#PharmEconFriday: Understanding PMPM

ben urickA guest post by Ben Urick, PharmD, Presidential Fellow and PhD Candidate at the University of Iowa. He is also the author of the blog RPhD.

Costs aren’t the most important thing health insurers worry about. It’s per member, per month (PMPM) spending that keeps a plan administrator up at night. Calculated by dividing total monthly spending for a pool of insured patients/members by the number of people in the pool, PMPM spending must stay comfortably below monthly premiums for the insurer to remain in business. Creeping PMPM spending drives increases in monthly premiums.

What PMPM Means to Pharmacy

For the pharmacy world, PMPM comes up when pharmacy benefit managers (PBMs) make efforts to reduce drug spending. When attempting to control drug spending, PBMs don’t just think of the drugs that cost the most. High drug costs get a lot of press but, frankly, PBMs care a lot more about substantial increases in insulin prices than they do about the astronomical price increases from companies like Turing and Valeant.

The reason is because spending is made up of two factors:  unit cost and unit volume. A drug that costs a lot but is rarely used will result in less total spending than a drug that costs less but is used a lot more. Total monthly spending on drugs is divided by the total number of patients paying premiums to yield PMPM spending.

pmpm

It’s reducing PMPM spending on drugs that drives insurers to contract with PBMs.  To accomplish this goal, PBMs can act in one of two ways:  reduce unit cost or reduce unit volume. Unit cost reductions are most commonly achieved through seeking rebates from drug manufacturers in exchange for formulary placement and reducing pharmacy payments to the lowest level a pharmacy will accept. Reductions in unit volume are accomplished through various utilization management techniques, including prior authorization requirements.

Efforts to Reduce PMPM Drug Spending

Express Script’s 2015 Drug Trend Report provides a detailed description of the PBM’s efforts to reduce PMPM drug spending. For diabetes medications used by commercially insured patients, Express Scripts finds that a 6.7% increase in unit volume and a 7.4% increase in unit cost compounded to create a 14.0% increase in total drug spending. For asthma, on the other hand, a 5.8% increase in unit volume was offset by a 7.5% decrease in unit cost to yield a total decrease in PMPM spending of 1.6%.

Express Scripts touts its efforts to reduce both unit cost, through the National Preferred Formulary, and unit volume, through efforts like the Cholesterol Care Value Program. Designed to limit use of the PCSK9 inhibitors to only those patients with familial hypercholesterolemia, the value program is a classic example of utilization management. Drugs like PCSK9 inhibitors are especially concerning to insurers and PBMs because of their high cost and large potential market.

 What it All Means

In summary, it’s not necessarily the most expensive drugs that make insurers and PBMs nervous. It’s the expensive drugs that are used often that make the biggest impact on their PMPM spending. The most significant medication-related fear for insurers and PBMs is the more frequent use of high cost biologics and specialty medications. As the Drug Trend Report points out, unit cost and unit volume are both up in this segment. Look for more formulary exclusions and prior authorizations as insurers and PBMs attempt to reduce both the cost and use of these products.

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Ben
Pharmacist, PhD, and Author of RPhD

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