Regulating pharmacy benefit managers with transparacy: the potential for unscrupulous business practices in the multibillion-dollar prescription drug industry has attracted state lawmakers' attention

Healthcare Financial Management, May, 2005 by Melicia Seay

Many are questioning the role of pharmacy benefits managers as intermediaries between drug manufacturers and health plans. Their concern is that lack of transparency in the industry makes it impossible to verify whether a PBM is fulfilling its role honestly and with integrity.

PBMs and drug manufacturers have a mutually beneficial relationship. PBMs have the power to include drugs on a health plan's formulary, giving them the ability to increase a drug manufacturer's market share. In return, to the extent that PBMs can persuade a health plan to go with a particular drug, the drug's manufacturer can offer the plan a rebate. This relationship is complicated by the fact that PBMs contract with health plans and receive payment for the services they provide. However, whether a PBM actually saves the plan money is typically not disclosed.

The PBM-drug manufacturer relationship has caused some states to question the effective role of PBMs. They are asking, for example, whether:

* PBMs are negotiating discounts on inflated prices

* PBMs are receiving incentives from drug manufacturers to promote more expensive drugs

* The rebates and discounts PBMs receive are being passed down to the plan sponsor and covered individuals

State lawmakers are also concerned that the relationship weakens market competition. Proponents of legislation to make PBN business practices transparent believe that disclosure of contract arrangements with drug manufacturers will increase competition and encourage PBMs to compete more aggressively, thereby allowing plan sponsors to obtain lower drug prices.

Litigation Fuels Uncertainty

In 2004, litigation added to the uncertainty about PBM practices.

Medco Health Solutions, the nation's largest PBM, reached a $29.3 million settlement agreement for allegations of violating consumer protection and mail fraud laws filed by 20 states and the federal government. Medco also paid Massachusetts $5.5 million to settle allegations that the company pocketed millions of dollars in rebates from drug companies that should have been passed down to the state.

New York's attorney general, Elliot Spitzer, filed suit against the PBM Express Scripts, alleging breaches of its $600,000 contract and violations of civil law resulting in the state being defrauded of up to $100 million over five years.

Caremark Rx, the nation's second-largest PBM, was subject to a class action lawsuit in Tennessee. The suit alleged that Caremark kept discounts from drug manufacturers instead of sharing them with member benefit plans, secretly negotiated rebates for drugs and kept the money, and provided plan members with more expensive drugs when less expensive alternatives were available.

State Actions Stir Controversy

State legislatures are using "transparency," "fiduciary," and "disclosure" provisions to regulate the business practices of PBMs. The provisions require PBMs to disclose all rebate, discount, and revenue arrangements made with drug manufacturers, including all utilization information on covered individuals.

Fiduciary duty provisions have stirred the most controversy. They require PBMs to act in the best interest of health plans in a way that conflicts with PBMs' role as the intermediary, which is the foundation of the PBM industry. The Pharmaceutical Care Management Association, the national trade association representing PBMs, starkly opposes legislation of this kind. The PCMA believes public disclosure of confidential contract terms would damage competition and ultimately harm private and public sector consumers. The association also argues that transparency already exists for clients that structure contracts to best suit their needs, including imposing audit rights.

Maine, South Dakota, and the District of Columbia have laws requiring PBM transparency. PCMA filed suit against Maine and the District of Columbia for their financial disclosure laws.

In the Maine lawsuit, PCMA v. Rowe, PCMA alleged the law:

* Destroys the competitive market and will result in higher drug costs for Maine consumers

* Deprives PBMs of proprietary information and trade secrets

* Conflicts with the Employee Retirement Income Security Act and the Federal Employees Health Benefit Act

* Violates the "taking and due process" clause of the U.S. and state constitutions

* Allows for broad enforcement of violation under the Maine Unfair Trade Practices Act

PCMA won preliminary injunctions against the Maine law twice but was denied its motion for summary judgment. The judge agreed that financial disclosure was reasonable in relation to controlling the cost of prescription drugs. It was determined that the law was designed to create incentives within the market to curtail practices that are likely to unnecessarily increase costs without providing any corresponding benefit to those filling prescriptions. PCMA won an interim injunction against the D.C. law, with the judge ruling that it would be an "illegal taking" of private property.

States Forge Ahead

Threat of lawsuits has not deterred state lawmakers. In the 2005 legislative session, six states--California, Colorado, Hawaii, Illinois, Iowa, and Kentucky--have introduced legislation regulating PBMs through financial disclosure laws.