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Plan Sponsor ALERT: Reverse Auction Procedure Does Not Protect States from PBM Abuse

In September 2018, New Jersey Governor Phil Murphy announced that the State of New Jersey awarded the Pharmacy Benefit Manager (PBM) contract to OptumRx and agreed to pay OptumRx $6.7 billion over three years to manage and administer pharmacy benefits for the State. Although “reverse auction” is a step in the right direction, such procedure is meaningless unless Plan Sponsors implement contractual tools that protect themselves from PBMs’ revenue tactics and schemes.

More specifically, the reverse auction process requires PBMs to compete by offering lower prices over successive rounds of bidding. 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 organizations, businesses, and office-holders claim that it can save the state millions of dollars of prescription drug costs by adopting the New Jersey’s reverse auction model. 

However, the reverse auction process or other similar mechanisms that are designed to protect Plan Sponsors, whether it be public (state or municipality) or private self-funded employee plans, does not necessarily lead to transparency and cost-containment. Instead, 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.

PBMs intentionally employ variations of Average Wholesale Price (AWP) to create a mark-up or “spread” between the price charged to their clients (Plan Sponsors) and the amount paid to pharmacies. 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 what they pay pharmacies. In fact, such egregious pricing schemes have been hurting independent pharmacies, virtually putting independent pharmacies out of business and eliminating competition. As such, 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 also encourage the use of PBM-owned mail order services on the premise that this class of trade results in more cost-savings compared to 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 but a higher drug-spend for Plan Sponsors. Repackaging typically occurs when PBMs-affiliated/owned pharmacies turn the single purchase of medications into different quantities and configurations than how they were originally supplied by the drug manufacturer, and ultimately set inflated AWPs. Moreover, PBMs can assert their influence overprescribing physicians to generate more non-preferred brand-name medications versus cheaper generics, and steer patients to their mail-order pharmacies. Plan Sponsors should refrain from contracting with PBMs that own a mail-order or specialty pharmacy unless the contract is a fiduciary contract.

Manufacturer rebates have become a significant portion of PBMs’ overall revenue and profitability. Manufacturer rebates are designed to provide another layer of cost-containment for Plan Sponsors. However, the rebates have morphed into a prime area of PBM abuse. PBMs create and implement their own “formulary” to maximize revenues from manufacturer rebates that are not passed onto Plan Sponsors. Specifically, PBMs disguise rebates as “administrative expenses” or create backdoor arrangements with the “rebate aggregators,” to reduce the shared rebate amount with Plan Sponsors. Coupled with the rebate disguising, 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 creates greater spreads) but where there is no therapeutic advantage of using brand-name drugs over its generic substitutes. To mitigate such rebate schemes, 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, a 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 a reduction in drug spending. Plan Sponsors should retain counsel that possesses an in-depth knowledge of the PBM industry.

Frier Levitt routinely works with Plan Sponsors to control or eliminate spread pricing, evaluate and confirm rebate compliance, conduct PBM audits to ensure compliance, and negotiate better terms in future PBM contracts. If you are a Plan Sponsor entering into a contractual relationship or having a dispute with PBMs, contact Frier Levitt today to speak to an attorney.