pharmacy benefit manager – The National Academy for State Health Policy

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State Legislative Action to Lower Pharmaceutical Costs

How Waste-Free Formularies Create Savings on Prescription Drugs

June 22, 2020/in Policy Blogs, Featured News Home Administrative Actions, Consumer Affordability, Health System Costs, Prescription Drug Pricing /by Jennifer Reck

Removing wasteful drugs from formularies and replacing them with drugs that offer the same benefits at a lower cost, helps state employee health plans and other public purchasers reduce spending without sacrificing value – a critical strategy for savings as states face tremendous budget pressures.

A formulary is a list of prescription drugs covered by a health plan. Common categories of wasteful drugs found on formularies include:

High-priced, brand-name drugs for which there is a generic available (Nexium sells for $270 for a month’s supply, versus its generic, esomeprazole, which costs $30 per month);
Combination drugs for which the combined product costs substantially more than the two components would if purchased separately (Duexis, a combination of ibuprofen and famotidine, costs $1,500 a month versus the same drugs, Motrin and Pepcid, purchased over the counter for $20 a month);
Prescription drugs that have over-the-counter options available; and
“Me-too” drugs, which are expensive “new” drugs that offer minor “tweaks” to a generic (e.g., a different strength or extended release) but have no added clinical value, compared to the less expensive original.

Which drugs are wasteful?

To check a drug formulary for potential savings, check to see if any of these wasteful drugs identified in the Johns Hopkins Bloomberg School of Public Health report, Removing Waste from Drug Formularies, are on its list.

If they cost so much more without any added value, why are these wasteful drugs on formularies to begin with? Pharmacy benefit managers (PBMs) use placement on a formulary as leverage when negotiating rebates with drug manufacturers. When PBMs are paid based on a percentage of rebates, higher-cost drugs yield higher rebates, creating an incentive for PBMs to favor wasteful drugs on formularies instead of lower net price, therapeutically equivalent options.

Health plans can change their PBM contract terms so a PBM is reimbursed through an administrative-fee-only model and can require 100 percent pass-through of rebates to realign PBM incentives with the health plan’s interests. The National Academy for State Health Policy (NASHP) has created model PBM contract language for states and other public purchasers working to rein in drug costs to include in their contracts with PBMs.

Several public purchasers have already put waste-free formularies to the test and experienced savings. For example, Self-Insured Schools of California (SISC), a community of public schools that represents 260,000 members, stopped covering more than 600 drugs that did not provide value. SISC found health care providers were comfortable changing prescriptions to accommodate the changing drug formulary because the alternative drugs were just as safe and effective as the more costly versions that were being excluded from the formulary. One example was removing the 1,000-mg dose version of metformin, which cost $352 for a 30-day supply from the formulary but keeping the more affordable lower-dose option of metformin HCL ER 500-mg pills, which cost $12.68 for 30 days. The same clinical benefits are available from the far less costly 500-mg pills, if two are taken, as are from the far more expensive 1000-mg formulation.

SISC instituted its formulary changes, which focused on covering clinically effective drugs with the lowest net costs, in combination with other strategies to more actively manage its pharmacy benefits. SISC’s approach included working with a pharmacy consultant, with no conflicts of interests with PBMs, to secure a transparent, pass-through contract with a new PBM. SISC’s results show a marked decline in per member per months drug costs from $87.31 in 2013 to $78.65 in 2019 – a time of rapidly rising drug costs.

The New Jersey State Health Benefits Program and the School Employees’ Health Benefits Program (SEHP/SEHBP), representing 800,000 lives, have also been active in removing waste from their formularies. Their initial strategy for 2019 focused on excluding high-cost brands and generics when a therapeutically equivalent, lower-cost generic was available, which generated approximate savings of $12.8 million per year. Their focus for 2020 is removing prescription drugs for which over-the-counter equivalents are available – a category of spending projected to save approximately $12.6 million a year.

Effective communication with plan enrollees is an essential part of the New Jersey SEHP/SEHBP approach. For example, state plan officials work with union leaders to educate their members about why a drug may be removed from the formulary while also providing a list of alternative medications offering the same clinical benefits. Another key message is the importance of eliminating spending on wasteful, low-value drugs in order to free up resources for coverage of new, high-priced, life-saving medications that are coming to the market.

Researchers at the Johns Hopkins Bloomberg School of Public Health have identified a list of wasteful drugs and less-costly therapeutic alternatives in the report, Removing Waste from Drug Formularies, and have created a worksheet that health plans can use to determine their potential savings when removing specific wasteful drugs. Its analysis of 15 self-insured plans and approximately 2.5 million drug claims found potential savings of $63.3 million if the plans were to remove wasteful drugs from their formularies.

For more information, including special access to a June 2020 webinar recording on waste-free formularies limited to state officials only, please contact Jennifer Reck.

Model Pharmacy Benefit Manager Contract Terms Help States Achieve Prescription Drug Savings

January 27, 2020/in Policy Blogs, Featured News Home Administrative Actions, Cost, Payment, and Delivery Reform, Health System Costs, Model Legislation, Prescription Drug Pricing, State Employee Health Plans, State Rx Legislative Action /by Jennifer Reck

As major purchasers of prescription drugs for their public employee drug plans and other entities, states can leverage their buying power by establishing favorable terms in their contracts with pharmacy benefit managers (PBMs).

The National Academy for State Health Policy’s (NASHP) new resource, Model PBM Contract Terms, offers specific language that states can use in their requests for proposals and contracts in order to achieve cost-saving for states, including:

Administrative-fee only compensation;
Guarantee 100 percent pass-through of rebates and revenue to states;
Cost trend and pricing guarantees;
Price transparency; and
Member cost-sharing protections.

The model PBM contract was developed by NASHP legal consultant Erin Fuse Brown, MPH, JD, in consultation with members of NASHP’s Pharmacy Cost Work Group and others who have experience implementing – and achieving saving from – their state-of-the-art contracts with PBMs.

Establishing favorable PBM contract terms can be a state’s first step toward leveraging additional savings through a second strategy – implementing a state purchasing pool for prescription drugs.

Once a state has established a favorable contract with a PBM for its public employee drug benefit plan, it can allow others – such as individuals and small employers – to join in a purchasing pool. This can be a win-win situation, where the increased negotiating power of the state’s expanded purchasing pool results in lower prices for all pool participants.

Keeping the State Rx Purchasing Pool administratively separate from the state employee drug plan, – though purchasing pool members and the state plan would use the same PBM – effectively avoids multiple legal and regulatory difficulties. Uninsured individuals could be given drug discount cards that allow them to enjoy the discounted drug prices available to purchasing pool members. Concerns about adverse selection, which would be relevant to medical benefits, are not a factor for this model because prescription drug plans do not pool risk to secure savings. Instead, the more covered lives a purchasing pool has, the greater the savings due to the increased purchasing power of the plan.

Speakers from Wisconsin and Connecticut will share their experiences with PBM contracting and leveraging state employee drug plan purchasing power during a NASHP webinar, Model PBM Contract Language and State-Buy-In Model, for states officials only, at noon (ET), Thursday, Feb. 6, 2020. The webinar is for state officials only. Register for the webinar here.

Read NASHP’s new Model Pharmacy Benefit Manager Contract Terms by Erin Fuse Brown, MPH, JD.

Join the webinar, Model PBM Contract Language and State Buy-In Model, for states officials only, at noon (ET), Thursday, Feb. 6, 2020.

Read NASHP’s Proposal for a State Purchasing Pool for Prescription Drugs.

What We’ve Learned from Early Adopters of Drug Price Transparency, and What We’ll Learn from the Next Wave

December 2, 2019/in Policy California, Maine, Nevada, Oregon, Vermont Blogs, Featured News Home Administrative Actions, Cost, Payment, and Delivery Reform, Health System Costs, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by Jennifer Reck

As prescription drug price increases greatly outpace inflation and new specialty drugs priced in the millions of dollars enter the market, several states have led the way as early adopters of drug price transparency legislation and are taking the first steps to curb costs with the help of transparent drug pricing information.

Read NASHP’s new report, What Are We Learning from State Reporting on Drug Pricing?, to discover what early reports from California, Maine, Nevada, Oregon, and Vermont’s drug price transparency laws reveal.

A new National Academy for State Health Policy (NASHP) report, What Are We Learning from State Reporting on Drug Pricing?, offers a cross-state analysis of drug price transparency findings through August 2019, based on reports from California, Maine, Nevada, Oregon, and Vermont. States are:

Learning which drugs cost the most – and are the best targets for focused strategies;
Tracking the percentage of health premiums attributed to drug spending – and identifying opportunities to leverage reporting on drug spending, such as implementing spending caps; and
Beginning to capture information on net price – and profit – along the supply chain to inform fair and balanced policy approaches to ensure affordability.

Honing in on the Costliest Drugs to Take Action Where It Matters Most

States with transparency laws are identifying the drugs creating the greatest affordability challenges for both payers and consumers. State transparency laws require gathering data from a variety of sources, including through required reporting by public and private health plans (California, Oregon, Vermont), or through all-payer claims databases (Maine), or proprietary databases (Nevada), in order to report lists of:

The costliest drugs in the state based on price and utilization;
The drugs with the highest year-over-year cost growth; and
The most commonly prescribed drugs.

A cross-state analysis of these reports identified 30 drugs that appear in common across drugs reported in three of five states. Many of the drugs reported are used for the treatment of diabetes, including Humalog, Lantus Solar, Novolog, Januvia, Metformin, and Victoza. Multiple drugs for the treatment of arthritis were also identified across states: Stelara, Cosentyx, Enbrel, and Humira.

Identifying the classes of drugs – and specific drugs within those categories – that are creating the greatest affordability challenges can help states hone in on strategies to address drug costs. For example, states working to leverage their purchasing power across agencies are seeking this type of information to guide potential approaches such as bulk purchasing or establishing single preferred drug list. State officials from Nevada have credited their transparency law, initially limited to diabetes medications and since expanded to include asthma medications, with bringing payers to the table to leverage their purchasing power through Nevada’s Silver State Scripts program.

Illuminating the Link between Rising Drug and Insurance Premium Costs

Several states (California, Vermont, and Oregon) require commercial health plans subject to state regulation to submit information on the impact of prescription drug spending on premiums rates. Results shared publicly to date include a range of prescription drug spending accounting for, on average, 13 percent in California, 15.67 percent in Vermont, and up to 18 percent of premiums in Oregon. Tracking prescription drug spending, as part of rate review or other initiatives, represents an important leverage point for states to take action on drug spending. Doing so can enable, for example, monitoring and enforcement of prescription drug spending caps. Several states, including New York, Massachusetts, and Maine, have established caps for drug spending – New York and Massachusetts have the authority to negotiate supplemental rebates to meet their caps while Maine tasks its Drug Affordability Review Board with identifying strategies to meet its voluntary cap on drug spending for public plans.

Uncovering the Factors Driving Up Prices along the Drug Supply Chain

One of the questions at the heart of drug price transparency laws is: What factors are driving high price increases and high launch prices? The only way for a state to determine the actual causes of high drug prices – and the relative profit accrued by players in the supply chain – is by requiring reporting across the entire supply chain, including manufacturers, pharmacy benefit managers (PBMs), wholesalers, and health plans. In order to be meaningful, this information must shed light on the net cost of drugs – an otherwise closely guarded secret behind a black box of secret rebate negotiations between manufacturers and PBMs.

Some of the early adopter states, while laying the foundation for future transparency efforts, enacted laws with limitations in terms of their ability to shine a light on net prices or to uncover the interplay between players in the drug supply chain. California, for example, limits manufacturer reporting to information that is already in the public domain. While Nevada did require reporting of some information considered to be trade secrets, and required reporting by both manufacturers and PBMs, the lack of alignment in reporting requirements (e.g., state versus national level) makes it difficult to “follow the money” across the supply chain.

A new wave of tougher state transparency measures, including a 2019 Maine law, An Act To Further Expand Drug Price Transparency, will have the ability to shine a light on net drug prices – and profits – in order to guide fair and effective state policy solutions. The Maine law, based on NASHP’s model legislation, requires reporting by entities across the entire drug supply chain, including manufacturers, PBMs, wholesalers, and health plans.

Enforcement

In addition to establishing reporting requirements with the ability to produce meaningful, actionable data, states must also have the ability to enforce reporting their new requirements. Early efforts at collecting data from manufacturers have yielded imperfect compliance at best. California received data justifying price increase from only one-third of manufacturers required to report, and Nevada recently levied $17.4 million in fines on manufacturers for failure to report in that state. While non-reporters in Nevada face fines up to $5,000 a day, Maine’s new law increases that penalty to up to $30,000 a day.

Taking Action on What Transparency Reveals

As actionable information on net drug prices and profits across the supply chain becomes available, states will use the data to make informed, impactful policy decisions. Though state policymakers are challenged by a number of limits on their authority to regulate drug prices, and meaningful action at the federal level currently remains pending, states are advancing a number of policy options to address drug prices building on what transparency laws are revealing. One model is a state Drug Affordability Review Board (DARB) with the authority to review data on drugs deemed unaffordable, and if warranted, set an upper payment limit for that drug within the state. Transparency data is essential to DARBs and related efforts. Such approaches do not seek to prohibit profit along the supply chain, but to ensure that those profits are reasonably balanced with the need to preserve access to essential drugs by ensuring their affordability.

States Assert their Drug Purchasing Power to Capture Savings for Medicaid

November 18, 2019/in Policy Ohio, Washington, West Virginia Blogs, Featured News Home Administrative Actions, Cost, Payment, and Delivery Reform, Health System Costs, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by Johanna Butler

In the face of rapidly rising prices, state Medicaid programs are asserting their prescription drug purchasing power through more active oversight of the administration of prescription drug benefits. As major drug purchasers, state Medicaid programs have leverage to lower costs without action from state legislatures. Ohio, Washington, and West Virginia have recently deployed a range of strategies to curb drug costs:

Ohio requires Medicaid managed care plans to adopt transparent, pass-through payment models with their pharmacy benefit mangers (PBMs).
To maximize rebate potential and reduce administrative burden, Washington State is implementing a single preferred drug list (PDL) across Medicaid fee-for-service and managed care plans.
West Virginia carved out the prescription drug benefit from its managed care contracts and now acts as its own PBM to increase oversight of drug purchasing and reduce costs.

Below is a detailed explanation of how these three states have implemented innovative purchasing strategies for their Medicaid pharmacy purchases.

Ohio Requires a Transparent, Pass-Through PBM Payment Model

A 2018 report found that PBMs retained profits of $224 million by creating a “spread” between what Medicaid paid PBMs for pharmacy claims versus what PBMs paid pharmacies. In response, Ohio mandated that managed care plans switch to contracts with transparent, pass-through payment models with the PBMs. With a transparent, pass-through model, states can ensure PBMs do not profit off this spread-pricing practice and pass through drug discounts and rebates to managed care plans. PBMs are instead reimbursed more directly through fees. Wisconsin’s state employee health plan requires a similar, fully transparent, pass-through payment model. Through this change in contract terms, Wisconsin’s per member, per month drug costs were more than 10 percent below industry averages from 2016 to 2018.

Ohio state officials report making significant changes to managed care contracts to increase transparency, reporting, and accountability pertaining to their PBM contracts and drug payments. Through enhanced reporting from managed care plans, officials have been able to confirm the successful implementation of the pass-through model. Ohio’s 2020 budget goes a step farther, requiring all managed care plans to contract with a single PBM, which will be selected by Ohio’s Medicaid department, giving the state more authority over drug purchasing.

Washington State: Implementing a Single, Standard Medicaid PDL Across MCOs

In January 2018, the Washington Healthcare Authority implemented a single PDL – a list that indicates which drugs are “preferred” by the state and do not require prior authorization. Washington’s Medicaid program transitioned from six different PDLs across managed care organizations (MCO) to one. A single PDL provides a number of advantages, including:

Administrative ease for providers, patients, and pharmacies;
Rebate maximization by selecting drugs with the lowest cost or maximum rebate potential;
Rebate transparency for more accurate cost management; and
Fewer disruptions for patients who may switch between managed care plans.

To transition to a single PDL, Washington submitted two State Plan Amendments – one for the single PDL and one to include managed care plans in its supplemental rebate contracts through a multi-state purchasing pool for drugs on the PDL. Washington also added and amended contracts with a number of vendors to ensure the Medicaid agency and managed care plans had access to the same drug data sources to allow seamless collaboration – an important detail for ensuring care coordination. Officials met with managed care plans weekly to plan and roll out the three phases of implementation, ensuring that drugs added to the PDL were clinically appropriate and cost-effective for the state and the plans. Implementation began with 27 drug classes and is expected to be complete by April 2020 with almost 400 different drug classes included in the PDL.

West Virginia: Carving Prescription Drugs Out of Managed Care

In 2017, West Virginia Medicaid began acting as its own pharmacy benefit administrator under a fee-for-service model, after carving out prescription drug benefits from its managed care contracts. To accomplish the prescription drug carve-out, West Virginia:

Added an additional pharmacist to its staff;
Stress-tested its existing claims processing system;
Increased its capacity for prior authorizations; and
Educated the public and its help desk staff about the program change.

West Virginia’s Medicaid program now covers over 550,000 enrollees through a fee-for-service model. State officials report they are able to effectively manage the pharmacy benefit and maintain care coordination across MCOs, while obtaining savings for the state. The prescription drug carve-out led to a savings of $54.5 million in 2018. Additionally, changes to the state’s reimbursement methodology during the carve-out process led to an infusion of $122 million in dispensing fees to the state’s pharmacy community.

While West Virginia is acting as its own PBM, California is carving out the prescription drug benefit from its managed care contracts and contracting with a single PBM to leverage the state’s immense purchasing power. California will use strict contracting terms to ensure greater transparency and cost savings with the contracted PBM. Michigan is currently considering a drug carve-out and legislatures in Louisiana and Nevada prompted their Medicaid programs to explore a potential carve-out of prescription drugs from managed care.

As states strengthen their oversight of drug purchasing, the National Academy for State Health Policy (NASHP) has created and will soon release a model PBM contract for states. Informed by Ohio and Minnesota’s contracts, NASHP’s model contract is designed to help states ban spread pricing and better understand rebate arrangements with their PBMs. To learn more about other administrative actions to curb rising drug costs, read the Administrative Action section of NASHP’s Prescription Drug Pricing website.

Webinar for State Officials Only: Innovations in Medicaid Pharmacy Benefit Management Policies – A Look at Three States

September 30, 2019/in Policy Ohio, Washington, West Virginia Webinars Administrative Actions, Cost, Payment, and Delivery Reform, Health System Costs, Prescription Drug Pricing, Quality and Measurement, State Rx Legislative Action, Value-Based Purchasing /by NASHP Staff

Friday, Nov. 1, 2019
3:30-4:30 p.m. (ET)

Faced with rising prescription drug costs, state Medicaid programs are implementing innovative policies to manage their pharmacy benefit and find savings. This webinar, for state officials only, is an opportunity to hear officials from three leading states:

West Virginia carved pharmacy benefits out of its Medicaid managed care program in 2017 and reports that its shift to a fee-for-service model saved the state over $54 million in state fiscal year 2018.
In response to a report demonstrating the cost to the state when pharmacy benefit managers (PBMs) profit from “spread pricing,” Ohio began requiring managed care plans’ contracts with PBMs to include a transparent, pass-through payment model and to prohibit spread pricing as of January 2019. Ohio’s recently passed 2020 budget bill goes a step farther, requiring all managed care plans to contract with a single PBM, which is selected by the Ohio’s Medicaid department.
To lower the cost of drugs and maximize rebate potential, Washington’s Medicaid program implemented a single formulary for all managed care and fee-for-service pharmacy benefits on Jan. 1, 2018.

This webinar is for state officials only and will not be recorded.

Moderator: Trish Riley, Executive Director, National Academy for State Health Policy

Speakers:

Brian Thompson, MS, PharmD, Director of Pharmacy Services, Bureau for Medical Services, West Virginia Department of Health and Human Resources
Vicki Cunningham, PharmD, former Director of Pharmacy Services, Bureau for Medical Services, West Virginia Department of Health and Human Resources
Maureen Corcoran, MBA, MSN, Director, Ohio Department of Medicaid
Donna Sullivan, MS, PharmD, Chief Pharmacy Officer, Washington Health Care Authority

New PBM Laws Reflect States’ Targeted Approaches to Curb Prescription Drug Costs

August 12, 2019/in Policy Blogs Cost, Payment, and Delivery Reform, Health System Costs, Medicaid Managed Care, Model Legislation, Prescription Drug Pricing, Quality and Measurement, State Rx Legislative Action /by Sarah Lanford and Maureen Hensley-Quinn

In 2019, states built on the momentum that had been gaining in recent years and passed targeted legislation to address the role harmful pharmacy benefit manager (PBM) business practices play in escalating prescription drug prices. The laws supporting these approaches, described below, give states enforcement mechanisms to ensure that the discounts that PBMs recoup are ultimately used to lower drug and premium costs for consumers.

#NASHPCONF19: New Recipes to Control Rx Pricing
10-11:30 a.m. Thursday, Aug. 22, 2019

New state PBM laws will be among the topics discussed at this session at NASHP’s 32nd Annual State Health Policy Conference, Aug. 21-23 in Chicago.

There is still time to register, learn more here.

During the 2017 and 2018 legislative sessions, states increasingly passed laws focused on PBMs, often referred to as the “middleman” in the drug supply chain. Health plans contract with PBMs to manage their pharmacy benefit, which includes negotiating rebates with manufacturers and ensuring pharmacies have medications to dispense.

As states address prescription drug prices, there have been many questions raised about PBM practices. Where do the negotiated manufacturer rebates go? How much is the PBM keeping versus what is passed along to help consumers pay for prescriptions? Also, what about the differing amounts health plans pay for prescription drugs – compared to the often lower reimbursement amount paid to pharmacies? How much of that “spread in pricing” do PBMs keep as profit? Could opaque PBM payment practices be contributing to the overall high costs of prescription drugs?

Explore NASHP’s Pharmacy Benefit Manager Model Legislation and Resources page for more information.

Last year, Ohio’s state auditor released a report revealing that PBMs charged Medicaid managed care organizations (MCOs) a “spread” of more than 31 percent for generic drugs, which cost the state $208 million – all of which PBMs pocketed as profit. This issue is not unique to Ohio. Lack of defined regulations allow PBMs to pocket portions of manufacturer rebates or use spread pricing models instead of passing negotiated discounts back to health plans and their consumers.

To address those opaque practices, in 2019 several states enacted laws to:

More clearly define PBM practices;
Require transparency of specific prices, costs, and rebates; and
Take steps to explicitly define fiduciary responsibilities of health plans for their contracted PBMs.

Licensure Requirements

To date, 27 states require PBMs to obtain licensure from their states’ departments of insurance prior to operating in the state. This year, Minnesota, South Carolina, West Virginia, and Utah enacted laws to require PBM licensure. Licensure is a critical component of effective PBM regulation because it allows a state to know how many and what entities are operating as PBMs. This also gives the state power to suspend or revoke a license should the PBM break the law or engage in fraudulent activity.

Transparency Requirements

States also passed stronger transparency reporting requirements for PBMs. New York passed and Minnesota enacted measures requiring transparency reporting to both health plans and relevant state agencies. Notably, under the New York bill, a health plan will have access to all financial and utilization information of a PBM in relation to pharmacy benefit management services provided to the plan. Access to a PBM’s financial information will allow health plans in New York to monitor their contracted PBMs for fraudulent activity and deceptive acts. It also empowers health plans to enforce provisions of its contract with a PBM. The measure passed the legislature with broad support and now awaits action by New York Gov. Andrew Cuomo.

The Minnesota law goes beyond other states’ transparency bills by requiring PBMs to submit de-identified claims level information to their plan sponsors. Under this law, PBMs must report any spread collected on a claim, along with the amount paid to the pharmacy for each prescription. The law also requires PBMs give information to plan sponsors that differentiates between payments made to pharmacies owned or controlled by the PBMs and those not affiliated with the PBM. Data reported to plans will highlight any PBM conflicts of interest and deceptive business practices. Health plans and the state can use this data to create a clearer picture of how PBMs make their profits and identify additional actions the state can take to rein in bad practices.

Health Plan Oversight

States are also increasingly focused on requiring health plans to take more responsibility for monitoring the PBMs they contract with. For example, under Maine’s new law, if a health insurance carrier uses a PBM to manage its prescription drug benefits, the carrier is responsible for monitoring all activities performed by the contracted PBM. By tasking carriers with PBM monitoring responsibilities, Maine is leveraging its Bureau of Insurance to enforce these provisions of the law. The law also stipulates that PBMs have a fiduciary duty to their insurance carriers when managing their prescription drug benefits and as such, carriers are empowered to hold PBMs accountable for their financial dealings. This law may be protected from an Employee Retirement Income Security Act of 1974 (ERISA) legal challenge because lawmakers purposefully used an existing definition of “carrier” in state law that imposes requirements on state-regulated insurance carriers only. Therefore, the law does not apply to plans governed by ERISA. (Read Maine Forges New Ground and Enacts Comprehensive Drug Package for more information about Maine’s comprehensive PBM law.)

The New York measure stipulates that in addition to health plans, PBMs have a duty and obligation to covered individuals to perform their services with care, diligence, and professionalism. Under this measure, all funds received by the PBM, including funds derived from spread pricing, must be used on behalf of the health plan and can only be used pursuant to the PBM’s contract with the plan. Medical loss ratio rules require health plans to spend 80 percent of a beneficiary’s premium on medical claims and the remaining 20 percent on overhead expenses, including profits. This means that any manufacturer discounts passed from PBMs to a health plan will be used to lower spending on pharmacy benefits, which will in turn decrease premium costs for beneficiaries.

Medicaid Managed Care Contracts

States are also increasing their Medicaid agencies’ oversight of PBMs. Informed by Ohio’s report last summer, lawmakers included provisions in their budget that require the state to contract with a single PBM for the entire Medicaid managed care program. The “state PBM” will have strict transparency reporting requirements and will be prohibited from requiring a Medicaid recipient to obtain a specialty drug from a specialty pharmacy owned by or associated with that state PBM. This will end the practice of “self direction,” which benefits PBMs but typically increases out-of-pocket costs for consumers. Conflicts of interest language along with transparency requirements limit anti-competitive practices and give state officials more control over how PBMs operate in the Ohio.

Similarly, a new law in Louisiana authorizes its Department of Health to carve out pharmacy services from Medicaid MCO contracts and assume direct responsibility for all pharmacy services. If the department chooses to use a PBM to administer the pharmacy benefit, the PBM can only be reimbursed with a transaction fee and cannot retain any portion of spread pricing or state supplemental rebates. This ensures the state will get all of the discounts the PBM negotiates with drug manufacturers. The transaction fee will be the only payment to the PBM, which prevents it from pocketing a spread or a portion of discounts intended for the state.

States cannot control which new drugs come to market or what their list prices will be, but they can impose Medicaid contracting requirements to ensure PBMs are working in the interest of the state. Through these laws, Ohio and Louisiana can take active roles in monitoring PBM practices and administering pharmacy benefits to ensure protections for the state.

The laws passed during the 2019 legislative session are the result of states’ iterative policymaking processes – lawmakers first work with state agencies to identify problems, build on prior legislation, and then develop legislative solutions. Targeted approaches like the ones highlighted here can help stem drug spending, but PBMs are only one part of the supply chain contributing to rising drug costs. To see all types of legislation to address drug costs, explore NASHP’s state Legislative Tracker and learn about other new laws states have enacted this year.