Legislative Approaches to Curbing Drug Costs Targeted at PBMs: 2017-2021

June 14, 2021/by Sarah Lanford and Jennifer Reck

As states seek solutions to rising prescription drug costs, lawmakers have frequently
targeted pharmacy benefit managers (PBMs) as one of the entities along the drug supply chain contributing to higher costs. Since 2017, states have enacted more than 100 laws to address ways PBMs contribute to higher drug costs. These laws achieve a range of outcomes, including the following:

Ensuring consumers are not paying more than necessary at the point of sale. Research indicates that 23 percent of the time, consumers’ copayments are more than the cost of their prescription drugs, so opting not to use their health insurance to purchase some prescription drugs saves them money. State laws have helped ensure that pharmacists inform consumers that they can opt out of insurance and save money.

Increasing transparency to understand the extent to which PBMs retain rebates they negotiate with manufacturers as profit versus passing them through to health plans to lower costs. The secrecy surrounding discounts and rebates can otherwise make this important information impossible to determine.

Preventing excessive drug spend caused by PBM “spread pricing.” Recent reports from a handful of states showed that PBMs serving Medicaid managed care organizations (MCOs) make significant revenue from spread pricing – the practice whereby a PBM pays a pharmacy a lower amount for a prescription drug and then claims a higher price for reimbursement from the health plan it serves.

Guaranteeing pharmacies are adequately reimbursed. Some PBMs reimburse pharmacies for drugs at a rate lower than a pharmacy’s acquisition cost but will claim a higher reimbursement from health plans. This practice is particularly harmful to independent pharmacies that are not affiliated with PBMs. State laws have put various provisions in place to protect pharmacies from losing money to supply prescriptions.

There have been several overlapping waves of PBM legislation in the last five years: the first wave predominantly addressed licensure, transparency, and ways to protect consumer savings at the point of sale. The second wave focused on ensuring adequate reimbursement for pharmacies and cost-effective contracting with PBMs. Indicators of a third wave of legislation focused on giving pharmacies more discretion when dispensing prescriptions and extending existing regulations to PBMs that contract with self-funded plans have emerged following the Supreme Court’s December 2020 decision in Rutledge v. Pharmaceutical Care Management Association (PCMA).  

The two bar graphs show the total number of enacted PBM laws by provision and year. Depending on their goal, states may consider legislation with a single provision or any combination of provisions. However, it is worth noting that while this blog focuses on PBM legislation, PBMs are only one of several points along the supply chain in need of attention to rein in drug costs. Other measures outside the scope of this blog that look upstream at manufacturer list prices are also necessary for a more comprehensive solution. 

First Wave: Increasing Oversight of PBMs and Protecting Consumers at the Point of Sale 

The three largest PBMs control more than 70 percent of the market, and their negotiations with manufacturers for rebates are conducted in secret and are often not disclosed – even to the health plans that contract for their services. As PBMs grew in market dominance over the past decade, states began to take steps to regulate PBMs via licensure and transparency requirements. States also enacted some initial consumer protections to ban gag clauses. Key provisions in the first wave of PBM legislation included: 

Licensure/Registration: Licensure allows states to know how many and which entities are doing business as PBMs and gives a regulatory agency the ability to monitor and regulate their business practices. For example, Maine law enacted in 2019 requires PBMs to obtain a license before operating in the state. The law leverages the regulatory authority of its insurance department to enforce oversight by tasking insurers with the responsibility of monitoring PBMs. This is a common first step for states regulating PBMs – since 2017, states have passed 26 laws requiring PBMs to either obtain a license from or register with a state agency. 

Banning Gag Clauses: Prohibiting gag clauses in contracts between pharmacies and PBMs allows pharmacists to notify a consumer when the cash price of a drug is cheaper than they would pay with insurance, or if there is a cheaper therapeutic alternative available. A 2018 law in California not only bans gag clauses, it also requires that if a consumer pays cash price for a drug, pharmacies must submit the claim to the consumer’s health plan the same way it would if they had used insurance, so that the consumer’s purchase counts toward annual out-of-pocket maximums. Congress enacted provisions to prohibit gag clauses in 2018, following 33 states that had already done so. 

Limiting Patient Cost Sharing: These laws ensure that the consumer is paying the lowest possible amount for a drug at the point of sale. These provisions, like the ones in a 2017 Connecticut law, typically include language that ensures the consumer will pay the lowest of the applicable copayment, the retail price, or the allowable claim amount for the drug. Since 2017, 26 states have enacted 31 laws to limit patient cost sharing at the pharmacy counter. 

Transparency: Lawmakers have looked to increase transparency around rebates so that public and private plans can determine how much PBMs are retaining versus passing through rebates negotiated from manufacturers. A Washington law requires PBMs to submit an annual report to the Health Care Authority detailing all discounts and rebates received from manufacturers, all discounts and rebates retained, the actual and total reimbursement amounts for each drug, and the negotiated price health plans pay the PBM for each drug. Nine states are currently collecting aggregated rebate information from PBMs. 

Second Wave: Ensuring Adequate Pharmacy Reimbursement and Improving PBM Contracts 

The growing market power of the three largest PBMs, each of which are vertically integrated with major chain pharmacies and health plans, enables PBMs to adopt reimbursement practices that often have a disproportionately negative impact on independent pharmacies that are not affiliated with a major PBM. In certain cases, PBMs may reimburse pharmacies less for a drug than a pharmacy’s cost to acquire the drug. Similarly, PBMs may use a reimbursement model known as “spread pricing,” whereby a PBM reimburses a pharmacy in an amount less than it charges a health plan and retains the difference. In the second wave of PBM legislation, states pushed back against these practices, with laws including the following provisions: 

Prohibiting Retroactive Denials: Laws to prohibit retroactive denials – the reversal of a pharmacy’s previously paid claim – help ensure that both the consumer and the pharmacy are protected from these practices. For example, a South Dakota law allows a PBM to retroactively adjust a claim only if there is a technical billing error. 

Maximum Allowable Cost (MAC) Requirements: MAC lists document the maximum amount a plan will pay for generics and brand-name drugs with generic alternatives. They are intended to provide dollar thresholds, so consumers pay a similar amount for a drug regardless of where they fill their prescriptions. However, the methodology used to determine which drugs are included is often unclear. Additionally, MAC lists may not be updated in a timely manner, which could result in a pharmacy losing money each time a drug is dispensed at a lower cost if the PBM has increased the MAC. Most PBMs have multiple MAC lists: one to pay pharmacies for dispensing a drug, and another to bill the carrier, allowing the PBM to retain the spread. Laws targeting MAC list transparency, the timeline in which PBMs must update their lists, and appeals processes have been common in recent years. For example, a law in Minnesota requires PBMs to share the sources used to determine MAC lists at the beginning of a contract. It also requires PBMs to update MAC lists every seven business days and to make an appeals process available to pharmacies that would like to challenge a MAC reimbursement. Maine’s PBM law eliminates spread by requiring the use of a single MAC list that is transparent to all parties. 

Stopping Spread Pricing: States have also looked to increase transparency in their role as drug purchases for state health care plans. A 2018 audit of Ohio’s Medicaid Managed Care Pharmacy Services revealed that PBMs retained more than $200 million in spread over the course of a year. A similar report in Kentucky found that PBMs retained $123 million in spread in 2017. Some states have enacted laws to limit PBMs’ ability to use spread pricing in their contracts with health plans. For example, a law in Louisiana prohibits all PBMs from using spread pricing unless a PBM provides written notice of the practice to a plan. Kentucky, New York, Pennsylvania, and Virginia have also leveraged their roles as purchasers to prohibit spread pricing in contracts between Medicaid MCOs and PBMs. 

Changing the Way States Contract with PBMs: Following reports that revealed how much spread PBMs retain, many states have sought to strengthen their contracts with PBMs. Some states, like New York and Ohio, carved the pharmacy benefit out of Medicaid managed care organizations and into the fee-for-service program, where drug reimbursement is based on the ingredient cost of a drug plus a professional dispensing fee. Others, like Maryland and New Hampshire, have opted to use reverse auctions to procure pharmacy benefit services to foster greater competition across PBM bidders to get better deals. Though this blog examines state legislative activity in the PBM space, states have also used administrative action to carve out pharmacy benefits from Medicaid or implement a reverse auction. 

Third Wave: Emerging State Action Post-Rutledge vs. PCMA 

Following inconsistent rulings in various circuit courts regarding the constitutionality of state PBM lawsthe Supreme Court took up Rutledge vs. PCMA and in December of 2020 issued a landmark ruling clarifying that the Arkansas PBM law at issue is “a form of cost regulation that does not dictate plan choices. The ruling stipulates that the Arkansas law is not preempted by the Employee Retirement and Income Security Act of 1974 (ERISA), the federal law regulating self-funded plans which cover more than 60 percent of individuals with employer-sponsored coverage. Because the ruling was issued in late 2020 and COVID-19 response dominated most states’ legislative sessions, the full impact of this ruling will likely not be felt until the 2022 legislative session. However, several pieces of legislation introduced in 2021 reflect its early impact:  

Extending Existing PBM Regulations to Self-Funded Plans: After the Supreme Court’s ruling in Rutledge made clear thaERISA does not preempt state regulation of PBMs, Arkansas and Wisconsin passed laws explicitly applying existing state PBM regulations to self-funded plans.  

Decline to Dispense and Reimbursement Floors: The Arkansas law in question in the Rutledge case allowed pharmacies to decline to dispense a prescription if, as a result of MAC pricing, it would be reimbursed below acquisition cost. Following that decision, five states (DE, IL, NE, ME, and NY) introduced legislation with a decline to dispense provision during the 2021 legislative session. Other states have introduced legislation to establish a minimum amount that PBMs must pay pharmacies. For example, a law enacted this year in West Virginia requires PBMs to reimburse a pharmacy in an amount that is at least the National Average Drug Acquisition Cost plus a professional dispensing fee. 

For additional information on each of these provisions, explore the charts above, as well as NASHP’s State Drug Pricing Laws trackerStates can continue to lead the effort to lower drug prices by focusing on not just PBMs, but all entities in the drug supply chain, including manufacturers and wholesaler/distributors. Addressing PBM practices is necessary, and the provisions above highlight the  many approaches states have taken to regulate PBMs to date, however states may also wish to consider strategies that go after list prices themselves as opposed to limiting their action to PBMs only. 

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