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Pharmacy Benefit Managers

Last Updated 1/28/2020

Issue: Pharmacy Benefit Managers (PBMs) are third party companies that function as intermediaries between insurance providers and pharmaceutical manufacturers. PBMs create formularies, negotiate rebates (discounts paid by a drug manufacturer to a PBM) with manufacturers, process claims, create pharmacy networks, review drug utilization, and occasionally manage mail-order specialty pharmacies.

In light of rising health care costs, the role of PBMs are being reviewed due to the cost of prescription drugs and the effects on consumers. In particular, the cost of insulin and EpiPens has been the focus of most news coverage with patients being forced to ration medicine when they cannot afford copays.

Background: When insurance companies began offering prescription drugs as a health plan benefit in the 1960s, PBMs were created to help insurers contain drug spending. Originally, PBMs decided which drugs were offered in formularies and administered drug claims. In the 1970s, PBMs began to adjudicate prescription drug claims. In the 1990s, drug manufacturers began acquiring PBMs. Concerns about conflicts of interest caused federal orders for divestment from the Federal Trade Commission, sparking a trend of mergers and acquisitions within the PBM field.

Today, there are 66 PBM companies, with the three largest – Express Scripts (an independent publicly-traded company), CVS Caremark (the pharmacy service segment of CVS Health and a subsidiary of the CVS drugstore chain), and OptumRx (the pharmacy service segment of UnitedHealth Group Insurance) – controlling approximately 89% of the market and serving more than 270 million Americans.

PBMs work in conjunction with drug manufacturers, wholesalers, pharmacies, and health insurance providers but play no role in the physical distribution of prescription drugs, only handling negotiations and payments within the supply chain. When a new drug is available, the manufacturer negotiates with wholesalers and Pharmacy Services Administrative Organizations (PSAOs), who then sell and distribute drugs to pharmacies. PBMs negotiate agreements with drug manufacturers on behalf of insurers and are paid rebates by drug manufacturers. PSAOs and wholesalers negotiate reimbursements with PBMs on behalf of pharmacies. PBMs then pay pharmacies through health insurance providers for drugs dispensed to patients. PSAOs and PBMs are both third party companies with similar functions negotiating rebates and reimbursements, with PSAOs representing and offering services to independent pharmacies and PBMs representing health insurers.

Pharmacy Benefit Managers earn profits primarily through administrative fees charged for their services, through spread pricing (the difference between what is paid to pharmacies and the negotiated payment from health plans), and shared savings where the PBM keeps part of the rebates or discounts negotiated with drug manufacturers. Concerns with PBM business practices revolve around transparency to consumers regarding rebates and reimbursements. ‘Gag clauses,’ provisions in contracts between PBMs and pharmacies that prevent pharmacists from telling patients when the cash price of a drug is less than the insurance copay price, were banned in 2018 by the Patient Right to Know Drug Prices Act, S.2554 and the Know the Lowest Price Act, S.2553 in an effort to promote transparency toward patients. In a 2019 study, the Government Accountability Office reported that PBMs retain less than 1 percent of rebates in a review of Medicare Part D plans, while passing the rest on to consumers. Medicare Part D rebates accounted for $18 billion of the $26.7 billion in rebates in 2016.  A study conducted by the Office of Inspector General found that in Part D, rebate-adjusted unit costs increased at almost the same rate as non-rebate-adjusted costs in a 5-year period.

Status: The NAIC currently has two model laws that protect the drug benefits of consumers. The Health Carrier Prescription Drug Benefit Management Model Act #22 provides standards for the establishment, maintenance and management of prescription drug formularies and other procedures used by health carriers that provide prescription drug benefits. The Health Benefit Plan Network Access and Adequacy Model Act #74 establishes standards for the creation and maintenance of networks by health carriers to ensure the adequacy, accessibility and quality of health care services offered under a managed care plan.

In order to address pharmaceutical cost drivers and the increasing concern, the NAIC created the Pharmacy Benefit Manager Regulatory Issues (B) Subgroup under the Health Insurance and Managed Care (B) Committee in November 2018. The Subgroup is currently tasked with creating a new NAIC Model Law to establish a licensing or registration process for pharmacy benefit managers.

The new model will focus on regulating PBMs through a standardized licensing or registration process and potentially also address prescription drug price and cost transparency of drugs and rebates. Several individual states have already passed legislation regarding the licensure of PBMs, spread pricing, rebate transparency, and fees. The Subgroup will continue reviewing and discussing legislative developments in various states to inform the framework for the new model.

 

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