Mobile Menu

Pharmacy Benefit Managers

Pharmacy benefit managers (PBMs) are middlemen in pharmaceutical markets. They were originally created to process drug claims for health insurance companies, but today they do much more, including decide which drugs are covered by insurance, bargain with pharmaceutical companies to determine drug prices, and decide which pharmacies are in a health insurer’s network. On top of this, they own physical, mail-order, and specialty retail pharmacies of their own, and they manage pharmaceutical benefits for government programs like Medicare Part D and Medicaid. With such immense control over drug prices in the United States, PBMs are responsible for many of the problems in our country’s pharmaceutical care system.

The top three PBMs — Caremark, Express Scripts, and OptumRx — manage 80% of drug claims in the United States. With this market power, they chronically under-reimburse community pharmacies for drugs. States have also found that PBMs have overcharged taxpayers for administering Medicaid drug benefits, sometimes by hundreds of millions of dollars.

Furthermore, the top PBMs are “vertically integrated” into the largest health insurance corporations, complete with their own mail-order pharmacies. Caremark is owned by pharmacy chain CVS, which also owns health insurer Aetna. The PBM Express Scripts is owned by insurer Cigna, and PBM OptumRx by insurer UnitedHealth. So as a patient going to an independent pharmacy, your health insurer owns the PBM deciding which drugs are covered and how much they cost, and also might own the competing pharmacy down the street.

As a result, when dealing with Medicaid, Medicare, employer health plans, and pharmacists, PBMs have a built-in incentive to self-deal. The more a PBM can overcharge taxpayers through a health plan like Medicare or Medicaid, and then under-reimburse the independent pharmacies that they compete with — pocketing the difference between the two — the more money they make.

However, state governments can and have regulated PBMs over the past two decades, aiming to limit many of the most harmful PBM practices by increasing transparency, preventing PBMs from taking an extra cut of profits, and prohibiting them from steering patients toward their own pharmacies.[1]

Notes

[1] It should be noted that there is some legal dispute over state legislation to regulate PBMs. The federal Employee Retirement Income Security Act (ERISA) governs all employee benefit plans, including health insurance, and preempts state regulation. Federal courts have reached different conclusions regarding the extent to which state regulation of PBMs is preempted by ERISA.

Prohibit Spread Pricing by PBMs

The Problem

“Spread pricing” is when PBMs charge payers like Medicaid more money than they reimburse a pharmacy for that medication. The PBM keeps the difference, the “spread,” as profit.[1] PBMs have been known to refer to spread pricing as “differential pricing” or “risk mitigation pricing,” even though there is no meaningful way in which this compensation structure manages business risks.

To explain: When a patient goes to fill a prescription, they pay the pharmacy a certain amount, and the rest is covered by insurance, whether a government plan like Medicaid or private health insurance. However, many PBMs reimburse the pharmacy one amount for the insurance’s portion of the costs, but then turn around and charge the patient’s insurance plan more than that as reimbursement for the pharmacist’s services. The PBM keeps the difference. This is one way that PBMs are compensated, with the primary alternative being a transparent administrative fee paid by the insurance plan.

The use of spread pricing is particularly a problem for government healthcare plans like Medicare and Medicaid, in which the insurance plan is often capped by a “medical loss ratio” to a maximum amount of administrative costs and profits relative to patient care and benefits. Insurance plans, however, are allowed to consider the money paid through spread pricing to count as spending on care, allowing the PBM and insurance company to earn excess profits and prevent the state from covering more beneficiaries.

The Solution

PBMs should not be able to charge the insurance plan more for a drug benefit than the amount they reimbursed the pharmacy. This would ideally lead to PBMs being primarily compensated through a straightforward and transparent administration fee from insurance plans.

Model Legislation

Virginia § 38.2-3467 prohibits a carrier or PBM from conducting spread pricing, requiring that the pharmacy must be reimbursed the same amount as was charged to insurance.[2]

Notes

[1] National Community Pharmacists Association, “Spread Pricing 101,” https://ncpa.org/spread-pricing-101.

[2] Code of Virginia § 38.2-3467, https://law.lis.virginia.gov/vacode/title38.2/chapter34/section38.2-3467/.

Establish Minimum Reimbursement Rates for Independent Pharmacies

The Problem

Related and in addition to spread pricing, PBMs have also been known to reimburse independent pharmacies less than the pharmacy’s costs of filling the patient’s prescription, sometimes reimbursing independent pharmacies less than the PBM’s own mail-order pharmacy. This makes it nearly impossible for independent pharmacies to make a profit and stay in business, and PBMs are only able to do this because of their concentrated power over pharmaceutical benefits.

The Solution

PBMs should not be able to reimburse pharmacies for less than the cost of fulfilling a prescription or dispensing a drug. This would ensure that independent pharmacies are paid fairly and able to compete on a level playing field.

In designing this policy, to prevent pharmacies from artificially inflating their costs to earn more revenue, the minimum reimbursement rates could use NADAC-plus pricing. This would tie pharmacy reimbursement rates to the National Average Drug Acquisition Cost (NADAC), a database of drug costs maintained by CMS, plus the state Medicaid plan’s dispensing fee or spread.

Require Equal Reimbursement for Independent and PBM-Affiliated Pharmacies

The Problem

When patients go to an independent pharmacy, the pharmacy is reimbursed by the PBM representing the patient’s insurance company. However, the largest PBMs (OptumRx, Express Scripts, and CVS Caremark) all have their own mail-order or retail pharmacies, and PBMs will often offer different reimbursement rates for those drugs than they offer to their own pharmacies. This puts the independent pharmacy at an unfair disadvantage, and as a result many prescriptions are unprofitable for independent pharmacies to fulfill, and many struggle to stay in business.

The Solution

To avoid conflicts of interest and ensure a level playing field between independent and PBM-owned or affiliated pharmacies, PBMs should be required to offer the same reimbursement rates to nonaffiliated pharmacies as they do to their own.

Model Legislation

Oklahoma’s 2019 Patient’s Right to Pharmacy Choice Act includes provisions that prohibit PBMs from reimbursing independent pharmacies differently than they reimburse PBM-owned or affiliated pharmacies.[1]

Notes

[1] Okla. Stat. tit. 36, § 6962(B)(3).

Prohibit PBMs From Steering Patients to Their Own Pharmacies

The Problem

The largest PBMs own mail-order or retail pharmacies, but they are also responsible for reimbursing the independent pharmacies that compete with their own pharmacies. As a result of this conflict of interest, PBMs use a variety of tactics to steer patients away from independent pharmacies and direct business to their own mail-order pharmacies, which often provide worse service for essential prescriptions. Patient steering tactics can be direct, like requiring that patients use the PBM’s pharmacy, or indirect, like using patient data to push patients toward their own pharmacies or ensuring that patients pay more to use an independent pharmacy than a PBM-owned one.

The Solution

Patients should have a free and fair choice of pharmacy, and independent pharmacies should be able to compete with PBM-affiliated pharmacies on a level playing field. State law should entirely prohibit PBMs from requiring patients to use their own pharmacy, and prevent PBMs from using patient data to steer patients and make them pay more to use another pharmacy.

Model Legislation

Georgia’s 2019 Pharmacy Anti-Steering and Transparency Act.[1]

Notes

[1] O.C.G.A. § 26-4-119.

Adopt "Any Willing Pharmacy" Laws

The Problem

Many PBMs adopt a series of discriminatory arrangements to favor certain pharmacies over others, either because the PBM owns and operates their own mail-order pharmacy or because the PBM has favorable contract terms with certain pharmacies. As a result, PBMs have been known to steer patients towards their own mail-order pharmacies by refusing to deal with independent pharmacies, reimbursing independent pharmacies at a lower rate, or otherwise erecting barriers to using other pharmacies with a patient’s insurance.

The Solution

States can adopt laws to require that PBMs honor fair contractual terms with “any willing pharmacy” that meets the requirements of a patient’s healthcare plan. These provisions will bar PBMs from cutting other pharmacies out of an insurance plan’s coverage or otherwise providing unfairly favorable terms to certain pharmacies, ensuring that patients are able to use their preferred pharmacy.

Model Legislation

N.J. Stat. § 17:48-6j, a 2017 New Jersey law, requires that pharmacy benefit managers and distributors sell to “any willing pharmacy” that meets the requirements of a health insurance plan. This means that PBMs can’t do business exclusively to pharmacies they either own or have discriminatory contractual relationships with.[1]

Notes

[1] N.J. Stat. § 17:48-6j, https://codes.findlaw.com/nj/title-17-corporations-and-institutions-for-finance-and-insurance/nj-st-sect-17-48-6j.html.

Require Drug Rebate Pass-Throughs

The Problem

One of the core functions of PBMs is to negotiate drug prices with drug manufacturers, in theory to make drugs cheaper for patients. In practice, PBMs tend to negotiate not the list price for a drug but rather rebates (discounts) from drug manufacturers, which decrease the net price of a drug after the rebates are applied. In theory, these discounts should be passed on to the patient and their insurance company to decrease the effective price. However, PBMs often do not pass these rebates on, such that the patient sees none of those benefits at the pharmacy counter.

Furthermore, PBMs generally negotiate these rebates as a percentage of the drug’s list price. This means that the PBM will get a larger rebate for a more expensive drug, and the PBM has an incentive to choose and negotiate discounts for costlier drugs rather than cheaper equivalents. As a result, the PBM is often selecting more expensive drugs for the patient in order to get a higher rebate, and then the PBM does not even pass the rebate on to the patient.

The Solution

State lawmakers can require that PBMs pass on to patients 100% of the rebates that they negotiate with drug manufacturers. This will immediately reduce the cost of drugs for many patients, and it will eliminate or reduce PBMs’ incentives to select more expensive drugs for insurance coverage.

Model Legislation

West Virginia HB 2263 requires PBMs to pass through 100% of rebates to the patient at the pharmacy counter.[1]

Notes

[1] West Virginia HB 2263, https://www.wvlegislature.gov/Bill_Status/bills_text.cfm?billdoc=HB2263%20SUB%20ENR.htm&yr=2021&sesstype=RS&billtype=B&houseorig=H&i=2263.

Establish PBM Oversight Through State Insurance Commissions

The Problem

For the above regulations regarding PBMs to be effective, enforcement mechanisms need to be in place to monitor and ensure compliance, establish and levy penalties, and if necessary, revoke PBMs’ certification to operate within that state.

The Solution

This could easily be solved by placing PBMs under the certification authority and oversight of state insurance commissioners, who would be able to monitor PBMs’ compliance with state regulations and punish violations.

Model Legislation

Oklahoma’s 2019 Patient’s Right to Pharmacy Choice Act places responsibility for enforcing the Act with the state insurance commissioner, and provides the commissioner authority to penalize PBMs’ violations.