The past few years have seen some progress in efforts to rein in how pharmacy benefit managers (PBMs) operate. However, a lot remains to be done, especially with respect to state and federal laws that can mandate procedural changes.

PBMs are the third-party administrators appointed by insurance companies (both private and government-run) and large employers or employer groups to negotiate payment rates for prescription drugs with manufacturers. Their role in the process has been questioned especially as patients and the healthcare industry seek to integrate value in care delivery, and certain practices by PBMs, such as the obscure rebate system, seem to contradict this.

The jury is out on who profits from the rebates that pharmaceutical manufacturers pay PBMs. PBMs claim to pass on a majority of the rebate amount, which is influenced by competitor drugs and placement in the plan’s formulary (also called tier), to health plans and payers—a claim that is refuted by small payers and employers.  

MAC-Based Pricing

When it comes to reimbursing pharmacies, PBMs refer to their own MAC (Maximum Allowable Cost) list, which is the maximum amount that a plan will pay the pharmacy for generic drugs and for generic versions of brand-name drugs. The list is influenced by several factors, including product availability, manufacturer competition, product efficacy compared to the innovator, etc. It seems, however, that there is no standard process for inclusion on the list or for MAC determination, opening up a revenue channel whereby PBMs can reimburse pharmacies at a low rate for a particular drug while charging health plans and large employers at a higher rate for the same drug.  

In Ohio, for example, this increasing “spread” pricing hit its peak in the fourth quarter of 2017, based on an audit of the Ohio Medicaid prescription drug program, and has resulted in struggling pharmacies that eventually closed shop, which can further complicate patient access. Passage of the PBM Transparency Law (HB 166) earlier this year will hopefully protect Medicaid patients and pharmacies alike.

The Need for Transparency

Transparency in the way PBMs conduct their business has much broader implications for the overall drug cost issue that our nation has been grappling with for a while. While several states have passed laws to eliminate obscurity from the process of drug supply chain and pricing, federal efforts are warranted. One such effort has been S. 2554, the Patient Right to Know Drug Prices Act, passed in October 2018, which bans the “gag clause” on pharmacies so they can inform patients if their drug would be cheaper if they paid cash instead of using their health plan drug benefit. According to the National Council of State Legislatures, 33 states have enforced removal of “gag clauses” from PBM-pharmacy contracts.

Several national provider organizations have also made calls for PBM transparency:

  • The American Medical Association has raised questions about the list price of drugs and whether they’d be cheaper in the absence of rebates, pointing out the lack of incentives for PBMs and drug manufacturers to lower list prices. Lack of transparency around cost-sharing and continued drug coverage can ultimately impeded patient access to care, or, even worse, put a patient’s life in danger.  
  • The Community Oncology Alliance (COA) remains a vocal opponent of PBM practices that raise barriers for cancer patients from accessing adequate care. Applauding the Senate Finance Committee’s hearing on business policies of the PBMs, COA encouraged the Health and Humans Services to further investigate spread pricing practices.   
  • The American College of Rheumatology released an issue brief asserting its support for legislation that would increase PBM pricing transparency and accountability. The brief also informs ACR members about how murky business practices by PBMs drive up healthcare cost and put a financial stress on patients.

Policy Recommendations to Counter Status Quo

A recent issue brief released by The Commonwealth Fund recommends a few approaches to counter the PBM rebate game:

  • PBMs should pass on the entire amount of the rebate to payers and depend on other revenue sources, such as administrative fees for pharmacy benefit management and margins on specialty drug mail orders. However, could this disincentivize PBMs from negotiating high rebates for their clients?
  • Transparency in PBM rebate contracts with manufacturers could help mandate existing pass-through laws and require that a minimum rebate level be passed through to payers. To avoid full public disclosure of these contracts, PBMs could submit the information to a government-appointed oversight body.
  • Can patient cost-sharing at the point of sale be tied-in to these rebates? UnitedHealthcare announced such a plan in 2018, to be rolled out in January 2019, whereby certain enrollees in group health benefit plans could receive discounts on their prescription medication at the pharmacy counter if the manufacturer of that drug provides a rebate. However, the pass-through to patients, meaning reduced savings retained by health plans, could increase plan premiums in the long-term.

Additional Resources

State-wise information on PBM legislation:

PBM controversies and what’s coming: