The National Academy for State Health Policy (NASHP) has released model legislation to help states shed light on the opaque business practices of pharmacy benefit managers (PBMs). States can use the model bill to require the licensing of PBMs, ban gag clauses that prevent pharmacists from sharing lower-price drug options with consumers, and require more transparency into who profits from rebates.
This year alone, more than 80 PBM bills have been introduced in state legislatures across the country and 26 became law. NASHP developed its new PBM transparency model act in consultation with its Pharmacy Cost Work Group following a review of these recently-enacted PBM laws.
States have implemented PBM legislation in response to its current business model, which has been criticized as anti-consumer and anti-competitive.
- Formulary design that increases PBM revenue at the expense of consumers. A formulary is an insurance plan’s list of covered prescription drugs that usually includes multiple tiers with varying copays. This tier pricing, designed by PBMs, produces financial incentives to drive consumers to purchase “preferred” drugs.
- Some PBMs penalize consumers by charging them more for shopping at pharmacies that they do not have an ownership stake in.
- Some PBM contracts prevent pharmacists from providing lower-priced drug options to consumers.
- Some PBMs have reimbursement practices that are not fair to pharmacists; and
- Some PBMs may not always serve the financial interest of their health plan clients.
The PBM business model appears to have a very basic conflict of interest – the rebates that drug manufacturers pay to PBMs are based on a percentage of the drugs purchased by the PBM. The result? Higher drug prices translate into higher rebates paid to PBMs, and only a portion of those rebates are shared with the PBM’s health plan clients or consumers. While higher drug prices generate more net revenue to PBMs, higher drug prices also mean that the health plan, pharmacy, and consumer end up paying more for prescription drugs. And, those rebate negotiations all take place under the cloak of confidentiality. This lack of transparency appears to benefit drug manufacturers, allowing them to negotiate prices without any public disclosure of discounts.
In the complex structure of prescription drug markets, “payers” are not always “purchasers.” Purchasers are pharmacies, hospitals, clinics, and nursing facilities that provide drugs to patients. Payers (insurers and their PBMs) reimburse purchasers for the drugs they dispense to patients. Drug manufacturers don’t give their deepest discounts to purchasers because these discounts are not typically passed from the purchaser (the hospital, pharmacy, etc.) to the ultimate payer (the insurer or its PBM).
Rebates allow manufacturers to focus their price concessions on the payers who can help or harm a manufacturer’s drug sales. Manufacturer price concessions don’t necessarily show up at the pharmacy counter as discounts that benefit consumers. As drug costs continue to rise, consumers pay more and more for their drugs because what consumers pay is based on the cost of the drug to the pharmacy.
Transparency measures in NASHP’s model PBM bill seek to provide answers to some key questions, including:
- Who really benefits from rebates and how much do they get?
- How are rebates and price concessions used?
- Do rebates reduce insurance premiums or do they boost PBM company stock prices?
It is hard to assess the impact of a PBM’s business model on health care costs, but there is growing concern that PBMs do not really add value to health care systems and may instead be contributing to rising health care costs. This is why states, who are major purchasers of drugs through their Medicaid programs, want more transparency into what PBMs do and how they do it.
While investigating the PBM’s business model is necessary, this legislation is just one strategy for states to combat ever-rising drug prices. Drug manufacturers’ price increases are not solved by policies aimed only at PBMs or insurers. The PBM business model is simply one component of the drug supply chain’s market dysfunction – but it is not the most significant. Explore NASHP’s Center for State Rx Drug Pricing for other model legislation that can help address drug prices, including drug affordability review (rate setting), manufacturer drug price transparency, and wholesale drug importation here.