Self-Funded w/ Spencer - True Captive - 4/6

This video provides an in-depth exploration of the intricacies of Pharmacy Benefit Managers (PBMs) within the self-funded employee benefits landscape, with a particular focus on the growing movement towards transparency. Featuring Rachel Strauss, Director of Strategic Development at EHIM, the discussion aims to demystify the operational models of PBMs, highlighting the critical differences between traditional and transparent approaches. The core objective is to educate employers on how PBMs generate revenue and to challenge common misconceptions, especially regarding the perceived value of drug rebates.

The conversation begins by establishing the fundamental distinction between transparent and traditional PBM models. Rachel Strauss explains that the primary difference lies in how PBMs are compensated. In a traditional model, administrative fees are often obscured, with PBMs embedding their profits directly into the cost of claims, making it difficult for employers to ascertain the true cost of services. In contrast, transparent PBMs, like EHIM, operate on a clear administrative fee structure, explicitly detailing their charges to clients. This shift towards transparency is presented as a response to a broader demand for clarity in an era where PBMs frequently face scrutiny over their financial practices.

A significant portion of the discussion is dedicated to dissecting the "rebate" system, which Rachel Strauss identifies as a major problem area. She argues that rebates are often viewed by employers as "free money" or a form of savings, akin to a tax return. However, she clarifies that receiving a rebate implies an initial overpayment. Spencer reinforces this by drawing an analogy to an "experience reward" or dividend contract in stop-loss insurance, where an upfront premium load is paid with the hope of a partial return later. This psychological framing, the speakers contend, tricks employers into a "sunk cost fallacy," making them believe they are saving money when they are, in fact, paying more upfront for the chance of a partial return, rather than questioning the initial expenditure.

The video concludes by emphasizing the evolving landscape of employee benefits, driven by an increased demand for data and actionable insights from employers. Rachel notes that regulatory changes, such as the "No Surprises Act," are contributing to a greater openness and a push for information freedom. The overall message underscores a shift in the industry from merely identifying pain points to actively prescribing tangible solutions. The speakers highlight the importance of empowering employers to critically evaluate their spending and explore alternative, more cost-effective options, rather than passively accepting opaque models and perceived savings through rebates.

Key Takeaways:

• Fundamental PBM Model Differences: The core distinction between transparent and traditional PBMs lies in their compensation structure. Transparent PBMs charge explicit administrative fees, while traditional models often embed their profits within the cost of claims, leading to opacity.
• The Illusion of Rebates: Rebates, often perceived as "free money" or savings by employers, are fundamentally a return of funds that were initially overpaid. This creates a misleading sense of financial benefit.
• Sunk Cost Fallacy in Benefits: The rebate model can lead employers into a "sunk cost fallacy," where they assume they must spend a certain amount to receive a rebate, rather than questioning whether the initial expenditure was necessary or optimal.
• Analogy to Stop-Loss Experience Rewards: The concept of rebates is compared to an "experience reward" in stop-loss contracts, where a higher upfront premium is paid for the potential of a partial return, illustrating that the "savings" come at an initial cost.
• Employer Demand for Data and Action: There is a growing trend among employers to not only demand access to their benefits data but also to seek actionable insights and clear solutions derived from that data, moving beyond mere data availability.
• Impact of Regulatory Changes: Legislation like the "No Surprises Act" is fostering an environment of greater transparency and information freedom within the healthcare and employee benefits sectors, pushing for more accountable practices.
• Industry Shift Towards Solutions: The benefits industry is evolving to provide concrete solutions to identified problems, rather than just elaborating on pain points, offering employers clearer pathways to optimize their plans.
• Psychological Framing of Savings: The way rebates are presented can psychologically train employers to believe they are saving money, even when they are effectively overpaying upfront to get a portion back later.
• Importance of Questioning Initial Spend: Employers are encouraged to question the initial cost of their prescription drug benefits and explore whether better, more cost-effective options exist, rather than simply focusing on the rebate amount.
• Transparency as a Revolution: The shift towards transparent PBM models is framed as a "revolution" driven by the need for employers to understand exactly what they are paying for and how their PBM is compensated.

Key Concepts:

• PBM (Pharmacy Benefit Manager): A third-party administrator of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, and other government and private programs.
• Transparent PBM: A PBM model where administrative fees are clearly itemized and disclosed to the client, and all rebates and discounts are passed directly back to the client.
• Traditional PBM: A PBM model where administrative fees may be less explicit, and the PBM may retain a portion of rebates or spread pricing, making the true cost opaque to the client.
• Rebates: Payments from pharmaceutical manufacturers to PBMs, typically for placing their drugs on a formulary or for market share. The video discusses how these are often viewed as savings but can mask higher initial costs.
• Administrative Fees: Explicit charges for the services provided by a PBM, distinct from the cost of the drugs themselves.
• Experience Reward (Stop-Loss): A feature in some stop-loss insurance contracts where a portion of the premium may be returned to the policyholder if claims run below a certain threshold, analogous to rebates in PBMs.
• Sunk Cost Fallacy: A cognitive bias where an individual continues a behavior or endeavor as a result of previously invested resources (time, money, effort), even if future costs outweigh the benefits.
• No Surprises Act: A U.S. federal law that protects consumers from surprise medical bills, particularly those from out-of-network providers or facilities. Its mention in the video highlights a broader regulatory push for transparency in healthcare.