Pharmacy Benefit Manager Model Legislation: Questions and Answers

These questions and answers explain the role pharmacy benefit managers (PBM) play in the drug supply chain and highlight NASHP’s model PBM legislation that states can use to better oversee PBMs and protect consumers.

What are pharmacy benefit managers?

Pharmacy benefit managers (PBMs) contract with health plans to administer their pharmacy benefits. Depending what a health plan needs for pharmacy services, a PBM can:

  • Set up a health plan’s pharmacy network (which can include “preferred” pharmacies) to supply drugs and services to members;
  • Design its formulary — the plan’s list of covered prescription drugs  that can include multiple tiers with varying copays that act as financial incentives to drive consumers to preferred drugs;
  • Establish how much health plan members pay out-of-pocket (copays) for prescription drugs; and
  • Pay the pharmacy claims, which the health plan reimburses.

While PBMs do not buy drugs directly from manufacturers (wholesalers or distributors perform that task), when they create drug formularies for their health plan clients, they designate which “preferred” drugs the insurance plans will cover, which puts them in a powerful bargaining position. PBMs can insist on discounts or rebates from manufacturers in exchange for placing their drug products in a health plan’s formulary. If a manufacturer’s drug is not in a formulary, insurers won’t cover the drug and physicians won’t prescribe it, so PBMs have great leverage when negotiating prices.

These negotiations, which are confidential, result in rebates paid by the manufacturer to the PBM based on the volume of drugs dispensed to the PBM’s health plan enrollees. However, these rebates are not discounts that are shared with consumers at the point of service. Instead, PBMs share some portion of their rebates with their health plan clients. Some of the manufacturer rebates do go to lower the net cost of drugs to the health plan, but it’s not clear how much of that discount is shared with consumers. The three largest public PBMs in the United States (CVS Caremark, Express Scrips, and OptumRx) control 72 percent of the US market.

Why are states legislating PBM business practices?

Many aspects of the current PBM business model have come under scrutiny as anti-consumer and anti-competitive because some PBMs have:

  • Designed drug formularies that benefit the PBM at expense of consumers;
  • Required consumers to purchase drugs only from PBM-controlled pharmacies;
  • Restricted how much price and cost information pharmacies can share with consumers; and
  • Failed to act as the fiduciary and safeguard the financial interest of their health plan clients.

Most important, the typical PBM business model appears to have a very basic conflict of interest – the rebates a PBM receives from drug manufacturers are based on a percentage of the drug’s price – so the higher the price, the higher the rebate – and only part of the rebate is shared with health plans . While higher drug prices generate more net revenue for the PBM, health plans, pharmacies, and consumers end up paying more in higher prices .It is hard to determine the impact of the PBM business model on health care system costs, but there is growing concern that PBMs do not add value to the health system and may, in fact, be contributing to rising prescription drug costs. This is why more transparency is needed about how PBMs operate.

Why  are concerns about PBMs surfacing now?

Today, PBMs select and manage formularies (the lists of prescription drugs covered by each insurance plan) and pharmacy networks. PBMs pay drug claims, and they negotiate rebates with drug manufacturers that they share with their health plan clients. As a result, PBMs can have a significant impact on consumers. They can determine which drugs are included and/or preferred (and available at a lower cost) in the formularies they design and manage. They often select (and may own) the pharmacies that are part of the health plan’s network, and they can control how much patients pay in out-of-pocket costs (copays, deductibles, coinsurance). PBMs tend to take on more of these functions for smaller health plans while larger plans retain more of control over their pharmacy benefit designs.

The PBM business model has evolved over years. Originally, the PBM industry contracted with health plans to run their retail pharmacy benefit. For example PBMs would put together the pharmacy network, negotiate pharmacy-dispensing fees, and pay claims on behalf of the health plans. Today, it is a massive industry that has an increasing ability to raise revenue from drug manufacturers in the form of rebates. There is concern that this rebate model has a perverse impact on pharmacy costs and patient out-of-pocket costs.

What is the big concern about drug rebates?

Rebates are confidential price concessions between a PBM and a drug manufacturer that occur after a drug has been dispensed and the pharmacist reimbursed. The PBM’s rebate   based on a percentage of the price of the dispensed drug. The higher the price of the dispensed drug, the higher the PBM’s per unit rebate. The more units dispensed, the more revenue a PBM gains.

Because of recent industry consolidation – today just three companies control 75 to 80 percent of insured lives – PBMs’ negotiating clout with manufacturers has grown. PBMs’ ability to use formulary design to generate greater rebates may dictate which drugs they place on lower-cost formulary tiers (which cost consumers less out-of-pocket) and which drugs they placed on higher-cost tiers (which cost consumers more out-of-pocket). The ability to place a manufacturer’s drug on a formulary tier gives PBMs the ability to affect a drug manufacturer’s market share.

While tier placement represents the PBM’s net cost (after rebates), tier placement does not necessarily mean lower-tier drugs are the least-costly for consumers. Consumers pay the list price – without rebates factored in to reduce prices.

Some portion of rebates is shared with a health plan, and some is retained by PBMs as revenue. However, it is not clear what percentage is retained by PBMs and what percentage is passed on to health plans.

The bottom line is transparency is needed to understand the impact of PBMs’ complex financial arrangements on health care spending, consumer access to drugs, and consumer costs.

What would the NASHP PBM model act do?

The NASHP Pharmacy Benefit Manager (PBM) Model Act  is a compilation of provisions from proposed and enacted state legislation. In 2018, for example, there were more than 80 PBM bills introduced in state legislatures across the country and 27 became law as of Aug. 1, 2018. Here are some of the model act’s components :

State licensure: States have a long history of licensing other parts of the drug supply chain, such as pharmacies, wholesalers, and similar entities, but only recently have they begun to license and regulate PBMs. This  section of the act requires a PBM operating in a state to become licensed.

Fiduciary responsibility: The model act requires PBMs to have a fiduciary duty to its health plan clients. This means PBMs have a legal responsibility to protect the financial interests of their health plan clients.

Gag clause ban: This bans PBM contract provisions that limit a pharmacist’s ability to inform customers about the least expensive way for customers to pay for a prescription. For example, some current PBM bans prevent a pharmacist from telling consumers when they will spend less if they pay in cash rather than use insurance or select a less costly generic drug or a therapeutic alternative.

Patient out-of-pocket costs: This section prevents a health plan or its PBM from setting patient copays or coinsurance at a higher level than the actual cost of the drug to the health plan (or its PBM).

Conflict of interest: The model act requires a PBM to notify health plan clients if the PBM has a conflict of interest. For example, when a PBM owns its own pharmacy operations, it may want to drive business there, instead of focusing on the most cost-effective drug distribution for its health plan client.

Protecting consumers from conflicts of interest: The model act prohibits penalizing patients who do not use pharmacy services in which the PBM has an ownership stake or other financial interest.

Rebate transparency: The model act requires a PBM to report rebates and fees in a variety of ways. The state would make public the reported information that is not a trade secret.

Limiting PBM requirements on pharmacies: Some PBM contracts limit which drug wholesaler or distributor a pharmacy can buy from. Those PBM-specified distributors may serve the PBM’s financial interests more than a pharmacy’s. The model act would prohibit a PBM from establishing pharmacy network requirements that exceed what are defined by state law.

Has the PBM industry ever sued a state after it approved PBM legislation?

To date, there has been one challenge of a state’s PBM legislation. In July 2017, the PBM industry challenged two North Dakota 2017 laws (SB 2258 and SB 2301) (PCMA v Mylynn Tufte et al July 2017. Docket No. 1:17-cv-00141 and No. 1:19-02.1-16.1). The industry’s suit claims North Dakota’s laws violated the federal preemption of the Employee Retirement Income Security Act (ERISA). The court denied the industry request for an injunction in November 2017 and the case is currently pending.

Interestingly, there were 12 lawsuits filed against the PBM industry in 2016 and 2017. Many of these are consumer class action suits. These lawsuits focused on PBMs’:

  • History of charging consumers more than the PBM’s actual cost of the drug;
  • Lack of transparency about rebates; and
  • Other business practices.

Stronger state regulation of PBMs may obviate the need for future consumer lawsuits.