Articles | August 26, 2024
Pharmacy benefit managers (PBMs) have been the subject of repeated criticism and challenges — in state legislatures, the courts, Congress and, most recently, the Federal Trade Commission (FTC).
Many states have enacted laws to restrict certain PBM practices and promote PBM transparency. PBMs have been sued regarding prices paid for prescription drugs by employers and plan participants. In Congress, bills have been introduced to regulate the PBM industry. A new FTC report found the behavior of the PBM industry has led to enormous power and influence over patients’ access to drugs and the prices they pay.
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Additionally, plan participants have filed health class action lawsuits involving prescription drug costs against plan fiduciaries, akin to those that have been filed for years against 401(k) and 403(b) plans, where it is alleged that plans paid excessive fees and violated their fiduciary duties with respect to vendor selection and fee payment.
This article discusses recent developments affecting the PBM industry, PBM payment structures and 10 actions plan sponsors should consider to ensure that plans secure maximum value from PBMs.
In July 2024, the FTC published “Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies.” This interim staff report, which is part of an ongoing inquiry the FTC launched in 2022, details how the increased vertically integrated and concentrated market structure has raised concerns over competition and fair pricing. Currently, the six largest PBMs manage nearly 95 percent of all prescriptions, according to the report.
The FTC found PBMs wield enormous power and influence over patients’ access to drugs and the prices they pay and that they exert substantial influence over local independent retail pharmacies — particularly affecting access to medications in rural and medically underserved areas. The report emphasizes concerns that PBMs steer patients to use affiliated pharmacies. The FTC intends to continue its investigation of the PBM industry.
This report was cited by some in Congress, such as Senators Chuck Grassley (R-IA) and Ron Wyden (D-OR), as support for bipartisan efforts to pass legislation regulating the PBM industry. Legislation has been introduced in both the Senate and the House that would increase transparency in PBM disclosures and prohibit some practices. While legislation is unlikely to pass prior to the November 2024 election, many believe that the issue will be taken up afterward by the lame-duck Congress.
On July 23, 2024, a U.S. House Committee issued a report finding that PBMs frequently tout the savings they provide for payers and patients through negotiation, drug utilization programs and spread pricing, even though evidence indicates that these practices often increase costs for patients and payers. For example, the Committee found that there were numerous instances where the federal government, states and private payers have found PBMs used opaque pricing and utilization schemes to overcharge plans and payers by hundreds of millions of dollars.
At the same time, plan sponsors have become concerned that they could face liability based on the business practices of the PBM they have hired to administer their prescription drug program. In one class action lawsuit, Lewandowski v. Johnson & Johnson, plaintiffs sued Johnson & Johnson for breach of fiduciary duty, alleging plan fiduciaries failed to appropriately select and monitor their PBM, relied upon a biased benefit plan consultant and failed to control plan expenses. Many believe that the lawsuit brings to light potential challenges to plan fiduciaries and a new wave of fiduciary liability litigation. Another lawsuit was recently filed against the Wells Fargo health plan alleging similar violation of fiduciary duties in connection with prescription drug prices.
Plan sponsors have grown increasingly frustrated as previously opaque PBM business practices come to light, many of which appear to increase PBM profits at the expense of the plan. To address these practices, plan fiduciaries should consider PBM pricing models and determine which is appropriate for their plan.
PBMs derive their revenue from various sources, including, but not limited to:
In March 2024, the General Accountability Office published a report examining these practices and the actions some states have taken to address them.
When a PBM contract uses spread pricing, the PBM reimburses pharmacies at one rate and charges the plan a different rate, retaining any positive difference as revenue. In a sample spread pricing arrangement, a PBM may charge the plan $20 for a prescription but only pay $12 to the pharmacy, keeping the $8 difference as profit. Spread pricing has been criticized as lacking transparency and contributing to rising prescription drug costs. Additionally, under the spread-pricing model, the PBM can receive higher profits from higher-cost medications, creating an incentive to promote the use of more costly drugs. Its supporters claim that spread pricing can add flexibility and control costs better than pass-through pricing.
Given these concerns, plan fiduciaries should consider moving away from a traditional spread-pricing arrangement and review whether alternatives, such as a pass-through model, would be appropriate.
Plan sponsors can negotiate a pass-through model that provides a more transparent alternative. Under this model, the PBMs no longer earn revenue on spreads at retail network pharmacies.
Some PBMs have contracts with retail pharmacies with both pass-through and spread-pricing reimbursement. PBMs have claimed that retail pharmacies often require higher reimbursement rates (e.g. higher plan costs) when they enter into transparent, retail-pricing arrangements with the PBM. The argument given is that the retailer prefers secrecy about their individual pricing compared to other retail pharmacies in the network. PBMs may offer better pricing under conventional spread pricing than for full pass-through, transparent contracts. A pass-through model does not guarantee that all drugs will be cheaper; in fact, under this model, some may be more expensive.
However, by having individual pricing by retail pharmacy, plan sponsors can use the cost data to create more efficient, custom networks by eliminating the costliest retailers from the network. Segal prefers this transparency to help our clients be more informed about the retail price variations so they can hold PBMs and the retail pharmacies more accountable to competitive market forces and to future negotiations.
In recent years, even transparent models have become more opaque. PBMs have contracted with GPOs to collect manufacturer rebates, and the PBMs only pass through the portion of rebates which are passed through to them by the GPO, even when the PBM owns the GPO. (GPOs are described at the end of this article.) Similarly, PBMs pass through the pharmacy contracted price with their mail-order and specialty pharmacies, even when they own both of these delivery channels. The true acquisition cost of the drugs remains elusive.
The benefits to plan fiduciaries of a pass-through transparency model are that costs will be easily understandable and can be monitored. Many state Medicaid plans and Medicare prescription drug plans, including Employer Group Waiver Plans (EGWPs), are already required to use a transparent model rather than spread pricing. The pass-through arrangement could better align payments with the fiduciary’s responsibilities to ensure that it is paying a reasonable amount for prescription drug services. Having a clearer fee payment may also help to prevent litigation involving lack of monitoring a service provider and unreasonable and excessive fees that have been prominent for certain retirement plans.
PBMs may offer clients more financially advantageous pricing to enter into exclusive specialty pharmacy contracts. They may also offer incentive copayment designs at mail-order pharmacies, and retail 90-day supply deals at only one or two chains.
These practices may need to be carefully reviewed with legal counsel. Some of these practices are being scrutinized by state and federal regulators and others are the subject of new state law prohibitions. As mentioned above, these practices are particularly questionable when the PBMs own the specialty and mail-order pharmacies through which they provide these exclusive arrangements.
While PBMs are a popular target for legislative reform, some commentators suggest a more holistic approach is needed to address the high cost of prescription drugs. The 2024 Segal Health Plan Cost Trend Survey found that utilization continues to drive prescription drug trend, including the rising cost of more effective and expensive new drug therapies, such as diabetes and obesity drug treatments with the glucagon-like peptide-1 receptor agonist (GLP-1) mechanism. Additionally, about 80 percent of Americans say drug company profits are a major contributing factor to prescription drug costs, according to a 2023 survey by the Kaiser Family Foundation.
To provide greater insight into the role of the drug manufacturers, policies could address such items as patent reform, encouraging use of generic and biosimilar drugs, and ensuring the pharmaceutical supply chain continues without interruption. Additionally, the Inflation Reduction Act will allow Medicare to negotiate drug prices for certain high-cost medications beginning in 2026. The lower costs Medicare will pay should apply to employer-sponsored plans as well, and plans should not be required to pay additional costs to make manufacturers whole.
As plan sponsors move to address plan costs and ensure that they have a reasonable contract, it is important to keep in mind the plan’s fiduciary duties. When selecting and monitoring their service providers, plan fiduciaries have an obligation to use a prudent decision-making process. Fiduciaries must act in the sole interests of their participants and beneficiaries, and follow well-established paths to ensure they make a prudent selection.
As part of this process, plan sponsors should consider taking these steps:
Let’s have a conversation about how we can help.
Contact UsSegal is an independent consulting firm that has no financial relationships with PBMs. Segal can assist plan fiduciaries in understanding their fiduciary obligations and assuring that the PBM selection process is responsible.
Segal can also assist plan sponsors that wish to understand the financial implications of moving from a traditional spread pricing arrangement to a transparent pass-through arrangement.
As the name “group purchasing organizations” suggests, GPOs negotiate on behalf of multiple purchasers, which gives them a leverage to obtain discounts with vendors. In the healthcare industry, GPOs act on behalf of hospitals and other healthcare providers.
GPOs are a relatively new addition to the pharmacy benefit ecosystem. They negotiate prescription drug rebates and formulary placement with pharmaceutical manufacturers, a role originally performed by PBMs. There are more than 20 GPOs that focus on prescription drugs. A few of them are led by PBMs, and many are owned by the same parent companies as the PBMs they serve.
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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.
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