Policy Background

Although PBMs can provide a useful service in managing prescription drug benefits, their activities are shrouded in secrecy and replete with questionable and even illegal practices. Many dozens of lawsuits have been filed against PBMs. Plaintiffs include: federal and state governments, private corporations, pharmacists, HMOs, unions and individuals. The defendants include: all of the “big three” PBMs (Caremark, Medco and ExpressScripts) as well as many smaller PBMs. Key allegations in the many lawsuits against PBMs, some of which have been settled for millions of dollars, include the following:

  • PBMs secretly retain most manufacturer payments –e.g. rebates, discounts and other fees – instead of
    passing through such payments to clients
  • PBMs switch plan members from low-to-high cost drugs
  • PBMs favor higher-cost drugs on their formularies
  • PBMs manipulate generic (“MAC”) pricing
  • PBMs conspire with manufacturers to violate OBRA and “Best Pricing” regulations
  • PBMs commit multiple other contract/fiduciary breaches

These practices do not appear to be abating, despite recent rhetoric from the industry pledging transparency. In the most recent of many articles detailing the practices of PBMs, the Wall Street Journal last month exposed practices of health care consultants with financial ties to PBMs and insurance companies. Just in May, Medco announced a settlement of $163 million in a case brought by the federal government for drug switching and shorting and canceling prescriptions of federal employees. Other PBMs remain under investigation for similar practices.

In upholding the Maine PBM law, the Federal District Court decision, subsequently upheld by the First Circuit Court of Appeals, addressed the advantages of state regulation. The court noted that “(w)hether and how a PBM actually saves an individual benefits provider money with respect to the purchase of a particular prescription drug is largely a mystery to the benefits provider.” The court stated:

This lack of transparency also has a tendency to undermine a benefits provider’s ability to determine which is the best proposal among competing proposals from PBMs. For example, if a benefits provider had proposals from three different PBMs for pharmacy benefits management services, each guaranteeing a particular dollar amount of rebate per prescription, the PBM proposal offering the highest rebate for each prescription filled could actually be the worst proposal as far as net savings are concerned, because that PBM might have a deal with the manufacturer that gives it an incentive to sell, or restrict its formulary, to the most expensive drugs. In other words, although PBMs afford a valuable bundle of services to benefits providers, they also introduce a layer of fog to the market that prevents benefits providers from fully understanding how to best minimize their net prescription drug costs.

PBM transparency standards will make the marketplace more competitive. Enacting PBM transparency, conflict of interest and audit standards will remove this “layer of fog” and make the PBM marketplace more competitive by insuring that those hiring PBMs actually have enough information to evaluate responses to RFPs and to compare PBM contracts and know whether they are getting a good deal for the service provided or, to put it bluntly, are being ripped off. Such laws also protect patients’ health by discouraging practices such as drug-switching and certain formularies that are designed to enhance drug maker and PBM profits, not promote medical outcomes.

Regulating PBM practices will save money. We are starting to see savings from PBM transparency and fiduciary requirements. Although the Maine PBM law was the first to be enacted, because lawsuits halted implementation for several years, there isn’t yet a track record measuring its effectiveness in cutting costs. However, in South Dakota, which has a PBM transparency law that was not challenged in the courts, $820,000 was saved in state health insurance costs in a single year as the direct result of the more transparent business model required by its law. Several recent reports commissioned by state Governors and agencies have also pointed to the value of transparency requirements in achieving savings. A plan prepared for the Governor of Oregon by the Heinz Family Philanthropies recommended Oregon “require the greatest level of transparency possible” as well as annual audits of the PBMs and insurance companies the state contracts with to insure that rebates are passed through.

A report to the Illinois Commission on Government Forecasting and Accountability recommended the state stop using PBMs entirely, or at a minimum require a fiduciary relationship. By directly negotiating pharmacy benefits in its state employee health plan instead of paying a PBM $2.81 per enrollee per month to negotiate on its behalf, the report estimated savings of $1.35 per claim or about $10 million per year. In another measure of potential costs savings, the University of Michigan, in an attempt to deal with skyrocketing drug costs, dropped the five benefit managers it had been working with, hired a single new manager that has less control over how the drug plan is administered, and imposed strict new rules. These changes enabled UM to hold its drug spending to $43 million in 2003, or $8.6 million less than it would have paid under the previous plans.

The most effective legislation includes a fiduciary duty requirement. PBMs’ secret financial deals with drug companies lead to higher drug costs. A fiduciary duty simply means the PBM must serve the client's interest in getting the lowest price for drugs, and not the PBM’s own financial interest, or those of drug companies. That will lead to lower cost for drugs because the PBMs will be less able to siphon away money for themselves that could go instead towards lower drug prices for the client. The fiduciary language is effective because it is a basic principle of common law and states have centuries of legal precedent to look to in interpreting this legal concept. Fiduciary responsibility is a comprehensive standard that will cover all PBM dealings and avoid loopholes. It is a reasonable standard that already applies to real estate agents, lawyers, and even voluntary library board trustees – to carry out one’s duty with care, prudence, and diligence and not to benefit one’s personal interest.

Some state models. In addition to Maine, the District of Columbia has a comprehensive PBM law, and South and North Dakota have each adopted transparency and “fair dealing” standards.
Mississippi has enacted prompt payment standards, Louisiana has just completed a PBM recruitment RFP process requiring fiduciary responsibility, Kansas and Rhode Island require PBMs to register with the state, and Georgia requires PBMs to be licensed as pharmacies. Although the PBM industry has challenged the legality of the Maine and D.C. statutes, which also establish state fiduciary requirements, Maine’s law has been upheld by the U.S. Court of Appeals for the First Circuit, and the U.S. Supreme Court refused to consider the industry’s appeal. The D.C. law was initially enjoined by the federal District Court for the D.C. Circuit but this decision is under review in light of the favorable PBM decision in the First Circuit.

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