Key Items in Pharmacy Benefit Manager Contracts

Contracting with Pharmacy Benefit Managers (“PBMs”) is a daunting task and one that Plan Sponsors should not delegate and entrust to non-fiduciary brokers or consultants. Some benefit brokers put their personal interests above their clients and receive, unbeknownst to Plan Sponsors, substantial financial incentives from PBMs. Plan Sponsors have the ultimate responsibility to review the PBM contract terms and ensure that there are no vague contract terms that would hinder Plan Sponsors’ ability to monitor PBM performance. PBMs use loose terms to create hidden revenue streams. Frier Levitt has identified several pitfalls in PBM contracts, some of which are listed below.

Limitation on Auditing Rights.

Plan Sponsors must audit PBMs to effectuate cost-containment strategies and to optimize services provided to the beneficiaries. However, many PBM contracts contain contract language substantially limiting full audit rights to Plan Sponsors. PBMs will also
include certain conditions that Plan Sponsors need to establish before conducting a PBM audit. For example, with respect to audits regarding manufacturer rebates that PBM are supposed to pass on to Plan Sponsors, PBMs conceal secretive relationships they have entered into with Rebate Aggregators. Frier Levitt has reviewed PBM contracts where Plan Sponsors are prohibited from conducting audits on drug manufacturer rebates. It is imperative that Plan Sponsors have full audit rights to all PBM network pharmacy contracts, claims data, manufacturer rebate and administrative fee contracts, mail service purchasing invoices, clinical coverage criteria, and formulary decision-making records. Preserving these rights requires having competent healthcare counsel to negotiate Plan Sponsor agreements.

Rebate Guarantee.

Possibly the most significant opportunity for PBM abuse of Plan Sponsors arises in the context of manufacturer rebate relationships. The key is in the contract wording. A “full passthrough” of rebates does not necessarily mean all of the revenue that the PBMs are receiving from the manufacturer are passed on to Plan Sponsors. As we explained here and above, PBMs have weaved in contractual terms that would prevent Plan Sponsors from uncovering the true amount of manufacturer rebates procured and retained by PBMs. Plan Sponsors should have fully transparent relationship with PBMs but such relationship can only be created through a carefully crafted contract. The contract should list out all the types of revenue and have an agreement upfront for both parties as to the amount of rebates – always try to negotiate a fixed dollar rebate and do not allow PBMs, to pay a rebate per formulary script – that will be passed onto Plan Sponsors and that will be retained by PBMs. Importantly, Plan Sponsors should
demand PBMs to produce list of sub-contractors or Rebate Aggregators that PBMs intend to use for rebate administration and their underlying agreements. Plan Sponsors should have the final authority to agree to have PBMs contract out the rebate administration function.

Differential pricing.

Another key component of the Plan Sponsor contract with PBMs relates to differential pricing. Most PBMs employ a traditional
pricing approach known as spread pricing or differential pricing, meaning that the PBM negotiates to pay pharmacies in the network aggressively low reimbursement rates for drugs and, in turn, invoices the PBM customer, the Plan Sponsors, at higher contracted rates. PBMs profit from the spread between what the Plans pay the PBM and what the PBM in turn, pays the pharmacy. In order to take control over the spread pricing scheme, Plan Sponsors must require PBMs to identify and use either the lowest pricing source for each drug or the pricing source that represents, on average, the lowest Average Wholesale Price (“AWP”) prices. PBMs use two sets of Maximum Allowable Cost (“MAC”) drug pricing lists for generics. One MAC pricing list is paid to the pharmacy, and a different MAC pricing list for the same generic drugs is charged to the Plan Sponsor. The PBM enjoys the spread between these two sets of pricing lists. Plan Sponsors should demand PBMs to use one comprehensive MAC list and also demand transparency in pricing.

As prescription-drug costs become an ever-increasing portion of Plan Sponsor’s healthcare spend, Plans should seek healthcare counsel to negotiate PBM contracts and demand full transparency from PBMs.  

Read more about the issues that impact Plan Sponsors in our latest Plan Sponsor News newsletter here.

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