Cholesterol medication, blood pressure pills, arthritis pain relievers—baby boomers are taking a dozen or more daily prescription drugs to manage various maladies and conditions—some of them acute but more associated with prevention and aging.

The costs are huge, more than $260 billion annually, according to the Centers for Medicare & Medicaid Services, and expected to increase 5.2% this year. But employers can take steps to reduce those costs, including the use of Pharmacy Benefit Managers (PBMs), third party administrators of prescription drug benefits.

PBMs structure prescription drug benefits, manage co-pays and negotiate discounts with drug manufacturers and are supposed to pass their savings back to customers. But are employers getting all of the value out of their PBM agreements?

Susan Pilch, vice president of policy and regulatory affairs at the National Community Pharmacists Association in Alexandria, Virginia, says employers may not be sharing PBM discounts as deeply as they should—and need their agents and brokers to keep a closer check on the administrators.

Pilch, whose association represents local drug stores that often compete with PBM mail order prescription drug sales services and rely on PBM payments for local sales, says PBMs should be subject to stricter regulatory disclosure and available for careful audits of their income streams.

“Transparency is what we all need from them,” she says. PBMs receive a wide variety of direct and indirect compensation, incentives to support contracted products and volume discounts from drug manufacturers.
However, PBM contracts, she says, “are long and full of jargon,” that could obscure full disclosure of their income and how much is passed back to customers.

“Employers often have the contractual right to audit their PBMs, but even large employers struggle to understand everything revealed in their audits. Small and medium-sized employers have much greater difficulty without expert help.”

Agents and brokers should assist their clients in conducting audits and restructuring PBM contracts, she says, and regulators should provide better tools to help them understand complicated PBM agreements.
On August 20, Pilch testified before the Employee Benefits Security Administration’s ERISA Advisory Council about consideration of new regulations that could restrict PBM compensation and fee disclosures. Her testimony identifies several contract pitfalls.

Pilch told regulators that PBMs serve as the “middleman” in virtually all prescription drug transactions in the United States. The PBMs leverage the number of beneficiaries in a particular plan in order to negotiate lucrative rebates from pharmaceutical manufacturers. They also formulatepharmacy provider networks that will supply or dispense these drugs to the plans’ beneficiaries and in turn charge the plan sponsor for these products.

“What most consumers and plan sponsors alike do not know is that PBMs extract ‘spread’ profits from both of these activities. Unless a plan has negotiated a ‘pass through’ contract with its PBM—and typically only the largest and most sophisticated plans are able to do so—the PBM will keep a significant percentage of the rebate dollars that they have obtained by virtue of the number of plan beneficiaries.

“Second, the amount that the PBM pays the pharmacy for dispensing the drug to the plan beneficiary is rarely the same amount that the PBM ‘charges’ the plan for the same drug. Typically, the PBM ‘marks up’ the cost of the drug, charging the plan more than the pharmacy is reimbursed, keeping the difference as profit for the PBM,” she testified.

Pilch said these hidden spread amounts need to be disclosed in some way to plan sponsors or plan fiduciaries. This type of information should be readily available to a plan. If plan sponsors or fiduciaries have a clearer picture about the amount of money that is being made by their vendor by virtue of handling the plan’s business—this may provide them with a greater ability to negotiate competitive contracts with these vendors in the first place.

Pilch recommended three specific reforms:
• Extend to PBMs the disclosure requirements already applied to vendors of pension plans, such as 401(k) retirement programs.
• Require PBMs to disclose to plan fiduciaries the same aggregated information that is currently required of PBMs in state health insurance exchanges as well as in Medicare drug plans.
• Ensure that plan sponsors and ERISA fiduciaries can conduct an effective audit of their PBM and restrict PBMs’ ability to water down audits by: selecting an auditor, limiting the audit’s scope, restricting the auditor from sharing findings with the plan sponsor and preventing the recovery by the plan sponsor of funds obtained through pharmacy audits.

However, the PBM industry offered counter arguments in its own testimony on August 20. Douglas Holtz-Eakin, former director of the Congressional Budget Office and current president of the Washington-based research group American Action Forum, told the advisory panel that new legislation requiring disclosure of PBM compensation would increase costs for everyone.

“The PBM industry is highly competitive and uses market incentives to provide lower costs to employer health plan sponsors and health plan administrators,” he said. “Overall, the changes suggested could cost employer health plans and beneficiaries $110 billion over ten years.”

Holtz-Eakin told regulators that intense market competition has already demanded that PBMs disclose their financial arrangements to an increasingly savvy client base. “The PBM clients—employer health plan sponsors—have created intense competition among PBMs, incorporating a request for proposal (RFP) process where PBMs offer bids for managing the prescription drug benefit in a health plan. This contracting process has developed a market where transparency is already a requirement without federal interference and regulation.

“PBMs place a bid making an offer for a contract with the employer health plan. As a part of the competitive process, PBMs are incentivized to offer the lowest bid bringing down prices in order to win the employer’s business. Along with the cost to the plan, plan sponsors will also ask for information regarding the PBM’s pricing structure,” he said.

In order to participate in the bidding process, plan sponsors already require PBMs to disclose direct and indirect payments and inform the employer of the potential profits earned by the PBM. This disclosure is conducted under heavily protected confidentiality agreements.

Holtz-Eakin also noted that audit agreements that allow employers and their advisers to determine whether or not PBMs are appropriately passing on savings are common and part of the usual negotiations.

“Plan sponsors have the ability to assess the value of PBM services—including the pricing structure—without regulatory interference.”

He said the current overall average AWP discount achieved by PBMs is 30%. If PBMs are required to disclose their rebates, the average discount may fall to 27%, resulting in a loss of up to $110 billion in savings for employers over ten years.

The author
Len Strazewski has been covering employee benefits issues for more than 30 years. He has an M.S. in Industrial Relations from Loyola University in Chicago.