Colorado hopes to save millions in employee drug costs with reverse auctions

Colorado leaders hope to save millions of dollars through the state’s employee health plan by changing the way prescription drugs are handled — with the ability for nonprofits and businesses to join later if it does. works.

House Bill 1237 requires the Colorado Department of Personnel and Administration to hold a “reverse auction” to administer state employee health plan drug benefits. Colorado will be the fourth state to require drug benefit managers who want the contract for state employees to compete for the lowest costs on prescription drugs.

If other insurance plans like what they see, they could join the state pharmacy benefits manager contract when it comes up for auction in a few years.

Colorado officials have yet to announce how much they expect to save from the process, but some of the other states that have adopted reverse auctions have saved hundreds of millions of dollars over a period of years – amounts that may depend on the cost of these states. prescription drug offerings were.

Skip Miller, a state employee and president of the Colorado WINS union, said he’s heard estimates that the reverse auction could save $6 million to $10 million a year, money that would be available. for raises or other state priorities.

“Having this as a way to not just contain costs, but reduce costs, is a win not just for employees but for the state,” he said.

Pharmacy benefit managers are essentially intermediaries who decide which drugs will be easiest to access and how much employees pay for them. The idea is that they will negotiate the best prices with the pharmaceutical companies, because they serve many employers and carry more weight than any sole proprietorship or public employer.

In practice, it is not always clear whether employers are getting a good deal. In a typical process, each pharmacy benefits manager comes up with their own plan, which is difficult or impossible to directly compare to others, said Mark Blum, executive director of America’s Agenda, a coalition of employers and unions that advises states on reverse auctions. And incentives can be somewhat perverse in the world of prescription drugs, as pharmacy benefit managers can collect more discounts and fees if customers use more expensive drugs.

“You get different prices, different contract terms, different formularies,” which are the framework for steering employees towards certain drugs and away from others, he said.

In a reverse auction, a state develops a general plan that it wants the drug benefit manager to enact. Colorado doesn’t have to make decisions about every drug employees might need, but can make provisions to limit spending on the most important items, Blum said. For example, this could include requiring the pharmacy benefits manager to put in place incentives that encourage the use of less expensive forms of insulin, or limiting the circumstances under which they can dictate which pharmacy must fulfill a prescription, he said.

Once a state has its plan in place, it can hold multiple tenders over several weeks, Blum said. Pharmacy benefit managers do not submit a single number as an offer, but offer their own plans setting prices and incentives for the full range of drugs.

That’s more than a human could reasonably handle, so a computer takes the submitted plans and runs a simulation, giving the state an idea of ​​what it would pay under that plan. Pharmacy benefit managers then have the opportunity to fine-tune their plans and improve their offerings, he said.

“The assumption is that (drug benefit managers) would be better at undermining each other” than states are in bargaining, he said.

The computer program works on the assumption that employee drug use is relatively constant, which is generally correct when the group is large enough, Blum said. It also includes assumptions about rising drug costs, so the final amount the state pays may be different. But it was very close to ultimate costs for New Jersey, which held its first reverse auction in 2017 and another in 2019, he said.