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Embrace Reverse Auction Procedure and Protect Plan Dollars with Proper Contractual Tools

In September 2018, New Jersey Governor Phil Murphy announced that the State of New Jersey awarded the PBM contract to OptumRx and agreed to pay OptumRx $6.7 billion over three years to manage and administer pharmacy benefits for the State. Under New Jersey’s reverse auction procedure, the State provided the formulary and other coverage details and the PBMs submitted corresponding bids. PBMs endured multiple phases of competitive bidding process to undercut each other. New Jersey claims the system – which covers approximately 800,000 public employees – would cut $1.6 billion from medication costs over three years without reducing benefits. Similarly, in New Hampshire, a wide-ranging group of businesses claim that they can save the state millions of dollars of prescription drug costs by adopting the New Jersey’s reverse auction model.

However, the auction procedure is meaningless unless Plan Sponsors implement contractual tools that protect against PBM revenue tactics and schemes. Plan Sponsors should be armed with in-depth knowledge to prevent PBMs’ abusive practices. In order to do so, Plan Sponsors must implement cost-containment strategies in their contracts with PBMs. Competent healthcare counsel is essential for this contract analysis.

This is because PBMs intentionally employ variations of Average Wholesale Price (“AWP”) to create a mark-up or “spread” between the price charged to their clients, i.e., Plan Sponsors, and the drug reimbursement rate paid to pharmacies in the PBMs’ networks. To appear as if they are offering a deal, PBMs often charge Plan Sponsors AWP less a specified discount even though this amount has no relationship to the reimbursement rate PBMs pay to network pharmacies. The egregious “spread pricing” schemes have been hurting independent pharmacies, virtually putting independent pharmacies out of business and eliminating competition. Notably concerning, Drug Channels reported that 95% of total U.S. equivalent prescription claims are handled by Top 6 PBMs: (1) Caremark; (2) Express Scripts; (3) OptumRx; (4) Humana; (5) MedImpact; and (6) Prime Therapeutics. Plan Sponsors should require PBMs to identify and use either the lowest pricing source for each drug or the pricing source that represents, on average, the lowest AWP prices. Furthermore, Plan Sponsors should contractually eliminate spread pricing to ensure that drug costs charged by PBMs match what PBMs pay their member pharmacies.

PBMs encourage the use of PBM-owned mail order services on the premise that this class of trade results in more cost-savings compared to drugs dispensed by retail pharmacies. This is not so. PBM owned/affiliated mail-order pharmacies are more prone to egregious pricing schemes, such as repackaging and repricing of medications, which ultimately result in higher margins for PBMs and a higher drug-spend for Plan Sponsors. Repackaging typically occurs when PBMs-affiliated/owned pharmacies turn single purchase of medications into different quantities and configurations than how they were originally supplied by the drug manufacturer, and ultimately set inflated AWPs. PBMs can assert their influence over prescribing physicians to generate more nonpreferred brand-name medications versus cheaper generics, and steer patients to their mail-order pharmacies. Therefore, Plan Sponsors should refrain from contracting with PBMs that own a mail-order or specialty pharmacy unless the contract is a fiduciary contract. Alternatively, Plans Should contractually permit independent pharmacies to  participate in the pharmacy network.

Manufacturer rebates have become a significant portion of PBMs’ overall revenue and profitability. Manufacturer rebates are presumptively designed to provide another layer of cost-containment for Plan Sponsors. However, manufacturer drug rebates have morphed into a prime area of PBM abuse. PBMs create and implement their own “formulary” to maximize rebate revenues from manufacturers. PBMs do not pass through all of these rebates to Plan Sponsors. To accomplish retention of these rebate dollars, PBMs disguise rebates as “administrative expenses” or create backdoor  arrangements with the “rebate aggregators,” to reduce the shared rebate amount with Plan Sponsors.

Plan Sponsors must be cautioned that rebate revenue also drives formulary management. Coupled with the strategy of disguising rebate  revenue, PBMs have also generated significant revenue from creating a formulary that substitutes low cost drugs for newer, high cost drugs that pay larger rebates and greater PBM spread pricing but where there is no therapeutic advantage of using brand-name drugs over its generic substitutes. To mitigate such rebate scheme, Plan Sponsors must demand that manufacturer rebates be disclosed and fully  distributed back to them. 

The reverse auction process does not guarantee cost reduction for Plan Sponsors. Instead, full and complete understanding of the ways in which PBMs secretly generate revenue from Plans, such as spread pricing and rebate schemes, will result in reduction in drug spending. Plan Sponsors should retain counsel that possesses an in-depth knowledge of the PBM industry.