Updated Apr 2, 2018

The algorithm black box

Illustration: Sarah Grillo / Axios

One of the biggest mysteries within the Express Scripts contract template is the algorithm that determines whether a drug is a brand or a generic. Here is an example of how the algorithm could be used at the smallest scale.

How it works:

  • Imagine a generic drug has an average sticker price of $100, and its cost (including money for the drug maker, wholesaler and pharmacy) is $15.
  • The PBM says it will apply an 80% discount on generic drugs, meaning an employer should only pay $20 for the drug. The PBM pockets $5 on normal spread pricing (after subtracting the $15 cost).
  • However, using the algorithm, the PBM could define the generic drug as a brand, which only commands a 17% discount.
  • Under that scenario, an employer would pay $83, or more than four times what it should for the generic, and the PBM pockets $68 after subtracting the drug's cost.
  • Multiply this strategy for millions of generic prescriptions, and the profits add up quickly.

The bottom line: "You, as a customer, will never understand what's in there," one person familiar with the pharmacy benefits industry said about the algorithm.

From the Express Scripts template:

"Brand/Generic Algorithm" or "BGA" means ESI's standard and proprietary brand/generic algorithm, a copy of which may be made available for review by Sponsor or its Auditor upon request. The purposes of the algorithm are to utilize a comprehensive and logical algorithm to determine the brand or generic status of products in the ESI master drug file using a combination of industry standard attributes, to stabilize products "flipping" between brand and generic status as may be the case when a single indicator is used from industry pricing sources, and to reduce Sponsor, Member and provider confusion due to fluctuations in brand/generic status. Sponsor or its Auditor may audit ESI’s application of its BGA to confirm that ESI is making brand and generic drug determinations consistence with such algorithm.

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