States Regulating Pharmaceutical Benefit Managers
As state lawmakers continue to grapple with rising prescription drug spending within the parameters of their state’s budget, transparency in the pharmacy supply chain is increasingly seen as an approach to mitigate the cost. Until recently, drug manufacturers often found themselves in the political crosshairs but now more attention is being drawn to the role of pharmacy benefit managers (PBMs).
According to the Centers for Medicare & Medicaid Services (CMS), pharmacy-based and mail-order consumer purchases of prescription drugs were a $333 billion market annually in the United States in 2017. Furthermore, the Pharmaceutical Research and Manufacturers of America (PhRMA) estimates that physicians and other prescribers write approximately 6 billion prescriptions in the U.S. every year with approximately two-thirds of them being processed by a PBM. This has led to many lawmakers asking, “What are PBMs, what is their role and what actions are states taking?”
What are PBMs and What is Their Role?
Pharmacy benefit managers are third-party administrators of prescription drug coverage for insurers and employers who pay a fee to the PBM for their services. These services include developing and maintaining formularies, processing claims and negotiating discounts and rebates. PBMs manage plans for millions of Americans who have health insurance from a variety of sponsors including commercial health plans, self-insured employer plans, Medicare Part D plans, state government employee plans, and Medicaid managed care organization (MCO) plans. According to the Drug Channel Institute, as of 2018, the three largest PBMs, ExpressScripts, CVS Caremark and OptumRx, controlled over 70% of the market.
Status of PBM "Gag Clause" State Laws and Legislation (2004-2019)
Pharmacy-based and mail-order consumer purchases of prescription drugs were a $235 billion market annually in the United States in 2015.
Commercial contracts between a pharmacy and a Pharmaceutical Benefit Manager (PBM) are a widespread feature in the distribution and sales chain between original manufacturer and the end consumer.
However, the terms of these arrangements and binding contracts usually are invisible to individual consumers and some purchasers such as employers. In some cases, these arrangements include restrictions that mean a pharmacist is prohibited by a contract with a PBM from informing consumers that the drug they want to buy has options, and could be purchased at a lower cost if the consumers paid out of pocket rather than purchasing through their insurance plan. In financial terms, prescription drug overpayments (also known as “co-pay clawbacks”) occur when commercially insured patients’ copayments exceed the total cost of the drug to their insurer or pharmacy benefit manager.
These so-called “gag clauses” have come to the attention of state policymakers seeking to lower drug costs by requiring more extensive transparency at the retail pharmacy level. A growing number of legislative proposals in 2018 seek to block such commercial PBM or health insurer contracts that may prohibit pharmacies from informing customers about available alternative pricing for medications, including paying out-of-pocket, or including generics or brand products that may be less costly, or comparatively more suitable for a patient. Many bills also address the "co-pay clawback” situation noted above.
"Blueprint to Lower Prices and Reduce Out-of-Pocket Costs" - On May 11, 2018, the Trump Administration announced a report that includes more than 25 elements such as, "Incentives for Lower List Prices and Lower out-of-pocket Costs," and restricting gag clauses for future federal action. - [Read: Fact Sheet | Blueprint Report, 41 pp] As part of President Trump’s blueprint to lower drug prices, "CMS is warning Medicare Part D Prescription Drug Plans (PDPs) that so-called “gag clauses” aren’t allowed and that their network pharmacies must disclose when the Part D plan price or copay of a drug is more than the cash price. Yet analysts say it’s likely to affect a small percentage" (5%) of PDPs. That translates to some 2.5 million beneficiaries. (article from AIS, 6/13/18)
U.S. Congress Passes Gag Clause Bills; Signed by Pres. Trump — Congress passed the Patient Right to Know Drug Prices Act, S. 2554 with a senate amendment by a 98 Yea-2 Nay vote on Sept.17, 2018. It became Public Law No: 115-263. It would end practices that prohibit pharmacists from telling customers that they could save money by paying cash out-of-pocket rather than using their insurance. Congress also approved a bill, S. 2553 (115), "Know the Lowest Price Act of 2018" that bans gag clauses in Medicare; it became Public Law No: 115-262.), Both were sign on Oct. 10. The president described the legislation that will "completely end these unjust gag clauses once and for all." While the legislation is designed to save consumers money, a CBO score shows it would lead to a slight decrease in federal revenues. The office of Sen. Susan Collins (R-Maine), who sponsored the bill, said that's because the CBO reasons that pharmacy benefit managers would try to recapture some of the money they will lose if it's enacted.
As of May 2019, the nationwide total is 33 states legislatures enacted laws prohibiting “gag clauses” in contracts that restrict pharmacists. The most recent laws signed in 2019 include Montana, New Mexico and Wyoming.
This research reviewed measures from all 50 states, but may not include every bill or older statute that contains this type of restriction. Most legislation and details have been excerpted from the online NCSL Prescription Drug Database, which includes bill status updated weekly and complete full text links.
- There are at least 20 states which have enacted "anti co-pay clawback" provisions that aim at preventing numerical price overcharges to patients buying retail drugs in a pharmacy. These prohibitions on pharmacy copay clawbacks are law in: Arizona, Colorado, Connecticut, Florida, Georgia, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Missouri, New York, North Carolina, North Dakota, Ohio (executive action only), South Carolina, Texas, Utah, and Virginia.
Non-NCSL Resources Related to Gag Clauses
- Pharmacy Benefit Manager: Practices, Controversies, and What Lies Ahead Authors - Elizabeth Seeley and Aaron S. Kesselheim. Published by the Commonwealth Fund, 3/26/2019. Pharmacy benefit managers (PBMs) are responsible for negotiating payment rates for a large share of prescription drugs distributed in the U.S. Recently, policymakers have expressed concern that certain PBMs’ business practices may not be consistent with public policy goals to improve the value of pharmaceutical spending. Researchers sought to explain key controversies related to PBM practices and their roles in driving value in the pharmaceutical market.
- Why Your Pharmacist Can't Tell You That $20 Prescription Could Cost Only $8 (cites NCSL data) published by the New York Times, 2/25/2018.
- Overpaying for Prescription Drugs: A White Paper - The Co-pay Clawback Phenomenon; an academic report by USC Schaeffer Center, California, 3/2018 (11 pp, PDF)
- “There Might Be a Cheaper Drug, But Pharmacists Can’t Tell You That” - (NCSL report cited) – Stateline, 5/30/2018
PBM 'Gag Clause' Legislation Status in Detail
Views from Stakeholders
The National Community Pharmacists Association in a member survey taken in June 2016, provided examples. The survey of 650 pharmacists found that more than 38 percent said they were unable to tell patients about cheaper cash prices 10 to 50 times in the previous month. One told surveyors that a major PBM required the pharmacy to collect a $35 copay for a generic allergy spray, then took $30 back from the pharmacy. Another said a PBM charged a $15 copay for insomnia drug Zolpidem, then took back $13.05. Patients were charged $30 above the cash price for a generic cholesterol medication at another pharmacy. [full article in Kaiser Health News, 6/24/2016]
The Pharmaceutical Care Management Association, with Mark Merritt, president and CEO of the benefit managers’ trade association blames pharmacists, whom he says should simply offer customers the cash price of the drugs — if cheaper — bypassing their insurance plans altogether. “Not everything has to go through the plan... The only reason [for pharmacies] to process the claim is to keep the copay for themselves.” [ibid, Kaiser Health News, 6/24/2016]
The Pharmaceutical Care Management Association, with Mark Merritt, president and CEO of the benefit managers’ trade association blames pharmacists, whom he says should simply offer customers the cash price of the drugs — if cheaper — bypassing their insurance plans altogether. “Not everything has to go through the plan... The only reason [for pharmacies] to process the claim is to keep the copay for themselves.” [ibid, Kaiser Health News, 6/24/2016.
Update: On August 19, 2018 the three largest pharmacy benefit managers – Express Scripts, CVS Caremark, and OptumRx – all told PBS NewsHour Weekend they do not engage in clawbacks. (See article above)
Another practice garnering attention is spread pricing. With spread pricing, PBMs are compensated by retaining the difference, or spread, between the amount they charge a plan sponsor and the amount they reimburse a pharmacy. Auditors in Kentucky, New York, Ohio, Pennsylvania, Texas and West Virginia have taken significant actions looking more closely at this pricing model. In 2018, Ohio conducted an audit of its Medicaid MCOs who contract their prescription benefit plans to PBMs. The attorney general’s report found that while the overall spread in 2017 was $224.8 million, or 8.9%, a significant portion of the spread occurred on generic drugs. The PBMs charged the state a spread of more than 31% for generic drugs which comprised more than 86% of all prescriptions.
Some states require PBMs to act as a fiduciary. A fiduciary is a person or entity who holds a legal or ethical responsibility to act in the best interests of their clients. At the time of this report, one state—Nevada—had implemented a law requiring that a PBM has a fiduciary duty and at least four states are considering it. Nevada’s law specifies that a PBM has a fiduciary duty to a third party with which it has entered into a contract to manage that party’s pharmacy benefits plan. This means the PBM must act in the best interest of the pharmacies or consumers it serves rather than a health plan.
Pharmacy Audit Standards - Enacted Legislation
Audits of pharmacies by pharmacy benefit managers (PBMs) is a common practice to help identify and mitigate fraud, waste and abuse of a prescription drug benefit. Audits also serve a dual purpose of validating data entry and documentation to ensure compliance with regulatory and contractual requirements. Pharmacists have begun to push back on these inspections citing unfair auditing practices which can result in stiff penalties and fees. In response, over the past few years several legislative measures, often referred to as the Fair Pharmacy Audit Act or Pharmacy Audit Bill of Rights, have been enacted in 38 states.
For 2018, five of these states are seeking to amend the previous statute while seven states have proposed new legislation: Alaska, Illinois, Michigan, Nebraska, New Jersey, New York and Rhode Island. Many of these statutes use similar language that outlines the procedural requirements and limitations for pharmacy audits, as well as the registration requirements for PBMs.
Most legislation and details have been excerpted from the online NCSL Prescription Drug Database, which includes bill status updated weekly and complete full text links. Other resources include Westlaw and state sponsored websites.
Compiled by Colleen Becker, NCSL Health Program.