Stuck in the Middle: Regulating Pharmacy Benefit Managers

by Gwen Moritz  on Monday, Mar. 12, 2018 12:00 am   12 min read

State Rep. Michelle Gray, R-Melbourne, is a moving force behind a first-in-the-nation effort to regulate pharmacy benefit managers. (Karen E. Segrave)

A special legislative session starting Tuesday is expected to result in deep-red Arkansas becoming the first state to license and regulate pharmacy benefit managers.

PBMs say they help hold down drug costs by negotiating with manufacturers on behalf of insurance companies and by providing pharmacists with instant approval of drug benefits.

But in the multitrillion-dollar health care industry, PBMs have become politically powerful middlemen whose tactics have made the real cost of drugs even less transparent, and they can force retail pharmacies to choose between selling medicine at a loss or turning away patients.

After Arkansas Blue Cross & Blue Shield, the state’s dominant health insurance carrier, changed a key contract with its PBM in January, independent pharmacists were facing that choice more often.

And though ABCBS has since walked back its decision, the temporary change that affected perhaps 12 percent of pharmacy customers, and an even smaller portion of pharmacy revenue, has already had a blistering side effect: The pharmacists have transformed into a vocal and sympathetic political movement.

“Every single state is having the same issues we are, and no state has regulatory oversight authority,” said state Rep. Michelle Gray, R-Melbourne, who started fighting PBMs as soon as she arrived at the Legislature in 2015. “This is because of the lobbyists.”

The General Assembly put some limits on PBMs with laws passed in 2009 and 2015, but the industry has proven clever at consolidating power in the pharmaceutical supply chain. Rather than continuing to play legislative whack-a-mole, Gray is the primary House sponsor of a bill that “has all the regulatory language in it” so that the state insurance commissioner “can plug holes and can be punitive.”

Predictably, the industry is not as enthusiastic as the pharmacists, warning that the result may be higher costs.

CVS Caremark, the PBM contracted by Arkansas Blue Cross, said it would work with legislators and the state attorney general on the proposed legislation. “However, language currently being drafted goes well beyond the regulation of PBMs and would eliminate the tools that help lower the cost of prescription drug benefits,” Christine Cramer, senior director of corporate communications for CVS Health in Woonsocket, Rhode Island, said in a statement emailed to Arkansas Business.

“As currently contemplated, these potential PBM regulations directly interfere in the contracts between PBMs and their clients, negatively impacting the ability to effectively manage a pharmacy benefit in the state. As a result, while they may benefit independent pharmacies, these proposed regulations would increase costs for Arkansas consumers as well as payors in the state.”

An End to Gag Clauses
Most of the draft Arkansas Pharmacy Benefits Manager Licensure Act that was being circulated last week concerns PBM behavior toward the pharmacists whose reimbursement they control.

But one section, titled “Gag clauses prohibited,” frees pharmacists from contractual limits on what they are able to tell customers.

“It was actually the speaker of the House that asked for that,” said House sponsor Michelle Gray, R-Melbourne, referring to Rep. Jeremy Gillam, R-Judsonia.

Contracts that pharmacy services administrative organizations negotiate with PBMs on behalf of pharmacists often limit information pharmacists can share. For instance, generic drugs are sometimes cheaper than the patient’s insurance copayment, but patients rarely ask and pharmacists can’t volunteer that information, which would cut the insurance company and PBM out of the transaction.

Under the proposed bill, those kind of gag clauses would be illegal, and pharmacists would be free to provide that information to patients.

Gag clauses forbidding pharmacists from sharing information with the state and federal government would also be forbidden, so “they can make complaints to government officials without losing their contracts,” Gray said.

Pass-Through vs. Spread
At the beginning of the year, Arkansas Blue Cross & Blue Shield adopted a new contract for pharmaceuticals covered by policies sold through the Arkansas Health Insurance Marketplace, the “Obamacare” exchange.

The change seems simple enough, nearly benign. Instead of paying CVS Caremark an administrative fee plus the pharmacy’s reimbursement for a generic drug, ABCBS contracted to pay a set cost and let its PBM settle up with the pharmacists.

In insurance-speak, the kind of cost-plus-fee contract Blue Cross traditionally had with CVS Caremark is called a “pass-through” or “transparent” contract. The all-inclusive payment that was in place from Jan. 1 to Feb. 28 is called a “spread,” referring to the difference between what the insurer pays and the portion that finds its way to the pharmacy.

ABCBS’ pass-through payments were acceptable to pharmacists, who almost always received enough from the PBM to cover the wholesale cost of the drugs, plus an average of $10 toward the overhead cost of dispensing them to patients. (On March 1, ABCBS returned to a pass-through method but adopted a payment schedule that is less generous to pharmacists than in past years.)

While pharmacists prefer the transparency of pass-through contracts, spread contracts are appealing to the insurance carrier because they guarantee lower costs and incentivize PBMs to control costs. They are also attractive to the PBMs, which have a remarkable degree of control over how much of the insurance payment goes to the pharmacist and how much it keeps for itself.

The two other insurance carriers that sell plans in the Arkansas Health Insurance Marketplace, where individual buyers and low-income residents eligible for Arkansas Works benefits choose their plans, were already using a spread. And those competitors were reimbursing pharmacists an average of $2 less than wholesale cost per generic prescription, according to ABCBS spokeswoman Max Greenwood.

“Our members were subsidizing the marketplace,” Greenwood said.

QualChoice of Little Rock has a spread contract with its PBM, OptumRx, which is owned by the same company as health insurance carrier UnitedHealthcare. Ambetter of Arkansas, a subsidiary of Centene Corp. of St. Louis, uses CVS Caremark, the same PBM as Blue Cross.

The monthly premium a carrier can charge the state for Arkansas Works coverage is strictly limited, and the state’s unique approach to Obama-era Medicaid expansion accounts for about 80 percent of policies sold through the Arkansas Health Insurance Marketplace. Paying more for drug benefits put ABCBS at a competitive disadvantage with QualChoice and Ambetter, Greenwood said, so ABCBS elected to adopt the same CVS Caremark spread contract that AmBetter was already using.

“Carriers have been encouraged to use any levers available to reduce the cost to the state,” Greenwood said.

Switching to the spread contract with CVS Caremark was just one of many cost-containment “levers” ABCBS has used to manage the cost of AHIM plans, she said, and the immediate blowback from pharmacists was unexpected because they had not objected to the same reimbursements from AmBetter.

“We did not think it would be any more than us moving in line with the marketplace,” Greenwood said, although she acknowledged that the change should have been communicated better on the front end.

Timing Is Everything
Legislation to make Arkansas the first state to regulate pharmacy benefit managers still has to pass the House and Senate and get the governor’s signature. But the time may be right.

Despite conservative political disdain toward regulation in general, the issue of spiraling drug costs has caught the attention of Republican politicians in Washington as well as Little Rock. Even President Donald Trump has repeatedly promised to bring down the cost of prescription medicines.

Hearings by the U.S. House Oversight & Government Reform Committee explored dramatic price increases even for decades-old medicines like the ubiquitous EpiPen and Daraprim, a 65-year-old drug whose price spiked by 5,000 percent after it was bought by a company led by smirking “Pharma Bro” Martin Shkreli.

When Heather Bresch, CEO of Mylan Inc., testified in 2016, she showed a breakdown of the cost of EpiPen that started with a “wholesale acquisition cost” of $608, of which $334 went to the next line item: “rebates and allowances.” She didn’t reveal how that $334 was divided up.

PBMs control the list of preferred medicines covered by the policies written by their insurance carrier clients, and they routinely demand rebates from manufacturers in exchange for being listed on these formularies. Rebates are paid only after a prescription is filled, and some or all of the rebates may be paid to the insurer.

Max Greenwood, spokeswoman for Arkansas Blue Cross & Blue Shield, would not reveal specifics but said ABCBS shares in rebates negotiated by its PBM, CVS Caremark, and uses that revenue to lower premiums.

Rebates also may flow to pharmacists after a medication is sold, offsetting some of the original invoice price.

The timing is also right for industry consolidation. Amazon, Berkshire Hathaway and JPMorgan Chase announced in January the  creation of a company to streamline the cost of health care for their employees. Insurance giant Cigna announced last week that it would buy PBM Express Scripts, while another PBM, CVS Caremark, is planning to buy Aetna.

The Firestorm
Blue Cross’ new methodology took effect for AHIM policies on Jan. 1, and pharmacists felt it even before it was extended to businesses that hired ABCBS to administer their self-insured plans on Jan. 24.

Scott Pace, CEO of the Arkansas Pharmacists Association, said his members were aware that QualChoice and AmBetter were already using spread contracts with their PBMs, but they were a relatively small portion of the market so pharmacists could absorb the occasional losses.

Using the real-time online databases that pharmacists consider to be the most valuable services provided by PBMs, pharmacists can immediately compare the reimbursement they can expect with their invoice cost of the drug. Suddenly about 90 percent of AHIM prescriptions, for both ABCBS and AmBetter, were being reimbursed under CVS Caremark’s spread methodology, and the number of below-invoice reimbursements swelled.

This red ink on an individual drug may be reduced or offset by rebates later. And the 355,000 Arkansans insured through AHIM plans — about 286,000 by Arkansas Works and about 69,000 more who buy individual policies — represent less than 12 percent of the state’s population. What’s more, the below-cost reimbursements only applied to certain generics, and generics represent only about 30 percent of pharmaceutical revenue (but 90 percent of individual prescriptions filled).

Still, the loss on a single prescription could range from a few cents to hundreds of dollars, according to the Arkansas Pharmacists Association. And the sudden increase in the number of below-cost prescriptions was an ominous development, especially for pharmacies in poor and rural areas of the state, which serve a much higher concentration of Arkansas Works beneficiaries than the statewide average.

Rep. Gray said a pharmacy in Izard County reported that about 15 percent of its prescriptions were being reimbursed at a loss; a pharmacy in Sharp County reported 25-30 percent, she said.

Evidence that CVS Caremark’s spread was sometimes more than was being remitted to the retailer sent independent pharmacists into orbit. On the last day of January, the legislative subcommittee that oversees the Arkansas Health Insurance Marketplace granted an audience to an angry, standing-room-only crowd in lab coats.

Not Big Enough MAC
Act 900 of 2015 allowed Arkansas pharmacists, for the first time, to refuse to fill a prescription at a loss, or to fill it and appeal the below-cost reimbursement. These appeals are handled by another category of middleman: pharmacy services administrative organizations that set up networks of pharmacies and negotiate group contracts with insurance companies.

PSAOs are often owned by or affiliated with drug wholesalers, so choosing a PSAO may effectively determine which wholesalers the pharmacist does business with as well.

Last fall, according to Rep. Michelle Gray, the bill’s sponsor, virtually all appeals started being denied because the PBMs said the pharmacists had been paid the “maximum allowable cost” for the drugs, in line with typical language in contracts that PSAO negotiate with insurers.

“They just keep being told these are the MAC rates,” Gray said. “And, of course, the MAC rate is set by the PBMs.” And the PBM’s decision is final.

The PBMs are required to inform the pharmacist of a wholesaler that is selling the drug at or below the price that the PBM has determined is the maximum allowable, but getting that price might require the pharmacy to join — and pay — another PSAO.

The Complaints
Pace, CEO of the pharmacists association, said Arkansas Blue Cross & Blue Shield’s contract permitted CVS Caremark to manipulate the spread in two ways:

  • By keeping so much of the total insurance payment that pharmacists ultimately receive less than the cost of the medicine; and
  • By paying CVS retail pharmacies, owned by the same company, more than other pharmacies are paid for the same prescription.

These are not new complaints, and lawmakers had dealt with both in the past. Act 769 of 2009 essentially outlawed the use of spread contracts for pharmacy benefits under state-funded plans. Act 900 of 2015, a bill Rep. Gray championed at the request of one of the four pharmacies in Izard County, forbids PBMs from paying their own pharmacies more than they pay independents.

“I knew they’d find ways around it and ways to shoot holes in it,” she said.

Pace claimed in a press conference on Feb. 18 that CVS Caremark paid a CVS pharmacy $3,940 for an oral chemotherapy drug while reimbursing an independent pharmacist $909 for the same medicine. Similarly, he said, an explanation of benefits form that a patient shared with the APA showed that CVS received $513 for an antipsychotic medicine while CVS Caremark paid an independent pharmacy $28 for the same.

How the PBMs justify the different reimbursements in light of the 2015 law is not clear; Gray said she thought they may have unilaterally created reimbursement tiers in which their own pharmacies are always eligible for the biggest reimbursements. But even a more generous “generic effective rate” — a guaranteed average reimbursement on the average wholesale price of generics — would not explain the vastly larger payments to CVS that Pace alleged.

Attorney General Leslie Rutledge’s office is investigating, Gray said.

Pace said insurers have argued that the 2009 law addressing spread contracts by state-funded plans did not contemplate Arkansas Works. Known as the “private option” when it launched in 2014, Arkansas Works has been paid for almost entirely with federal money so far, but it has to be approved each year by a supermajority of the Legislature, as it was again last week.

Pace also speculated that insurers might use the spread contracts to hide the administrative costs of PBMs. Obamacare — the Affordable Care Act of 2010 — requires insurers to spend at least 80 percent of premium dollars on patient care (85 percent in group plans), and claiming the entire amount paid to a PBM as pharmacy costs would make it easier to meet that requirement.

Greenwood, however, said Arkansas Blue Cross & Blue Shield counts only the portion actually paid to the pharmacist toward its “minimum loss ratio.”

Pharmacists also complain that PBMs have another unfair advantage: They steer patients with prescriptions for profitable maintenance medications to their own mail-order pharmacies.

And yet another complaint: That CVS has been aggressively prospecting for independent pharmacies to buy even as its PBM affiliate has been systematically making them less profitable. One prospecting letter made public by the APA identified “declining reimbursements” among the reasons a pharmacy owner should consider selling to CVS.

The Response
After the Jan. 31 hearing, Gray and Sen. Ron Caldwell, the Wynne Republican who co-chairs the AHIM Oversight Subcommittee, began crafting legislation authorizing the Arkansas Insurance Department to license and regulate pharmacy benefit managers.

At first they hoped to add it to the agenda of the Legislature’s fiscal session that ended last week, but Gov. Asa Hutchinson instead promised to call a special session.

By Thursday, the Arkansas Pharmacy Benefits Manager Licensure Act had 29 Senate co-sponsors and 75 in the House; only 18 Senate votes and 51 House votes are needed for passage.

Gray said the bill will bypass the question of whether Arkansas Works is state-funded and therefore subject to Act 769. Instead, a draft circulated last week requires licensure of any PBM that services any insurance plans that are not self-funded by employers, and regulations to be promulgated by the Arkansas Insurance Department will address the use of spread contracts by licensed PBMs.

Licensing of PBMs will commence on Sept. 1 if the bill is passed as drafted, and licensed pharmacists will face new regulations concerning “market conduct practices” and reports that must be filed with the department.

The bill specifically prohibits paying a pharmacy affiliated with the PBM more than other pharmacists.

“One piece that I love,” Gray said, requires PBMs to maintain an adequate network of pharmacies “within a reasonable distance from a patient’s residence.” And a mail-order pharmacy doesn’t count.

“It essentially says that they have to pay reasonably in order to keep an adequate network to service the state of Arkansas,” Gray said.

Pharmacy Business Glossary

A list of prescription drugs that are given preferential treatment under a particular insurance plan. Like an “in-network” provider, drugs on the formulary will be cheaper for the patient. Choosing the formulary is one of the services that PBMs provide to insurance carriers, and the selection of a brand-name drug for the formulary may be influenced by rebates that the manufacturer pays. Some or all of the rebates may be passed on to the insurance carrier, depending on its contract with the PBM.

Pharmacy benefit manager. Contracted by health insurance carriers to manage the prescription drug portion of policies. PBMs negotiate with drug manufacturers and wholesalers about which drugs will be included in an insurer’s “formulary” of covered medicines and maintain real-time online networks that pharmacists use to determine a customer’s insurance coverage. PBMs are often owned by companies that also operate retail and/or mail-order pharmacies.

Buying Group
Networks that independent pharmacies join in order to get bulk discounts from drug wholesalers, who are themselves buying in bulk from manufacturers. Manufacturer rebates can flow through these buying groups to the retail pharmacies, but only after a drug is sold to a patient.

Pharmacy services administrative organization. A subscription service that organizes pharmacies into networks that then negotiate group provider contracts with insurance companies (or the PBMs to which they outsource the pharmacy benefits portion of their policies). PSAOs are often owned by drug wholesalers.

As opposed to a pass-through, this is a contract in which insurance carriers pay PBMs a set price for a prescription drug and the PBM determines how much of that to pay the dispensing pharmacy and how much to keep. The difference is also known as the spread.

A contract in which insurance carriers pay PBMs the average wholesale price of the prescription drug, which is passed on to the dispensing pharmacy, plus an administrative fee, which belongs to the PBM. Also known as a transparent contract.

The maximum allowable cost that a pharmacy benefit manager will pay a pharmacy for a specific drug. PBMs set the MAC and may even set different maximum allowable costs for the same drug for different insurance company clients. If challenged by a pharmacist, the PBM is supposed to prove that the drug is actually available for pharmacies to purchase at the MAC.

The acronym stands for average wholesale price of a prescription drug, but that is a misnomer. In practice, it is a list price against which insurance companies and pharmacies negotiate discounts.

The generic effective rate is the average discount off the AWP for all generic drugs.



Please read our comments policy before commenting.