PBM Contracting Transparency: Pennsylvania Auditor General Releases PBM Report

December 14, 2018Legal Alerts

On December 11, 2018, Pennsylvania Auditor General Eugene A. Depasquale released a long-awaited report discussing the role of pharmacy benefit managers (PBMs) in Pennsylvania’s health care system.   The report, “Bringing Transparency and Accountability to Drug Pricing,” provides a critical review of PBM pricing practices and makes 10 recommendations the auditor general believes will improve PBM pricing transparency, stabilize reimbursements to pharmacies, and ultimately lower the cost of prescription medication for Pennsylvania patients and taxpayers. 

As background, PBMs administer prescription drug benefits on behalf of health insurers and work to lower the cost of prescription drugs for insurers and patients.  PBMs assemble networks of approved pharmacies, create medication formularies, negotiate rebates from manufacturers, and negotiate reimbursement between health insurers and pharmacies.  PBMs also provide clinical and administrative services, including prior authorization, claims processing, utilization and claims review, and benefit plan design (determining which drugs fall within a formulary or specialty tier).  In short, PBMs serve as industry middlemen who negotiate payment for drugs among drug manufacturers, insurers, pharmacies, and patients.

In exchange for their services, PBMs charge health insurers various types of fees including administrative fees, processing fees, claims review fees, and dispensing fees.  To determine the amount of fees charged, PBMs usually employ a tactic called “balloon strategy” whereby the PBM may offer a discount on administrative fees in exchange for an increase in claims review fees.  

Additionally, and implicit in many PBM fee structures, PBMs also engage in rebate retention and spread pricing as another means to generate income.  Rebate retention occurs when the PBM negotiates volume-based rebates with drug manufacturers in exchange for the PBM placing the manufacturer’s medication on the PBM’s drug formulary.  The PBM then either retains the full amount of the rebate or shares a percentage of the rebate with the health insurer.  Comparatively, spread pricing occurs when the PBM maintains a network of participating pharmacies to which it makes payments for drugs dispensed to patients of a contracted health insurer.  The PBM negotiates payment rates with each pharmacy and charges the health insurer a fee in excess of the rate the PBM pays the pharmacy.  The PBM then retains this excess amount of fees known as “the spread.”  For example, if the PBM pays a pharmacy $10 for filling drug X and charges the health insurer $12 for every fill of drug X, the PBM retains a spread of $2 per fill as payment for its services. 

In this context, the auditor general’s report found Pennsylvania taxpayers paid PBMs a total of $2.86 billion in 2017 for Pennsylvania Medicaid enrolled patients alone.   According to the report, Pennsylvania’s Medicaid PBM fees have increased by nearly 100 percent over the past four years from $1.41 billion in 2013.  In 2017, three PBMs made between $2 million and $40 million on spread pricing, which translated into PBM profits between $0.28 and nearly $13.00 per Medicaid prescription filled.

Additionally, separate and distinct from health insurer charges, the auditor general report references fees PBMs charge to pharmacies that participate in PBM networks.  PBM pharmacy fees include claims processing, participation fees, resubmission fees, and direct and indirect remuneration (DIR) fees based on the pharmacy’s dispensing habits.  The auditor general’s report notes that in one case, a PBM’s pricing mechanism caused a Pennsylvania pharmacy to be reimbursed $605.62 less on a prescription drug than it cost the pharmacy to acquire it. Further, the report notes PBMs’ low network reimbursement rates have arguably caused nearly 12 percent of Pennsylvania’s community pharmacies to go out of business between 2003 and 2013. 

Despite the amount of fees paid to PBMs and charged to Pennsylvania taxpayers and pharmacies, the auditor general’s report noted Pennsylvania cannot effectively audit or scrutinize PBM pricing and practices as PBM contracts are generally shielded from government review, as are other private contracts.  In this regard, the auditor general’s report recommends the Pennsylvania Department of Human Services (DHS) or the Pennsylvania General Assembly take the following actions to improve transparency in PBM pricing.

  1. The general assembly should immediately pass legislation banning all gag rules and allow pharmacists to tell all patients if they could be paying less for a medication.

  1. To ensure taxpayer dollars are being handled effectively and efficiently, the general assembly should immediately pass legislation allowing the state to perform a full-scale annual review or audit of subcontracts with pharmacy benefit managers.

  1. To better control costs, Pennsylvania DHS should consider directly managing its Medicaid prescription drug benefits instead of contracting with managed care organizations to do so.

  1. The general assembly should pass legislation that increases transparency into PBM pricing practices.
  2. The general assembly should pass legislation to use the federal Centers for Medicare & Medicaid Services’ National Average Drug Acquisition Cost (NADAC) for pricing prescription drugs filled through Medicaid.

  1. The general assembly should grant state oversight of contracts signed between PBMs and pharmacies or pharmacy services administration organizations, which are currently shielded from oversight because they are subcontracts.
  2. So the state pays only for services PBMs render, the general assembly should pass legislation requiring a flat-fee pricing model for compensating PBMs.
  3. Pennsylvania’s Department of Human Services should use Texas’ Vendor Drug Program as a model to create Pennsylvania’s own universal preferred drug list for Medicaid clients.
  4. Pennsylvania’s Department of Human Services should add “good steward” language to all Medicaid-related contracts.
  5. The Federal Trade Commission should investigate whether separation truly exists between the PBM and pharmacy acquisition segments of major companies that operate both. If the FTC does not investigate, then the general assembly should consider legislation that prevents managed care organizations from using a PBM for Medicaid if the PBM is part of a larger company that also owns retail pharmacies.

The auditor general’s report is a good representation of states’ shifting attitudes toward PBMs in the states’ efforts to curb ever-increasing drug prices. Although it is unclear whether Pennsylvania DHS or the Pennsylvania General Assembly will take action as recommended by the auditor general, PBM pricing and practices are growing ripe for legislative review.  

If you or your organization are affected by the auditor general’s PBM report or wish to learn more about PBM contracting and negotiation, please contact your Dinsmore attorney.