In 2019, states built on the momentum that had been gaining in recent years and passed targeted legislation to address the role harmful pharmacy benefit manager (PBM) business practices play in escalating prescription drug prices. The laws supporting these approaches, described below, give states enforcement mechanisms to ensure that the discounts that PBMs recoup are ultimately used to lower drug and premium costs for consumers.
During the 2017 and 2018 legislative sessions, states increasingly passed laws focused on PBMs, often referred to as the “middleman” in the drug supply chain. Health plans contract with PBMs to manage their pharmacy benefit, which includes negotiating rebates with manufacturers and ensuring pharmacies have medications to dispense.
As states address prescription drug prices, there have been many questions raised about PBM practices. Where do the negotiated manufacturer rebates go? How much is the PBM keeping versus what is passed along to help consumers pay for prescriptions? Also, what about the differing amounts health plans pay for prescription drugs – compared to the often lower reimbursement amount paid to pharmacies? How much of that “spread in pricing” do PBMs keep as profit? Could opaque PBM payment practices be contributing to the overall high costs of prescription drugs?
Last year, Ohio’s state auditor released a report revealing that PBMs charged Medicaid managed care organizations (MCOs) a “spread” of more than 31 percent for generic drugs, which cost the state $208 million – all of which PBMs pocketed as profit. This issue is not unique to Ohio. Lack of defined regulations allow PBMs to pocket portions of manufacturer rebates or use spread pricing models instead of passing negotiated discounts back to health plans and their consumers.
To address those opaque practices, in 2019 several states enacted laws to:
- More clearly define PBM practices;
- Require transparency of specific prices, costs, and rebates; and
- Take steps to explicitly define fiduciary responsibilities of health plans for their contracted PBMs.
To date, 27 states require PBMs to obtain licensure from their states’ departments of insurance prior to operating in the state. This year, Minnesota, South Carolina, West Virginia, and Utah enacted laws to require PBM licensure. Licensure is a critical component of effective PBM regulation because it allows a state to know how many and what entities are operating as PBMs. This also gives the state power to suspend or revoke a license should the PBM break the law or engage in fraudulent activity.
States also passed stronger transparency reporting requirements for PBMs. New York passed and Minnesota enacted measures requiring transparency reporting to both health plans and relevant state agencies. Notably, under the New York bill, a health plan will have access to all financial and utilization information of a PBM in relation to pharmacy benefit management services provided to the plan. Access to a PBM’s financial information will allow health plans in New York to monitor their contracted PBMs for fraudulent activity and deceptive acts. It also empowers health plans to enforce provisions of its contract with a PBM. The measure passed the legislature with broad support and now awaits action by New York Gov. Andrew Cuomo.
The Minnesota law goes beyond other states’ transparency bills by requiring PBMs to submit de-identified claims level information to their plan sponsors. Under this law, PBMs must report any spread collected on a claim, along with the amount paid to the pharmacy for each prescription. The law also requires PBMs give information to plan sponsors that differentiates between payments made to pharmacies owned or controlled by the PBMs and those not affiliated with the PBM. Data reported to plans will highlight any PBM conflicts of interest and deceptive business practices. Health plans and the state can use this data to create a clearer picture of how PBMs make their profits and identify additional actions the state can take to rein in bad practices.
Health Plan Oversight
States are also increasingly focused on requiring health plans to take more responsibility for monitoring the PBMs they contract with. For example, under Maine’s new law, if a health insurance carrier uses a PBM to manage its prescription drug benefits, the carrier is responsible for monitoring all activities performed by the contracted PBM. By tasking carriers with PBM monitoring responsibilities, Maine is leveraging its Bureau of Insurance to enforce these provisions of the law. The law also stipulates that PBMs have a fiduciary duty to their insurance carriers when managing their prescription drug benefits and as such, carriers are empowered to hold PBMs accountable for their financial dealings. This law may be protected from an Employee Retirement Income Security Act of 1974 (ERISA) legal challenge because lawmakers purposefully used an existing definition of “carrier” in state law that imposes requirements on state-regulated insurance carriers only. Therefore, the law does not apply to plans governed by ERISA. (Read Maine Forges New Ground and Enacts Comprehensive Drug Package for more information about Maine’s comprehensive PBM law.)
The New York measure stipulates that in addition to health plans, PBMs have a duty and obligation to covered individuals to perform their services with care, diligence, and professionalism. Under this measure, all funds received by the PBM, including funds derived from spread pricing, must be used on behalf of the health plan and can only be used pursuant to the PBM’s contract with the plan. Medical loss ratio rules require health plans to spend 80 percent of a beneficiary’s premium on medical claims and the remaining 20 percent on overhead expenses, including profits. This means that any manufacturer discounts passed from PBMs to a health plan will be used to lower spending on pharmacy benefits, which will in turn decrease premium costs for beneficiaries.
Medicaid Managed Care Contracts
States are also increasing their Medicaid agencies’ oversight of PBMs. Informed by Ohio’s report last summer, lawmakers included provisions in their budget that require the state to contract with a single PBM for the entire Medicaid managed care program. The “state PBM” will have strict transparency reporting requirements and will be prohibited from requiring a Medicaid recipient to obtain a specialty drug from a specialty pharmacy owned by or associated with that state PBM. This will end the practice of “self direction,” which benefits PBMs but typically increases out-of-pocket costs for consumers. Conflicts of interest language along with transparency requirements limit anti-competitive practices and give state officials more control over how PBMs operate in the Ohio.
Similarly, a new law in Louisiana authorizes its Department of Health to carve out pharmacy services from Medicaid MCO contracts and assume direct responsibility for all pharmacy services. If the department chooses to use a PBM to administer the pharmacy benefit, the PBM can only be reimbursed with a transaction fee and cannot retain any portion of spread pricing or state supplemental rebates. This ensures the state will get all of the discounts the PBM negotiates with drug manufacturers. The transaction fee will be the only payment to the PBM, which prevents it from pocketing a spread or a portion of discounts intended for the state.
States cannot control which new drugs come to market or what their list prices will be, but they can impose Medicaid contracting requirements to ensure PBMs are working in the interest of the state. Through these laws, Ohio and Louisiana can take active roles in monitoring PBM practices and administering pharmacy benefits to ensure protections for the state.
The laws passed during the 2019 legislative session are the result of states’ iterative policymaking processes – lawmakers first work with state agencies to identify problems, build on prior legislation, and then develop legislative solutions. Targeted approaches like the ones highlighted here can help stem drug spending, but PBMs are only one part of the supply chain contributing to rising drug costs. To see all types of legislation to address drug costs, explore NASHP’s state Legislative Tracker and learn about other new laws states have enacted this year.