The federal political pressure on drug pricing may have stalled on Washington gridlock, but as we previously covered here at CBPartners, it is driving real change at the state level. State lawmakers are better positioned to develop laws that regulate pharmaceutical stakeholders, given the more manageable scope of state markets, as well as their roles in state-level payment considerations, such as MEDICAID and other public programmes. In addition to the many new bills addressing manufacturer price transparency, a wave of legislation targeting pharmacy benefits managers (PBMs) has also emerged in the past year.
This focus on PBMs, a relatively unknown entity to the general public, has come out of the evolving debate over who is ultimately responsible for rapidly rising drug prices. For example, while USA portfolio has seen an average WAC increase of over 9% annually since 2010, the average net price increase was less than 5%. The implication to casual observers and policymakers is that the 4% difference between those two figures is ‘margin-sharing’ with “middle-men” players like PBMs. In the convoluted cost structure of the USA, PBMs are an easy target relative to the two larger, more powerful groups of manufacturers and health plans. In reality, PBMs, which have a diverse customer base, are driven by the concept of pooling the customer base to negotiate for higher rebates – which are mostly passed along to the health plans which contract with them for support, as well as other customers like employer groups, and individual benefit holders. The degree to which these PBM-negotiated rebates are passed along to these customers depends upon the type of formulary they decide to procure (open, closed, etc.).
Compounding this misguided perception of supply-chain profit-sharing is the truly minimal regulation of PBMs at the state level. They are not always required to register or obtain a license to operate, and usually do not report to government authorities. This makes them an easier target for state lawmakers looking to take action on drug prices.
In the past year alone, over 15 states have introduced laws regulating PBMs. The majority would implement fairly minor changes, but are potentially significant for PBMs’ operating autonomy. NH, NJ, and HI all want PBMs to register with the state before operating within their respective jurisdictions. NC, WV, and CT are considering anti-gag rules between PBMs and pharmacists, allowing pharmacists to discuss lower-cost alternatives with patients when appropriate.
Some states are considering more comprehensive changes, including requirements of rebate or pricing disclosure to health plans and other groups. For example, CT’s bill, SB925, proposes that manufacturers must report all PBM rebates as a part of a larger price transparency law. Many of the laws appear targeted at specific PBM issues, like A4338 in NJ. This bill would require PBMs to explain their methodology for selecting which generic equivalent they provide when there are multiple sources. The bill in the CA Assembly, AB315, would go further than the rest, establishing a fiduciary duty between PBMs and payers. This would require PBMs to disclose any potential conflicts of interest, and to demonstrate that they are operating in the payers’ best interests by revealing their drug acquisition and manufacturer rebates.
Any kind of methodology or rebate disclosure could be hugely debilitating to PBMs, who rely on their confidentiality to establish negotiating leverage in both directions of their operation. Even requirements for PBMs to report directly to government agencies could be challenging. If disclosure is not sufficiently confidential, leaks or other unintended revelations could reveal to both manufacturers and the health plans they serve how a PBM is treating them relative to other stakeholders. Payers could demand greater rebates if they see others receiving more significant discounts, and manufacturers could push in the opposite direction to lessen their provided rebate. The net effect would likely be contrary to the bills’ intentions: freedom of information in this space hamstrings PBMs’ ability to negotiate for larger rebates, which thereby increases the net price. Any discount that would otherwise be passed along to the health plan customer or directly to patients via cost-sharing would be affected.
While these kinds of laws would be significant anywhere, CA, CT, and NJ are key states for the future development of PBM regulation. If these major environments (CA and NJ with large employer groups and patient populations, while CT is the home to many insurance companies) pass PBM regulations, it would send a strong signal to other states to follow suit. They also increase the likelihood of a patchwork of regulation developing, with different standards for reporting and transparency across all 50 states, rather than a blanket federal policy. It would create substantial administrative burden and inequity – and may actually further affect the already precarious situation around healthcare coverage on a state-by-state level (EXCHANGES, but also MANAGED MEDICAID, in addition to general commercial insurance books of business).
While almost all laws in this category are still struggling through the committee phase of development, it will be important to monitor their progress over the rest of the year. CBPartners will continue to track this issue at both the state and federal level to better understand the evolving role of PBMs in the USA pricing landscape.