Two large public sector health plans in Minnesota say they jointly will save more than $28 million over the next two years — and potentially more down the road — after using new technology to evaluate bids from competing pharmaceutical benefits managers.

The technology allows health plan sponsors to conduct reverse auctions where the pharmaceutical benefit managers — companies known as PBMs, for short — must respond to detailed requests for proposals and make multiple bids in order to win these large contracts.

Proponents say use of the technology could solve what they see as competition and transparency flaws in the industry, ushering in an era where big PBMs see their profits chopped down to size as employers are better able to make apples-to-apples comparisons between competitors.

For about 200,000 state and local government employees, the new contract takes effect Jan. 1 and won't bring significant changes in benefits, state officials say. But the lower expense is helping tamp down health insurance premium increases, said Pat Arseneault, co-chair of the state's Joint Labor Management Committee on Health Plans.

"It's one of the lowest increases in premiums that we've had in a number of years," said Arseneault, who is the legal/labor and equity director with Inter Faculty Organization, which represents faculty at seven public universities in Minnesota.

Minnesota joins a growing number of states utilizing reverse auctions for PBM services.

The State Employee Group Insurance Program (SEGIP) and Public Employees Insurance Program (PEIP) jointly held the reverse auction following legislation passed in 2021. It allowed the state to hire New York-based Truveris to conduct the auction and review invoices going forward to ensure contract compliance.

Over five years, the state will pay Truveris nearly $2.6 million.

Rhode Island-based CVS Caremark won the contract and will structure pharmacy benefits for members of the two health plans.

PBMs negotiate prices for medications and develop the pharmacy network where patients can get prescriptions filled at the lowest price. They also create formularies that assign drugs to different "tiers," which dictate what a patient pays out-of-pocket for medicines.

CVS Caremark currently serves as the PBM for SEGIP.

Beyond about $28.5 million in savings on drug costs and fees, the state also expects to save another $74.7 million over the next two years through improved rebates from drug manufacturers. The additional rebate savings likely would have come with any bidding process, state officials say, given market trends.

"This is an incredibly complex process but, in the end, we believe that it's getting the greatest value to the state for the least money," said Minnesota Management and Budget, the state agency that runs SEGIP, in a statement.

The push for the reverse auction by legislators was bipartisan.

"We created a transparent, online marketplace like eBay for prescription drugs," Sen. Michelle Benson, R-Ham Lake, said in a statement. "PBMs had to underbid one another over multiple rounds to win the state contract."

"The high cost of prescription drugs is out of control for far too many Minnesotans and this new bipartisan law takes a positive step to reign in those costs," Rep. Mike Howard, DFL-Richfield, said in a statement.

An advocacy group called the PBM Accountability Project of Minnesota supported the state's new approach. It's a coalition of unions, independent pharmacists, patient advocates and the Freedom Foundation of Minnesota, which promotes free market principles and limited government.

Their effort is an outgrowth of the national PBM Accountability Project, where managing director Mark Blum was an adviser to the Minnesota group.

The traditional process for selecting a PBM is one where sellers have a significant information advantage, Blum said in an interview. The product is so complex that purchasers who don't use advanced technology struggle, he said, to make apples-to-apples comparisons on competing bids. As a result, they wind up selecting vendors based largely on relationships rather than value.

"Any market where price is not transparent to both the supplier and the demander, you get an intermediary to take advantage of that," Blum said. "It's called arbitrage, and PBMs are classic arbitrageurs — operating in a marketplace they make even more opaque to increase their ability to extract value from all kinds of players: pharmacists, manufacturers. employer-sponsored health plans, patients."

He added: "There are many different schemes by which PBMs can actually divert value into their own pockets that, in a competitive market, would go to the purchaser. There's nothing criminal here — they're not villains. They're taking advantage of a very imperfect marketplace to make money for themselves as go-betweens."

Prime Therapeutics, a PBM based in Eagan, said it is not opposed to health plan sponsors conducting reverse auctions, saying technology partners can be helpful given the complexity of pharmaceutical benefits management. The auctions "have the opportunity to support some of the core values Prime represents including transparency with our customers," said Dave Schlett, an executive vice president with the company, in a statement.

OptumRx, which is the PBM at Minnetonka-based UnitedHealth Group, said its "clients choose to partner with us because of the value we offer, including lower overall drug and health care costs, better patient outcomes and better experiences for clients and members."

CVS Caremark declined to comment.

However, the Pharmaceutical Care Management Association — the trade group for PBMs including OptumRx and Prime Therapeutics — pointed to Blum's work as executive director of America's Agenda, a health policy group that partners with the trade group for pharmaceutical companies and a large insulin manufacturer. Greg Lopes, a spokesman for the Pharmaceutical Care Management Association, asserted in an email that drug manufacturers are critical of the industry because "PBMs lower the prices they, and they alone, set."

"America's Agenda and its drug manufacturer partners push an agenda that allows for higher drug-maker profits on the backs of health plan sponsors and patients," Lopes said in a statement.

Blum said his group is a labor-led organization with partners ranging from hospital systems and insurers to PBMs and manufacturers.

"We have helped save billions of dollars for patients and state purchasers of medicines," he said in e-mail. "Why would any PBM or its trade association oppose this?"

Lopes said more than 70 PBMs currently compete to provide choice for health plans, regardless of how plan sponsors select a PBM.

The PBM Accountability Project of Minnesota, however, argues PBMs that were intended to help lower medication costs for patients have diverted savings into their own profits.

"Partnering in solidarity, we all stood strong for our members and Minnesota taxpayers, by demanding a transparent and accountable procurement process," Brian Aldes, secretary-treasurer and principal officer of Teamsters Local 320, said of the reverse auction. The union is part of the PBM Accountability Project of Minnesota.