Affidavit: Healthcare and the Law - A Prescription for a Changing Healthcare System

Contributor: Bradley A. Wasser, Esq. 
To learn more about Bradley, click here.


1242.jpgIf you have never heard of a pharmacy benefit manager, you are not unique among most Americans. What if I told you there are entities within the American healthcare system that essentially act as middlemen who transfer money between drug manufacturers and health insurers, employers, and pharmacies but that produce no products, yet generate billions of dollars in annual revenue?  These are pharmacy benefit managers.  

While that may be an oversimplification of the role of pharmacy benefit managers, or PBMs for short, within the American healthcare system, the role of PBMs are little known and even less understood. PBMs may be obscure entities, at least to the average American not ingrained in the healthcare industry. However, the once hidden middleman has been recently thrust into the spotlight as the subject of much controversy surrounding high drug prices and mega mergers.  This article briefly explores the role of PBMs and the current controversy that surrounds these drug behemoths. 

What is a PBM?  In the late 1960’s and early 1970’s drug card programs emerged as an ancillary service to medical benefit programs. PBMs were originally formed as processors of prescription drug claims under such medical benefits. Throughout the 1980’s and 1990’s as more and more employers implemented drug benefit plans and such plans became more and more popular under health insurance benefits, PBMs fulfilled the role of honest brokers in building computer infrastructure to automate the submission of drug claims. Drug benefit management was off-loaded to the third-party entities who would offer online, real-time adjudication of drug claims. The business of PBMs proliferated in the late 1990’s and early 2000’s. During this time, the major PBMs formed or purchased pharmacies that compete with retail, mail order, and specialty pharmacies within their networks.

What does a PBM do? A full-service PBM is an entity that focuses on managing the prescription drug benefits on behalf of insurance companies, employers, union groups, third-party administrators, Medicare Part D Plans, managed care organizations, and other payers. PBMs’ roles, however, go beyond just adjudication of claims. PBMs create pharmacy networks, which their members can utilize to obtain prescription drugs; they develop formularies (drug lists of covered therapies); and, they contract for drug manufacturer rebates.  PBMs’ roles span the trifecta of the insurance, pharma, and pharmacy industries. PBMs have their hands in every stage of the drug supply chain. The largest of these entities are Express Scripts, CVS Caremark, and OptumRx, collectively owning approximately 80% of the market share for PBM services in the United States.

What makes PBMs so amorphous to the masses is their behind-the-scenes operations. Even more complexing is the virtual black box of revenue. Despite the widespread demand for increased transparency, how PBMs generate billions of dollars is still opaque.  Even though PBMs provide substantial management services for very large employers and insurance companies, and collectively manage the drug benefits of hundreds of millions of Americans, it might still surprise you to learn the largest PBM, CVS Health, listed as number 7 on the 2017 Forbes Fortune 500 list, earned $184 billion in revenue in 2017 –  over $100 billion more than the largest pharmaceutical manufacturer’s earnings in 2017. Johnson and Johnson’s 2017 revenue sat at $76.5 billion.

How is it that PBMs earn such substantial revenue? Imagine the billions of prescriptions that are dispensed each year throughout the United States – 4.06 billion in 2017, for example. PBMs charge on average between $3 and $5 per prescription for their services. In addition, plan sponsors (the payers) pay PBMs for the cost of the prescription on behalf of the member or insured minus any cost-sharing amounts.  

Beyond the traditional fee structure outlined above, the opaqueness of PBMs’ operations and the sources of revenue have not been shy of controversy as the subject of much government scrutiny, as shown by the examples below.

PBMs “play the spread.” PBMs have the ability to control the cost of your prescription for which your insurer or employer pays. PBMs will often charge the insurer or employer more than it is reimbursing the pharmacy that dispensed your medication.  For example, a PBM will charge the insurer $200 for a prescription for which it reimburses the pharmacy $180, and will pocket that $20 spread. 

In August of 2018, Barbara R. Sears, Director of the Ohio Department of Medicaid, instructed the state’s five managed care plans to terminate and/or renegotiate PBM contracts in order to transition from a spread-pricing drug purchasing model to a pass-through model, effective as of January 1, 2019. An auditor hired by the State found that in 2017 PBMs contracted with the managed care plans charged the managed care plans $223 million more than what the PBMs paid in pharmacy costs.

PBMs charge administrative and performance fees to network pharmacies. These are sometimes referred to as direct and indirect remunerations. PBMs through unilateral contracts will require network pharmacies to meet performance standards, many of which are inapplicable to patient populations or are otherwise unattainable. As a result, the PBM will either withhold or claw-back monies from under-performing pharmacies. These practices cost pharmacies millions of dollars in earnings annually, diminishing the ability of many to provide high-quality pharmacy care.

This past year more than 50 members of Congress urged the Department of Health and Human Services and the Centers for Medicare and Medicaid Services to eliminate the allowance of such fees. Additionally, states Attorneys General, including publically Arkansas and Ohio, are conducting investigations into such PBM pricing practices.

PBMs also earn substantial rebates from drug manufacturers, which has essentially become a pay-to-play marketplace. With PBMs controlling the vast majority of lives in the United States, ergo control over what drugs can reach covered individuals, drug manufacturers pay monies to PBMs to place their drugs on PBM formularies. PBMs typically keep a percentage of the rebate and sometimes pass part of the rebate through to the payer client.  However, according to many commentators, drug rebate programs likely increase drug expenditures if PBMs create incentives to drive utilization toward higher cost, brand name drugs. 

While these types of rebates arguably fall under safe-harbors to the Federal Anti-Kickback law – namely the shared risk or discount safe harbors – Secretary of Health and Humana Services, Alex Azar, has proposed the elimination of such rebates in a proposal sent to the White House, entitled “Removal Of Safe Harbor Protection for Rebates to Plans or PBMs Involving Prescription Pharmaceuticals and Creation of New Safe Harbor Protection.”

The value of PBM operations is not lost on others in the healthcare marketplace. This is evidenced by the $60 plus billion acquisitions of CVS Health by Aetna and Express Scripts by Cigna. 

PBMs tout their ability to save millions of dollars in negotiated drug costs for the American healthcare system. That may very well be the case. However, being the gatekeeper for access to prescription drugs for hundreds of millions of American, it is difficult to justify the continued lack of transparency in PBM practices.

What is important for healthcare providers to understand is how PBM pricing practices affect their practices and patients’ access to the right medications at an affordable cost. Healthcare providers affected by limitations imposed by PBMs should contact a qualified healthcare attorney to discuss options. 

The government’s heightened scrutiny into the PBM marketplace, however, could unveil specifics of numerous opaque practices and present opportunity for additional cost savings and broader access to medications across the American healthcare system. 

Contact Brad at:
[email protected]