PBM FIDUCIARY DUTY AND TRANSPARENCY
Pharmacy Benefit Managers (PBMs) administer nearly every prescription
drug insurance plan in the U.S.
The first PBMs were created by managed care organizations in the
1980s to apply
managed care principles, such as provider networks and patient co-pays,
to the drug
benefit portion of health care plans. Through rapid growth in the
1990s, PBMs
“emerged as the national standard for the administration of prescription
drug insurance
in the United States.” The three largest PBMs manage drug benefits
for over 200
million Americans – 95% of Americans with prescription drug coverage.2
Today’s PBMs
manage all aspects of a prescription drug benefit plan, including
creating formularies of
preferred medicines, negotiating with drug manufacturers for discounts
and rebates,
negotiating with pharmacies to establish retail networks for dispensing
drugs, and
establishing automated processes for determining (often called “adjudicating”)
coverage
eligibility at the point of sale. Each of the four largest PBMs operates
its own mail order
pharmacy to fill prescriptions directly.
The PBM industry is highly concentrated
Through a
period of consolidations in the last decade, the PBM industry has
become dominated by three large companies. The three largest PBMs
- Medco, Caremark and
Express Scripts - administer 80% of insured prescriptions and 90%
of insured mail order
prescriptions. Each of these companies has annual revenues exceeding
$15 billion.
PBMs increase their profits by retaining payments
from pharmaceutical companies to promote their drugs
Many
opportunities and incentives for PBM practices that raise drug costs
to consumers can be traced to their acceptance of payments (referred
to as “rebates”) from
pharmaceutical companies for increased sales of their most profitable
products. As
described by the Federal Trade Commission:
Pharmaceutical manufacturers recognize that having their
drugs listed on the formulary or in a preferred spot on the
formulary (as compared to competing drug products) will
likely increase the drug products’ sales. . . . [P]harmaceutical
manufacturers use “formulary payments” to obtain formulary
status, and/or they use “marketshare payments” to
encourage PBMs to dispense their drugs. Both payments
are often specified as a percentage of the drug’s wholesale
price (e.g., a percentage level of 10% means the
manufacturer will pay the PBM 10% of a measure of the
drug’s wholesale price multiplied by the quantity dispensed).
Most industry members refer to these payments as
“rebates,” and they refer to the percentage level as the
“rebate level.”
PBMs profit from rebates by retaining some or all of them instead
of passing the savings
on to plans and consumers. Court documents establish that Medco
Managed Care,
while under the ownership Merck, was paid more than $3.5 billion
in rebates in 1997-99,
the majority of which were not passed through to customer health
plans.6 In 2004, New
York Attorney General Eliot Spitzer filed suit against Express
Scripts alleging that the
PBM pocketed as much as $100 million in drug rebates that should
have gone to the
state.
Favoring Higher Priced Drugs
Higher rebates are paid on single-source brand name prescription
drugs that do not
have generic equivalents. Accordingly, PBMs “have an incentive to
sell newer and
higher priced single-source drugs, even when it may be more costly
for the payer.”
There is a growing body of evidence that PBMs favor single-sourced
and brand name
drugs over drugs with generic competition. According to estimates
by the FTC, the top
25 brand drugs account for over 70% of the total payments by pharmaceutical
companies to PBMs. Single-source brand drugs generally account for
over 50% of the
drugs dispensed to plan members by PBMs.
Playing the Spread
PBMs increase their profits by “playing the spread” between the amount
that is
reimbursed by the PBM to a pharmacy for a prescription and the amount
reimbursed to
the PBM from a plan for the same prescription. Because each amount
is independently
negotiated and is normally kept secret from the other, the PBM can
negotiate a higher
reimbursement amount for itself than it pays to a participating pharmacy
to dispense the
prescription. For example, in one reported case a PBM billed an employer
$215 for a
generic stomach medicine, Ranitidine, but paid the pharmacy only
$15 for the drug, pocketing the difference.
Drug Switching
PBMs can favor higher priced drugs through drug switching. Drug switching,
or
“therapeutic substitution,” occurs when a doctor prescribes one drug
and the PBM requests to change the prescription to a different drug
of similar therapeutic value. The PBM can profit off of the switch
if the second drug has a higher rebate value or mark up than the
initially prescribed drug. In May 2006, Medco took a charge of $163
million in its first quarter to cover a proposed settlement of federal
charges that it defrauded customers by shorting, changing and canceling
their prescriptions. In a three-month period, Medco persuaded doctors
to switch more than 71,000 prescriptions from Lipitor, made by Pfizer,
to Zocor, a more costly drug from Merck (then Medco’s owner). In
2002, AdvancePCS sent letters encouraging doctors to switch patients
from a generic ulcer drug costing 20 cents a days to Celebrex, which
cost ten times as much. Also in 2002, AstraZeneca paid ExpressScripts
$500,000 to call 22,000 doctors and ask them to switch their patients
to Nexium from Prilosec, after Prilosec became available in a cheaper
generic form.
Drug Repackaging and Mark Ups
PBMs that own their own mail order pharmacies can profit by repackaging
drugs and selling the repackaged items at higher prices than the
original average wholesale price set by manufacturers. One study
found, for example, “15 instances when the branded drug Celebrex
was repackaged and the unit price for the repackaged drug exceeded
the original manufacturer’s per unit price by more than 7% and
as much as 176%.” A 2004 report of the Vermont State Auditor found
that Express Scripts marked up state employee benefit drug prices
by as much as 111%, costing Vermont taxpayers $1.85 million in
one year.
Contract terms have not been sufficient to protect plans from
excessive PBM profiteering
Some sophisticated plans negotiate contracts that include provisions
for sharing rebates
between the PBM and the plan sponsor and provide for audit rights
that allow them to verify whether they receive the payments for which
they contract. But the extent of
such contract terms varies with the bargaining and power and sophistication
of plans.
“[A] PBM might receive a discount from a manufacturer on a particular
drug and not
pass any of it on to the health benefit provider, keeping the difference
for itself.”
Lack of Transparency
It is often the case that buyers cannot discipline PBM profiteering
because they do not know the extent to which it is practiced. In
most cases, plans do not have access to PBM rebate agreements and
other side deals. PMS have often claimed that these agreements
are “trade secrets,” although some contracting parties have achieved
access to the agreements and the First Circuit Court of Appeals
has rejected trade
secret claims. As the federal District Court in Maine explained,
PBMs “introduce a layer
of fog to the market that prevents benefits providers from fully
understanding how to
best minimize their net prescription drug costs.”
In 2003, Maine passed the first transparency
and fiduciary duty law
The Maine law was upheld in all particulars in 2005 in a unanimous
decision by the U.S.
Court of Appeals for the First Circuit. The court specifically
upheld the rights of states
to regulate the practices of PBMs by imposing contract transparency
and conflict of
interest requirements, to establish a state fiduciary duty owed
by PBMs to client health
plans, and to require that savings based on volume discounts be
passed through to
client health plans and thence to consumers. On June 5, 2006,
the U.S. Supreme
Court rejected a request by the pharmacy benefits management industry
that the Court
consider the constitutionality of a Maine law. In rejecting the
writ of certiorari, the
Supreme Court ended the litigation over Maine’s law, which will
now be enforced.
Other states have followed suit
Since the Maine law was enacted, many other states as well as the
District of Columbia have passed similar laws. The D.C. statute was
recently upheld (reversing an earlier decision enjoining the law)
based on the 1st Circuit decision. Both the Maine and DC laws require
the PBM to act as a fiduciary, require transparency and pass-through
of rebates and other payments and savings, restrict drug-switching
and conflicts of interest, and establish guidelines for drug-switching
and other practices. Maryland passed a series of PBM reform measures
in 2008 including legislation addressing transparency, registration,
drug-switching, pass-through of rebates, and pharmacy contracts.
Iowa, South Dakota and Vermont also have PBM laws that seek to
address transparency, conflicts of interest disclosure, greater
transparency on rebates and other payments, and include more limited
fiduciary language (requiring “fair dealing” or “reasonable care
and diligence”, “fair and truthful under the circumstances”). Several
other states have more limited laws governing registration and/or
payment provisions including Kansas, Mississippi, North Dakota,
Rhode Island, Tennessee and Connecticut. Arkansas and Georgia have
enacted a “Pharmacy Bill of Rights” which
outlines audit and payment requirements. Louisiana does not have
a law, but in 2006 completed a PBM recruitment RFP process requiring
fiduciary responsibility.
Potential for savings
Although the Maine PBM law was the first to be enacted, because the
PBM industry was successful in halting implementation of that law
for several years, there isn’t yet a track record measuring its
effectiveness in cutting costs. However, in South Dakota, where
the law was not challenged, well over $800,000 was saved in state
health insurance costs in a single year as the direct result of the
more transparent business model required by its law. In Arkansas,
an audit of the PBM managing the state employee health program
determined the state was overcharged almost $500,000 in just a
3 month period of time. The state ultimately issued a new transparent
RFP for state business, lowering pharmacy expenses and directly saving
the state over $13
million.
Several recent reports have pointed to the value of transparency
requirements in achieving savings for state government. A plan
prepared for the Governor of Oregon by the Heinz Family Philanthropies
recommended Oregon “require the greatest level of transparency possible”
as well as annual audits of the PBMs and insurance companies the state
contracts with to insure that rebates are passed through. A report
to the Illinois Commission on Government Forecasting and Accountability
recommended the state stop using PBMs entirely, and at a minimum require
a fiduciary relationship. By
directly negotiating pharmacy benefits in its state employee health
plan instead of paying a PBM $2.81 per enrollee per month to negotiate
on its behalf, the report estimated savings of $1.35 per claim
or about $10 million per year. The University of Michigan, in an
attempt to deal with skyrocketing drug costs, dropped the five
benefit managers it had been working with, hired a single new manager
that has less control over how the drug plan is administered, and
imposed strict new rules. These changes enabled UM to hold its
drug spending to $43 million in 2003, or $8.6 million less than
it
would have paid under the previous plans.
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