To address the rising costs of prescription drugs, plan sponsors—including self-funded plans (employers, labor funds, public sector, and federal), health plans (commercial, Medicare, Medicaid, and exchange plans), and regulated markets (Medicare, Medicaid, and public health exchanges)—have turned to the services of Pharmacy Benefit Managers (“PBMs”) for processing prescription medication claims. However, PBMs have exploited their positions as “middlemen”, adding excessive fees and charges for their services, subcontracting to other affiliates and subsidiaries such as rebate aggregators to retain even more fees, and other conduct that results in higher prescription costs for both health plans and patients.
What is a PBM?
PBMs are third-party intermediaries that contract with health plans, plan sponsors, pharmaceutical manufacturers, insurance providers, and pharmacies for administering pharmacy benefits. In an arrangement between a PBM and a plan, when a plan member receives a prescription drug from a pharmacy, the prescription claim is submitted and adjudicated by the PBM, and the PBM reimburses the dispensing pharmacy. The PBM then receives reimbursement for the prescription claim from the plan sponsor.
Unfortunately for plan sponsors, PBMs often do not prioritize the interests of their clients in fulfilling their contractual obligations. PBMs often use opaque, vague, or confusing contractual language to increase their own profits at the expense of plan sponsors.
What is a Health Plan Sponsor?
A plan sponsor is an organization that offers its enrollees and their dependents medical and/or pharmacy benefits. Typically, plan sponsors are one of the following:
- Self-funded employers
- Insurers
- Managed Care organizations
- State and federal government agencies
When contracting with PBMs, plan sponsors must demand transparency to effectuate cost-containment strategies while providing optimal care to their enrollees. Procuring transparency begins with a consultation with industry experts that have zero affiliation with or connection to PBMs.
What is Spread Pricing on Prescription Claims?
PBMs often use a tactic called spread pricing when contracting with plan sponsors. Spread pricing exists when the PBM reimburses the dispensing pharmacy at a lower rate than what it is paid by the plan sponsor for the same claim, allowing the PBM to siphon the difference (i.e., spread) as profits. For example, assume a PBM reimburses a pharmacy $10.00 for dispensing a prescription drug to a plan sponsor’s member. In turn, the PBM charges the plan sponsor $15.00 for the same exact claim and retains the $5.00 spread as pure profit. By demanding radical transparency, plan sponsors are better able to eliminate spread pricing from their contractual arrangements with PBMs.
What is Spread Pricing on Rebates?
PBMs enter into contractual agreements with pharmaceutical manufacturers to receive rebates from them. In return, PBMs promise to fulfill specific obligations, which typically include a requirement that the PBM will include the manufacturer’s drug on the formulary used by its plan sponsor clients. Plan sponsors must understand that they are entitled to those rebate dollars, but PBMs often use deceitful contractual language in their arrangements with plan sponsors to deny them those rebates. This withholding of manufacturer revenue by PBMs is referred to as spread pricing on rebates.
For example, a common PBM tactic is to include provisions in their contracts with plan sponsors that state the plan is entitled to “100% of rebates received by the PBM.” On the surface, this provision seems ideal for plans. However, what most plans fail to realize is that the PBM defines the term “rebate” so narrowly, that a majority of the fees the PBM receives from the manufacturer are not included in the definition. Indeed, fees paid to PBMs by manufacturers such as service fees, administrative fees, formulary fees, etc. are all forms of rebates, but are carved out of the definition. Alternatively, PBMs may use an affiliate or subcontractor to aggregate rebates and withhold the number of rebates that are “actually received” by the PBM itself.
What is a PBM Audit?
PBM audits are a tool that allows plan sponsors to review a PBM’s records, documents, and finances to uncover hidden revenue streams the PBM may be utilizing. Critically, PBMs often attempt to limit the audit rights the plan sponsor is entitled to. Plan sponsors need to be wary of common terms PBMs try to impose in audit provisions, such as limitations on time frames that may be audited, restrictions on which entities may conduct the audits, and perhaps most importantly, attempts by PBMs to restrict plan sponsor access to the contractual agreements the PBM has with pharmaceutical manufacturers. Plan sponsors cannot allow PBMs to prevent access to their contracts with pharmaceutical manufacturers as PBMs derive the majority of their revenue and often withhold monies owed to plan sponsors through their manufacturer arrangements.
Plan Sponsor PBM Contract and Auditing Services
Frier Levitt has zero conflicts with representing plan sponsors against PBMs. Frier Levitt’s Plan Sponsor Practice Group works with plan sponsors to ensure PBM compliance with contracts and law, providing a variety of legal services, including:
- Representation of plan sponsors in contractual negotiations with PBMs
- Auditing of PBM performance and compliance with contractual and fiduciary obligations
- Ensuring that plan sponsors understand their contractual rights and relationships with PBMs, including pass-through pricing and manufacturer rebates
- Ensuring that plan sponsors understand their legal rights when PBMs have engaged in behavior that breaches a PBM’s contractual obligations and/or fiduciary duties, including situations where more aggressive legal action may be appropriate
- Pursuing legal action against PBMs to enforce Plan Sponsor Agreement terms and conditions
- Conducting and guiding Requests for Proposal (“RFPs”)
- Reviewing and analyzing existing PBM Agreements
- Drafting and negotiating PBM Agreements
- Assisting plan sponsors with CMS reporting and CMS audits
- Pursuing legal action against PBMs to enforce PBM Agreement terms and conditions and recover losses for the Plan
- Providing regulatory compliance with respect to various federal and state laws
How Frier Levitt Can Help
Our team has extensive experience representing plans and plan sponsors in negotiations and disputes with PBMs. We have observed the unethical practices of PBMs and the negative impact they have on healthcare and life sciences industry stakeholders, including plan sponsors.
Frier Levitt provides strategic, industry-focused legal counsel tailored to your needs. Contact our team today to learn how we can help you.
