Pharmacy benefit managers (PBMs) are the healthcare system players most patients have never heard of. Yet, PBMs represent a multibillion-dollar industry that touches the majority of Americans’ lives. Known as “pharmacy middlemen,” PBMs manage prescription drug benefits for healthcare system payers, including commercial health insurers, Medicare Part D plans, and self-insured employer plans. PBMs negotiate discounts and rebates from prescription drug manufacturers, create formularies listing covered medications for health plans, and negotiate with pharmacies over reimbursement for their drug acquisition and dispensing costs. This central role in the pharmaceutical supply chain yields PBMs immense power to determine what patients pay for prescription drugs, which drugs are available under a particular health plan, and the number and choice of pharmacies available to patients.
PBMs do not make, dispense, or prescribe drugs, and critics argue that they should not play such an outsized role in determining the medicines accessible to patients, despite a recent study determining that PBM services provide a net value of at least $145 billion annually1. Nonetheless, rising drug prices and affordability concerns have catapulted PBMs to national news and the attention of policymakers in recent years. Most notably, legislators have commented on rising insulin drug prices and their impact on patients with diabetes.2
Growing consolidation among PBMs has only fueled these concerns: three PBMs now control 80% of the prescription drug market.3 Vertical integration between PBMs and other healthcare system entities, such as health insurance companies and pharmacies, also create potential conflicts of interests that may reduce patient options. As a result, members of Congress introduced a new bill in May, the Pharmacy Benefit Manager Transparency Act of 2022, seeking to regulate PBM activity and provide avenues of enforcement for the Federal Trade Commission (FTC) as well as state attorneys general. Days later, the FTC announced an in-depth investigation of the nation’s six largest PBMs in the hopes of offering legislative and policy prescriptions for key stakeholders.
Pharmacy Benefit Manager Transparency Act of 2022
Introduced on May 24, 2022, the Pharmacy Benefit Manager Transparency Act of 2022 is a bipartisan bill co-sponsored by Senators Maria Cantwell (D-WA) and Charles Grassley (R-IA) that imposes compulsory disclosure requirements on PBMs while seeking to limit certain controversial PBM practices such as spread pricing. The Act also empowers the FTC and state attorneys general to take enforcement action against PBMs that engage in “unfair and deceptive acts” or “dissemination of false information” related to PBM services.
A. Prohibition on Unfair or Deceptive Prescription Drug Pricing Practices
The proposed legislation expressly prohibits three types of controversial PBM activities that may be considered “unfair or deceptive,”4 including:
(1) Charging a health plan or payer a different sum for a prescription drug’s ingredient cost or dispensing fee than the PBM reimburses a pharmacy for the prescription drug’s ingredient cost or dispensing fee, then retaining the difference as profit, a practice known as “spread pricing.”
(2) Arbitrarily, unfairly, or deceptively reducing, rescinding, or clawing back by any other means a reimbursement payment to a pharmacist or pharmacy for a prescription drug’s ingredient cost or dispensing fee.
(3) Arbitrarily, unfairly, or deceptively increasing fees or lowering reimbursement to a pharmacy to offset reimbursement changes mandated by the federal government for any federally funded health plan.
At the same time, the proposed legislation includes exceptions to the aforementioned prohibited acts. These exceptions, which were designed to improve transparency in PBM practices, include5:
(1) The PBM passing along or returning in full any price concession to a health plan or payer, including any rebates or discounts, and
(2) The PBM fully disclosing
a. the cost, price, and reimbursement of the prescription drug to each health plan, payer, and pharmacy with which the PBM has an agreement to provide PBM services;
b. all fees, markups, and discounts that the PBM imposes on each health plan, payer, and pharmacy with which the PBM has an agreement for pharmacy benefit management services; or
c. all remuneration the PBM receives from a prescription drug manufacturer for a prescription drug, including discounts, rebates, administration fees, and any other payment or credit received under an agreement for pharmacy benefit management services to a health plan, payer, or federal agency (upon the agency’s request).
B. Mandating Transparency Reporting to FTC and Congress
The Act requires PBMs to annually report the following information to the FTC, beginning no later than one year after the proposed legislation’s enactment6:
(1) The difference between the amount the PBM was paid by each health plan and the amount that the PBM paid each pharmacy on behalf of the health plan for prescription drugs.
(2) The amount of any: 1) generic effective rate fee charged to each pharmacy; 2) remuneration fees charged or other price concessions provided to any pharmacy; and 3) payments clawed back from reimbursements made to any pharmacy.
(3) If the PBM shifted a prescription drug to a formulary tier with a higher cost, higher copayment, higher coinsurance, or higher deductible to a consumer or lower reimbursement to a pharmacy, an explanation for why the drug was moved to a different tier, including whether the move was requested by a prescription drug manufacturer or another entity.
(4) For any PBM that owns, controls, or is affiliated with a pharmacy, information regarding any differences in reimbursement rates or practices, remuneration fees or other price concessions, and claw backs between a pharmacy owned, controlled, or affiliated with the PBM versus all other pharmacies.
In addition, the FTC would be required to provide two reports to the Senate Committee on Commerce, Science, and Transportation and the House Committee on Energy and Commerce: a general report concerning enforcement actions under the Act and a report directed to PBM formulary design or placement practices.7 Filed annually, the report on enforcement activity under the proposed legislation would cover8:
(1) The number of actions brought by the FTC to enforce the Act, and the outcome of the actions;
(2) The number of investigations and inquiries into potential violations of the Act;
(3) The number and nature of complaints that the FTC received alleging violations of the Act;
(4) An anonymized summary of the annual reports that PBMs have filed with the FTC; and
(5) Recommendations for strengthening enforcement actions in response to violations of the Act, including recommendations for additional PBM prohibited conduct.
Filed within one year following enactment of the proposed legislation, the agency’s report to Congress on PBM formulary design or placement practices would cover9:
(1) Whether PBMs use formulary design or placement to increase gross revenue without also improving patient access or reducing patient costs; or
(2) Whether such PBM activities relating to formulary design or placement violate section 5(a) of the Federal Trade Commission Act under 45 U.C. § 45(a).
C. Whistleblower Protection
The proposed legislation would prevent healthcare industry employees who serve as whistleblowers from being terminated, demoted, suspended, reprimanded, or otherwise punished for reporting violations of the Act or participating in investigative, judicial, or administrative proceedings that enforce provisions of the Act.10 Additionally, the proposed legislation prohibits employers from the use of pre-dispute arbitration agreements as a condition of employment to force an employee to waive whistleblower protections under the Act.11
D. Enforcement by the Federal Trade Commission and State Attorneys General
The Act authorizes the FTC and state attorneys general to enforce provisions of the proposed legislation.12 Additionally, under the proposed legislation, violators could be liable to the penalties applicable under the Federal Trade Commission Act (15 U.S.C. 41 et seq.), plus additional civil penalties of up to $1,000,000.13
E. Status of the Bill
On June 22, 2022, the Senate Committee on Commerce, Science, and Transportation approved of and advanced the bipartisan bill to the full Senate.14
FTC 6(b) Study of PBMs
On June 7, 2022, the FTC announced that it would be launching an industry-wide investigation subject to its authority under Section 6(b) of the FTC Act. The agency will probe the PBM industry by requiring the nation’s six largest PBMs to provide documents and data on certain business practices that could impact patient access and affordability of drugs.15 These PBMs are CVS Caremark; Express Scripts, Inc.; OptumRx, Inc.; Humana Inc.; Prime Therapeutics LLC; and MedImpact Healthcare Systems, Inc. Section 6(b) authorizes the FTC to conduct studies which have no law enforcement purpose. The agency’s five commissioners voted unanimously to launch the 6(b) study of PBMs, a move that underscores the bipartisan perception that PBMs are a significant cause of rising prescription drug prices. The study also follows a request for information on PBMs that the agency launched on February 24, 2022,16 which yielded over 24,000 public comments.17 Companies subject to the 6(b) study will be required to respond to compulsory orders within 90 days.
In its announcement, the agency stated that it was principally concerned with the effect that vertical integration is having on access to and the affordability of prescription drugs.18 It noted that the largest PBMs have become increasingly vertically integrated with large health insurance companies (upstream) and pharmacies (downstream).19 This consolidation has provided PBMs with an outsized role in determining the types of drugs patients have access to, the pharmacies patients may or may not use, and the cost of prescription drugs to patients.
The FTC’s 6(b) study will scrutinize the possible impact of several controversial PBM practices.20
First, the agency intends to examine what it considers to be the PBMs’ unequal treatment of non-affiliated and affiliated or wholly owned pharmacies. Specifically, the agency raised concern over three types of PBM practices that may amount to preferential treatment of affiliated or wholly owned pharmacies. These include: (1) fees and claw backs that PBMs charge to non-affiliate pharmacies; (2) tactics with the underlying purpose of steering patients specifically towards PBM-owned pharmacies; and (3) the auditing of independent pharmacies.21
Second, the agency plans to review methods of determining reimbursements to pharmacies that it describes as “complicated and opaque,”22 and which it claims have sometimes resulted in pharmacies being reimbursed for less than a prescription drug’s acquisition cost.23 Two commissioners issued statements raising concerns that PBM practices may be contributing to the demise of independent pharmacies across the country, particularly in rural and low-income urban areas.24
Third, the agency will review the use of prior authorizations or other administrative obstacles that reduce patient access to certain prescription drugs.25 Typically used as a health plan cost-control measure, a prior authorization (also known as a “precertification” or “prior approval”) is required for healthcare providers to receive approval from a health plan before a drug or service is provided to a patient under health plan coverage. Physicians have complained that such administrative requirements are sometimes unnecessary from a medical perspective.26
Fourth, the agency plans to review the use of specialty drug lists and associated policies for such prescription drugs.27 Specialty drugs are often prescribed for rare or complex diseases or require special procedures for handling, administration, or monitoring. FTC Commissioner Alvaro N. Bedoya’s statement on his agency’s 6(b) study provided an anecdote to illustrate the potential harms of PBM specialty drug policies: In 2021, the offices of West Virginia’s Insurance Commissioner reported that an in-state family had attempted to fill a prescription for their child’s cancer medication at a local pharmacy but was denied authorization to receive the drug because the PBM of the family’s insurance company required the drug to be dispensed through its mail order specialty pharmacy, which would need two weeks for delivery. At the time the family attempted to fill the prescription, the drug was in stock at the brick-and-mortar pharmacy.28
Finally, the agency announced that it would scrutinize the use of rebates and fees from drug manufacturers to determine formulary design and prescription drug costs to patients and payers.29 This addresses a core part of the PBM role; PBMs negotiate discounts and rebates from drug manufacturers that determine a drug’s cost to payers and patients as well as its formulary status (and hence, its ease-of-access to patients).
At the same time, PBMs separately contract with pharmacies to determine their reimbursements for drug acquisition costs. Thus, PBMs sit at the center of a tangled web of healthcare system players and are accordingly able to leverage their position through contracting schemes in order to control access to medicines as well as the profitability of independent pharmacies. FTC Chair Lina Khan raised the concern that PBMs may extract rebates in exchange for denying coverage of generic drugs or impose claw backs or unwarranted fees on independent pharmacies.30
The FTC’s 6(b) study is aimed at determining whether the PBM industry warrants reform in the interest of competition. As Commissioner Rebecca K. Slaughter remarked, the findings of the 6(b) study can be reported to the public in the form of a final report that provides a level of transparency and impetus for policy prescriptions that enforcement actions may not.31
The complexity and fragmentation of the U.S. healthcare system has empowered PBMs and provided PBMs an outsized role in the perpetually scrutinized healthcare economy. The details behind confidential PBM agreements are often shrouded in mystery, creating the possibility that PBMs may negotiate immense profits for themselves while reducing competition through vertical and horizontal consolidation.
Individual states have already begun to notice and take action. Since the start of 2020, at least 30 states have enacted about 50 PBM-related laws (with many more proposed).32 These laws range from licensure and contracting requirements to disclosure requirements, prohibition on spread pricing, anti-discrimination prohibitions, and further requirements intended to protect pharmacies, consumers, and the states themselves. Specifically, over a dozen states have prohibited the use of spread pricing models in PBM as well as in health plan contracts.33 Similarly, this summer, Florida Governor Ron DeSantis issued Executive Order 22-164, aimed at promoting transparency in prescription drug costs.34 The executive order prohibits PBM spread pricing and reimbursement claw backs while imposing data transparency and reporting requirements on executive agencies.
As prescription drug costs continue to rise, stakeholders and legislators have increasingly turned their attention to the pharmacy middlemen in order to ease cost burdens shouldered by patients. The Pharmacy Benefit Manager Transparency Act of 2022 and the FTC’s newly launched 6(b) study of PBMs are undoubtedly small steps that foreshadow bigger developments for the PBM and healthcare industries.
Reproduced with permission. This article was first published by the Food and Drug Law Institute Update (FDLI) Magazine on September 23, 2022. The original article is available here, and will be published in FDLI Update Magazine’s Fall 2022 issue.