The pharmacy benefits landscape is changing for large employer groups and affecting all parties in the drug supply chain. Recent federal actions, such as the Federal Trade Commission’s investigation into Pharmacy Benefit Managers (“PBMs”) and Rebate Aggregators (detailed below), indicate an increasing scrutiny on PBMs, their routine abusive practices, and the impact they have on prescription drug costs. Plan Sponsors are uniquely positioned and key to helping reduce total drug spend and out of pocket expenses for their plan beneficiaries/employees. Plan Sponsors must be aware of common PBM tactics as well as the statutory law governing Plan obligations to employees. This three-part series offers Plan Sponsors valuable insights and five key action items to reduce total drug spend.
Understanding PBMs and Spread Pricing
PBMs regularly attempt to impose provisions in their contracts with Plan Sponsors allowing PBMs to utilize Spread Pricing as a tactic to increase PBM profits. PBMs artificially inflate the reimbursement rate Plans pay to the PBM for each prescription claim. PBMs earn “Spread Pricing” when the PBM charges a Plan one price for a specific prescription claim, but simultaneously reimburses the dispensing pharmacy at a lower price. The PBM retains the difference (spread) between these two prices as profit. To illustrate, a PBM may charge a Plan Sponsor Average Wholesale Price (“AWP”) minus 15% but tell a pharmacy that the cost for the same drug is AWP minus 20%, resulting in a 5% Spread that the PBM retains as profit.
The Spread is likely even larger for specialty and other non-generic drugs. An example of this is seen in Ohio, where the Auditor General revealed that PBMs working on behalf of Ohio Medicaid managed care plans charged the state $224 million in hidden spread pricing—in one year. Unfortunately, the Plan’s members/employees are often left bearing the extra costs of that Spread through higher copays at the point of sale or increased premiums.
Taking Action Against Spread Pricing
To combat this issue, Plan Sponsors must push back on Spread Pricing provisions and demand PBMs use transparent terms that prohibit Spread Pricing and ensure the price the Plan pays and the price the PBM reimburses dispensing pharmacies at is identical. Further, Plan Sponsors must be aware of applicable state law that can be relied upon to avoid Spread Pricing, several states have enacted legislation which limits or completely prohibits PBMs from utilizing Spread Pricing.
Utilizing the Consolidated Appropriations Act (CAA)
The Consolidated Appropriations Act (“CAA”) provides a slew of opportunities for Plan Sponsors to confirm whether their PBMs are acting accordingly. Under the CAA, PBMs must disclose in writing, among other things, a description of all direct compensation, either in aggregate or by service, that the PBM, an affiliate, or subcontractor expects to receive for the provided services; and a description of any compensation that will be paid among the PBM, an affiliate, or a subcontractor in connection with the services if compensation is set on a transaction basis (such as commissions, finder fees, or other similar incentive compensation based on business placed or retained), including identification of the services for which such compensation will be paid and identification of the payers and recipients of such compensation (including the status of the payer and recipient as an affiliate or subcontractor). These requirements allow Plan Sponsors to negotiate transparent contracts with PBMs.
How Frier Levitt Can Help
Frier Levitt’s Plan Sponsor Practice Group provides a host of legal services for health plans and plan sponsors. This includes reviewing and analyzing PBM contracts, negotiating and drafting PBM contracts, auditing PBMs to ensure adherence to contract terms, and when necessary, litigating against PBMs. and demanding access to Plan data to uncover any hidden cash flows retained by PBMs. If your organization is a plan sponsor, contact us to learn more about your contractual rights and obligations.
