I am hopeful that in this issue we can bring to the public’s attention a very serious problem. First, I wonder how many of our readers know what a Pharmacy Benefit Manager (PBM) is. Then the question is – of those of you who know what a PBM is – do you really know how the PBM’s are operating and for whose benefit? Regardless of your answers, I believe you will be surprised at the real story concerning PBMs. Because I don’t believe many people realize how they are being ripped off, I am going to spend more time on this subject. Hopefully, our readers will read all of this information and then check things out for themselves to see how truly bad things are.
PBMs have been involved in the health care industry since the 1960s. In the early years, PBMs performed the administrative work involved with the claims administration – they processed paperwork dealing with insurance claims for prescription drugs. As prescription drug coverage became more prevalent, insurance companies were faced with a big logistical problem. Prescription drug claims were relatively small in dollar amount, but massive in quantity.
As more and more Americans use maintenance drugs, prescriptions taken on a daily basis, the number of claims continues to grow. As the number of claims increased, and to save money, most insurers utilized PBMs to handle the paperwork. It was cheaper to hire a PBM to process the claims than to allocate their own workers to perform those duties. But then something happened in Congress that changed the role of PBMs dramatically.
Once Congress passed Medicare Part D and it came into existence, PBMs boomed. PBMs also handle processing for other plans. In fact, PBMs handle nearly every prescription drug insurance plan in the United States. With increasing numbers of Americans signing up for Medicare, and with the increasing number of people with insurance through the Affordable Care Act, the power of PBMs has grown. No longer are PBMs just the administrative processing companies they used to be. They grew into “middlemen” and were able to market their services as cost-saving. They also touted their ability to use corporate customers’ combined purchasing power to negotiate lower costs from pharmaceutical manufacturers. All of this sounded good since it appeared drug costs would be reduced sharply.
Today, the top PBMs are as big as or bigger than their clients. Express Scripts generated $94 billion in revenues in 2012 after merging with Medco, putting it at No. 24 on the Fortune 500. Its annual profits have grown from $250 million a decade ago to $1.8 billion in the 12 months ended in June, according to S&P Capital IQ. The company now manages benefits for more than 100 million Americans. Total industry revenues exceed $250 billion, according to J.P. Morgan analyst Lisa Gill. The big prescription managers — Express Scripts, CVS Caremark, and OptumRx control about 70 percent of all U.S. prescriptions — have become some of the most potent players in health care.
There is a long-standing misconception in the health care industry that PBMs save money; that they somehow lower costs for everyone. What they really do is negotiate deals for themselves through rebates with pharmaceutical manufacturers and miniscule payments to pharmacies. One example, taken from the experiences of Meridian Health Systems and published in Fortune last October, demonstrates one way PBMs are profiting. Meridian Health Systems, a non-profit that provides prescription coverage for its 12,000 employees and has in-house pharmacies, compared the price it was charged by the PBMs with the price its pharmacy was reimbursed for one drug.
Meridian was billed $92.53 for a prescription for generic amoxicillin filled at an outside pharmacy. Meanwhile, Express Scripts paid $26.91 to Meridian’s own pharmacy to fill the same prescription. That meant a spread – the difference between the cost a drug is purchased at and the price a pharmacy is reimbursed – of $65.62 on one bottle of a generic antibiotic. Meridian isn’t the only employer that is paying such spreads. Susan Hayes, who has audited more than 100 PBM contracts for her auditing and consulting firm Pharmacy Outcomes Specialists, says: “The nation’s employers are being taken for a ride.”
Until recently, last year in fact, PBMs were not subject to the requirements of the Federal False Claims Act (FCA). That meant PBMs had practically zero oversight and carte blanche when it came to Medicare Part D reimbursements and costs. They were making a financial killing at the expense of the American people and the very businesses they were supposed to be helping.
Another money-making scheme for PBMs involves Medicare. Medicare can be a bit complicated unless you are one of the few who is actively involved in the system. At its most basic level, Medicare functions through teamwork between a plan sponsor, the federal government, pharmacies and PBMs. A plan sponsor is a private insurance company that submits a bid to the Center for Medicare and Medicaid Services (CMS) estimating the cost to provide prescription drug coverage on a per beneficiary/per month basis. If the bid is approved, the plan sponsor can market the plan to American citizens to get beneficiaries to sign up for coverage.
As part of that bid, the sponsor is required to submit a “negotiated price.” The negotiated price “must be the amounts ultimately paid to the pharmacy.” It should include all price concessions and rebates, even those that a PBM negotiates for itself. As it turns out, PBMs have not been passing along the rebates to the plan sponsor, who would then be able to provide a lower negotiated price to the government. The lower the negotiated price, the lower the government costs. Lower government costs equal lower monthly premiums and copays for beneficiaries. By not passing along those rebates and keeping the money for themselves, PBMs have been defrauding not only the government, but also every citizen paying a higher premium and copay. You may wonder why our elected officials are letting this happen.
Unfortunately, that isn’t the end of the story. Recently, last year in fact, PBMs became subject to the Federal False Claims Act and now have to report the amount of their rebates to CMS. Reporting rebates means the PBM can no longer keep that money. Instead, the PBMs have started charging that money back to the pharmacies as “network access fees,” “administrative fees,” “technical fees,” or “service fees.” Technically, those fees also have to be included in the plan sponsor’s bid to CMS and CMS has proposed rules to make that requirement clear.
For right now, thanks to the extra fees, pharmacies are reimbursed less than what their costs are on some drugs. But the PBM keeps the extra fees and no cost-savings are passed back to the government. This is absolutely a rip-off – it can’t be justified and it’s costing consumers a bundle. Again, why are our elected officials letting this happen?
A 2012 report by the Kaiser Family Foundation calls the PBM assertions of Medicare savings “overstated” and says the reduced cost probably stemmed from incorrectly high predictions of prices (because true negotiated prices were not included in the bid) and from brand drugs going generic (which has nothing to do with PBMs).
If you were to ask a PBM how they are doing, they would claim they are saving their customers money. There is much debate about the truth of that claim. But even if it is true, bear in mind that pharmacies and American citizens are not their customers. PBMs work for the plan sponsors and the money a PBM “saves” is not a reduction in cost. Neither is this a reduction in expenses through increased efficiency. Instead, it is money the PBMs have charged someone else. Those “somebodies” are:
• Your neighborhood pharmacist who may be forced out of business because he can’t pay his employees.
• The company you work for because they are paying more for the drugs themselves so the PBM can keep the difference in price as a profit.
• You or someone you know who is insured by a Medicare plan using a PBM because you have higher premiums than you would if the actual prices paid to pharmacies, the true “negotiated price,” were reported.
As it functions right now, the health care industry is at the whim of the PBMs. Those in the pharmaceutical industry, with the help of politicians who created this monster, knew exactly what they were doing. Maybe the politicians were just totally in the dark when they did it. Putting the matter in perspective, consider that the PBMs:
• determine where patients fill their prescriptions by creating preferred pharmacy networks (incidentally, the preferred pharmacies are generally charged a fee for participation, further reducing their reimbursements).
• decide what drugs people will take by creating preferred drug lists.
• arbitrarily set how much pharmacists will get reimbursed for dispensing those drugs.
• shift patients to generic drugs by mandating generic substitution.
• require patients fill basic prescriptions at the PBMs’ vast mail-order pharmacies.
With some 30 million Americans expected to gain prescription-drug coverage through the Affordable Care Act, PBM use is likely to continue increasing. Thankfully, several states are looking to pass legislation that would require more transparency with PBMs. Unfortunately, Alabama is not one of them. You may want to ask our elected officials in Alabama why they haven’t joined in.
CMS is continually evolving its rules and regulations in an attempt to get ahead of the PBMs, but it is a constant game of catch-up. Nobody is arguing that PBMs should not make a legitimate profit, but they should have to do it in the manner intended – by being more efficient. The way the system works now, the wrong people are paying the cost so that PBMs can make billions.
If you need more information on this very important subject, contact Rebecca Gilliland, a lawyer in our firm’s Consumer Fraud Section, at 800-898-2034 or by email at Rebecca.Gilliland@beasleyallen.com. I also suggest that you check with your local pharmacists and ask about the PBM problem.
Sources: http://katherineeban.com/2013/10/23/painful-prescription-fortune-com/; and http://www.nhpf.org/library/issue-briefs/IB749_ABCsofPBMs_10-27-99.pdf
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