States poised to take a closer look at pharmaceutical benefit managers

February 25, 2019

As part of the Trump administration’s plan to reduce drug prices, the Office of the Inspector General (OIG) for the U.S. Department of Health and Human Services has proposed a new regulation aimed at pharmaceutical benefits managers (PBMs), which are often considered the “middle man” between patients and the pharmaceutical companies. PBMs operate by negotiating prices on behalf of public and private insurers, but some critics question whether PBMs provide value to their customers because these negotiations are not transparent. Given that taxpayer funding may be involved, several states (including Connecticut, Maryland, New Hampshire, and Vermont) have debated legislation to regulate PBMs or to review their negotiating process, and the proposed federal regulation could provide an opening for increased state regulation.

four people at pharmacy counter inside mart

Photo by Tbel Abuseridze on Unsplash

Although few people may know what a PBM is, many consumers are likely receiving their pharmacy benefits through a PBM. According to the PBMs’ trade association, the Pharmaceutical Care Management Association (PCMA),

Pharmacy Benefit Managers (PBMs) administer prescription drug plans for more than 266 million Americans who have health insurance from a variety of sponsors including: commercial health plans, self-insured employer plans, union plans, Medicare Part D plans, the Federal Employees Health Benefits Program (FEHBP), state government employee plans, managed Medicaid plans, and others. PBMs are projected to save employers, unions, government programs, and consumers $654 billion – up to 30 percent – on drug benefit costs over the next decade.

PBMs’ main responsibility is to negotiate drug prices on behalf of public and private insurers directly with pharmaceutical companies; in exchange, PBMs will give a company’s drug a preferred spot or tier on an insurer’s formulary. PBMs also offer other benefits to both consumers and insurers such as helping with patient adherence, increasing generic drug utilization, and reviewing drugs for safety, efficacy, and possible dangerous interactions with other drugs.

PBMs, however, have been criticized for the lack of transparency in their negotiations and whether any savings they negotiate are being passed along to consumers. For example, pharmacists claimed that PBMs were including “gag clauses” into contracts with pharmacies that prohibited pharmacists from letting customers know about cheaper alternatives to drugs on the formulary. In 2018, Congress passed prohibitions on such restrictions. Others have criticized “spread pricing,” or markups that PBMs may charge above a generic drug’s actual cost.

The OIG proposal would alter PBMs’ ability to negotiate rebates, a key issue raised in the President’s Blueprint to Lower Drug Prices, in Medicare’s prescription drug program and in the Medicaid program. Rebates of course are common across all industries: the seller agrees to give the buyer a portion of the purchase price rather than lowering the actual price. In pharmaceutical sales, PBMs may negotiate a rebate from a drug maker instead of an actual lower purchase price in exchange for giving the drug maker a more favorable or preferred spot on the insurer’s formulary, and the PBM will split the rebate with the insurance company. But critics—including HHS Secretary Alex Azar and Food and Drug Agency Commissioner Scott Gottlieb—argue that consumers may not see the benefit of those rebates, particularly if the consumer is charged a co-pay based on the actual sales price—often called the list price—that does not reflect the rebate.

Under current regulations, these rebates are legal in Medicare and Medicaid under a “safe harbor” exemption from federal anti-kickback statutes, which would otherwise prohibit such arrangements. The OIG proposal would eliminate the current safe-harbor exemption and instead create a new safe-harbor exemption for discounts offered directly to consumers and for fixed fee agreements between pharmaceutical companies and PBMs. Although the proposal could save some consumers through lower co-pays and federal spending, it is also possible that other consumers will face higher premiums as rebates change. Additionally, PBMs note that the proposal would not necessarily lead to pharmaceutical companies lowering their list prices.

If the OIG proposed regulation is finalized, some commentators are encouraging states to adopt similar regulations in their own insurance markets: “in states that harmonize their anti-kickback rules with the federal government’s, the change filters into the broader private insurance market. If states don’t act, the administration believes that a full-fledged reform for the privately insured would require an act of Congress.”

Regardless of what happens with the proposed regulation, PBMs may be rethinking their business model in light of increased political scrutiny. For example, Express Scripts, the country’s largest PBM, announced a new arrangement with the National Drug Purchasing Coalition, a group of large employers, that would be based on fixed administrative fees and “pay for performance” incentives for achieving certain metrics.

Comments for the OIG’s proposed regulation can be submitted through April 8, 2019. For more information, please feel free to contact me.

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