pbm – ScriptSourcing

J&J Sued Over Contracting with PBM that Overcharged Health Plan, Enrollees

A new area of potential liability for employers was recently opened when a class-action suit was filed against Johnson & Johnson, accusing it of mismanaging its pharmacy benefit manager plan, resulting in the health plan and its enrollees overspending millions of dollars on medications.

Health plans contract with PBMs to tamp down pharmaceutical costs, but reports have shown that they often send enrollees to pharmacies they own and which overcharge for medications sometimes by thousands of percent.

PBMs have been drawing increasing flak from states attorneys general as well as Congress and state houses, where multiple measures that would rein them in are in play.

If the lawsuit is successful, it could leave both self-insured and insured employers exposed to lawsuits by disgruntled employees who are forking out significantly more than they should.

The case

The class action, filed Feb. 5 in the US District Court for the District of New Jersey, accuses J&J of breaching its fiduciary duty under ERISA when it mismanaged its employee health plan by paying its PBM, Express Scripts Inc., inflated prices for generic specialty drugs that are widely available at a much lower cost.

The employees suing J&J cite a number of examples of how the company’s plan overpaid for prescription drugs. One of the most egregious examples cited in the lawsuit was an instance when the plan paid more than $10,000 for a 90-pill generic drug to treat multiple sclerosis, which can be purchased without insurance on different retail and online pharmacies for $28 and $77.

“The burden for that massive overpayment falls on Johnson and Johnson’s ERISA plans, which pay most of the agreed amount from plan assets, and on beneficiaries of the plans, who generally pay out-of-pocket for a portion of that inflated price,” the plaintiffs wrote.

“No prudent fiduciary would agree to make its plan and beneficiaries pay a price that is two-hundred-and-fifty times higher than the price available to any individual who just walks into a pharmacy and pays out-of-pocket,” they added.

It further accuses J&J of agreeing to terms under which plan beneficiaries were financially incentivized to obtain their prescriptions from the PBM’s own mail-order pharmacy, even though that pharmacy’s prices are routinely higher than the prices at other pharmacies.

The case accuses the company of:

Failing to regularly put PBM services out to bid.
Failing to negotiate favorable terms with PBMs and continually supervise PBM’s actions to ensure that the plan is reducing costs and maximizing outcomes for beneficiaries.
Failing to periodically attempt to renegotiate PBM contracts.
Failure to independently assess the PBM’s formulary placement of each prescription drug and closely supervise PBM’s formulary management to ensure the plan is paying only reasonable amounts for each prescription drug.
Improperly steering plan participants towards their PBM’s mail-order pharmacy, even though that pharmacy’s prices were routinely higher than what retail pharmacies charge for the same drugs.

The fallout

Legal observers say employers that offer their employees group health insurance that includes one of the nation’s large PBMs, could be targeted.

The driving argument would be that employers have been warned through news reports of how PBMs have been accused of not being transparent about their negotiated prices, and how they often pocket rebates that could be used to lower the plan’s and enrollees’ outlays.

Most at risk are employers that are in self-insured or level-funded plans. It’s not clear yet how much liability insured employers may have, but they too could be accused of choosing health plans for their employees that contracted with PBMs that allegedly overcharge for medications.

PBMs Feeling the Heat on All Fronts

While drugmakers have been assailed for years for increasing their prices and driving the cost of medications higher and higher, there is another player in the health care space that is receiving increased scrutiny: pharmacy benefit managers.

PBMs are intermediaries, acting as go-betweens for insurance companies, self-insured employers, drug manufacturers and pharmacies.

They can handle prescription claims administration for insurers and employers, facilitate mail-order drug delivery, market drugs to pharmacies, and manage formularies (lists of drugs for which health plans will reimburse patients.)

Express Scripts, which provides network-pharmacy claims processing, drug utilization review, and formulary management, among other services, is the best-known PBM. CVS Caremark and UnitedHealth Group’s OptumRx are other major players.

PBMs typically contract with both insurers (or self-insured employers) and pharmacies. They charge health plans fees for administering their prescription drug claims and create formularies that spell out the prices pharmacies receive for each drug on the list.

Commonly, the price the plan pays for a drug is more than the pharmacy receives for it. The PBM collects the difference between the two prices.

It can do this because the health plan does not know what the PBM’s arrangement is with the pharmacy, and vice versa. Also, the plan doesn’t know the details of the PBM’s arrangements with its competitors.

A PBM could charge one plan $200 for a month’s supply of an antidepressant, charge another plan $190 for the same drug, and sell it to a pharmacy for $170. None of the three parties knows what the other parties are paying or receiving.

Additionally, PBMs have been accused of pocketing the rebates that drug manufacturers offer, instead of passing them on to the end users: the patients who are prescribed the medications. Those rebates can be significant.

In the crosshairs

In theory, the PBMs should pass these rebates back to the individuals who are prescribed the medication so that they can reduce their out-of-pocket costs. However, if most of those costs are born by the insurer, those rebates would conceivably be transferred to the insurer that is paying for the drugs and the insurer could pass some of those savings on to enrollees.

But, because these arrangements are also confidential, the extent to which these savings are passed back to health plans is unknown.

As pressure on PBMs has grown, federal and state lawmakers, attorneys general in various states and state regulators have been taking action.

In 2022, 12 states enacted 19 measures that included a variety of restrictions and requirements for PBMs, according to the National Academy for State Health Policy.

A number of state attorneys general have filed lawsuits against some of the country’s largest PBMs. Ohio Attorney General David Yost has managed to wring more than $100 million in settlements with PBMs in the last three years, after filing lawsuits accusing them of violating state antitrust laws and overcharging state agencies like the Ohio Bureau of Workers’ Compensation and the Ohio Department of Medicaid.

And in Washington D.C., a bipartisan bill introduced in the U.S. Senate would require PBMs to file an annual report with the Federal Trade Commission about fees charged to pharmacies and reimbursements sought from drug companies.

The bill also authorizes state attorneys general “to conduct investigations, to administer oaths or affirmations, or to compel the attendance of witnesses or the production of documentary or other evidence.”

PBM Trade Association Sues Over Transparency Rules

As the federal government continues rolling out new laws and regulations aimed at increasing price transparency in the health care industry, one group is fighting back: pharmacy benefit managers.

The Pharmaceutical Care Management Association, a trade association for PBMs, has sued the Department of Health and Human Services, Internal Revenue Service and Department of Labor, all of which were instrumental in rolling out transparency regulations in 2020, which took effect Jan. 1, 2021.

The rules specifically require health plans (including PBMs) and health insurers to disclose on their websites their in-network negotiated rates, billed charges and allowed amounts paid for out-of-network providers, and the negotiated rate and historical net price for prescription drugs.

PBMs were included in the transparency rules because numerous reports have found that some of them rely on opaque contracts with pharmacies and drug companies, and that they allegedly fail to pass on rebates and lower drug prices they negotiate to their enrollees.

The lawsuit comes as PBMs are feeling the heat over their practices. At least seven states and the District of Columbia are investigating them, mainly focusing on whether they fully disclose the details of their business and whether they receive overpayments under state contracts.

Also, attorneys general in four states have sued PBMs, mostly alleging that they misled state-run Medicare programs about pharmacy-related costs.

What the PBMs are saying

The PBMs allege in their lawsuit that the rule will not benefit consumers because their knowing what the contracted drug prices are won’t have an effect on them as there are no actions they can take knowing this information.

The trade association said: “The rule offers consumers no actionable information because net prescription drug prices are not charged to consumers and never appear on a bill.” Instead, the information will likely confuse consumers, it alleges.

The trade body in its court filing said PBMs maintain that their business model hinges on their ability to negotiate confidentially and keep the details of their manufacturer contracts as trade secrets that are not available to other drug manufacturers or otherwise disclosed to the public.

“Confidentiality, in turn, allows PBMs to bargain from a position of strength to reduce drug prices,” it wrote. “Government-enforced information sharing will raise costs by reducing PBMs’ ability to negotiate deeper discounts on drug prices.

“The regulation threatens to drive up the total drug price ultimately borne by health plans, taxpayers and consumers by advantaging drug manufacturers in negotiations over price concessions,” it added.

Trump Administration Decides Not to End PBM Rebates

The Trump administration has decided not to pursue a policy that would have put an end to rebates paid to pharmacy benefit managers, which could put the focus again on how drug companies set their prices.

The proposal would have barred drug companies from paying rebates to PBMs that participate in Medicare and other government programs. According to the administration, the proposed rules were shelved because Congress had taken up the issue to control drug costs.

The spotlight has been harsh on some of the country’s largest PBMs, which have been accused of pocketing a substantial portion of the rebates for themselves while passing on only a sliver of the rebates to the insurance companies that hire them and the health plan enrollees that pay out of pocket for the drugs.

Rebates had become a popular target of criticism in Washington after drug companies lobbied aggressively to cast them as the reason for high prices. PBMs negotiate drug discounts in the form of rebates, often keeping some of that money for themselves.

However, many pundits say that the rebate system put in place by large, national PBMs incentivizes drug companies to keep list prices high, which in turn defeats the purpose of the PBMs – that is, to reduce the out-of-pocket costs that health plan enrollees pay for their prescription drugs.

Like insurers and PBMs, some of which have sought to undermine the practice with accumulator adjustment programs, the Trump administration believes such coupons may be driving up health care spending by getting patients to opt for higher-priced name-brand drugs over generics.

The Centers for Medicare & Medicaid Services proposal unveiled in January would have essentially blocked drug manufacturer rebates from going to PBMs and health plans that serve Medicare and Medicaid patients, starting next year.

Now that the push to eliminate rebates has come to end, the focus looks like it’s shifting to how drug companies price their products. We will keep you posted if any legislation surfaces in this area.

Ohio Auditor’s Report on PBMs Sparks Changes

An audit carried out for Ohio Medicaid found that large pharmacy benefit managers that contract with the state’s Medicaid program have been pocketing a larger and larger share of drug pricing.

In fact, PBMs charged Ohio Medicaid plans 31% more for generic prescriptions than the amount they paid pharmacists for the drugs, the audit found, shedding light on a practice that observers say is being mirrored throughout the country.

The auditor found that the two largest PBMs operating in the state billed Medicaid managed-care plans $223.7 million more for prescription drugs than they paid pharmacy providers in 2017.

The report comes as pressure grows on PBMs to be more transparent about their pricing and costs amid complaints by pharmacies that are barely breaking even or losing money due to the tough contracts they have to enter into with PBMs. Many critics say that PBMs are not passing on the savings to payers when they negotiate lower contracts with pharmacies.

“We know that Ohio is not alone,” Ernie Boy, executive director of the Ohio Pharmacy Association, said in a prepared statement. “Every state and every payer in the country is grappling with these overinflated costs.”

What’s going on

Medicaid doesn’t directly pay pharmacists. Ohio Medicaid pays five private insurance companies to manage Medicaid plans for the state. The insurance companies contract out pharmacy benefits to middlemen, which pay pharmacists to fill prescriptions.

Medicaid and most health plans contract with PBMs to essentially run the drug portion of the health insurance equation. They are supposed to negotiate volume discounts with drug-makers and rates with pharmacies to reduce the overall drug spend by the payers.

PBMs make a good deal of their money from a growing “spread” between what the PBM pays pharmacies and what it charges payers (in this case, the state Medicaid program). The PBM keeps the spread, but most PBMs are not transparent about how much the spread is, leaving both the pharmacies and the payers in the dark.

According to the report, the overall spread in 2017 in Ohio was $224.8 million – with an average spread of 8.9% per prescription. Generic drugs, which comprise 86% of Medicaid prescriptions in Ohio and for which pricing is most opaque, accounted for an overwhelming majority of the spread.

The report found that during the entire study period:

The average spread was $5.71 per prescription.
The average spread for brand-name prescriptions was $1.85.
The average spread for generic prescriptions was $6.14.
The average spread for specialty drugs was $33.49.

Generic drugs account for 86% of Medicaid prescription claims in Ohio.

The auditor stated in its report that PBMs’ administrative fees typically range from $0.95 to $1.90 per prescription.

“Although this figure may not include all of services performed by a (pharmacy benefit manager), it suggests Ohio’s current spread may be excessive and warrants the state taking further action to mitigate the impact on the Medicaid program,” the report stated.

As part of its findings, the auditor noted that pharmacies in Ohio have been shuttering at a brisk pace since Medicaid PBMs have been cutting how much they reimburse them for medications.

Between 2013 and 2017, some 371 pharmacies closed in Ohio, coinciding with significant reimbursement reductions in their PBM contracts. The majority of those closures have taken place since 2016.

As a result of the audit, Ohio’s Medicaid department directed its managed-care organizations to quit their contracts with PBMs, citing the opaque pricing practices.

The state’s five managed-care plans were required to enter into new contracts with companies that were able to manage pharmacy services using a more transparent pricing model by the start of 2019.

Pharmacy Benefit Managers: A Brake on Rising Prescription Costs or a Cause of Them?

In 2017, spending on prescription drugs grew 11%, faster than any other category of health care spending, according to the U.S. Centers for Medicare and Medicaid Services.

The report cited increased use of new medicines, price increases for existing ones, and more spending on generic drugs as the reasons for this growth. Increasingly, though, observers of the health care system point to one player – the pharmacy benefit manager.

PBMs are intermediaries, acting as go-betweens for insurance companies, self-insured employers, drug manufacturers and pharmacies. They can handle prescription claims administration for insurers and employers, facilitate mail-order drug delivery, market drugs to pharmacies, and manage formularies (lists of drugs for which health plans will reimburse patients.)

A PBM typically has contracts with both insurers and pharmacies. It charges health plans fees for administering their prescription drug claims, and also negotiates the amounts that plans pay for each of the drugs.

At the same time, it creates the formularies that spell out the prices pharmacies receive for each drug on the lists. Commonly, the price the plan pays for a drug is more than the pharmacy receives for it. The PBM collects the difference between the two prices.

It can do this because the health plan does not know what the PBM’s arrangement is with the pharmacy, and vice versa. Also, a health plan does not know the details of the PBM’s arrangements with its competitors.

A PBM could charge one plan $200 for a month’s supply of an antidepressant, charge another plan $190 for the same drug, and pay the pharmacy $160. None of the three parties knows what the other parties are paying or receiving.

In addition, drug manufacturers, who recognize the influence PBM’s have over the market, offer them rebates off the prices of their products.

Questionable transparency

In theory, the PBMs pass these rebates back to the health plans, who use them to moderate premium increases. However, because these arrangements are also confidential, the extent to which these savings are passed back to health plans is unknown. Many observers believe that PBMs are keeping all or most of the rebates.

To fund the rebates, drug manufacturers may increase their prices. The CEO of drug-maker Mylan testified before Congress in 2016 that more than half the $600 priceof an anti-allergy drug used in emergencies went to intermediaries.

The PBMs argue that they help hold down drug prices by promoting the use of generic drugs and by passing on the savings from rebates to health plans and consumers.

They reject the notion that they are somehow taking advantage of health plans and pharmacies, pointing out that they are “sophisticated buyers” of their services. They also argue that revealing the details of their contracts would harm their ability to compete and keep prices low.

Nevertheless, PBMs are now attracting scrutiny from Congress, health plans and employers. At least one major insurer has sued its PBM for allegedly failing to negotiate new pricing concessions in good faith.

In addition, businesses such as Amazon are considering getting into the PBM business. Walmart is already selling vials of insulin at relatively inexpensive prices.

PBMs earn billions of dollars in profits each year. With the increased attention those profits have brought, it is uncertain how long that will continue.