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How PBMs Win at Plan Sponsors’ and Pharmacies’ Expense Using DAW Codes and Maximum Allowable Cost (MAC) Pricing

Pharmacy Benefit Managers (“PBMs”) have developed a perverse technique to incentivize pharmacies to dispense more expensive brands, at the expense of Plan Sponsors and patients.  Plan Sponsors seek to reduce their drug spend by encouraging the dispensing of more generics and fewer brands.  Pharmacies want to serve their patient population and earn a reasonable living.  PBMs combine “below cost” reimbursement of generics, with Dispense As Written (“DAW”) Code “overrides” to secretly encourage more expensive brands.  PBMs are motivated by drug rebates. 

DAW Codes and MAC pricing have been abused by non-transparent PBMs and have become a significant tool by PBMs to drive rebate revenue.  In theory, DAW Codes should help PBMs determine whether a pharmacy claim is covered or not covered under a patient’s prescription drug insurance plan.  Moreover, MAC pricing for multi-source generic drugs should help lower prescription drug costs by encouraging pharmacies to buy generics at the lowest cost.  Despite the theoretical benefits of DAW codes and MAC pricing, PBMs have used these tools to increase revenues, profits and guarantee themselves substantial revenue regardless of whether a brand or generic drug is dispensed.

Therapeutically interchangeable generic prescription drugs are as effective as their counterpart brand-name drugs and PBMs should have policies in place that encourage substitution, not discourage it.  Under state law, pharmacists are allowed to substitute – certain states actually mandate pharmacists to substitute – brand-name drug prescriptions with generic prescription drugs unless the prescribing physician specifically restricted such substitution by noting “Do Not Substitute” on the prescription.  Thus, upon receipt of the brand-name drug prescription, it is a usual and customary practice of the pharmacists to substitute and to submit a generic drug prescription claim through the pharmacy system by using DAW Codes indicating that substitution is allowed.  However, we see too often that the generic substitution claim is not covered by the patient’s drug coverage (despite that the generic substitution would cost less to both the Plan Sponsor and the patient).  Indeed, the pharmacists are only allowed to submit the claim using an appropriate DAW code and dispense a brand-name drug to the patient.  This has become a new trend created by PBMs. 

From the PBM perspective, brand dispensing is all about rebate dollars.  As we reported in our June issue of the Plan Sponsor News, pharmaceutical manufacturers pay PBMs enormous sums of money in drug rebates for the privilege of having a drug be on the PBM’s “formulary.”  Secretively, much of the rebate is kept by PBMs and their wholly owned Rebate Aggregators.  Therefore, PBMs are monetarily incentivized to drive up the dispensing rate of brand-name drugs that come with “rebates” versus many generics, for which generic manufacturers do not pay rebates.  It is worth noting that PBMs also collect Direct-and-Indirect (“DIR”) Fees from pharmacies for failing to meet certain generic prescription dispensing rate benchmarks.  Pharmacies are often forced to “lose money” dispensing the generic “below their reimbursement cost”, only to experience the indignity of later having the PBM “recoup” additional funds from that pharmacy in the form of DIR fees.  That topic will be discussed in greater detail in a separate article. 

To understand the full PBM strategy in ensuring themselves substantial revenue and profit, it is important to consider the role that MAC pricing plays.  To ensure the proverbial “win-win,” PBMs will often price generic drugs in a manner that ensures they either (1) collect a substantial “spread” from the Plan Sponsor by reimbursing the pharmacy at an unconscionably low MAC reimbursement rate or (2) collect substantial rebate revenue by forcing a pharmacy to utilize an appropriate DAW code and dispense a brand name drug in place of a generic to avoid being reimbursed below the pharmacy’s acquisition cost.  Consider a scenario where the pharmacy is faced with the choice of dispensing a $15 generic drug at a five dollar loss or using an appropriate DAW code and dispensing a brand drug costing the Plan Sponsor $2000, where the pharmacy earns a meager $10 gross profit.  In this disturbing scenario, created by the PBM, the Plan Sponsor loses thousands, the PBM earns valuable rebates, and Pharmacies lose in the long run because of complex generic dispensing rules and unsustainable reimbursement rates. 

PBMs are able to employ these tactics by ensuring that Plan Sponsors do not see the Pharmacy’s contracts or MAC lists and by setting up artificial barriers to a Plan Sponsors’ auditing of the PBM.  In the end, whether a brand name drug or a generic drug is dispensed, the PBM ensures that it wins at the expense of Plan Sponsors, patients and Pharmacies.  

How Frier Levitt Can Help

It is critical for Plan Sponsors to consult with life sciences counsel that demonstrates broad knowledge of PBM contracting before entering into a contract with PBMs.  Frier Levitt’s Plan Sponsor Practice Group and MAC Pricing Practice Group work with Plan Sponsors and Pharmacies to ensure they understand the full panoply of their rights under their contracts and applicable law and to ensure that PBMs comply with their contracts and applicable law.  Frier Levitt’s Plan Sponsor Practice Group and MAC Pricing Practice Group provide a variety of legal services to Plan Sponsors and Pharmacies including: PBM contract negotiations; auditing of PBM performance and compliance with contractual and fiduciary obligations; educating Plan Sponsors and Pharmacies of their contractual rights with PBMs, including the different PBM tactics that breach PBMs’ contractual obligations and/or fiduciary duties where more aggressive legal action may be appropriate; and pursuing legal action against PBMs to enforce Plan Sponsor Agreement terms and conditions as well as Pharmacy contracts and agreements.  If you are a Plan Sponsor or Pharmacy dealing with legal issues involving PBMs, contact Frier Levitt today to speak to an attorney.