Innovation ’19: Reverse Auctions for PBMs

In New Jersey, a race to the bottom that saves a billion

The state used a reverse auction whose rounds of bidding saved $1 billion on PBM services, according to the consultant who helped orchestrate the deal. Other states (maybe Maryland) and large purchasers may follow suit.

Joseph Burns
Contributing Editor

New Jersey has developed an innovative way to award the PBM contract for more than 750,000 of its public-sector employees and dependents. That method could become a model for other purchasers because it has cut drug spending sharply.

When New Jersey was seeking to reduce health care costs in 2017, labor unions for state workers encouraged the legislature to use a reverse auction for the three-year PBM contract that would begin on Jan. 1, 2018. In other industries such as waste hauling and fuel buying, purchasers use reverse auctions to get bidders to compete by offering lower prices over successive rounds of bidding.

In June 2017, three PBMs submitted opening bids in New Jersey’s reverse auction for pharmacy benefits: CVS Caremark, Express Scripts (which had the contract until the end of the year), and OptumRx. After analyzing the complex components of each proposal in the first round, state officials reported the lowest bid to the PBMs and asked each one to submit still lower bids in a second round.

From this process, New Jersey awarded the PBM contract to OptumRx, agreeing to pay the unit of UnitedHealth Group $6.7 billion over three years. In September 2018, Gov. Phil Murphy, a Democrat, said in a press release that the reverse auction helped cut pharmacy costs for state and local governments by over 25%. School employee members saw their premiums drop this year by 1.1%, versus an increase of 13% in 2018, according to Murphy’s press release.

During the first two years of the contract, the savings totaled about $1 billion, according to Mark Blum, executive director of America’s Agenda, a not-for-profit organization in Washington, D.C., that advised New Jersey’s unions and the legislature on the reverse-auction method. If the contract had been in place for all three years, the savings would have totaled $1.6 billion, says Blum. The third year was canceled when a state court ruled that a new reverse auction was needed after Express Scripts challenged the initial award, saying OptumRx’s bid violated state contracting rules that applied to all PBM bidders.

New Jersey became interested in reverse auctions because of a budget crisis. The public sector unions asked America’s Agenda for advice on how to save money without cutting benefits. At the time, New Jersey was spending some $2 billion each year on prescription drug benefits for state workers. The unions had previous experience working with Blum and his organization, which had developed a direct primary care program for state workers in 2016. America’s Agenda, founded in 2005, describes itself as a health care alliance that brings together labor unions, businesses, providers, health plans, pharmaceutical companies, and policymakers to make high-quality health care affordable for all Americans.

Knowing that PBM contracts are notoriously opaque, Blum reasoned that a reverse auction would force PBMs to compete aggressively. While many PBMs expressed interest, only the three largest—Express Scripts, CVS Caremark, and OptumRx—were allowed to bid because state officials wanted a PBM with a statewide pharmacy network. To analyze the bids and project their costs going forward, the state hired Truveris, a tech and data analytics company.

Almost immediately after awarding the contract to OptumRx, Express Scripts challenged the decision in state court and won a partial victory when a judge ordered the state to redo the reverse-auction bidding for a new three-year contract that will begin on Jan. 1, 2020. The new contract will be awarded this summer.

Given the results in New Jersey, Blum expects other states and large purchasers to follow its example when contracting for PBM services. For example, America’s Agenda has recommended this strategy to officials in Maryland.

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