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Six years ago, Robert Schenk, who administered drug prescriptions for
the Meridian Health Systems employee health plan, started to scratch
his head over medication costs. Meridian, a nonprofit that owns and
operates six hospitals in northern New Jersey, had hired Express Scripts
in hopes that the pharmacy benefit manager (PBM) would reduce the
system’s spending on drugs for employees, according to a 2013 article in
Fortune magazine.
Schenk had once owned two small-town drugstores, so he knew some of the arcane practices underlying PBM pricing. He discovered that
Express Scripts was charging the Meridian health plan $92.53 for a
generic amoxicillin prescription filled at an outside pharmacy. Schenk
was able to do something that others in his position could not: figure
out the “spread,” the difference between what the PBM charges the health
plan and what it pays the pharmacy. Most health plans do not have
access to the PBM’s payment to the pharmacy, so they can’t compare the
two. But Schenk could determine what Express Scripts was paying
Meridian’s outpatient pharmacy to fill the same prescription: $26.91.
That meant a spread of $65.62 on one bottle of a generic antibiotic.
PBMs argue that spreads are part of a revenue balancing act. “When
evaluating spread pricing, it is important to take into account all
drugs, including those that the PBM takes a loss on,” says David
Whitrap, an Express Scripts spokesman.
It is perfectly legal for a PBM to charge a spread of any size. But
the extent of that spread is not disclosed pursuant to a contract, nor
is the price per prescription the PBM pays a retailer or its direct-mail
pharmacy. “Most PBMs do not disclose to employers either the price that
they pay to retail pharmacies or drug acquisition costs for their mail
operations, which makes the PBM spread nontransparent to sponsors,”
explains Patricia M. Danzon, PhD, Celia Moh Professor at the Wharton
School of the University of Pennsylvania.
Nor does a PBM disclose the rebates it receives from a drug
manufacturer, often as a reward for privileged placement on the PBM
formulary—although contracts sometimes guarantee a health plan a
specific percentage of that rebate. Then the transparency issue becomes
the degree to which the plan can audit the PBM rebates. In certain
circumstances, that can be difficult to do. Susan A. Hayes, an
accredited health care fraud investigator who is Principal of Pharmacy
Outcomes Specialists, has consulted with more than 1,000 plan sponsors.
She says the $15,000 to $200,000 cost of audits can be prohibitive for
smaller firms. “PBMs make it near impossible to audit both their ‘secret
agreements’ for rebates with pharmaceutical companies and retail
network agreements with pharmacy chains,” Hayes explains. “If the PBM is
acting on behalf of the plan sponsor to negotiate rebates or network
arrangements, why keep the rebate agreements secret from the entity you
are working for?”
Therein lies the controversy over PBM transparency, or the lack
thereof, which appears to be headed for a higher profile because of
recommendations from a U.S. Department of Labor (DOL) committee. An
upcoming report and recommendations in September 2014 from the DOL’s
ERISA Advisory Council
1
give new life to efforts by the business community and the retail
pharmacy industry to convince the DOL to require more transparency from
PBMs. ERISA (the Employee Retirement Income Security Act) is the federal
law that covers corporate pension and health care plans. For a decade,
employer groups, backed by pharmacy trade organizations, have been
trying to convince the DOL to issue regulations requiring PBMs to
provide more information about the compensation they receive from
pharmaceutical manufacturers and other suppliers.
Under current law, PBMs serving ERISA health plans have to file a
Schedule C that includes a Form 5500. The kinds of reportable data
include dispensing fees the PBM pays to a pharmacy and payments the PBM
makes for ancillary administrative services such as record-keeping, data
management, information reporting, formulary management, participant
health desk service, benefit education, utilization review, claims
adjudication, participant communications, reporting services, website
services, prior authorization, clinical programs, and pharmacy audits.
“However, PBMs generally do not currently disclose the specific
details of their arrangements with pharmaceutical manufacturers,”
concedes William Kilberg, a Washington attorney with Gibson, Dunn, &
Crutcher, LLP, who represents the Pharmaceutical Care Management
Association, the PBM trade group. He adds that it is the retail pharmacy
industry, not employer health plans, that is pushing the DOL to ramp up
PBM transparency requirements. “They want to obtain information
regarding PBMs’ arrangements with pharmaceutical manufacturers because
they believe it would allow them to obtain better deals from PBMs for
their benefit,” he argues. “ERISA plans and other consumers would not
obtain any benefits from this outcome.”
Amanda Beck, Vice President of Public Affairs for the HR Policy
Association, which represents human resource officers at Fortune 500
companies, says large corporations are very interested in seeing the DOL
continue to investigate, although she notes that PBMs serve an
important role in keeping employees healthy and productive. “But the
industry is beset with a lack of transparency that is difficult to deal
with even for the largest employers,” she adds. “Unfortunately, benefit
consultants, who are often relied upon to help employers with complex
situations, are often aligned with specific PBMs, thereby limiting their
independence.”
The DOL has been paying more attention to ERISA transparency issues
lately, making it more likely the department will move into PBM
rule-making. Rules for covered service providers (CSPs) to pension plans
were upgraded in 2012. These rules go beyond the Schedule C disclosure
standards. CSPs must give responsible fiduciaries information they need
to assess the reasonableness of total compensation, both direct and
indirect, received by the CSP, its affiliates, and/or subcontractors.
That compensation must be expressed as a monetary amount, formula,
percentage of the covered plan’s assets, or per capita charge, or by
another reasonable method when compensation cannot be expressed in such
terms. CSPs can provide “good faith estimates” when they cannot
otherwise describe compensation or cost, but the methodology and
assumptions used to prepare such estimates must be explained.
Is a DOL Regulatory Initiative Coming Up?
CSP rule-making in 2012 provided momentum for the DOL to move forward
on PBM transparency—hence the hearings held in June 2014 by the ERISA
Advisory Council. In September 2014, the ERISA Advisory Council made two
recommendations:
1
- The
DOL should consider making Section 408(b)(2) regulations—the 2012
enhanced disclosure rules that cover CSPs—apply to welfare plan
arrangements with PBMs. That would deem such arrangements reasonable
only if PBMs disclose direct and indirect compensation, including
compensation paid among related parties such as subcontractors.
- The DOL should consider issuing guidance to assist plan sponsors in
determining whether and how to conduct a PBM audit of direct and
indirect compensation.
“In the past, some council
recommendations have led to regulatory projects,” says Michael Trupo, a
DOL spokesman. “The department looks forward to reviewing the council’s
final reports when they are submitted.”
At the council hearings last June, several corporate representatives
and the National Community Pharmacists Association (NCPA) pressed for
greater PBM transparency. Allison Klausner, Assistant General Counsel on
Benefits for Honeywell International Inc., says her company “would
support a Department of Labor effort to draft new or modify existing
regulations that demand PBMs to provide greater transparency with
respect to how PBMs provide their services and with respect to their
sources of fees and compensation.” And when the council’s
recommendations were released, B. Douglas Hoey, RPh, MBA, the NCPA’s
Chief Executive Officer, said: “We commend the ERISA Advisory Council on
its action and we are also excited that U.S. Labor Secretary Thomas
Perez has indicated his desire to ensure those long-overdue changes are
implemented.” Pharmacies have argued they are victims of spread pricing.
One could argue that transparency is even more important as PBMs sign
deals with drug manufacturers for formulary placement of expensive
specialty drugs. Both independent PBMs such as Express Scripts and PBMs
owned by insurance companies have announced deals with Gilead Sciences
and AbbVie for placement of their hepatitis C drugs. Gilead’s Sovaldi
and Harvoni cost $84,000 and $94,500 per treatment cycle, respectively.
AbbVie’s Viekira Pak costs more than $83,000. None of the PBMs or
insurers has disclosed what they would be paying per patient, what the
rebate structure will be, or what portion of any rebates health plan
customers will receive.
Kilberg says that there is enthusiastic competition among PBMs for
ERISA health plan business and that the competition assures companies of
getting fair pricing and maximum contract transparency, an assertion
the Federal Trade Commission (FTC) has backed repeatedly over the past
decade. “The FTC has consistently opposed regulatory initiatives that
would mandate PBMs to disclose their trade secrets and other proprietary
information, such as their arrangements with pharmacies and
pharmaceutical manufacturers,” he adds. “As the FTC has concluded, there
is no reason to believe that mandatory disclosures of PBM-related
information will help consumers. In fact, they almost certainly would
have the unintended effect of driving up prescription drug prices,
further increasing the costs borne by ERISA health care plans.”
Transparency Rules for Federal Health Plans
Three PBMs control the lion’s share of the market: Express Scripts,
CVS/Caremark, and Catamaran. Health plans such as Aetna, Humana, and
UnitedHealthcare also own PBMs. Mid-size PBMs include EnvisionRxOptions,
MedImpact, and Benecard.
Massive fines paid by PBMs in the past decade, often concerning
rebates from drug manufacturers, fuel the concern among health plans and
pharmacies that PBMs are not trustworthy. These cases were initiated by
federal and state law enforcement officials because federal health
plans such as Medicare and Medicaid were involved. Different laws apply
to those health plans and the PBMs that serve them compared with
employer health plans. At least that has been true to date.
AdvancePCS, which is now part of CVS/Caremark, paid $137.5 million in
damages for kickbacks, submission of false claims, and other rebate
issues in 2005; the violations predated Caremark’s acquisition of
AdvancePCS in 2004. “These kinds of rebates and hidden fees disguise the
true cost of what we’re paying,” U.S. Attorney Patrick L. Meehan said
at the time. In 2008, Express Scripts paid a $9.5 million fine for
drug-switching and for illegally retaining rebates, spread profits, and
discounts in cases involving federal health plans, not ERISA health
plans.
The difficulty that federally sponsored health plans have had with
PBMs probably influenced the inclusion of PBM transparency rules in the
Patient Protection and Affordable Care Act (PPACA); those rules apply to
federal and state marketplace and Medicare Part D health plans. The
Department of Health and Human Services (HHS) requires qualified health
plans to provide HHS with the following information:
- The percentage of prescriptions provided through retail and mail pharmacies
- Generic dispensing rates by type of pharmacy
- The aggregate amount and type of rebates, discounts, or price concessions attributable to patient use under the plan
- The aggregate amount of rebates, discounts, or price concessions passed through to plan sponsors
- The aggregate amount of the difference between what a plan pays the PBM and what the PBM pays pharmacies
- The total number of prescriptions dispensed
Even these
PPACA transparency rules leave something to be desired from a consumer
standpoint. “The limited nature and strong confidentiality protections
for these disclosures was an intentional decision of Congress, following
input from the FTC, because of the negative impact such disclosures
would have on the marketplace,” Kilberg states.
The Centers for Medicare and Medicaid Services has gone further by
adopting new transparency rules for Medicare Part D drug plans, many of
them run by or through PBMs. The new requirement mandates that Part D
plans and their PBMs make available to all contracted pharmacies the
reimbursement rates for drugs under maximum allowable cost (MAC) pricing
standards. This requirement takes effect for the 2016 contract year.
The Arcane World of PBM Pricing
Knowledge of a basic lexicon is required just to begin deciphering
the complex world of PBM pricing. Typically, generic drugs are priced on
a MAC basis and brand-name drugs on an average wholesale price (AWP)
basis. An AWP is set by a private company, Medi-Span, which takes the
drug price manufacturers charge the wholesaler, called wholesale
acquisition cost (WAC), and increases it, typically, by 20%. Wholesalers
distribute and sell drugs to pharmacies, adding a small margin (roughly
2% to 3%).
Unlike AWP, which is a list price set by third-party database
companies, each PBM sets its own MAC reimbursement prices for
pharmacies. These PBM-generated MAC lists include the upper limit or
maximum amount that a PBM will pay for generic drugs and brand-name
drugs for which generic versions are available. There is no standard
methodology for deriving MAC lists. Neither plan sponsors nor retail
pharmacies are told how products are added or removed from a MAC list or
the methodology that determines how the maximum cost is calculated or
adjusted. “Essentially, the PBMs reimburse low and charge high with
their MAC price lists, pocketing the significant spread between the two
prices,” says David Balto, former Policy Director of the Office of
Policy and Evaluation for the FTC’s Bureau of Competition. “Most plans
are unaware that multiple MAC lists are being used and have no real
concept of how much revenue the PBM retains.”
Brand-name manufacturers pay rebates for formulary placement, but
those rebates have become much less of a factor in the PBM revenue
stream as generic drugs have grown to account for around 80% of
prescriptions dispensed. As PBMs have made less money on rebates for
brand-name drugs, they have pumped up the spreads they earn on generics.
“Spread pricing” is one of the two methods PBMs use for billing
clients. The other is called “transparent pricing.” In spread
arrangements, PBMs negotiate with drug marketers to get aggressive, low
contracted rates for retail and mail-order drugs and invoice their
plan-sponsor clients at higher contracted rates, profiting from the
difference, or “spread.” The spread is kept by the PBM and usually not
disclosed to the plan sponsor.
Transparent or “pass-through pricing” arrangements involve a contract
in which a PBM charges a client a flat administrative fee per claim or
per member, and the client pays the exact purchase price or
reimbursement rate for the drug that the PBM has negotiated. However, it
is important to define the terms subject to the transparency
arrangement. For example, market share rebates or payments the PBM
receives from a manufacturer for placing a drug on a formulary may be
subject to the transparency arrangement, but fees paid to the PBM for
clinical programs might not be.
The FTC Has Opposed PBM Transparency
The FTC has given the PBM industry considerable cover in its efforts
to ward off new transparency requirements. In 2009, the FTC strongly
objected to a proposed New York statute that would have required PBMs to
make substantial disclosures to health plans during contract
negotiations and annually thereafter. The FTC noted that “health plans
appear able to protect themselves … through arm’s-length contracts.” The
FTC concluded that “[a]llowing competition among PBMs is more likely to
yield efficient levels of payment sharing, disclosure, and price than
contract terms regulated by government regulation.”
“In short,” Kilberg argues, “the FTC’s longstanding position with
respect to each state’s proposed PBM disclosure regime has been clear
and consistent: Mandated disclosures can lead to tacit collusion, which
can lead to higher prices. Far from benefiting ERISA plans and consumers
of prescription drugs, it is the consumers, including health-plan
participants and beneficiaries, who are the ultimate losers in such a
scenario.”
The problem with rebates is not so much what the PBM receives, but
whether the PBM is transferring to the ERISA plan whatever the contract
obligates it to provide (assuming the contract requires some transfer,
as most do). Large corporations are much more likely to be able to
negotiate access to information about rebates and other payments the PBM
receives. And studies have shown that PBMs are transferring about 60%
to 80% of rebates to clients. But to ascertain that the PBM is doing
what its contract mandates, the company has to be able to audit the PBM.
That can be a problem.
Plan sponsors may use a variety of techniques to audit PBMs. These
may include a pre-implementation audit, which tests the PBM plan design
and financial set-up before it goes into effect; a plan design audit, to
ensure plan rules are being followed; and a financial audit, which
reviews pharmacy claims-level data to verify that all contractual
financial guarantees are met. PBM audits can be effective, but they are
limited by a number of factors.
The plan sponsor can only audit those items to which the PBM will
allow access under the contract terms. Consequently, for example, in a
traditional PBM arrangement, the plan sponsor would not be allowed to
audit the “spread” because that is not a financial term that is
disclosed to the sponsor as part of the arrangement. Plan sponsors may,
however, be able to audit rebates if that was negotiated in the
contract. In addition, PBMs generally refuse to allow audits unless they
pre-approve the auditor. Consequently, the plan sponsor’s choice of
auditors is often limited. Finally, PBM audits can be time-consuming and
costly, and many plan sponsors have limited resources for this process.
It is true that the drugstore industry and ERISA employers with
health plans have somewhat different problems with PBMs. But both are on
offense while PBMs are on defense, given the Labor Department’s
perceived receptivity to new regulations as shown by its expansion of
pension-provider transparency, PPACA transparency rules, and Medicare
Part D initiatives. All of these changes (except the covered service
provider rules) forced PBMs to disclose more than they really wanted to.
ERISA Advisory Council, U.S. Department of Labor. PBM compensation and fee disclosure. November 2014;Available at: http://www.dol.gov/ebsa/publications/2014ACreport1.html. Accessed January 22, 2015.
Mr. Barlas, a freelance writer based in Washington, D.C., covers topics inside the Beltway.
