Continued Scrutiny of PBMs Highlights Need for Value-Based Formulary Design

Written by David Blaszczak, Senior Advisor at SCALE Healthcare

Bottom Line: Due to bipartisan interest in addressing high drug pricing and scrutiny of pharmacy benefit managers (PBMs) incentives for high rebate drugs, there has been movement towards state-level regulation of PBMs and increased transparency at the federal level. Recent actions at the federal and state level have put a spotlight on certain business practices of PBM’s including pharmacy drug reimbursement rates, audits of independent pharmacies, and clawback fees. Market consolidation and vertical integration of payers, PBMs, and specialty pharmacies is likely to continue and increase a shift towards mail-order and specialty pharmacies business models and put pressure on independent physician groups. In response to new regulations, PBMs will need to demonstrate their benefits to healthcare systems through value-based formulary design, streamlining of prior authorization, and tracking patient outcomes. Technology that enhances data can also help pharmacy distribution networks accelerate the shift towards value-based care and allow provider groups to coordinate with pharmacists and insurers.

While PBMs argue that costs are ultimately lowered through their negotiating power with different stakeholders, patients’ out-of-pocket costs for brand name drugs have continued to increase faster than inflation.

Overview

PBMs function as intermediaries between drug manufacturers, insurance companies, and pharmacists to negotiate rebates, design formulary coverage, and set pharmacy reimbursement for drug dispensing. However, patients may not see the benefits of their negotiations with drug manufacturers as PBMs earn profits off of the difference between what they reimburse the pharmacy compared to what they pay the plan. PBMs also determine patient choice and copays through formulary management for generics, biosimilars, and brand name drugs. PBMs may exclude some drugs from formularies entirely, causing some patients to lose coverage in a new plan year or go through step therapy and coverage denials for prescribed drugs.  PBMs typically prefer high rebate drugs and may exclude lower cost generics from formularies which directly impacts patient cost-sharing – coinsurance in Medicare Part D is based on a drug’s pre-rebate list price. While PBMs argue that costs are ultimately lowered through their negotiating power with different stakeholders, patients’ out-of-pocket costs for brand name drugs have continued to increase faster than inflation.  Additionally, recent stories of PBMs pocketing the difference between what they charge a plan and what they reimburse pharmacies (“spread pricing”) and preventing consumers from accessing cheaper generic drugs has intensified scrutiny of the industry.  In response to stricter regulations from states and federal agencies, PBMs are likely to shift their business towards value-based formulary design and partner with plans and providers in new ways to lower overall healthcare costs.

Federal Legislative Actions

In light of this pricing environment, recent actions from both the Senate and the Federal Trade Commission (FTC) have demonstrated an interest in learning more about PBM business practices and increasing transparency on how PBMs contract with pharmacies. On May 5, the Senate Subcommittee on Consumer Protection, Product Safety, and Data Security held a hearing on PBM transparency led by Chairwoman Maria Cantwell (D-WA). Senators discussed how hundreds of drugs including insulins and cancer drugs have been excluded from insurance plan coverage and more than a third of patients with Part D prescription drug coverage have faced denial of coverage issues. As the role of PBMs has grown over time, the market has consolidated into 3 companies that cover 80% of the prescription drug market alongside vertical integration of plans and pharmacy distribution networks through PBMs acquiring mail-order and specialty pharmacies in recent years. PBMs have also been criticized for performing aggressive financial audits of independent pharmacies and exacting retroactive “direct and indirect remuneration” (DIR) fees from competing pharmacies not in network, which has been criticized as anti-competitive.

At the hearing, expert witnesses testified on different viewpoints based on their experiences with anti-trust law and the PBM market, including an antitrust attorney who previously worked at the FTC and a professor of health services and management. Witnesses pointed out that PBMs are a minimally regulated industry in the drug supply chain with little oversight, which has led to an oligopoly between the 3 major players (Caremark, Express Scripts, and OptumRX) after a series of mergers that instead led to more restrictive networks and denial of pharmacy of choice for consumers. While PBMs earned $28 billion in profits in 2019, community pharmacies have been forced to accept drug reimbursement rates below acquisition costs putting financial pressure on those in underserved rural and inner-city markets. Experts at the hearing called for additional transparency to evaluate the amount of fees that PBMs levy on pharmacies.

JC Scott, the President of the PBM trade association PCMA, testified that while drug pricing and affordability are an increasing problem for the entire drug market, PBMs deliver value to healthcare plans through increasing access to medications and providing real-time benefit tools for estimating out-of-pocket. Retail pharmacies ask for higher reimbursement prices and drug manufacturers argue for higher list prices while PBMs negotiate lower drug prices on behalf of unions, pension funds, and health plans. Scott referenced an industry study that showed PBMs create $10 in savings for every dollar spent on services and lower total annual drug spending in the US by $1 trillion ($962 per covered life). Plans may also require step therapy and other utilization management tools to limit drug access which can be further streamlined using electronic prior authorization tools.

Following the hearing, Senator Cantwell introduced the Pharmacy Benefit Manager Transparency Act of 2022 which would prohibit spread pricing (i.e., when a PBM charges a payer more for a prescription drug than they reimburse a pharmacy) and clawback payments (when a PBM charges a pharmacy a retroactive fee if the cost of a drug was higher than the patient’s copayment). The bill would also require PBMs to provide a full disclosure of their costs, reimbursements, and fees to both plans and pharmacies, and an annual report to the FTC on specific business metrics. Finally, the bill would authorize the FTC to levy civil penalties from PBMs for noncompliance while offering protection to whistleblowers. Other lawmakers have also called for a GAO study to better understand how PBM’s affect drug costs.

Federal Regulatory Actions

On June 7, the FTC decided to pursue a study on PBM business practices after a previous a vote in February ended in a 2-2 tie, when 2 Republican appointed commissioners had expressed concern that the study would not do enough to examine consumers’ out-of-pocket spending. The position of the fifth commissioner was filled on May 11 by Alvaro Bedoya after a narrow Senate confirmation.  Specifically, the FTC announced that it would launch an inquiry into vertically integrated PBMs (when a large health insurance company, PBM, mail order pharmacy, and/or specialty pharmacy are all owned by one entity) and obtain internal documents from the 6 largest players: CVS Caremark, Express Scripts, OptumRx, Humana, Prime Therapeutics, and MedImpact Healthcare Systems. The investigation will also look into PBM fees to unaffiliated pharmacies, steering patients towards PBM-owned pharmacies, audits of independent pharmacies, pharmacy reimbursement methods, and other issues. The FTC has previously stated that proposed legislation to increase PBM transparency and require patients’ freedom of choice in pharmacies would increase drug prices and harm competition and allowed a large-scale merger of 2 PBM companies in 2018.

One the regulatory side, CMS released the 2023 Medicare Part D final rule in April that addresses pharmacy contracting and price reporting.  It redefines the negotiated price of a drug as the price reported at the point of sale and include all price concessions received from pharmacies. This requires Part D plan sponsors and their PBM partners to include all pharmacy price concessions and retroactive DIR fees into the negotiated price of a drug at the point of sale to patients. CMS cited that DIR fees assessed on pharmacies after a drug is sold through PBM contracts have risen dramatically by 107,400% between 2010 to 2020. Implementation of this so-called “rebate rule” was delayed until January 1, 2024 as it is projected to increase premium costs while lowering drug costs.

In light of this pricing environment, recent actions from both the Senate and the Federal Trade Commission (FTC) have demonstrated an interest in learning more about PBM business practices and increasing transparency on how PBMs contract with pharmacies.

State Policy

After the 2020 Supreme Court ruling in Arkansas v. Rutledge upheld the state’s law regulating PBM reimbursement, other states were encouraged to follow suit. Some states have also started to rethink their Medicaid programs’ pharmacy benefit management following cost concerns and legal battles. In 2018, a state audit of Ohio’s Medicaid program found that the spread of PBM reimbursement rates cost the state $223 million, leading lawmakers to pass legislation banning spread pricing and clawback payments (when PBMs charge pharmacies a fee for overpayment after a drug has already been dispensed, usually following a financial audit).  After a similar report on the costs of PBM pricing to the New York Medicaid program, the state opted to carve out their managed care pharmacy benefit and run their own fee-for service system (the implementation was delayed until 2023 and has received criticism from 340B providers).  In April, Louisiana sued Optum Rx for inflating prescription costs charged to the state for pharmacy reimbursement, while Centene has paid settlements for lawsuits in other states. States often lack the data required to track pharmacy drug spending and reimbursement in their Medicaid programs, leading to a disconnect between different stakeholders on the true price of a drug.

According to the National Community Pharmacists Association, nearly all states have now passed legislation regulating various aspects of PBMs including: allowable costs for pharmacy reimbursement, patient steering, pharmacy auditing standards, spread pricing, registration and licensing, and transparency requirements. After legislative action from many states, Congress outlawed “gag clauses” in 2018, wherein a PBM contract prevents a pharmacist from discussing options for patients to obtain their prescriptions (e.g., not using insurance). Although PBMs are now getting renewed attention from Congress, states will continue to regulate the industry themselves which may create a tipping point for more comprehensive federal reforms. KS, OK, NY, VT, and WV all enacted new PBM regulations in 2022.

Future Outlook

PBMs are now facing new scrutiny as federal drug pricing reform has stalled and in response must evolve their business model in response. Policymakers are more closely monitoring the effects of unregulated PBM contracting and spread pricing that have directly affected the adequacy of pharmacy networks, leading to pharmacy deserts. The industry has also seen new healthcare business stakeholders like Amazon, Truepill, and Mark Cuban’s “Cost Plus” enter the mail-order pharmacy space, disrupting the highly consolidated PBM industry. Amidst increasing vertical integration within large PBM businesses, healthcare providers are likely to face more barriers to patient access as a result of large PBM groups using restrictive networks and prior authorizations to control costs. Providers and other stakeholders should consider how PBM distribution networks affect patient out-of-pocket costs and premiums, or limit drug access from independent or specialty pharmacies.

As the industry moves towards new technology platforms and enhanced data capabilities, large PBM systems can help providers and insurers track patient outcomes and facilitate value-based contracts. Pharmacists can help track patient medication adherence and side effects, provide medication management services for patients juggling multiple prescriptions, and communicate with providers on patient care plans. This is especially important in therapeutic areas like mental and behavioral health where medication adherence is a key indicator of health outcomes and can prevent hospitalizations. For example, patients being treated for severe mental illness may struggle with adhering to multiple medications that treat different comorbidities, and therefore require greater care integration between their pharmacies and primary care doctors. Higher levels of integration between plans, PBMs, and pharmacies can benefit patients by reducing the number of prescribed drugs that are blocked by strict prior authorization criteria, especially for generics. Similar to other stakeholders now turning towards value-based care solutions, PBMs have shown interest in excluding drugs that have been shown to not be cost-effective relative to their clinical value as a way to counter manufacturers’ high list prices and appeal to health plans. As federal policymakers debate PBM transparency and other drug pricing legislation going forward, shifting towards value-based formulary design that emphasizes lower health system costs and better patient outcomes can help to align different stakeholders.

Contact David Blaszczak for questions or comments about this article.