Why You Can’t Ignore PBM Reform Momentum

May 11, 2023

Justin Venneri

The pharmacy benefit management (PBM) industry is squarely in the crosshairs of state and federal legislators. If there’s one thing that everyone in Washington, D.C., and state capitol buildings around the U.S. seems to agree on, it’s that a lack of transparency and alignment in the pharmaceutical supply chain has allowed some questionable business practices to flourish.

At Capital Rx, we fully appreciate the complexity of issues on the table and stakeholders’ concerns about PBM reform. There are several themes present in the tsunami of legislative activity spreading across America. State governors are signing comprehensive legislation into law, and high-profile senators and other committee members are asking the right questions about cost-sharing and clawbacks, “spread pricing,” and the pass-through of rebates, among other targets of reform.

With federal and state-level legislative activity surging in the wake of the Consolidated Appropriations Act, the PBM industry is on the brink of significant transformation.

The PBM Transparency Act of 2023

Health plan fiduciaries are likely aware of growing support for the Pharmacy Benefit Manager Transparency Act of 2023, which is bipartisan legislation that would regulate PBMs. The elimination of spread pricing and clawbacks of pharmacy reimbursement (DIR fees) and the full pass-through of rebates are key measures of this bill that would impact the “traditional” PBM model, which relies on practices including, but not limited to, spread pricing and retention of rebates.  

The PBM Reform Act

This Act, introduced by Sen. Bernie Sanders (I-VT), reaches even further than the PBM Transparency Act in terms of proposed oversight of PBMs, including extensive annual reporting to plan sponsors on drug and member costs, copayment assistance, rebates at the therapeutic class and aggregate level, broker compensation, and rationale for the formulary placement of preferred products.  

Additionally, the PBM Reform Act requires PBMs to provide bi-annual reporting on the volume and cost of drugs dispensed from PBM-owned dispensing assets under the plan, including an explanation of existing benefit design parameters that encourage the use of PBM-owned assets (mandatory mail/specialty, auto-refill, copay incentives). It also prohibits plan sponsors from contracting with PBMs that will not provide the reporting required by the bill.

PBM Legislation

A list of states with the most PBM-related bills; MA has 11 and TX has 8 to top the list.

At the state level, as of April 26th, 2023, there were 124 bills that would impact PBMs being tracked across 41 states.1

Massachusetts is leading the way with 11 bills thus far in 2023, but there are 11 other states with 5 or more, and fewer than 10% of bills being tracked have failed.

Yes, some bills have carried over from 2022, and there are some nuances about 2023 – e.g., all state legislatures meet in odd years, and most, if not all, states are passing or renewing budgets. But to put this level of activity in context, consider that it’s early May, and we’ve nearly eclipsed the total level of legislative activity seen last year:

In 2022, 36 states introduced 135 bills impacting PBM business practices.

What issues top the list of targets for PBM reform?

We scoured the 124 bills outlined on the NASHP’s state tracker (select Pharmacy Benefit Manager from the dropdown), and the most common goals of reform that could influence a health plan’s economics, a traditional PBM’s pricing, or member access relate to cost-sharing, pharmaceutical manufacturer rebates, and spread pricing.

That said, issues related to PBM licensure requirements, direct and indirect remuneration (DIR) and other fees that are “clawed back” from pharmacies, and the elimination of “gag” clauses that prohibit the sharing of information between buyers (patients) and sellers (pharmacies) are also mentioned frequently. Several bills promote or mandate the sharing of prescription claims data as well.

Why is cost-sharing mentioned so frequently?

The bills that mention or target cost-sharing almost uniformly require a PBM to calculate a member’s cost-sharing for each prescription drug being picked up at the point of sale based on a price reduced by 80% - 100% of all rebates received in connection with the dispensing or administration of the drug.

The goal here is to reduce patients’ out-of-pocket costs at the counter and limit clawbacks like DIR fees that have a negative impact on retail pharmacies. With everyone laser-focused on the impact that rising healthcare costs can have on Americans, it’s no surprise to see cost-sharing mentioned so frequently. Vermont H.223 goes a step further, directing “excess” rebates to be put toward the health benefit plan to reduce premiums for members.

Why do PBMs get rebates, and why are legislators focused on them?

As we explain in Our Single-Ledger Model™ - Pharma Revenue Explained, the revenue PBMs receive from pharmaceutical manufacturers takes several forms, including rebates. “Stakeholders responsible for procuring and managing pharmacy benefit programs must understand and be able to ask good questions about how healthcare service providers like PBMs make money off of their plan and plan members.”

Legislators want to ensure that PBMs are remitting compensation received from the drug makers to a) plan sponsors or b) covered members at the point of sale. This pass-through is essential because the retention of rebate dollars by PBMs creates a conflict of interest in the management of formularies and patient utilization (i.e., there’s an incentive to dispense more expensive medications) and ultimately makes drugs more costly for payers and patients.

What does spread pricing mean, and why is it a target of reform?

As we explain in The Upside of a Single-Ledger Model™, “PBMs have two sets of books and control the flow of money between payers, pharmacies, and pharma, they can charge a higher amount for medications than what they pay for them… that creates a margin opportunity. This practice is known as ‘spread pricing,’ It works because the parties involved in the transaction cannot see the price of the drug being filled.”

Legislators want to promote transparency and remove the misaligned incentive and conflict of interest related to the arbitrage opportunity that allows a PBM to take a piece of the spread between what it pays for the drug and what it receives for the drug as profit (at the expense of the payer).

Related Content on Drug Prices

Why Use NADAC-Based Pricing Over AWP

What is NADAC & How Does It Differ From AWP?

What about “steering” members?  

Generally speaking, if you own a retail, mail order, or specialty pharmacy, there’s an incentive to have members’ prescriptions dispensed by your own facility. Legislators want to remove incentives or add penalties related to anything encouraging an insured individual to use a specific pharmacy (retail or mail), especially those that a PBM has ownership in. In extreme cases, the practice of anything that resembles steering could be outlawed.

Why is Capital Rx writing about PBM reform?

To say the PBM industry and pharmaceutical supply chain are complicated is an understatement. Capital Rx proudly supports “common sense PBM reform,” which includes bringing greater transparency to drug pricing, eliminating misaligned incentives and hidden revenue streams for traditional PBMs, sharing data, and other measures that improve the affordability and experience for patients or aid plan fiduciaries in managing their pharmacy benefit programs.

We believe that the use of two sets of books, one that is for payments to/from the plan sponsor and another for payments related to acquiring and distributing the drugs, creates unnecessary opacity that benefits traditional PBMs.

Should bills that disrupt the traditional PBM model pass and become law, fiduciaries will be responsible for understanding how their PBM partners might react and what the implications could be to the price paid for the pharmacy benefit as a result. If costs could rise or member access will be disrupted, it’s time for a market check or formal request for a proposal.

Please get in touch if you’d like to learn more about Capital Rx’s aligned Single-Ledger Model™ and full-service PBM solution.

1 https://nashp.org/2023-state-legislative-action-to-lower-pharmaceutical-costs/

DOWNLOAD NOWBack to Insights

Sign up for our newsletter!

Get the latest information on JUDI news, webinars, and industry insights through our newsletter. Sign up now!