AHM 530: Retention: Keeping Providers Happy, Quality Outcome Measures, and Provider Performance

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Brett Andrew Johnson, Dealing with the Impaired Physician, American Family Physician, Nov. 1, 2009 ;
80(9):1007-1008; available at https://www.aafp.org/afp/2009/1101/p1007.html# (accessed August 2019)

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 AHM 530: Pharmacy Network Management

Pharmacy Network Management

Introduction

This module focuses on pharmacy networks and its related considerations.

After completing this module, you should be able to:

• Describe the advantages early pharmacy networks had over direct pay and cost-
sharing pharmacy systems

• Identify the features that distinguish pharmacy networks from other health plan
networks

• Describe the impact of pharmacy benefits management in managed care

• Describe the options available for delivering pharmacy services

• Identify the methods that health plans/Pharmacy Benefit Managers (PBMs) use to
reimburse network pharmacies

• Understand the impacts of coverage expansions under the Medicare Part D

prescription drug benefit, the Medicaid prescription drug benefit, and the
Affordable Care Act (ACA) on pharmacy network management

• Understand how drug pricing and pharmacy reimbursement work under the
prescription drug benefit components of Medicare, Medicaid, and private health
plans

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 AHM 530: Pharmacy Network Management

Pharmacy Networks
Pharmacy Networks

A pharmacy network is a group of pharmacies that have contracted with a health plan or a
pharmacy benefit manager (PBM) to provide covered products and services to members.

Pharmacy Benefit Managers (PBMs) administer prescription drug plans for millions of
Americans who have health insurance from a variety of sponsors including:

• commercial health plans

• self-insured employer plans

• union plans

• medicare Part D plans

• federal Employees Health Benefits Program (FEHBP)

• state government employee plans

• managed Medicaid plans

Pharmacy networks were not formally organized until around the mid-1960s. Since then,
they have become an integral part of the managed healthcare system.

History and Development of Pharmacy Networks

Before the advent of prescription drug programs in the late 1950s and early 1960s,
pharmacy benefits were delivered through open, direct contact between patients and
pharmacies. Patients needed written authorization from a licensed physician to obtain
prescription drugs, but there were no restrictions on which drugs the physician could
prescribe or which pharmacy the patient could use.

The payment was also direct. The patient either paid the pharmacy in full or shared
expenses with an insurer under a major medical insurance policy. Prescription prices were
determined by the pharmacy and were typically based on the cost of ingredients plus a
percent mark-up that reflected the pharmacy’s desired gross profit margin.

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Early Pharmacy Networks

In the late 1950s and early 1960s, third-party prescription programs began to emerge. A
third-party prescription program is a program in which prescription expenses are paid at
least in part by someone other than the patient. Most early third-party prescription
programs were sponsored by labor unions and provided benefits to union members through
designated pharmacies. Governments, insurance companies, and employers later began
offering similar programs. Because they were designed to serve specific groups, the
networks associated with these programs were organized locally and often consisted of a
single pharmacy that served a limited geographical area. The agreements between plan
sponsors and network pharmacies were loosely structured, with little, if any,
standardization. Payment to pharmacies was typically based on usual, customary, and
reasonable (UCR) charges rather than on any structured reimbursement schedule. In the
context of pharmacy benefits, UCR charges were typically the amount pharmacies charged
cash-paying customers for prescription drugs. These charges were determined by the
pharmacy and varied widely from region to region.

The National Auto Prescription Drug Program

The first formally organized pharmacy network appeared in 1967 when the United Auto
Workers (UAW) union negotiated a pre-paid prescription drug program for the automobile
industry. The National Auto Prescription Drug Program went into effect in October of 1969.
It offered benefits to program members who used approved pharmacy networks to obtain
legend drugs (drugs that require a written prescription from a licensed physician).

Legend drugs, also called prescription drugs, are drugs that are approved by the U.S. Food
and Drug Administration (FDA) and required by federal or state law to be dispensed to the
public only when it is prescribed by a licensed physician or another licensed provider. In the
U.S., a legend drug can be a controlled substance (narcotic) or a non-narcotic drug
authorized by veterinarians, dentists, optometrists, and medical practitioners.
Example: Morphine is a legend drug that is Schedule II, a classification for narcotics and
stimulants with a high potential for abuse. Basic-level registered nurses, medical assistants,
clinical nurse specialists, nurse anesthetists, nurse midwives, emergency medical
technicians, psychologists, and social workers do not have the authority to prescribe legend
drugs.
Terms of The National Auto Prescription Drug Program

Under the terms of the program, plan members could obtain any legend drug from any
participating pharmacy by presenting a plastic ID card and making a small copayment. The
pharmacy would fill the prescription and then bill the plan directly for reimbursement. Plan
members could also obtain prescription drugs from non-network pharmacies, but they were
required to pay the pharmacy in full and file a claim with the plan for reimbursement.
Claims administrators typically charged plan members a penalty—often as much as 25% of
the cost of the prescription— for out-of-network purchases.

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Third-Party Administrators

The networks that provided program benefits were organized regionally by the Blue
Cross and Blue Shield plans that underwrote the program. Blue Cross and Blue Shield
plans that had automobile manufacturing plants in their operating areas developed their
networks. If the health plan was not located in the same area as the manufacturing plant,
the health plan contracted with third-party administrators (TPAs) to develop networks.

A Third-Party Administrator (TPA) for employee health benefits is a person or

organization that performs administrative services (i.e. claim processing, adjudication,
record-keeping), usually on behalf of an employer that self-insures health benefits. Most
TPAs operate as an entity independent from the health insurance carrier and the insured
(employees or plan participants). Most states have a TPA licensing requirement, and
several more have similar minimum requirements.

Requirements for participation in the network were simple. Pharmacies wishing to

contract with the National Auto Prescription Drug Program, either directly or through a
claim’s processor, had to be registered in the state and agree to the reimbursement
formula specified in the agreement. Although pharmacy participation in the UAW’s
program was limited, the National Auto Prescription Drug Program served as a model for
most of the early pharmacy programs and for the health plans that appeared later.

Advantages of Early Pharmacy Networks

Pharmacy networks offered the following advantages over direct pay and cost-sharing
pharmacy systems:

• Increased patient access to pharmacy services. The cost-sharing requirements of

direct pay systems and major medical insurance policies created barriers to
patient care. Depending on the cost of drugs and the amount of deductible or
coinsurance requirements, these barriers could be substantial. Pharmacy
networks allowed plan members to purchase prescription drugs for a small
copayment. By reducing out-of-pocket costs for patients, pharmacy networks
eliminated the price barriers created by direct pay and cost-sharing systems.

• Increased administrative efficiency. Contracting with pharmacy networks allowed

TPAs to develop economies of scale and system capabilities that were not available
to individual plan sponsors. This advantage was especially important for
administrative tasks such as claims processing. TPAs found that reimbursing a
single pharmacy for prescriptions for a block of patients was more cost-effective
than reimbursing that same block of patients individually.

• Better data for monitoring and managing the benefit. Participating pharmacies
were required to maintain records of all pharmacy transactions. These records
contained information about prescription drugs, plan members, physician
prescribing patterns, and utilization that administrators could use to assess and
control plan performance.

• Standardized claims processing. Early prescription card programs took the first step
toward standardized claims processing by requiring network pharmacies to submit

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claims on designated forms. Unfortunately, each plan had its own form, and it was
necessary for pharmacies that participated in more than one network to maintain
and use separate forms for each plan. This was addressed in 1976 when the Drug Ad
Hoc Committee, which later became the National Council for Prescription Drug
Programs (NCPDP), created the Universal Claim Form for pharmacy (UCF). The
NCPDP later developed similar standards for electronic claims processing. 1

Historical Changes to Pharmacy Networks

Early pharmacy networks were typically open panels, in which any pharmacy that satisfied
registration and reimbursement requirements could participate. These networks expanded
patient access to pharmacy benefits, but they did very little to control costs. In a typical
fee-for-service (FFS) prescription program, a payer (typically a government agency or
employer) contracted with a TPA, which in turn contracted with various pharmacy
networks to provide services to plan members. This relationship is illustrated in Figure A.

Fee-for-service (FFS) is a payment model where healthcare services are unbundled and
paid for separately.

Figure A: Traditional Fee-for-Service Prescription Indemnity Program

TPAs could exert some control over participating pharmacies and plan members by:

• establishing dispensing fees

• encouraging the use of generic drugs

• requiring patient cost-sharing

Administrators, however, had no control over drug costs or prescriber habits, and cost
increases were typically passed on to payers in the form of increased insurance premiums.

In the early years of pharmacy benefit programs, cost increases were often dramatic.
Applying managed care strategies to pharmacy network development offered plans a way
of controlling those costs.

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Open and Closed Pharmacy Networks

A first step in the cost management process was to establish closed pharmacy networks
rather than open pharmacy networks.

Open pharmacy networks are, as the name suggests, open to virtually all
pharmacies. Closed pharmacy networks, by contrast, limit participation to a
specified group of pharmacies. By directing patients to specified pharmacies, closed
networks offered significant cost savings and greater control over pharmacy benefits
than was possible with open networks. Closed networks kept costs down for payers
by reducing contracting and administrative costs. Closed networks also gave TPAs
greater leverage in negotiating with pharmacies, by allowing them to trade business
volume for price discounts. They also gave administrators greater control over
pharmacy performance and made implementing additional cost-management
programs easier.

Pharmacy networks have continued to evolve in structure over time, as the

application of managed care principles has become more prevalent and changes to
the legal/regulatory landscape have occurred.

Prescription Drug Benefits and Managed Care

Modern Prescription Drug Benefits and Managed Care

Managed care refers to an organized health care delivery system designed to improve the
quality and accessibility of health care, while simultaneously being cognizant of costs.

Participants in managed care in the prescription drug benefits context include:

• health plan members

• healthcare professionals (prescribers, pharmacists, nurses, and others)

• pharmacies

• plan sponsors/payers (i.e. health plans, employers, government organizations, and

others)

• pharmacy Benefit Managers (PBMs)

• disease State Management (DSM) entities

• consultants

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Disease State Management (DSM)

Disease State Management (DSM) is an integrated, systems approach to healthcare

designed to influence the progression of disease within selected patient populations. A
detailed analysis of a patient population’s medical needs and the resources it consumes is
performed to design, implement and direct the delivery of care. Conditions that lend
themselves to DSM generally are chronic conditions that require drug rather than surgical
intervention, where there is general agreement on how to manage a condition but
practices among individual doctors may vary. Pharmacists have an important role to play
in DSM, including by issuing clear treatment guidelines and assuring that the most effective
drugs are used.

Example: One study examined the impact of following guidelines for treating community-
acquired pneumonia in 2,323 patients at 61 hospitals. Poorer patient outcomes were
found when the initial antibiotic prescribed or when the first dose of antibiotic was given
more than eight hours after admission. 2

Managed Care Strategies

Managed Care Strategies - Benefit Design

Application of managed care principles in delivering prescription drug benefits has

numerous goals, including disease prevention, focus on wellness/improved quality of life
for patients, improved outcomes, improved quality and accessibility of health care and
drug therapy, as well as controlling and containing costs.

A key driver of cost containment in this area is benefit design. Some of the more common
aspects of benefit design applicable in this context include:

• cost sharing

• formulary management

• prescribing generic drugs (where available)

• therapeutic substitution

• use of mail order programs

• utilization management

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Cost Sharing

Cost sharing strategies may vary by plan, but generally include the following:

• co-payments: a fixed charge paid by health plan members for each medication
purchased

• co-insurance: an established percentage of the allowed drug cost that is the plan
member’s responsibility

• tiers: structured cost sharing based on the type of drug dispensed

Example: A health plan might implement a two-tiered structure, with different co-payment
charges for drugs on the first tier (generic) and the second tier (brand). A three-tiered
structure might provide for different co-payment charges for drugs on the first tier
(generic), second tier (preferred brand), and third tier (non-preferred brand).

Formulary Management

A health plan formulary is the list of approved medications available through the plan,
designed to encourage use of safe, efficacious, and cost-effective agents.

In most health plans, the formulary is developed by a pharmacy and therapeutics (P&T)
committee, composed of pharmacists and physicians from various medical specialties. The
committee reviews new and existing medications and selects drugs to be included in the
health plan's formulary based on safety and how well they work.

A plan’s formulary may be constructed as open, meaning that most medications are
covered (although a different cost share amount may be assigned, such as for a preferred
brand vs. a non-preferred brand). It may also be constructed as closed, meaning that
certain medications or classes of medication may be excluded from coverage.

Generic Drugs

Another strategy to consider as part of benefit design is mandatory use of generic drugs -
where available. Where this strategy is employed, a generic drug must be dispensed for
the plan to cover payment unless other factors apply.

State laws and Medicaid insurance plans generally mandate generic substitution when there
is a US Food and Drug Administration (FDA)-approved generic, unless the physician
specifically checks the “dispense as written” box.

Example: If a physician prescribes a brand-name statin drug used to treat high cholesterol
and triglyceride levels, pharmacists generally can automatically substitute the FDA-approved
generic version.

Therapeutic Substitution

A related benefit design consideration involves use of therapeutic substitution. This occurs
when the medication prescribed to a plan member is switched by a pharmacist to a drug
with different active ingredients. Therapeutic substitution differs from when a brand name
drug is switched to a generic.

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Generic Substitution

Generic substitution means a brand name drug is switched to a generic with the same active
ingredients and is approved by the United States Food and Drug Administration (FDA) as an
equivalent drug, often at a substantial cost savings. For therapeutic substitution, medicines
in the same class of drugs, intended to treat the same condition, may have different active
ingredients and work in different ways. This means that they can have different side effects,
dosages, and potential risks for the patient.

Generic substitution can become more complicated when a prescription names a brand-
name drug for which there is no FDA-approved generic, but an approved generic version of
another drug within the same class exists. State laws vary on whether pharmacists can
substitute within therapeutic classes but generally require specific protocols and explicit
requests for physician approval.

Mail Order Programs

Another strategy to consider in the benefit design phase involves use of mail-order delivery
of drugs. This is a program that either requires or strongly encourages, maintenance drugs
to be filled through a mail-order pharmacy, often in exchange for a greater plan discount or
other financial incentive to plan members.

Maintenance drugs are medications prescribed for chronic, long‐term conditions that are
taken on a regular, recurring basis. Examples of chronic conditions that may require
maintenance drugs include high blood pressure, high cholesterol, and diabetes.

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Utilization Management

Utilization management (UM) is another critical component of managed care design.

When it comes to pharmaceuticals, UM might involve strategies such as prior
authorization, step-therapy, and or quantity limits.

Prior authorization is the process of requiring written approval from the health plan for
certain services or products prior to delivery. This means that before the plan will cover a
particular drug, a member’s doctor or prescriber must first demonstrate that the drug is
medically necessary for the member’s treatment and or that the member has met the prior
authorization requirements for the drug. Plans may require prior authorization to be sure
that drugs are prescribed and used correctly. This process is most often accomplished
through the submission of a designated form.

Step therapy is a type of prior authorization that involves utilizing the most cost-
effective drug therapy for a medical condition before progressing or “stepping up” to
more costly or risky therapies. This might mean trying a similar, more affordable generic
drug instead of a more expensive, brand-name medication. If a member has already
tried the more affordable drug and found it ineffective, or if the prescriber believes that
it is medically necessary for the member to be on a more expensive or different drug, he
or she can contact the plan to request an exception (which, if approved, will result in
coverage for the more expensive drug).

Example: Larry Levine is a member of Novellus Health Plan. He has been suffering from
severe allergy problems. In his case, step therapy might involve first trying an over-the-
counter medication to control his symptoms. If that does not work, Larry might move to a
Tier 1 medicine covered by the Plan. If that approach likewise is unsuccessful, Plan
administrators would review whether Larry has met step therapy requirements before
helping to pay for a Tier 2 or Tier 3 medication.

For safety and cost reasons, health plans also may set quantity limits on the number of
drugs they cover over a certain period.

Example: Larry Levine, a member of Novellus Health Plan, has been prescribed a medication to take
two tablets per day, or 60 tablets per month. Because Novellus has a quantity limit of 30 tablets per
month for that medication, Larry’s doctor or prescriber will need to work with the Plan to obtain
authorization for a higher quantity.

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Health Plan Pharmacy Networks

Key Features and Differences of Health Plan Pharmacy Networks

In terms of structure and operation, pharmacy networks are like other provider networks.
Like other provider networks, a pharmacy network must:

• be large enough to provide easy access to plan members within its geographical area
of operation

• be small enough to be manageable and to offer an attractive volume of plan

members to network providers

• provide plan members with comprehensive, quality services

• achieve maximum health outcomes for plan members at the lowest cost

Pharmacy networks differ from other provider networks, however, in certain key respects:

• pharmacy networks are designed primarily to deliver products with the expectation
that quality services are also delivered

• reimbursement methods vary for pharmacy networks compared to other provider

networks

• information management requirements/systems also vary in the development and

maintenance of health plan pharmacy networks

Difference #1: Products and Services vs. Services

As noted, one key difference between pharmacy networks and other provider networks is
that pharmacy panels are designed primarily to deliver tangible healthcare products to
health plan members, but they also deliver services. Unlike surgical procedures or diagnostic
techniques, medications have a concrete market value. In the minds of some payers,
prescription drugs are like commodities and should be purchased at the lowest possible
price and distributed through the lowest-cost provider.

This cost-conscious attitude has given health plans some economic leverage when
negotiating contracts with drug manufacturers in an environment of spiraling drug prices.
Health plans have no direct control over pharmaceutical products, but they do have control
over the market for those products – namely, health plan enrollees. Health plans have been
able to offer access to a large patient base in exchange for price discounts and rebates from
manufacturers. Health plans also have leverage over pharmacies as distributors of
pharmaceutical products. To maintain their customer bases, pharmacies must be willing to
accept the terms of network contracts offered by health plans.

Other types of prescription drug distributors, including chain pharmacies, mail-order drug
services, pharmacies located at employers’ workplaces, and online pharmacies, also
compete for the health plan patient base. In some locations, physicians dispense their own
prescription drugs, without the use of pharmacies.

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To compete effectively against these lower cost distributors, pharmacies must now do
more than simply sell prescription drugs. They must also provide services.

Pharmacies provide services by working with physicians, nurses, and other healthcare
providers to incorporate medications into a patient’s healthcare plan and take
responsibility for the outcomes of drug therapy. This process, which is referred to as
pharmaceutical care, is designed to achieve both therapeutic outcomes and quality of
life outcomes.

Therapeutic Outcomes

Therapeutic outcomes are measures of a drug’s effectiveness in treating disease and are
achieved by incorporating medications into patient care. Therapeutic outcomes include:

• curing the patient’s disease

• preventing or slowing the progression of disease

• eliminating or reducing the patient’s symptoms

• preventing a disease or symptom

• diagnosing a disease

• avoiding drug-related problems

Quality of Life Outcomes

Quality of life outcomes involve improving the patient’s physical, social, and emotional
well-being as observed by both the healthcare team and the patient. Improvement in
quality of life represents the outcome of the care process and indicates the success of
interventions.

Difference #2: Pharmacy Reimbursement Methods

Health plans cover pharmaceuticals under the medical benefit (i.e. drugs administered
in a medical office, clinic setting, or home health setting) and the pharmacy benefit (i.e.
drugs dispensed by a retail, mail order, or specialty pharmacy). Drugs covered under
either component of a health plan typically have differing payment methods and use
different pricing benchmarks.

Commonly utilized drug payment benchmarks include:3

• Average Wholesale Price (AWP): This represents the average price that wholesale
suppliers or manufacturers charge pharmacies for drugs. AWP is related to wholesale
acquisition cost (WAC), which is an estimate of the manufacturer's list price for a drug
to wholesalers or direct purchasers. Historically, the relationship of AWP to WAC has
been most commonly (though not always) characterized by one of the following
equations: AWP = 1.20 x WAC, or AWP = 1.25 x WAC for branded pharmaceuticals. WAC
does not reflect actual wholesale acquisition cost, however, because it does not include
discounts and price concessions offered by manufacturers.

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• Average Sales Price (ASP): As a result of the 2003 Medicare Prescription Drug,
Improvement, and Modernization Act (MMA), ASP replaced AWP as the basis for
payment for most drugs covered under Medicare’s medical benefit – Medicare Part B –
as of January 1, 2005. Unlike AWP, ASP is based on manufacturer-reported actual selling
price data and includes most rebates, volume discounts, and other price concessions
offered by manufacturers.

• Average Manufacturer Price (AMP): Congress created AMP as part of the Omnibus
Budget Reconciliation Act (OBRA 1990) to calculate rebates to be paid by manufacturers
to states for drugs dispensed to their Medicaid beneficiaries. AMP was defined as the
price available to retailers and reflected discounts and other price concessions afforded
to those entities.

• Federal Upper Limit (FUL): The FUL, is the maximum amount of pharmacy
reimbursement for product costs for certain generic and multiple-source drugs that the
federal government will recognize in calculating federal matching funds for payment to
state Medicaid programs. In other words, Federal Medicaid matching funds to states
are limited to payments that do not exceed the FUL in the aggregate for multiple-source
drugs, plus a dispensing fee set by each state. A multiple-source drug is a drug that is
available from a brand name manufacturer and several generic manufacturers. The FUL
formula was revised as part of the Affordable Care Act (ACA). The FUL list is created and
maintained by the Centers for Medicare and Medicaid Services (CMS) for use by states in
their Medicaid Pharmacy programs, but it is also publicly available for use by any entity.4

• Maximum Allowable Cost (MAC): MAC is typically a reimbursement per individual

multiple-source drug, strength, and dosage form. “MAC List” refers to a payer or PBM-
generated list of products that includes the upper limit or maximum amount that a plan
will pay for generic drugs and brand name drugs that have generic versions available (i.e.
multi-source brands). While defined in FUL for Medicaid, there is no standard private
sector definition, methodology, or market application for MAC.

• Wholesale Acquisition Cost (WAC): WAC is an estimate of the manufacturer’s list price
for a drug to wholesalers or other direct purchasers, not including discounts or rebates.

Pharmacy Reimbursement

As a general matter, pharmacy reimbursement depends on what medications are dispensed

and what type of health plan is involved:

• Private payers

• Medicare

• Medicaid

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Private Payers

Private health plans and PBMs negotiate drug payment rates and dispensing fees with
pharmacy providers. Historically, drug payment rates have been based on the average
wholesale price (AWP) or wholesale acquisition cost (WAC) and include maximum allowable
cost (MAC) pricing for most generic drugs. Dispensing fees are negotiated as well, typically
based on a percentage off the usual dispensing fee charge (i.e. a 40% discount).

The standard pharmacy reimbursement formula for private payers is as follows:

• Negotiated rate: this consists of the drug ingredient cost, dispensing fee, and sales
tax

o Ingredient cost: this is based on the AWP or WAC, discounted by a specified

percentage, or MAC set by the plan sponsors

o Dispensing fees: this compensates the pharmacy for processing the

prescription and covers expenses such as overhead, stocking, and storing
medications

Service Costs

The dispensing fee component of the reimbursement formula consists of the pharmacy’s
service costs. Service costs are those costs associated with dispensing prescription drugs,
exclusive of ingredient costs and profit, and include operating expenses assigned specifically
to the prescription department.

Service costs consist of two components: costs for services associated with dispensing
prescription drugs and costs for cognitive services. Dispensing services include making
generic substitutions, switching prescriptions to preferred drugs, or providing patient
monitoring and education. These services are typically specified by the health plan.
Cognitive services, or professional services, are services identified by the pharmacist as
being medically necessary for the patient and include:

• counseling patients about prescriptions and drug therapy

• reviewing drug profiles to prevent or monitor adverse drug interactions

• implementing quality improvement programs

• documenting pharmaceutical care in patient records

• monitoring program compliance.

Fees can be uniform—for example, the same specified amount added to each prescription—
or variable, based on specified criteria such as brand versus generic or the cost of the
medication.

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Rebate and Discount Programs

Pharmacies may also receive payment through rebates and discount programs.

• Manufacturers negotiate with payers (Medicaid, Medicare, private health plans, and or
PBMs) to pay rebates after a medication has been dispensed

• Patient discounts or coupons for medications are sometimes provided for high dollar or
specialty medications

Medicare

On January 1, 2006, following passage of the Medicare Modernization Act (MMA), Medicare
began to pay for outpatient drugs dispensed at the pharmacy under Part D. Part D benefits
are provided through standalone prescription drug plans (PDPs) or Medicare Advantage
prescription drug plans that are integrated with a medical plan (MA-PDs). These plans
typically are offered by PBMs and commercial health plans.

Subject to legislated mandates and CMS guidelines, each PDP and MA-PD sets its own
premiums, benefit structures, drug formularies, pharmacy networks, and terms of payment.
Thus, unlike Medicare Parts A, B, and C, where a standard payment formula typically exists,
drug payment to pharmacies and member cost sharing varies by individual plan under Part
D.

PDPs and MA-PDs may negotiate discounts and or rebates with drug manufacturers.

Medicaid

Every state Medicaid program includes an outpatient prescription drug benefit or pharmacy
benefit. Under fee-for-service Medicaid, most states pay pharmacies directly for drugs
dispensed to Medicaid beneficiaries, using a rate based on AWP or WAC for brand drugs and
MAC (based on federal and state upper limits) for multiple-source brand and generic drugs,
while several states have implemented AAC-based reimbursement.

If the beneficiary is enrolled in a Medicaid managed care plan, the state may pay the plan to
cover pharmacy benefits for beneficiaries or may “carve out” pharmacy benefits and pay for
it directly under fee-for-service administered by the state. Under managed Medicaid
without the carve out, each Medicaid-only managed care organization (MCO) negotiates
with drug manufacturers for rebates and discounts and manages its drug formulary and
network. Under the carve out, the state pays pharmacies for prescription drugs directly and
manages a statewide formulary that may include a preferred drug list (PDL) and
supplemental rebates as well as rebates mandated by federal statute. Beneficiaries eligible
for both Medicaid and Medicare (“dual eligibles”) receive prescription drug benefits through
the Medicare Part D prescription drug benefit.

Every state Medicaid program, either directly or through MCOs, also pays for drugs utilized
under the medical benefit (i.e. in a doctor’s office or clinic). Drugs covered under the
medical benefit are typically paid for differently than drugs covered under the pharmacy
benefit, using formulas that vary by state that are based on AWP, WAC, or ASP.

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Difference #3: Information Management Requirements/Systems

Pharmacies can obtain information about benefits, copayments, and member eligibility
from a health plan’s database, link it with their drug and utilization information, and
then send a completed claim to the health plan for reimbursement.

Point-of-service systems provide comprehensive online communication with health

plans’ and other providers’ databases and allow pharmacies to manage their
prescription departments and their patients’ needs.

Point-of-service capabilities are possible, in large part, because of the standardized formats
provided by the National Council of Prescription Drug Programs (NCPDP). The NCPDP’s
Telecommunication Standard Format provides standards needed for the exchange of
electronic prescription drug claims. Other standards, such as those for communicating
online drug use evaluation information, facilitate the exchange of pharmaceutical care
information, including documentation of drug problems, pharmaceutical care interventions,
and outcomes.

Benefits of Point-of-Service Systems

Point-of-service systems allow pharmacies to perform a variety of tasks quickly, accurately,

and economically. Point-of-service systems verify patient eligibility for prescription drug
coverage and determine copayment, deductible, and coinsurance requirements, point-of-
service systems allow pharmacies to:

• determine formulary compliance

• determine drug therapy restrictions

• determine preauthorization requirements

• conduct prospective drug utilization review

• submit and process prescription drug claim information

• adjudicate claims in “real time”1

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Benefits of Filing Prescriptions Online

Point-of-service technology also made it possible for physicians to forgo traditional paper
“scripts” in favor of sending prescriptions electronically to pharmacies. Electronic
prescriptions save both time and money. Prescription software can check prescribed
medications for generic equivalents and formulary compliance, issue alerts for
noncompliance, offer therapeutic alternatives, and generate drug-change requests. It can
even alert the physician when patients fail to pick up their prescriptions. Filing prescriptions
online also:

• eliminates the danger of forged prescriptions

• reduces hospital admissions that result from pharmacists misreading doctors’

handwriting

• provides accurate records of patient medications

• allows physicians to check prescribed medications against patients’ medical

histories to prevent allergic reactions or possible drug interactions

Electronic transmission of prescriptions, however, may have drawbacks. Some pharmacists

contend that electronic prescriptions represent unnecessary duplication of effort because
pharmacists are already performing the tasks that are included in prescription software
programs—either because of regulatory requirements or as part of their pharmaceutical
care efforts.

Pharmacy Network Structure & Delivery of Pharmacy Services

Pharmacy Network Structure

The structure of pharmacy networks is tied closely to health plan requirements, such as
access (the distance members must travel to reach of network pharmacy) and density
(the number of pharmacies available to a member within the access requirement).

Pharmacy networks can be open, which means they include all pharmacies within a
geographical area, or closed, which means the plan’s prescription drug benefit is only
available at designated pharmacies. In the former (open) pharmacy context, plan
members’ co-payments and out-of-pocket costs are the same regardless of which
pharmacy in the network dispenses the prescription.

A key component of most pharmacy networks is retail pharmacies, a category that

includes both chain retail pharmacy outlets (i.e. CVS, Rite Aid, and Walgreens) and
independent retail pharmacies. An advantage of including retail pharmacies in the
network is that there are often multiple outlets available to provide services near plan
members.

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 AHM 530: Pharmacy Network Management

A health plan’s pharmacy network also may include mail-order pharmacies, which may
be accessible online. Obtaining prescriptions through the mail may offer members a
convenient and cost-effective way to obtain drugs they take regularly and need to take
long term (i.e. maintenance drugs). The ability to obtain a larger quantity of drugs, often
possible through mail-order pharmacies, than might otherwise be available for
dispensing through a retail pharmacy may reduce costs/co-payments for plan members.

A health plan may also elect to include specialty pharmacies as part of the network.
Specialty pharmacies focus on high cost, high touch medication therapy for patients with
complex disease states. Medications in specialty pharmacies range from oral to cutting
edge injectable and biologic products. The disease states treated range from cancer,
multiple sclerosis and rheumatoid arthritis to rare genetic conditions.5

Narrow Pharmacy Networks

A type of pharmacy network designation that has emerged in recent years is the narrow
pharmacy network. With narrow networks, plan members receive financial incentives
to use particular pharmacies that offer lower costs and or give health plans more
control. Pharmacies that participate in narrow networks may accept reduced
reimbursement rates in exchange for boosting store traffic. There are different types of
narrow networks, including:

• preferred pharmacy network(s)

• specialty pharmacy network(s)

• limited pharmacy network(s)

• performance-based pharmacy network(s)

Preferred Pharmacy Network

In this type of structure, plan members can choose any pharmacy within the plan’s
network but pay a lower out-of-pocket cost when filling prescriptions from preferred
pharmacies and a higher out-of-pocket cost when filling prescriptions from a non-
preferred pharmacy.

Example: Louise Jordan’s health plan includes preferred pharmacies within the network.
If Louise fills her prescription at a preferred pharmacy, she will not have any copay
requirement. If she fills her prescription at a non-preferred pharmacy within the plan’s
network, she will have a $5 copay.

Specialty Pharmacy Network6

A specialty pharmacy network is a form of a preferred pharmacy network. This model is

used to deliver high-quality, accessible pharmacy services. By contracting with select
pharmacies, health plans, PBMs, and other payers can ensure consistent care
management and access to specialty medications while promoting affordability in the
specialty drug marketplace. For a specialty pharmacy to be included in a specialty
pharmacy network, the pharmacy must agree to meet criteria to ensure that patients
safely and appropriately use their medications, that payer benefit designs are

18
 AHM 530: Pharmacy Network Management

supported, and that desired clinical outcomes are achieved.

Specialty drugs are high-cost prescription medications used in the treatment of cancer
and chronic diseases such as rheumatoid arthritis, and multiple sclerosis. Medicare
defines specialty tier drugs as those costing more than $670 per month (2019). Specialty
drug coverage depends on where an individual receives the drug. If it self-administered
at home either by taking a pill or self-injecting, it is usually covered through the
individual’s prescription drug plan. If it is administered at a doctor’s office or outpatient
clinic, the costs are more likely to be covered through the medical benefits portion of
the individual’s coverage.

The cost of specialty drugs has received increased scrutiny as prices have risen and these
drugs, despite being taken by a small number of people, represent a substantial portion
of Medicare Part D expenditures. Costs have risen from an estimated 6-7 percent in
2010 to over 20 percent in 2019. Moreover, despite the many benefits offered by
Medicare Part D, many enrollees still face high out-of-pocket costs when taking these
medications. 7

Limited Pharmacy Network

In this model, plan members may only use the specific pharmacies included in the plan’s
network. This model gives payers the greatest amount of economic control, as they
typically will include only pharmacies with the lowest costs and highest service levels.

Performance-Based Pharmacy Network

These networks include incentives for pharmacies that demonstrate improvement in

medication adherence for certain chronic conditions and increased engagement with
plan members. They aim to strike a balance between cost and safety and can
incorporate pay-for-performance models, shared savings models, and/or risk-bearing
models based on patient outcomes.

Customized networks are networks designed to meet the needs of a specific population.
Most often, these networks take the form of company pharmacies that are owned by
large employers and operated at workplace sites. Because of the large number of
employees, company pharmacies can negotiate favorable price discounts from
manufacturers. Company pharmacies provide convenient access for employees. However,
the use of company pharmacies is typically limited to those companies whose employee
base is large enough to warrant the expense of setting up the network and whose
facilities are large enough to accommodate in-house operations. According to industry
guidelines, a company pharmacy requires 4,000 to 6,000 employees, a daily volume of at
least 150 prescriptions, and a minimum of 500 square feet of operating space. 23

Integrated pharmacy networks include community pharmacies combined with mail-

order pharmacies. In this type of network structure, community pharmacies offer access
to acute medications and focus on the initiation of maintenance medications until
patients become stable on a dosage regimen. Mail-order pharmacies are needed to
realize maximum savings on maintenance medications, to reduce plan members’ drug
costs.

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 AHM 530: Pharmacy Network Management

Criteria for Selecting Pharmacy Providers

Health plans follow the same guidelines when establishing a pharmacy network that they
follow when designing the pharmacy benefit. Their purpose is to create a network that
promotes quality, accessibility, efficiency, and member satisfaction. Using these
requirements as a base, health plans can develop specific criteria for network participation,
including requirements for providers to:

• be properly licensed and satisfy state-mandated requirements related to space,

equipment, reference books, and appropriately trained and credentialed personnel

• conform to dispensing standards for prescriptions and controlled substances

• adhere to auditing and reporting procedures

• establish procedures for handling customer complaints

• contribute to patient drug therapy through interventions such as DUR and disease
management

• provide patient counseling and education

• establish quality management programs

• provide service at a location and time that is convenient to plan members

• maintain adequate inventory for appropriate levels of drug availability

• have adequate online capabilities to process claims in real time

• be able to access and contribute to the health plan’s plan, patient, and provider
database

• satisfy customers’ expectations regarding technical competence and adequacy of

explanations.

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 AHM 530: Pharmacy Network Management

Managed Care Implementation and Pharmacy Networks

The Role of Pharmacy Benefit Managers

It is impossible to discuss health care delivery generally, and delivery of prescription drug
benefits specifically, without focusing on the key role of pharmacy benefit managers
(PBMs). Historically, PBMs acted as “middlemen” by processing prescription drug claims—
for a small fee per claim—for insurance companies and plan sponsors (i.e. private
employers).8 Pharmacy benefits management is an outgrowth of the third-party
administration of prescription drug programs but as we will see PBMs now do so much
more.

Unlike TPAs, which focus on providing administrative services such as contract

negotiations and claims processing, pharmacy benefit managers (PBMs) attempt to
control costs by intervening in the way prescription drugs are priced, prescribed,
dispensed, and used. To be included in the network, a pharmacy must ensure that
patients use their medication appropriately and that clinical outcomes are achieved.9

Pharmacy Benefit Managers Expansion

The role of PBMs in healthcare delivery has increased dramatically in recent years due to
several factors, including coverage expansions under the Medicare Part D prescription
drug benefit, the Medicaid prescription drug benefit, and the Affordable Care Act (ACA).
Major increases in drug spending have motivated commercial health plans and self-insured
employers to outsource the management of their spending on outpatient prescription
drugs, in whole or in part.10

Medicare Part D

Medicare Part D prescription drug benefit, also called the Medicare prescription drug
benefit, is an optional US federal government program to help Medicare beneficiaries pay
for self-administered prescription drugs through prescription drug insurance premiums.
Medicare Part D was created as part of the Medicare Modernization Act of 2003 and went
into effect on January 1, 2006.

For more information about the Medicare program and Medicare Part D please review
Appendix A in the Module downloads.

Medicaid

Medicaid is a joint federal-state program that provides health benefits, including pharmacy
benefits, to millions of Americans with low income. States typically use two types of
payment systems to provide those benefits: fee-for-service and managed care. Under the
fee-for-service system, states reimburse health care providers for each of the services they
deliver to beneficiaries. By contrast, under Medicaid managed care, states pay a fixed per
capita fee, or capitation payment, to private health insurance plans or to provider groups,
known as managed care organizations (MCOs), that provide services to enrollees.

For more information about the Medicare program and Medicare Part D please review
Appendix A in the Module downloads.

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 AHM 530: Pharmacy Network Management

Affordable Care Act

The ACA was enacted in March 2010, with three primary goals:

• Make affordable health insurance available to more people. The law provides
consumers with subsidies that lower costs for households with incomes between
100% and 400% of the federal poverty level.

• Expand the Medicaid program to cover all adults with income below 138% of the
federal poverty level. (As of 2019, not all states have expanded their Medicaid
programs.)

• Support innovative medical care delivery methods designed to lower the costs of
health care generally.11

The ACA focuses on five areas of pharmacy involvement: delivery systems reform, payment
reform and quality, comparative effectiveness research, workforce issues, and the 340B
Drug Pricing Program.12

Created in 1992, the 340B Drug Pricing Program (sometimes referred to as the Drug
Discount Program) is a US federal government program that requires drug manufacturers to
provide outpatient drugs to eligible health care organizations and covered entities at
significantly reduced prices.

Today, PBMs have leveraged their position to impact almost every aspect of the
prescription drug marketplace. They help to develop formularies, contract with
pharmacies, negotiating discounts and rebates with drug manufacturers, and process and
pay prescription drug claims. PBMs strive to maintain or reduce health plan pharmacy
expenditures while concurrently trying to improve health outcomes. PBMs operate within
integrated healthcare systems (i.e. Kaiser Permanente or Veterans Health Administration);
as part of retail pharmacies (CVS, Rite Aid, and Walgreens), and as part of health insurers. 13
As of this writing, the top three PBMs in the country currently manage drug benefits for
approximately 95% of the US population. 14

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 AHM 530: Pharmacy Network Management

How Are PBMs Compensated?

PBMs are compensated through administrative fees negotiated with plans, as well as
through rebates and the so-called “pharmacy spread.”

Administrative fees involve PBM charges to plan sponsors and manufacturers. In the case
of health plans, these fees/charges are negotiated and included in the PBM contract.

A rebate is a discount on a medication that a drug manufacturer provides to a PBM in

return for the PBM covering the manufacturer’s drug product. Since PBMs are often
involved in making the formularies that the plan sponsor will cover, they can negotiate
better prices for certain drugs (often branded) when there are other, less expensive
equivalent drugs that might be used. A portion of these rebates are shared with the plan
sponsor. These rebates and the lack of transparency around them and other aspects of the
pricing process have become matters of controversy in recent years.

The pharmacy spread is a PBM practice where the network pharmacy is reimbursed one
price, and the plan sponsor is charged a higher price for the same drug, with the PBM
keeping the difference (also known as a “clawback”).

Recent Controversies

PBMs have come under criticism from policymakers about rebates. Simply put, critics say
that rebates received by PBMs have failed to be passed through to individual consumers.
They have been cited by critics as a reason for rising drug costs and lack of transparency in
the pricing of prescription drugs. Defenders of PBMs have pointed to their role in achieving
lower drug costs through their ability to negotiate discounts from manufacturers – who
have in some cases arbitrarily raised prices by thousands of dollars. 15

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 AHM 530: Pharmacy Network Management

Drug Distribution Model

Most drug manufacturers ship drugs directly to wholesalers or distributors, who then
distribute the drugs to end customers (i.e. retail pharmacies, hospitals, physician’s offices
or clinics). Manufacturers enter into various forms of contracting arrangements, including
discounts and rebates, with all the entities within the drug supply chain.

Health plans and PBMs also negotiate with manufacturers for discounts and rebates,
principally for single-source branded drugs in specific therapeutic categories purchased for
plan enrollees, based on volume, market share, and formulary placement.

Pharmacies receive payment from the health plan or PBM for the drugs dispensed to the
plan members based on a reimbursement formula agreed to by the payer/PBM and
pharmacy. Physicians and other providers also negotiate with plans for payments for drugs
administered directly to plan members.

At the pharmacy or other points of sale locations, beneficiaries with health insurance that
includes prescription benefit coverage will typically pay a cost-share (i.e. copayment or
coinsurance) to the pharmacy for the drug, in accordance with the terms of the health
plan’s benefit design. If the plan is administered by a PBM, the PBM bills the member’s
health plan or another payer an amount based on the payment formula stipulated in its
provider service agreement, minus the beneficiary cost-share amount collected by the
pharmacy.

Why Select a PBM?

As discussed, the trend in recent years has been to carve out pharmacy benefits
management (in whole or in part) to specialized PBM companies. Several factors have
contributed to the increased use of PBMs. The three most important of these are:

• cost advantages

• access advantages

• quality advantages

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 AHM 530: Pharmacy Network Management

Cost Advantages
Cost Advantages

Claims processing is a major part of PBM operations. It is not unusual for PBMs to process
as many as 1 million claims transactions per day. This high volume of claims processing
gives PBMs an economy of scale—and therefore cost savings—that are not available to
individual health plans. While claims processing may be the most obvious cost advantage,
Health plans that work in tandem with PBMs help to control costs in several other ways
including their ability to exercise influence over:

• manufacturers

• prescribers

• pharmacies

Influence over Manufacturers

One of the most pressing problems facing health plans has been the rising cost of
prescription drugs. One way, health plans, and PBMs address the problem of rising costs is
by establishing and managing formularies.

Drugs and treatment protocols included in the formulary are considered preferred therapy
for a given managed population. A health plan with an open formulary covers drugs that are
on the preferred list as well as drugs that are not on the preferred list. A health plan with a
closed formulary covers only drugs that are on the preferred list. Health plans continually
update their formularies to ensure that the medications included represent the current
clinical judgement of providers and experts in the diagnosis and treatment of disease.

Most formularies encourage the use of generic and therapeutic substitutions to ensure that
patients receive is cost-effective as well as safe and appropriate. In some formularies, such
substitutions are required. In order to compete against lower-cost producers for a place on
the formulary, drug manufacturers have also lowered the price of brand name drugs.

Formularies also offer other benefits. For example, managed drug therapy contributes to
better disease management, fewer physician visits, fewer laboratory tests, fewer emergency
room visits, and less complicated, shorter hospital care.

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 AHM 530: Pharmacy Network Management

Influence over Prescribers

In most cases, physicians are accountable for the coordination of patients’ healthcare
services, including pharmacy services. Much of this accountability is established through
case management and utilization management requirements and reinforced by financial
incentives. PBMs exert additional influence over physicians by using the following tools:

• Drug utilization review

• Authorization requirements

• Second opinions

• Education requirements

• Peer review

• Penalties for violation of prescription policies

Influence over Pharmacies

By developing and managing preferred networks, health plans and PBMs exert direct
control over community-based pharmacies. PBMs determine which products and services
pharmacies deliver to plan members and how they will be reimbursed. The more
restricted the network becomes, the more control the health plan or PBM has. For
example, contracting with a single chain of pharmacies rather than with individual
pharmacies reduces the PBM’s contracting, claims to process, and administrative costs
and increases its ability to monitor and manage pharmacy performance. The overall high-
volume and low-cost operations of chain pharmacies may also make them more willing
than independent pharmacies to accept lower reimbursement or to share operating
costs.16

Non-Community Based Distribution Systems

Non-community-based distribution systems such as mail-order services also increase

competitive pressures on traditional pharmacies. High-volume and low-cost delivery
capabilities allow mail-order companies to offer health plans and PBMs deep discounts on
prescription drug prices. Mail-order and online distribution have also proved to be cost-
effective for long-term therapy associated with chronic conditions and for distribution to
patients, such as retirees and disabled patients, who have difficulty traveling to pharmacies
to have prescriptions filled. Faced with the prospect of losing clientele to these alternative
providers, pharmacies are accepting the reimbursement offered by health plans and PBMs
and emphasizing the value of services they provide.

Independent pharmacies can deflect some of this competitive pressure by joining forces to
create a pharmacy service administration organization. A pharmacy service administration
organization (PSAO) is an organized network of independent pharmacies created to market
competitive drug programs to health plans. A PSAO gives its members volume-buying power
and helps with claims processing and reimbursement

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 AHM 530: Pharmacy Network Management

Access Advantages

PBMs offer access advantages on two fronts: access to pharmacies and access to
pharmaceutical products and services. A health plan contracting directly with pharmacies
represents a single patient base. While that base may be large, it is only part of the total
market in any given geographical area. PBMs, on the other hand, typically represent
several health plans and other self-funded employer-sponsored plans and can use this
expanded patient base to draw pharmacies into the network.

Most PBMs also offer a complete package of pharmacy services, including drug formulary
management, programs for generic and therapeutic substitutions, drug utilization review
programs, and mail-order prescription delivery systems. These services, designed initially
to reduce costs by improving the health plan’s ability to monitor and control utilization,
have an added benefit: they expand patient access to pharmaceutical products and
services.

Quality Advantages

Today’s PBMs add a quality dimension to the services they provide. Industry studies show
that although the primary appeal of PBMs is their ability to control costs by managing drug
pricing and drug use, increasing numbers of employers and health plans are turning to
PBMs because of their ability to promote safe and effective drug use, contribute to disease
management, and improve patient and provider education and compliance.

PBMs can also improve the quality of care delivered to plan members through their
ability to influence which drugs are prescribed and which are proving most effective in
treatment. This is accomplished by PBM participation in outcomes and
pharmacoeconomic research, the development of disease management and practice
guidelines. PBMs have also undertaken drug utilization review (DUR) programs, patient
monitoring, academic detailing— that is, one-on-one visits to physicians to discuss
prescribing patterns and formulary compliance. PBMs now play an active role in clinical
and drug use decisions thus adding to their contributions to the quality of healthcare
received by health plan members. Moreover, PBMs promote safer drug use by making
sure pharmacists are aware of possible drug interactions even if a consumer uses
multiple pharmacies.17

Guidelines for Selecting a PBM

PBMs have a significant impact in determining total drug costs for insurers, shaping
patients’ access to medications, and determining how much pharmacies are paid. PBM
selection is thus critically important. For many health plans, selection of a PBM is based
on the PBM’s response to questions related to the following topics:

Contract arrangements

Does the PBM require fee-for-service reimbursement, or is it willing to contract on a

risk-sharing basis?

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 AHM 530: Pharmacy Network Management

Network development

Is the network open or closed? Does the network include mail-order services? How are
participating pharmacies selected?

Network reimbursement

How does the PBM reimburse network pharmacies? Is reimbursement available for non-
network purchases? If so, how is this reimbursement handled? Does the PBM reimburse
pharmacies for cognitive (professional expertise) as well as dispensing services?

Formulary development

What incentives do pharmacies have to dispense generic products? Do pharmacies have

the authority to make generic or therapeutic substitutions or to recommend prescription
changes? Is the formulary open or closed?

Drug pricing

What system does the PBM use to reimburse participating pharmacies for drug costs? Do
pharmacies share risks for the costs of drugs dispensed? If so, who is responsible for
establishing a risk-sharing program and for selecting, pricing, and assuring the quality of
the drugs under the program?

Online capabilities

Does the PBM operate a comprehensive point-of-service system? How does the PBM handle
utilization review and authorization? Does the system link the PBM to individual pharmacies
and other providers in the health plan?

Quality management

How does the PBM measure, monitor, and manage the quality of services provided by
network pharmacies? What quality indicators does the PBM evaluate?

Customer satisfaction

How does the PBM measure, monitor, and manage the quality of services provided by
network pharmacies? What quality indicators does the PBM evaluate?

PBM ownership

Is the PBM controlled by a pharmaceutical manufacturer through an ownership agreement

or other strategic alliance? Are manufacturer discounts limited to specific drugs because of
contract requirements?

28
 AHM 530: Pharmacy Network Management

Lesson Summary

Pharmacy benefit networks were not formally organized until the mid-1960s. Before that
time, pharmacy benefits were delivered through open and direct contact between patients
and pharmacies – including direct payment by patients. The patient either paid the
pharmacy in full or shared expenses with an insurer under a major medical insurance
policy.

Early pharmacy networks were open panel offering health plan members wide flexibility
and freedom of choice but little in the way of cost savings. Development of closed
pharmacy panels offered health plans and their members cost savings, greater
administrative control, and the potential to introduce quality measures.

The structure and operation of pharmacy networks are like other provider networks in that
they must be large enough to provide easy access and yet small enough to be manageable.
They must provide members with comprehensive quality services and achieve maximum
health outcomes at reasonable costs. Pharmacy networks, however, differ from other
provider networks in three keys ways. First, pharmacy networks deliver products as well as
services. Second, they are reimbursement in different ways. Lastly, pharmacy networks
require specialized information management systems.

Pharmacy networks may be structured to included retail pharmacies (including chains),

mail-order pharmacies, and specialty pharmacies to handle high-cost drugs for patients
dealing with complex health issues. In recent years, narrow pharmacy networks have
emerged to lower health care costs. Furthermore, different types of narrow networks have
come to be recognized including preferred pharmacy networks, specialty pharmacy
networks, limited pharmacy networks, and performance-based pharmacy networks.

Like other types of networks, health plans develop criteria for selecting pharmacy providers
to be part of their networks. These criteria include requirements for providers to be
properly licensed, conforming to dispensing standards for prescriptions and controlled
substances, and the ability to provide patient counseling and education. Selection criteria
also include the ability to establish quality management programs and the ability to access
and contribute information to the health plan’s database.

It is impossible to discuss the delivery of prescription drug benefits without considering the
key role played by pharmacy benefit managers (PBMs). While their historical roots may be
traced back to a middleman who processed claims, the have long evolved into playing a far
larger role. Today, PBMs impact almost every aspect and the prescription drug
marketplace. They help to develop formularies, contract with pharmacies, negotiate
discounts and rebates with drug manufacturers. Health plans increasingly rely on PBMs
because they offer cost, access, and quality advantages. PBMs due to their reliance on
rebates and spreads have come under criticism from other quarters of the healthcare
industry – most notably large pharmaceutical companies. Their role, however, while likely
to further evolve is unlikely to diminish in the foreseeable future.

Health plans no longer simply administer the delivery of pharmacy benefits from payers,
through pharmacy networks, to patients. Instead, health plans and their pharmacy networks
influence large swaths of the pharmacy benefits process.

29
 AHM 530: Pharmacy Network Management

Notes:

1
https://ncpdp.org/About-Us/History-and-Impact
2
Disease state management: an integrated approach to providing care, The Pharmaceutical Journal, 18 May
2002; see also Greer, Nancy, et al., Pharmacist-led chronic disease management, Annals of Internal Medicine,
April 26, 2016 (available at https://annals.org/aim/article-abstract/2517407).
3
Academy of Managed Care Pharmacy Guide to Pharmaceutical Payment Methods (2013).
4
Pharmacy Pricing, Federal Upper Limits, Medicaid.gov, available at
https://www.medicaid.gov/medicaid/prescription-drugs/pharmacy-pricing/index.html
5
https://www.pharmacist.com/specialty-pharmacy
6
Specialty Drug Definition, Health Insurnce.org Glossary, available at
https://www.healthinsurance.org/glossary/specialty-drug/
7
Juliette Cubanski, Wyatt Koma, and Tricia Neuman, The Out-of-Pocket Cost Burden for Specialty Drugs in
Medicare Part D in 2019, Kaiser Family Foundation (KFF) Issue Brief, Feb. 2019, available at
https://www.kff.org/medicare/issue-brief/the-out-of-pocket-cost-burden-for-specialty-drugs-in-medicare-
part-d-in-2019/
8
National Community Pharmacists Association. Pharmacy benefit managers (PBMs) 101. Available at:
http://www.ncpa.co/pdf/leg/nov12/pbm_one_pager.pdf
9
“What is a Speciality Pharmacy Network.” https://www.pcmanet.org/pcma-cardstack/what-is-a-specialty-
pharmacy-network/; https://cvshealth.com/newsroom/press-releases/cvs-health-introduces-new-pbm-
performance-based-pharmacy-network-focused
10
Concerns regarding the pharmacy benefit management industry. Applied Policy, November 2016. Available
at: http://www.ncpa.co/pdf/applied-policy-issue-brief.pdf
11
https://www.healthcare.gov/glossary/affordable-care-act/
12
Holahan J, Buettgens M, Carroll C, Dorn S., The Cost and Coverage Implications of the ACA Medicaid
Expansion: National and State-by-State Analysis. Washington, DC: Henry J. Kaiser Family Foundation; 2012.
13
Feldman, Brian S., Big pharmacies are dismantling the industry that keeps US drug costs even sort-of under
control, Quartz, March 17, 2016; available at https://qz.com/636823/big-pharmacies-are-dismantling-the-
industry-that-keeps-us-drug-costs-even-sort-of-under-control/ (accessed July 2019).
14
Hoffman-Eubanks, Brittany, The Role of Pharmacy Benefit Managers in American Health Care: Pharmacy
Concerns and Perspectives: Part 1, Pharmacy Times, November 14, 2017; available at
https://www.pharmacytimes.com/news/the-role-of-pharmacy-benefit-mangers-in-american-health-care-
pharmacy-concerns-and-perspectives-part-1 (accessed July 2019)
15
Elizabeth Seeley, Aaron S. Kesselheim, Pharmacy Benefit Managers: Practices, Controversies, and What Lies
Ahead, The Commonwealth Fund, Issue Brief, March 2019, available at
https://www.commonwealthfund.org/publications/issue-briefs/2019/mar/pharmacy-benefit-managers-
practices-controversies-what-lies-ahead
16
“Narrow Networks Changing Pharmacies.” https://join.healthmart.com/business-and-operations/narrow-
networks-changing-pharmacy/; http://www.amcp.org/WorkArea/DownloadAsset.aspx?id=18742
17
“Pharmacy Networks.” https://www.pcmanet.org/policy-issues/pharmacy-networks/;
https://www.pdmi.com/pharmacy-network-capabilities.htm

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 AHM 530: Provider Networks for Workers’ Compensation

Provider Networks for Workers’ Compensation

Introduction

This module explores how the application of managed care principles, such as provider
networks, can improve the quality and cost-effectiveness of medical services delivered as
part of a workers’ compensation program. Legal considerations relating to the use of
managed care in workers’ compensation, including issues that affect the selection of
providers for a network, compensation options, and other tools that may be used to manage
provider performance in the workers’ compensation area will also be discussed.

After completing this module, you should be able to:

• Explain the reasons that managed care can benefit workers’ compensation programs
• Describe how the selection process for workers’ compensation providers differs from
types of networks
• Describe some of the nonfinancial tools that a health plan can use to manage the
performance of its workers’ compensation providers

Workers’ Compensation
Workers’ Compensation

Workers’ compensation, often referred to as “workers’ comp,” is a state-

mandated insurance program designed to cover both medical expenses
associated with workplace injuries and associated lost wages.

State-based workers’ comp programs provide critical support to workers who are
injured or made sick on the job. Workers’ comp insurance is used to finance
health care delivery and benefits for these workers.

Goals of Workers’ Compensation

In order to control the expense of reimbursing workers for lost wages, the
primary goal for medical services provided under workers’ comp programs is to
return the employee to work as soon as possible. With emphasis placed on a
quick recovery, workers’ comp providers may be less concerned about
overutilization and strict definitions of medical necessity than other providers.

Use of managed care in workers’ comp programs also aims to control costs – both
medical costs and the costs of lost wages. A workers’ comp plan may need to
adjust its goals for healthcare delivery to manage both classes of benefits. Part of
the adjustment process is tailoring the management of the provider network to
emphasize rapid recovery as well as appropriate care and cost-effectiveness.
An equally important goal of using managed care in this context is providing
better care delivery for patients. It is important to remember that beyond

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 AHM 530: Provider Networks for Workers’ Compensation

controlling costs, managed care also seeks to contribute to the availability of

high-quality medical care by physicians experienced in treating occupational
injuries.

Categories of Workers’ Compensation Benefits – Overview1

The limits and duration of workers’ comp benefit can vary by jurisdiction. However, each state
provides the same three classes of benefits:

• Medical benefits
• Disability benefits/indemnity (i.e. lost wages)
• Death benefits

Medical benefits generally are unlimited, with no co-pay or deductible for the employee.
Payments are made to the point that the injured employee is “cured” and/or given maximum
relief so that the employee can return to work. Bills for services provided go directly to the
workers’ comp insurance carrier, and payment is made directly to the healthcare provider. The
employee’s only responsibility is to follow and cooperate with the treatment plan.

Sources of Workers’ Compensation Insurance 2

Non-federal employers can pay for workers’ comp by purchasing insurance from a private
insurance carrier, a state workers’ comp insurance plan (called a “state fund”), or by self -
insuring.

This module focuses on the use of private insurance.

Workers’ comp insurance is available for purchase on the private market in all but the
following four states:

• North Dakota
• Ohio
• Wyoming
• Washington

For these states, workers’ comp insurance must be purchased exclusively through the state
workers’ comp fund.

Workers’ comp policies provided by private insurers operate similarly to automobile or

homeowner’s insurance. Employers purchase insurance for a premium, which varies
according to expected risk. Available policies may be structured either to:

1. Require the insurer to pay all workers’ comp benefits

2. Include a deductible, which requires the employer to reimburse the insurer for
benefits paid up to the specified deductible amount

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In return for accepting a policy with a deductible, the employer generally pays a lower
premium. Deductibles may be written into an insurance policy on a per-injury basis, an
aggregate-benefit basis, or a combination of both.

Opportunities for Managed Care in Workers’ Compensation

Due to the underlying differences between workers’ comp and health plans, workers’ comp
plans historically lagged in the adoption of managed care techniques when compared to most
public and private health care plans. Managed care techniques were developed with the
objective of achieving positive health outcomes at the lowest cost. For workers’ comp,
managed care must address a different objective: restoring a worker to health and
productivity at the lowest cost.3

Today, workers’ comp plans increasingly involve the use of managed care, with attendant
advantages in terms of reducing the cost and improving the quality of the care provided.
Studies generally show that where managed care techniques have been applied to workers’
comp, these objectives have been achieved. 4

Although they constitute a relatively small percentage of all healthcare costs overall, workers’
comp healthcare costs still amount to billions of dollars a year in expenses for employers. In
recent years, medical costs have grown as a percentage of overall workers’ comp costs, and
these percentages are only projected to increase further in the coming years. The following
chart illustrates this trend:

Medical Indemnity

1992 48% 52%

2012 62% 38%
2020* 70% 30%

As this data illustrates, medical care as a proportion of workers’ comp benefits has been
growing with intensity over the past three decades, constituting 48 percent of total average
claims costs in 1992, more than 62 percent of total average claims costs in 2012, and
(*projected) 70 percent of developed claims costs in coming years. 5

Indemnity

Indemnity is a promise that one party will make good on any loss, damage, or liability incurred
by another. In the context of workers’ comp, indemnity refers to earnings lost as a result of a
work-related illness or injury, as opposed to medical bills. Workers' comp indemnity attempts
to compensate the employee for lost wages and make the employee financially whole.

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Three Issues that Increase Costs

There are several issues that contribute to increased costs in workers’ comp:

1. Lack of control over providers

2. Potential for fraud and abuse
3. Duplication of expenses

Issue #1: Lack of Control Over Providers

Various Managed Care Strategies

Case management (CM) is a collaborative process that consists of:

• assessment
• planning
• facilitation
• care coordination
• evaluation
• advocacy

Through communication and available resources to promote patient safety, quality of care, and
or cost-effective outcomes, this collaborative process assesses the options and services
necessary to meet an individual, and or a family’s, comprehensive health needs.6

Example: Coordinating care through a worker’s recovery from a serious accident.

Quality Management (QM) aims to ensure excellence in the provision of healthcare services to
patients. Health care providers, organizations, and administrators apply QM applications to
identify ways to improve internal processes, which in turn will produce higher quality outcomes
for patients.

Utilization Management (UM), sometimes called utilization review, is the evaluation of the
medical necessity, appropriateness, and efficiency of the use of health care services,
procedures, and facilities under the provisions of the applicable health benefits plan. UM may
assess the medical provider’s proposed or delivered treatment plan, the duration of care, scope
of services, specific injury, and other claim or patient factors to measure the effectiveness of
the medical services. The review may be prospective, concurrent with care, or retrospective. 7

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Lack of Control Over Providers

The level of provider control can contribute to the overall cost of medical care in the
workers’ comp area. For example, when fee-for-service (FFS) provider compensation is
used, providers have an economic incentive to maximize the number and intensity of
services provided.

Other factors that can affect the cost of care may include: the absence of mechanisms to
monitor the quality and appropriateness of the care given to workers’ comp recipients and
the ability of workers’ comp claimants (employees who suffer work-related illnesses or
injuries) to have free choice of providers—with little, if any, incentive to choose cost-
effective providers.

Managed care strategies employed with success in traditional group health plans, such as
alternative compensation schedules, provider networks, case management, quality
management, and utilization management, can help control these cost factors by ensuring
that the services provided under workers’ comp insurance plans are appropriate and cost-
effective.

Issue #2: Potential for Fraud and Abuse

Issue #2: Potential for Fraud and Abuse

It is also important to understand the potential for fraud and abuse in workers’ comp. Unlike
group health insurance, workers’ comp coverage includes no patient deductibles, coinsurance,
or benefit limits. Workers’ comp coverage is also available to all employees, regardless of their
eligibility for health insurance coverage. In addition, workers’ comp coverage provides
reimbursement for lost wages, a benefit that is not available through group health plans. These
features may tempt employees to represent illnesses or injuries that are not work-related or
that are not covered by group health plans as work-related, in order to receive medical benefits
and reimbursement of lost wages through workers’ comp. This practice is referred to as cost
shifting.

Case Study: Cost Shifting

John is a plumber at DrainCo., whose primary duty is repairing broken sinks. He hurt his back
repairing the sink in his own house one day, and he wanted to take some time off from work to
recover without missing out on his wages. He decided that it would be easy to convince
DrainCo. that his injury happened on the job, because he is not supervised during house calls,
and repairing sinks is what he does every day. When he reports the injury to DrainCo. and
requests workers’ comp, he has decided to partake in cost shifting, as his injury was not work-
related, even though he was repairing a sink.

Providers can also abuse workers’ comp programs through provider self-referral, which occurs
when a provider refers claimants to healthcare facilities, such as ancillary services facilities, in
which the provider has a financial interest.

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Case Study: Self-Referral

Dr. Jones is an orthopedist at Ortho1, who also maintains a financial interest in a separate
physical therapy practice, called PTBest. Every time a patient is seen at Ortho1 or PTBest, Dr.
Jones makes a profit. Samantha is employed by the local grocery store as a manager. When
Samantha trips over some spilled produce at work, she is referred to Dr. Jones’s Ortho1
practice to assess her resultant back injury. Dr. Jones assesses the back injury and determines
the best course of action is to refer Samantha to physical therapy. Dr. Jones can refer
Samantha to any physical therapy provider within her network, but he notices that PTBest is
one of twenty such in-network providers. Dr. Jones determines that the top-notch providers
at PTBest are likely Samantha’s best option, and he refers her to them. Even though Dr. Jones
was not acting solely in his interest, he still has engaged in provider self-referral.

Laws Related to Improper Referrals

There are several federal laws that prohibit and impose penalties in connection with
remuneration related to improper referrals. These include:
• Anti-Kickback Statute
• Physician Self-Referral Law (also known as the Stark Act)
• False Claims Act

Anti-Kickback Statute

The Anti-Kickback Statute (AKS) is a criminal law that broadly applies and prohibits the
knowing and willful payment of remuneration to induce or reward patient referrals or the
generation of business involving any item or service payable by the Federal health care
programs. “Remuneration” can be anything of value, including cash, below market value rent,
or relief from financial obligations. Penalties can include fines, potential jail time, and
exclusion from participation in Federal health care programs.

Safe Harbors are statutory exceptions that protect from civil and criminal liabilities. Certain
payment and business practices that include personal services and rental agreements,
investments in ambulatory surgical centers, and payments to bona fide employees may be
considered Safe Harbors.

Physician Self-Referral Law

The Physician Self-Referral Law, also known as the Stark Law, prohibits physicians from
referring patients to receive “designated health services” payable by Medicare or Medicaid
from entities with which the physician or an immediate family member has a financial
relationship unless an exception applies. Immediate family members of the physician are
defined as spouse, natural or adoptive parents, children, siblings, step-siblings, in-laws,
grandparents, and grandchildren.

“Designated health services” include the following:

• Clinical laboratory services

• Physical therapy, occupational therapy, and outpatient speech-language pathology
services
• Radiology and other imaging services

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• Radiation therapy services and supplies

• DME and supplies
• Parenteral and enteral nutrients, equipment, and supplies
• Prosthetics, orthotics, and prosthetic devices and supplies
• Home health services
• Outpatient prescription drugs
• Inpatient and outpatient hospital services7

The Stark Law is what is known as a “strict liability statute,” so proof of specific intent to
violate the law is not required. Penalties for physicians who violate the Stark Law include
fines as well as exclusion from participation in Federal health care programs. Exceptions may
be available, but all have detailed criteria that must be met.

Potential Impact of Self-Referral Laws

While the movement towards Accountable Care Organizations (ACOs) and integrated
healthcare have not led to a loosening of self-referral rules, some related impacts have been
noted.

For example, by allowing hospitals to pay for referrals within the bounds of health care self-
referral laws, some industry commentators have postulated that higher utilization and
patient volume from hospital acquisitions of physician groups may increase health spending.
This increase in health spending is attributed to the greater flexibility that the AKS and Stark
Law provides. The AKS and Stark Laws allows hospitals to compensate employed, as opposed
to contracted, physicians. Thus, hospitals can pay employed physicians productivity bonuses
for services personally performed by the physician, which would not be permitted for non-
employed physicians (i.e., independent contractors). Hospitals also can more readily require
their employed physicians to refer patients to the hospital or to other integrated providers
than they can require of independent physicians.

False Claims Act

Under the False Claims Act, it is illegal for a provider to submit claims to Medicare or
Medicaid known by the provider to be false or fraudulent. 8 Each item or service billed to
Medicare or Medicaid is considered a claim, and for each false or fraudulent claim, the
provider may receive fines of up to three times the programs’ loss, plus $11,000. 9

The fact that a claim is in violation of the Stark law, or that it results from a kickback, may
render the claim false or fraudulent, creating liability under the civil False Claims Act along
with the Anti-Kickback Statute and Stark law.9

Case management and utilization review can help plans detect and prevent cost shifting and
false or fraudulent billing. The credentialing carried out by plans can curb self-referral by
identifying facilities in which providers have a financial interest.