I recently had a discussion about business models and compensation structures within the financial services world with a few of the students in the finance elective class I teach at the University of Waterloo. The conversation centred around how widely accepted reimbursement models have evolved in various areas of the financial services sector, and how they didn’t always appear to make tremendous sense on the surface or seemingly add much value for the client. For example:
- Investment Bank XYZ charges a client 7% for raising capital. Sure, costs vary depending on a number of factors, but we’ll go with 7%. If the the bank raises $100 million for a client and is paid $7 million for its efforts, did the bank do double the work—and incur double the costs—in raising $100 million as opposed to $50 million for another client? Does a percentage structure make a pile of sense here for the client?
- Mutual Fund ABC charges a 2.5% fee on a client’s total investment every year for the privilege of investing in the fund—win or lose, it’s paid 2.5%. If you have an investment of $50,000 within the fund—and paid $1,250 in fees that year—does that mean it cost a multi-billion dollar fund $1,250 more that year to cover costs on a portfolio of $100,000? Seems like a very archaic model in today’s investment world when the variable costs involved are negligible.
I don’t begrudge these industries their fee structures—they just seem a bit antiquated, simple and skewed heavily in favour of the vendor in cases where underlying fixed and variable costs do not change dramatically. Are you going to need double the resources to raise $100 million instead of $50 million? It reminds me of the days of stock trading before the advent of online discount brokerages where you could pay hundreds of dollars of commissions on a trade that might cost you $9.99 today. It’s interesting to see in this segment of the financial services market how innovation and competition have spurred an incredible benefit for both retail and institutional investors.
So what does all of this have to do with employer-sponsored drug plans?
We may be on the cusp of seeing some significant changes to the way plan sponsors pay for pharmacy services, and some of the innovation here may finally put an end to a dated pharmacy compensation model that makes little sense today. Pharmacies are still being paid for distributing products, not for rendering higher-value medication management services. That made sense 40 years ago when pharmacists were not allowed to counsel patients on prescription drugs and medication management services weren’t even born. Today, though, the model is broken. The more prescriptions pharmacies dispense, the more dispensing fees they can collect. The more markup that can be added to the actual acquisition cost of a drug, the more revenue for the pharmacy distributing that product. Yet we are in an era where pharmacy is clamouring for an expanded scope of practice across the country and is looking to focus on cognitive services—not just filling prescriptions.
One of our clients in Western Canada, along with its benefits consultant partner, has initiated discussions with various pharmacy chains exploring potential opportunities for deeper relationships and more of a tangible impact on member health. One of the pharmacy chains proposed something very innovative: it asked that the plan sponsor and its benefits consultant consider the total annual drug cost for patients treating a given condition to assess what this group could do for the plan sponsor. This group’s suggestion is that plan sponsors need to look beyond fee structures and markups, and consider what they are paying per member per year to treat an existing chronic condition. Its premise? Through optimal medication management, member education, surveillance of member adherence and other associated offerings, the investment a plan sponsor makes in the services offered by this pharmacy group will result in lower costs overall.
It’s a very original idea. The only concern the pharmacy should have in pursuing such a focus is that plan sponsors can actually measure whether the rubber is hitting the road and whether what you are suggesting is actually happening. If you want to talk innovation, you better be able to deliver, because carriers, plan sponsors and their advisors can measure every last detail, and they have more robust data available to them than you do as a service provider. All that being said, it’s wonderful to hear that kind of forward-thinking discussion taking place. It’s a shame this is being discussed in 2013 and not 1993 or 2003, but better late than never.
So the new metric that carriers, plan sponsors and/or plan advisors may wish to measure is total cost to treat (TCT), and compare that between pharmacy providers when discussing preferred provider relationships. Here is how that can be done with blinded, transactional-level claims data:
- look at data from the previous 24 to 36 months to establish baseline measures and to set targets/incentives that responsibly and appropriately align the plan sponsor, member and pharmacy provider;
- look at drug claiming patterns by disease state and include all associated or secondary claims costs related to the focal disease state;
- measure optimal therapy metrics and medication adherence metrics;
- integrate short-term disability and/or long-term disability data (using a common encryption key and common classification tool) to assess the impact on disability experience relative to baseline measures and calculate direct savings;
- where available (and this is rare), integrate meaningful absence data to assess the impact on the absence experience relative to baseline measures and calculate direct savings;
- measure impact on co-morbid chronic conditions and calculate direct savings; and
- for all of the above, consolidate and compare the TCT between pharmacy services providers to determine the return on investment achieved through the provision of pharmacy services that look at the bigger picture.
Talk is cheap. The great news: the data is there to measure the impact, develop innovative partnership parameters and, with any luck, change the model by which pharmacy is reimbursed to usher in an era of win-win-win compensation structures that properly align everyone and add measurable (and meaningful) value.