Pharmacy Benefit Manager (PBM) Reform Update

April 2023

Lowering the cost of prescription drugs is a top healthcare priority for many Americans. In a February 2022 poll by Axios-Ipsos, 50 percent of Americans believe that the government should emphasize lowering prescription drug costs and work on bringing down the overall cost of health care. While there are many reasons for the high price of prescription drugs, including high regulatory, research, and administrative costs, one factor that has begun to receive additional scrutiny is the role of pharmacy benefit managers (PBMs) in increasing drug costs. This brief will examine the role of PBMs and recent reform efforts to change how they operate.

Pharmacy benefit managers act as a middleman between insurers and pharmacies to reduce administrative costs for insurers. PBMs assist with determining a patient’s eligibility, administering plan benefits, and negotiating prices between pharmacies and health plans. PBMs work with drug manufacturers, wholesalers, pharmacies, and health insurance providers but are not directly involved with the physical distribution of prescription drugs; they only handle negotiations and payments.

Moving products from the manufacturers to pharmacies is a multi-step process. When new drugs are made available for sale, drug manufacturers negotiate with wholesalers, who then sell and distribute the drugs to pharmacies. PBMs negotiate agreements with these manufacturers on behalf of insurance companies and are paid rebates by drug manufacturers for their services. PBMs then work with pharmacy service administrative organizations to determine the reimbursement rates. Finally, PBMs pay pharmacies on behalf of insurance providers for the drugs dispensed to patients.

PBMs are paid for their services in several ways: through administrative fees; through spread pricing, where the PBM keeps the difference between what is paid to pharmacies and the negotiated payment from health plans; through the shared savings, which occurs when the PBM keeps part of the rebates or discounts negotiated with drug manufacturers; and clawbacks, which occur when the copayments paid by insured patients exceed the cost of a drug.

While PBMs have proven to be very effective in lowering administrative costs for manufacturers and pharmacies, some concerns have emerged from regulators and healthcare advocacy groups regarding how PBMs profit from their services and their effect on the cost of drugs, especially generic drugs.

For years, PBMs have operated with relatively few checks on their business. The increasing cost of drugs combined with the lack of transparency in how PBMs determine drug costs has led many states and the federal government to impose new rules on PBMs. These reforms included new licensing rules, pharmacy audit requirements, and generic drug pricing reforms designed to shift some control away from PBMs regarding pricing.

The first practice to be banned was gag clauses, the provisions in the contracts between PBMs and pharmacies that blocked pharmacists from informing patients when a drug’s cash price was less than the copay price under their insurance. This practice was banned in 2018 by two laws, the Patient Right to Know Drug Prices Act and the Know the Lowest Price Act.

The FTC has also expanded its focus on PBMs over the last two years. In June 2022, the FTC released a policy enforcement statement, Policy Statement of the Federal Trade Commission on Rebates and Fees in Exchange for Excluding Lower Cost Drug Products. In the statement, the FTC responds to complaints regarding the rebates and fees generated by PBMs and argues they “may shift costs and misalign incentives in a way that ultimately increases patients’ costs and stifles competition from lower-cost drugs, especially when generics and biosimilars are excluded or disfavored on formularies.” This statement and recent inquiries into the PBM industry indicate an increased interest in PBMs and could lead to increased regulations in the future.

LUGPA’s Recommendations for Regulatory Reform:

• Encourage Transparency in the PBM market: Congress should consider rules that mandate that PBMs file reports detailing their pricing practices. These reports should include information on the amount each health plan pays the PBM for prescription drugs and how much the PBM pays the pharmacy on behalf of the health plan. These rules should include penalties for non-compliance.
  
  
• Prohibit the Use of Spread Pricing and Clawback Fees in Medicare and Medicaid: Spread pricing and clawback fees increase the cost of medications for both patients and government providers. This often-opaque process adds costs that mainly benefit PBMs.
  
  
• Reform Rebate Contracting: PBMs negotiate agreements with these manufacturers on behalf of insurance companies and are paid rebates by drug manufacturers for their services. PBMs then work with pharmacy service administrative organizations to determine the reimbursement rates. Finally, PBMs pay pharmacies on behalf of insurance providers for the drugs dispensed to patients.
  
  Rebates negotiated by PBMs should ultimately benefit patients, not PBMs. One way to ensure the rebates are passed on is to require PBMs to change their rebate process by tying patient cost-sharing to the net price, not the list price. One goal of rebate reform should be to remove financial incentives for a PBM to cover a branded medicine instead of its less expensive generic version.
  
  
• Require PBM Contracts to use Fixed Fees Per Transaction: Calculating fees as a share of drug costs creates incentives for PBMs to prefer higher-cost drugs; setting a fixed price per transaction limits this practice.
  
  
• Encourage Audits: One method for holding PBMs accountable is to ensure employers and government purchasers have more substantial audit rights to acquire and understand the actual prices paid by PBMs and insurers to pharmacies.

LUGPA supports legislative efforts directed at Pharmacy Benefit Managers that address unfair payor policies that negatively impact patient access to care and the ability of urologists to provide appropriate treatment. We will monitor any new developments with the previous proposal and respond to any new legislation.