The role of pharmacy benefit managers (PBMs) has evolved into a complex and vast landscape from the days of a claims adjudicator. Strategic PBM oversight and performance measurement are critical to ensure you are getting what you paid for. There is no doubt that we have plenty of metrics, but are you measuring meaningful key performance indicators (KPIs)? If not, you could be missing out on valuable business intelligence!
KPIs generally fall into one of two buckets: cost measures or clinical measures. In this blog, the focus is on cost measures related to drug spend. It is important to understand how one bucket relates to the other. In other words, how do decisions impacting drug spend affect the results for clinical KPIs? This series will focus on the KPIs you monitor to ensure your plan is maximizing both drug spend and clinical outcomes.
Historically, plan sponsors have suffered from two opposing “measuring diseases.” In one scenario, decisions are made based on unproven ideas or gut feelings, a handful of conversations, or who complains the loudest. This method may have been sufficient to sustain a business and career once upon a time, but this is a deteriorating condition.
The other “measuring disease” is more like a paralyzing anxiety, easily recognized by the organization drowning in numbers that few people look at with discernment. This usually happens when you have a good intention, a fistful of data sources, and overly creative ways to calculate numbers. The intention is a good one: make decisions based on data that reflect the status of the business and trends and signals that could indicate shifts to which to react. If the data is good, it’s great. But if it’s bad, it can lead somewhere between nowhere and a disaster.
Numbers have meaning – some are instantly recognizable, some are industry specific. PBMs have their own set of metrics for how they measure performance. You should understand these metrics so you know what they can or can’t tell you. If your management team has not developed its own meaningful set of KPIs to measure your plan’s performance and your PBM’s effectiveness in achieving overall value in meeting defined performance goals, then read on.
We begin this journey with a review of the basics.
There are two ways to analyze cost:
Per member per year, or PMPY, is the total amount of money spent on the pharmacy benefit in a year divided by the total number of members.
- PMPY = Total cost (ingredient cost + dispensing fees + sales tax) / membership per member, measure is the standard in the industry.
- Per Member Per Month (PMPM) = PMPY / 12 months of drug trend in pharmacy benefits, one of the best known (and perhaps least understood) metrics is drug trend. PMPM is the PMPY number divided by 12.
This measure reflects change in drug costs (spend) year over year. Comparing PMPM month over month fails to account for adjustments for higher risk populations, such as those with chronic conditions, from those enrolling lower risk populations. Such demographic changes can occur with the same plan year over year.
In pharmacy benefits, one of the best known (and perhaps least understood) metrics is drug trend. This measure reflects change in drug costs (spend) year over year or month over month. Drug trend is typically expressed as a percentage and is commonly used to assess a PBM’s performance.
PBMs can measure drug trend differently. Be sure to know what your PBM includes in its trend and what it means. Drug trend is influenced by three key factors: utilization, mix of brand name versus generic drugs, and inflation. Drug trend may not include rebates or other incentives and does not take value or outcomes into account.
Net Ingredient Cost
Net ingredient cost shows the actual drug cost for a year using a total dollar amount (using a PMPM unit). Ingredient cost + dispensing fee + tax – rebate = total drug cost.
Ingredient cost is one of the best ways to understand if a PBM is managing cost well since it is the base of all costs.
Generic Fill Rate (GFR)
GFR is the percentage of all prescriptions dispensed as generics. The generic dispensing ratio (GDR), the proportion of all prescriptions dispensed as generic, is the most common measure of generic drug use. Since increases in GDR contribute to decreases in pharmacy benefit costs, benefit design alterations enhancing the use of generics are often considered for their anticipated impact on GDR and lowering drug spend.
This measurement is monitored closely because it is the best way to measure if costs have been managed successfully. The higher the GFR, the lower the costs. PBMs and health plans pay close attention to GFR because increasing the use of generic drugs can lower drug spend. Understanding how the PBM defines and classifies brands versus generics is critical for KPI accuracy.
Consultants and plan sponsors have many ways to evaluate PBMs. Ask questions about methodology. Does the PBM publish measures that use its entire book of business? Who is excluded and why? Over the next several weeks, we will take a closer look at the metrics offered up by PBMs and if they are truly providing the data Medicare Advantage plan sponsors need to make better benefit design decisions.
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