• Formulary Management: Look for PBMs that offer customizable formularies, allowing employers to include or exclude certain drugs based on cost-effectiveness.
• Generic vs. Brand: Assess how the PBM encourages the use of generics over brand-name drugs, which can lead to significant savings.

Cost-Effectiveness

• Overall Savings: Compare the total expected costs of using different PBMs, including administrative fees, drug costs, and any potential rebates.
• Long-Term Value: Consider the long-term implications of a PBM’s pricing model on your overall healthcare spending.

Bottom Line

For employers seeking more control over their pharmacy benefits, transitioning to a cost-plus pharmacy model with NADAC-based pricing can lead to substantial savings and transparency. When evaluating PBM alternatives, focus on pricing transparency, performance metrics, and contract terms to ensure you choose a partner that aligns with your financial goals. By making informed decisions, you can better manage prescription drug costs and enhance employee satisfaction.