Patients Before Middlemen Act and Potential Impact

Congress has taken yet another major step towards controlling prescription drug prices and promoting affordability for Medicare Beneficiaries. On June 14, 2023, Senators Wyden, Crapo, Menendez, Blackburn, Tester and Marshall introduced bipartisan legislation untethering the compensation of Pharmacy Benefit Managers (“PBMs”) from the cost of prescription drugs and utilization in Medicare Part D. Below is a summary of the Act and its likely benefits to various pharmacy benefit stakeholders.

I. Patients Before Middlemen Act

The bill, entitled Patients Before Middlemen Act (the “Act”), amends Section 1860D-12(b) of the Social Security Act to require that any contract between a Part D plan sponsor and a PBM shall prohibit the PBM from deriving any income related to Part D drug utilization services. Under the agreement, PBMs are only entitled to a “bona fide service fee”, which cannot be contingent upon drug prices, discounts, rebates, fees, or other remuneration with respect to Part D prescription drugs. Part D plan sponsors and PBMs must submit annual certifications stating their compliance with these requirements. Failure to comply will result in disgorgement of any monies received in violation of the Act.

II. Impact on Patients at the Pharmacy Counter

Historically, PBMs link their compensation to a percentage of drug costs, incentivizing them to push for higher list prices on prescription drugs.   Moreover, because PBMs control which drugs are listed on plan sponsor formularies, and therefore covered by the plan sponsor, manufacturers oftentimes pay PBMs rebates to ensure that their drug is placed on the plan formulary. Most of the time, manufacturer rebates are a percentage of the drug’s sticker price. The higher the sticker price for the drug, the higher the rebate paid to the PBM. This framework incents PBMs to prioritize high-cost drugs for formulary placement which, in turn, results in patients having to pay more at the counter than they otherwise would. The Act eliminates this arrangement by untethering PBM compensation from the costs of drugs. If passed, PBMs will no longer have an incentive to prioritize drugs with high costs over more affordable alternatives or generic equivalents. Accordingly, the Act promises to save patients money by controlling PBMs’ misaligned incentives to raise drug prices.

III. Potential Benefits to Plan Sponsors

The Act also provides plan sponsors with additional protections that may prevent PBMs from retaining undisclosed portions of manufacturer rebates. For years, PBMs have used “rebate aggregators” to negotiate and collect manufacturer rebates. Rebate aggregators are little known entities owned or affiliated with PBMs, who assume the responsibility of the PBM and hold contracts with manufacturers for rebates. Rebates are supposed to be passed through to plan sponsors, but instead further contribute to fueling PBM profits. Rather than collecting rebates and passing them through to the plan sponsors in full, rebate aggregators siphon a percentage of the rebates without the plan sponsor’s knowledge. In turn, these siphoned rebates are easily shared between the PBM and rebate aggregator because the largest PBMs use affiliated rebate aggregators owned by the same parent companies. For instance, rebate aggregators Ascent Health Services, LLC and Zinc Health Services are owned by Cigna/Express Scripts and CVS Health/Caremark respectively.  Likewise, UnitedHealth/OptumRx own rebate aggregators Coalition for Advanced Pharmacy Services, LLC and Emisar Pharm Services, LLC. It is also worth noting that Ascent is based out of Switzerland and Emisar is based out of Ireland, adding an additional layer of opacity to their undisclosed rebate retention practices. Untethering PBM compensation from manufacturer rebates may help to eliminate or substantially ameliorate this gamesmanship and provide plan sponsors with more transparency with respect to manufacturer rebates. This, in turn, may help plan sponsors more accurately predict their future costs when creating and submitting bids to the Centers for Medicare Services.

IV. Potential Benefits to Pharmacies

Direct and Indirect Remuneration fees, or DIR fees, have become a major source of PBM revenue in recent years. In short, DIR Fees are retroactive adjustments to pharmacy reimbursement that are based largely on performance-based initiatives. Although PBMs pass through to their plan sponsors most of the DIR Fees recouped, they keep a percentage of those fees for themselves. The higher the DIR Fees recouped from pharmacies, the more money for PBMs. Thus, PBMs have an incentive to extract as much DIR fees as possible. The Act extinguishes this incentive by delinking PBMs compensation from DIR fees. 

V. Other Indirect Effects

The Act may have an indirect effect on the practice of spread pricing. While there are various ways PBMs can effectuate spread pricing, one method relies on the use of “Maximum Allowable Costs” (“MAC”). Spread pricing through the use of MAC lists occurs when PBMs create two MAC lists – one for the Plan Sponsor (with higher MAC prices) and one for the pharmacy (with lower MAC prices). With both lists, the PBM reimburses the pharmacy at the lower price and then seeks reimbursement from the Plan Sponsors for the higher price, keeping the spread. If PBM compensation can no longer depend, “directly or indirectly”, on the cost of any particular drug, then presumably PBMs cannot lawfully extract compensation through spread pricing.

How Frier Levitt Can Help

 Frier Levitt is at the forefront of federal and state efforts to combat PBM abuses. Our experienced attorneys collaborate with legislators at state and federal levels to shape legislation aimed at addressing PBM abuse for various industry stakeholders. Frier Levitt attorneys regularly litigate and arbitrate disputes against PBMs on behalf of pharmacies and other providers to curb abusive PBM practices, including patient steerage, gag clauses, spread pricing, PBM audits and network access/termination issues. Frier Levitt’s Plan Sponsor Practice Group has a proven track record of obtaining favorable results for health plans and plan sponsors in various areas, including, but not limited to, analyzing PBM contracts and initiating actions against PBMs to access Plan data to ensure PBM compliance or recover savings wrongfully withheld by the PBM.. For more information, contact us today to speak with an attorney.