Colorado’s “reverse auction” for state employee drug plan estimated to save $27.5 million

Switching the company that manages Colorado’s state employee drug plan is estimated to save more than $27 million over the next five years, but the manager that holds the current contract is formally protesting.

In 2021, the state legislature passed a bill requiring the Colorado Department of Personnel and Administration to hold a “reverse auction” for the contract to manage prescription drug coverage for state employees. The Colorado Workers for Innovative and New Solutions state employee union estimated the reverse auction could save $6 million to $10 million per year.

The savings will most likely be close to $5.5 million each year for the next five years, which is about an 11% reduction, said Skip Miller, a state employee and president of Colorado WINS. There may be some changes in the cost of specific drugs, but the format of the reverse auction prevented bidders from shifting significant costs to employees, he said.

Pharmacy benefit managers decide which drugs will be most easily accessible and how much covered employees will pay for them. In theory, they’ll use that ability to steer patients toward medications that offer the same benefit at lower costs, and negotiate better deals with drugmakers than an individual employer could. In practice, however, it’s difficult to know if they’re actually serving their clients well, or are more focused on pushing the medications that net them the most rebates and fees.

Optum RX, an affiliate of UnitedHealthcare, held the pharmacy benefit manager contract for the state for years, but lost out in the reverse auction to MedImpact, a smaller company based in San Diego.

Neither company responded to questions from The Denver Post about the process in Colorado.

To conduct a reverse auction, the state created a general base plan and let the competing companies submit detailed proposals. An algorithm, run by a third party, then determined which would be cheapest, based on the type and amount of prescription drugs that state employees and their families were expected to use. The companies could then tweak their proposals and submit them again, to try to win with the lowest bid.

The savings are an estimate, since it’s possible employees’ needs could change over time. Typically, though, drug spending with a large group grows fairly consistently from year to year.

Optum RX has filed a challenge, which Colorado’s procurement office is looking into, said Doug Platt, communications manager for the Department of Personnel and Administration. To invalidate the results of the reverse auction, a company would have to show the state broke its rules, he said.

“Employees will not see an interruption in their benefits” regardless of the outcome of the protest, he said.