Why Pharmacy Benefit Managers and Price Spreading: Focus in Congress's Deal to Avert a Government Shutdown and State Legislatures

1. Context

Price spreading, where Pharmacy Benefit Managers (PBMs) retain the difference between drug costs and reimbursements, has recently become a key focus of Congress and state legislatures. It was also included in a tentative bill to avert a government shutdown, but it has been stopped due to disagreements over what it includes. Examples include the Pharmacy Benefit Manager Reform Act and Florida's Prescription Drug Reform Act, which mandate full rebate pass-throughs and transparency in drug pricing. These measures seek to reduce costs for payers, improve pharmacy reimbursements, and ensure fairer practices in the pharmaceutical supply chain.?

The tentative bill mentioned includes other healthcare-related programs:

Medicare telehealth flexibilities extend telehealth provisions for Medicare beneficiaries for 2 years. Physician payment adjustment includes a 2.5% increase in physician payment rates. Patent thickets bill, legislation to address the issue of patent thickets, potentially affecting drug pricing and availability.

What is the price-spreading practice in PBMs, and why is it relevant to the healthcare industry?

Our article provides an overview of Pharmacy Benefit Managers (PBMs) and the practice of “price spreading” within the U.S. healthcare industry. It defines key terms, delves into the role of PBMs, analyzes the potential effects of banning “price spreading,” and summarizes other key legislative provisions related to PBMs and pharmacies.

2. Defining Key Terms

2.1 Pharmacy Benefit Managers (PBMs)

Pharmacy benefit managers (PBMs) are third-party administrators of prescription drug programs for various clients, including commercial health plans, self-insured employer plans, Medicare Part D plans, and state government employee plans1. They act as intermediaries between health insurance companies, pharmacies, drug manufacturers, and wholesalers1. PBMs manage prescription drug benefits for over 275 million Americans1. As of 2023, the three largest PBMs in the U.S. are CVS Caremark, Cigna Express Scripts, and UnitedHealth Group's Optum Rx, collectively controlling approximately 80% of the market share1.

2.2 Price Spreading

Price spreading, also known as spread pricing, is a PBM practice where they charge payers, such as Medicaid, more for a medication than they reimburse the pharmacy dispensing it2. The PBM retains the difference, or “spread,” as profit2. This practice has come under scrutiny due to concerns about rising Medicaid drug costs and decreasing pharmacy reimbursements2.

3. The Role of PBMs in Healthcare

PBMs play a multifaceted role in the healthcare industry. Their primary responsibilities include:

• Processing and paying prescription drug claims: PBMs act as the administrator for prescription drug programs, ensuring that claims are processed efficiently and accurately3.
• Negotiating with drug manufacturers: PBMs leverage their purchasing power to negotiate rebates and discounts from drug manufacturers, which can help lower drug prices for payers and patients4.
• Developing and maintaining formularies: Formularies are lists of covered medications that influence which drugs individuals use and determine their out-of-pocket costs3. PBMs develop and maintain these formularies for health insurers and other payers.
• Contracting with pharmacies: PBMs establish networks of pharmacies and negotiate reimbursement rates for dispensing medications to beneficiaries4.
• Improving medication adherence: PBMs often implement programs to help members improve their medication adherence, working with patients and their doctors to ensure safe and effective drug use3.
• Managing drug utilization: PBMs review drug utilization patterns to identify potential areas for cost savings and improved patient outcomes5. This may involve strategies such as prior authorization, step therapy, and quantity limits6.

4. Impact of Banning “Price Spreading”

4.1 Patients

Banning price spreading could have various effects on patients. While some argue it could lower out-of-pocket costs for generic drugs, others suggest it might lead to higher overall drug spending and increased administrative fees7. Removing generic drugs from insurance coverage has been proposed as an alternative solution to address the price-spreading issue7. However, this could shift more of the financial burden onto patients and potentially affect medication adherence7.

4.2 Insurance Firms

Eliminating price spreading could shift PBM pricing models away from simple discount structures and towards a “drug cost plus” model with higher transaction fees8. These fees would cover various PBM services, such as clinical programs, technology, and customer support. The shift could impact insurance firms' costs and how they manage prescription drug benefits.

4.3 PBMs

Banning price spreading could significantly impact PBM revenue streams7. PBMs may need to adjust their business models and raise administrative fees to compensate for lost revenue from spread pricing7. Some argue that this could lead to higher drug costs for payers, as seen in Ohio's Medicaid Managed Care program after implementing a pass-through pricing model2.

While this case study shows increased costs, it's important to note that this represents improved pharmacy reimbursement, which could be considered a positive outcome for the pharmacy sector.

4.4 Pharmacies

The elimination of spread pricing is likely to impact pharmacies' reimbursement rates positively. Here's how:

• Increased transparency in pricing would lead to fairer reimbursements for pharmacies. Without spread pricing, PBMs would be required to pass through actual pharmacy costs to payers, potentially resulting in higher reimbursement rates for pharmacies3.
• Evidence from state-level changes suggests improved pharmacy reimbursements. For example, when Ohio moved to a pass-through pricing model, pharmacy reimbursements increased by over $38 million in the first quarter after the change3.
• The current spread pricing model often results in pharmacies being reimbursed at rates that leave them “underwater” on the medications they dispense3. Eliminating this practice could help address this issue and improve pharmacy financial stability.
• States that have implemented pass-through pricing models or required PBMs to reimburse pharmacies at fee-for-service rates have seen improvements in pharmacy reimbursements3. For instance, Arkansas, Kentucky, Louisiana, and several other states have taken such measures to ensure more competitive reimbursement rates for pharmacies.
• Eliminating spread pricing leads to more direct and transparent pricing models, such as pass-through pricing, where PBMs are compensated through administrative fees rather than retaining spreads5. This change could result in more accurate and potentially higher reimbursements for pharmacies.
• While the elimination of spread pricing is generally expected to benefit pharmacies, it's important to note that the overall impact may vary depending on how alternative pricing models are implemented and regulated

4.5 Pharmaceutical Companies

The impact of banning price spreading on pharmaceutical companies is less clear10. Changes in PBM reimbursement models and negotiating tactics could indirectly affect pharmaceutical companies, influencing drug prices and how they interact with PBMs and pharmacies. Here's an explanation of how changes in PBM practices could indirectly affect pharmaceutical companies:

• Shifting negotiation dynamics: PBMs may need to adjust their revenue models if price spreading is banned. This could lead to more aggressive rebate negotiations with pharmaceutical companies to maintain profitability.
• Formulary decisions: PBMs might alter their formulary strategies, potentially favoring drugs with higher list prices and larger rebates, which could influence pharmaceutical companies' pricing strategies.
• Pricing strategies: Pharmaceutical companies may need to reconsider their pricing models. Some have already launched identical drugs at different price points to appeal to different purchasers, anticipating changes in PBM practices.
• Revenue impact: The ban on spread pricing could lead PBMs to seek alternative revenue sources, potentially increasing pressure on pharmaceutical companies through other means, such as higher administrative fees or more stringent formulary placement criteria.
• Market competition: Changes in PBM practices could affect the competitive landscape for pharmaceutical companies, favoring those better positioned to offer larger rebates or navigate new pricing models5.
• Supply chain dynamics: Alterations in PBM reimbursement models could indirectly impact the generic pharmaceutical supply chain, which may also have ripple effects on brand-name pharmaceutical companies.
• The overall impact remains uncertain and likely depends on how pharmaceutical companies, PBMs, and other stakeholders adapt to the new regulatory environment. The complex nature of drug pricing and reimbursement means that changes in one area can have unforeseen consequences throughout the system. This effect is typical of a complex system.

5. Other Key Legislative Provisions

Several legislative provisions aim to regulate PBMs and protect pharmacies. These include:

• Preventing pharmacy penalization:?PBMs should be prohibited from penalizing pharmacies for providing patient cost and efficacy information, promoting transparency and informed decision-making11.
• Protecting 340B drug programs:?Safeguarding pharmacies participating in the 340B program, which provides discounted medications to healthcare organizations serving vulnerable populations11, ensures that these pharmacies are not unfairly disadvantaged in contracts with PBMs.
• Requiring licensing: Mandating PBMs to obtain licenses to operate, increasing regulatory oversight and accountability11.
• Transparency in PBM Operations: Requiring PBMs to disclose information about their pricing, rebates, and fees to plan sponsors, promoting greater transparency and accountability12.
• Prohibiting Retroactive Fees and Clawbacks:?This will prevent PBMs from retroactively reducing pharmacy payments or imposing unfair fees, ensuring financial stability for pharmacies12.
• Addressing Conflicts of Interest: Prohibiting joint ownership of PBMs and pharmacies to prevent potential conflicts of interest that could harm patients and independent pharmacies14.

Overall

PBMs are integral to the U.S. healthcare system, managing prescription drug benefits for most Americans. However, practices like price spreading have raised concerns about transparency, cost, and patient access to medications. Ongoing legislative efforts aim to address these concerns by regulating PBM practices, promoting competition, and ensuring fair pharmacy reimbursement. The potential effects of banning price spreading are complex and require careful consideration to balance the interests of patients, payers, PBMs, and pharmaceutical companies.

References

1. Pharmacy benefit management - Wikipedia, accessed December 18, 2024, https://en.wikipedia.org/wiki/Pharmacy_benefit_management

2. Spread Pricing 101 | NCPA - National Community Pharmacists Association, accessed December 18, 2024, https://ncpa.org/spread-pricing-101

3. Pharmacy Benefit Manager (PBM) FAQs - Wisconsin Department of Employee Trust Funds, accessed December 18, 2024, https://etf.wi.gov/its-your-choice/2024/pharmacy-benefit-manager-pbm-faqs

4. Pharmacy Benefit Managers and Their Role in Drug Spending - Commonwealth Fund, accessed December 18, 2024, https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending

5. content.naic.org, accessed December 18, 2024, https://content.naic.org/insurance-topics/pharmacy-benefit-managers#:~:text=PBMs%20create%20formularies%2C%20negotiate%20rebates,manage%20mail%2Dorder%20specialty%20pharmacies.

6. What Is a Pharmacy Benefit Manager (PBM)? - Elevance Health, accessed December 18, 2024, https://www.elevancehealth.com/our-approach-to-health/consumer-centered-health-system/what-is-a-pharmacy-benefit-manager

7. Study Suggests Spread Pricing Ban on PBMs Alone May Have Little ..., accessed December 18, 2024, https://www.mmitnetwork.com/aishealth/spotlight-on-market-access/study-suggests-spread-pricing-ban-on-pbms-alone-may-have-little-impact-2/

8. Drug Pricing Legislation and Its Impact on Workers' Comp, accessed December 18, 2024, https://healthesystems.com/rxi-articles/drug-pricing-legislation-and-its-impact-on-workers-comp/

9. Eliminating Spread Pricing Would Lead to Higher Costs and Fewer ..., accessed December 18, 2024, https://www.pcmanet.org/pcma-blog/eliminating-spread-pricing-would-lead-to-higher-costs-and-fewer-choices-for-americas-employers/07/25/2023/

10. Potential Implications of Policy Changes in Medicaid Drug ... - KFF, accessed December 18, 2024, https://www.kff.org/medicaid/issue-brief/potential-implications-of-policy-changes-in-medicaid-drug-purchasing/

11. PBM reform: A closer look at state legislation this year. - Rightway Healthcare, accessed December 18, 2024, https://www.rightwayhealthcare.com/blog/pbm-reform-a-closer-look-at-state-legislation-this-year

12. S.127 - Pharmacy Benefit Manager Transparency Act of 2023 118th Congress (2023-2024), accessed December 18, 2024, https://www.congress.gov/bill/118th-congress/senate-bill/127

13. S.1339 - Pharmacy Benefit Manager Reform Act 118th Congress (2023-2024), accessed December 18, 2024, https://www.congress.gov/bill/118th-congress/senate-bill/1339

14. Rep. Harshbarger Introduces Legislation to Eliminate the PBM Monopoly on the Pharmaceutical Delivery Chain, accessed December 18, 2024, https://harshbarger.house.gov/media/press-releases/rep-harshbarger-introduces-legislation-eliminate-pbm-monopoly-pharmaceutical

Final Remarks

A group of friends from “Organizational DNA Labs” (a private group) compiled references and notes from various of our theses, authors, and academics for the article and analysis. We also utilized AI platforms such as Gemini, Perplexity, Open-Source ChatGPT, Grok and Grammarly as research assistants to save time and check for expressions' structural and logical coherence. The reason for using various platforms is to verify information from multiple sources and validate it through academic databases and equity firm analysts with whom we have collaborated. The references and notes in this work provide a comprehensive list of the sources utilized. As the editor, I have taken great care to ensure all sources are appropriately cited, and the authors are duly acknowledged for their contributions. The content is based primarily on our analysis and synthesis of the sources. The compilation, summaries, and inferences are the product of our time and motivation to expand and share our knowledge. While we have drawn from quality sources to inform our perspective, the conclusion reflects our views and understanding of the topics covered as they continue to develop through constant learning and review of the literature in this business field.