While there is general consensus that rising prescription drug costs are a vexing problem for people and institutions — from individual consumers, to collectively bargained health plans, to government programs such as Medicare and Medicaid — there isn’t wide agreement about the solutions to address this issue.
Pharmacy Benefit Managers (PBMs) emerged in response to these high costs. They work to control costs for those covered in their administered plans through a complex system that can include an array of terms such as “spread pricing”; “pass-throughs”; rebates; and formularies, just to name a few. Recent political attention on PBMs has cast them as the “bad guys” regarding drug costs, but placing blame and regulation on them may be ignoring the proverbial elephant in the room: the high costs of drugs are set by manufacturers, not the PBMs trying to carve out an affordable path for people to get the medications they need.
U.S. Supreme Court Ruling Weakens ERISA Standards
The frenzy to regulate PBMs kicked into high gear after the 2020 U.S. Supreme Court ruling in Rutledge v. Pharmaceutical Care Management Association. That ruling weakened federal ERISA standards in favor of state regulation of PBMs. Since that time, all 50 states have proposed or already enacted PBM regulations, and legislation at the national level is currently being debated. The rhetoric has ramped up, yet the range of political “fixes” are a mixed bag that in some cases will end up making the prescription drug cost problem even worse.
Eroding the authority of federal ERISA standards opens the door to what could become a long and slippery slope that diminishes other federal protections, such as the fiduciary responsibilities of pension officials; health and safety regulations; and even whistleblower protections.
Eroding the authority of federal ERISA standards in favor of state regulation of PBMs is a dangerous precedent that should be reversed. The patchwork of regs not only makes plan administration difficult, it also opens the door to what could become a long and slippery slope that diminishes other federal protections, such as the fiduciary responsibilities of pension officials; health and safety regulations; and even whistleblower protections.
Examples of where state PBM regs are headed include a high mandatory minimum dispensing fee of $10.49 in West Virginia, and proposed barriers to affordable mail order pharmacies in Oklahoma. Ironically, while aimed at PBMs, these legislative actions actually increase costs for consumers and plan sponsors, not the PBMs that administer the benefit. These are backward steps that will stymie the very things that have worked to control costs.
What’s on the Chopping Block?
At both the state and federal level, legislative efforts have honed in on eliminating some of the tools that PBMs offer plan sponsors to rein in costs and improve medication adherence, such as a 90-day supply of medication through mail order or retail-90 locations, and using a network of pharmacies to get better pricing.
90-Day Supply of Medication Via Mail Order or Retail-90 Location
PBMs often own or contract with mail order and retail pharmacies to provide a 90-day supply of medication, with consumers paying a reduced copay that saves them one-third or more of the retail copay cost. Consumers benefit from lower out-of-pocket costs as well as easier access to medications, which can be especially important to seniors or others who lack the time or mobility to get to a retail pharmacy. Increasing the convenience of obtaining medications raises the probability that it will be taken as directed, promoting a path to wellness.
Plan sponsors also achieve savings with fewer or no dispensing fees and more aggressive discounts under the 90-day supply system, helping to bring down health plan costs.
While PBMs are using technology to maintain proper temperatures for drugs delivered via mail order, more needs to be done to assure optimal quality. But some have focused on the temperature issue to create a rallying point to get rid of mail order all together. Temperature controls for mail order drugs have been studied at length, and more checks and balances between the pharmacies and shippers are being put in place to ensure the integrity of drugs, no matter the temperature.
Pharmacy Networks
Just as many health plans use a network of preferred providers, PBMs create significant cost savings by negotiating favorable pricing terms with a network of pharmacies. Some legislation would ban these cost-saving networks. The problem is that without favorable network pricing, consumers may have higher copays or co-insurance, and plan sponsors pay more for the drugs their members need.
Assuring prescription drug access in small towns or remote areas is critical, and PBMs recognize this by paying higher reimbursements to pharmacies in those areas. But banning networks in areas where chain and independent pharmacies both exist simply denies consumers and plan sponsors savings.
Ultimately, the lack of a pharmacy network places the affordability burden on plan sponsors and consumers.
Spread pricing – the enemy, or a cost-saver?
In the complicated landscape of drug plan pricing, the practice of “spread pricing,” has increasingly been portrayed as an evil that should be banned. Spread pricing, also referred to a traditional pricing, is when a PBM may invoice the plan sponsor more for a prescription drug than what it pays the pharmacy. For example, a PBM may pay a pharmacy $90 for a drug, but charges $100 to the plan sponsor. The $10 difference may be offset by rebate dollars paid to the plan sponsor, or deeper discounts on other drugs as well as to cover the PBM’s cost of administering the plan. The plan sponsors contract with PBMs to meet rebate and pricing/discount guarantees at an aggregate level across categories of drugs, such as generic, brand or specialty – not on a drug-by-drug basis.
Another PBM pricing model, called pass-through pricing, works with the PBM charging the plan sponsor the same price paid to the pharmacy, plus a high administrative fee. Manufacturer rebates are also passed through to the plan sponsor. These contracts offer less aggressive financial guarantees than spread pricing models because the PBM has a limited role in creating and monitoring for discounts and favorable terms.
Most PBMs offer both spread and pass-through pricing plans or some combination of both. Some plan sponsors will opt for pass through pricing because they value transparency, even though costs would be lower under a traditional contract.
Banning spread pricing, as has been proposed at both the state and federal levels, may sound like a good idea, but in reality it takes away a strategic tool that groups use to provide value and quality for their prescription drug plans.
Banning spread pricing, as has been proposed at both the state and federal levels, may sound like a good idea, but in reality it takes away a strategic tool that groups use to provide value and quality for their prescription drug plans.
What’s next?
Limiting the tools a PBM can offer to plan sponsors to save on prescription drug costs just doesn’t add up for groups or consumers. Right now, legislators are facing the dual pressures of constituents who urgently need prescription drug relief, and the lobbyists for drug manufacturers seeking to deflect from their practices of manufacturers price increases, patent protection and anti-competitive practices, such as limited price negotiations with Medicare. The best choices going forward regarding PBMs would include:
- Plan sponsors should have the option of choosing a pricing model – spread, pass-through or whatever works best for them;
- Plan sponsors should continue to have the ability to set plan design including pharmacy networks and mandatory mail order/retail 90;
- Increased PBM transparency is important – reporting to plan sponsors, state regulators on rebates, and pricing;
- Legislative or legal action should be taken to overturn the U.S. Supreme Court decision that allows state regulation of PBMs to stand above federal ERISA standards. Federal rules should be the foundation of our rights and protections, and this ruling puts many federal standards at risk.
