Pharmacy Benefit Managers Are Feeling a Push From States to ‘Turn the Lights on’ to Their Business Practices

In the endless debate over how to lower the cost of prescription medicines, Congress and the Biden administration are largely focused on reining in the prices set by drugmakers. But states are turning their sights to another player in the supply chain: pharmacy benefit managers.

Pharmacy benefit managers, or PBMs, are intermediaries that negotiate with manufacturers for lower drug prices on behalf of insurers and facilitate payment to pharmacies for the medicines they dispense. They’ve traditionally been less visible to the public, but their influence has grown, with the three largest PBMs — UnitedHealth Group Inc.’s OptumRx, CVS Health Corp.’s CVS Caremark and Cigna Corp.’s Express Scripts — processing an estimated 77 percent of all prescription claims last year.

Now, pressure on the PBMs is mounting, with a growing number of states looking to shed light on the middlemen’s secretive business practices — and uncover just how much money they actually save patients.

“PBMs have come to play an important role in the pharmaceutical space, and the services that they provide are useful,” said Juliette Cubanski, deputy director of the Medicare policy program at the Kaiser Family Foundation. “There's certainly a lack of transparency when it comes to the magnitude of the dollars changing hands.”

While the federal government has slow-walked some of its efforts to address PBMs this year, states have been more aggressive, with auditors and attorneys general launching investigations into their business practices and lawmakers introducing dozens of bills to increase oversight and transparency around their negotiations with drugmakers and pharmacies.

“The states are where all the activity is right now,” said Antonio Ciaccia, chief executive officer of the drug pricing research firm 46brooklyn, with a rising number of states “trying to address the collateral damage of the excessively inflated prices that the PBM-drugmaker market dynamic has created.”

States pushing hard on PBMs

The flurry of legislative activity was set off by a 2020 Supreme Court ruling that held Arkansas has the right to regulate PBMs within the state, which “really gave us the ability to assert a regulatory authority there on this one piece of the prescription drug supply chain,” said Troy Downing, Montana’s state auditor and commissioner of securities and insurance.

Montana is one of more than a dozen states where lawmakers have passed legislation this year to increase PBM oversight. Downing said one of the challenges in the state was that it was unclear how many PBMs were even doing business in Montana, and that regulators wanted to understand “how much money is in that middle tier of the drug supply chain.”

State lawmakers passed a bill in April that aims to provide regulators with more information on the cost of medications, rebates offered by manufacturers to get on PBMs’ list of covered drugs and more.

“What we want to do is just turn the lights on,” said Downing, a Republican elected official, adding that he hopes the transparency will make it easier for drugmakers and payers to negotiate better terms with PBMs. If it doesn’t, the “worst-case scenario is next session we know what we didn't know when we started down this path, and we just start to refine that to create a better tool.”

More than 100 other state bills targeting PBMs have been introduced this year, and in July, attorneys general from 33 states and Washington, D.C., filed an amicus brief in support of a North Dakota law that would impose state oversight and require PBMs to disclose some financial information.

Meanwhile, Ciaccia said newly passed legislation in West Virginia could be particularly impactful — if it’s enacted well. It’s the first state to pass a law requiring that PBMs offer 100 percent of the rebates they receive from drugmakers to health plans.

The law is now in the rulemaking phase — “regulatory purgatory,” Ciaccia said — but if it isn’t watered down, “that is going to be an earthquake moment for the rebating system.”

Separately, multiple states are investigating the business practices of PBMs, particularly how they manage state health plans. In June, for example, Centene Corp. agreed to pay Ohio $88.3 million and Mississippi $55.5 million to settle lawsuits alleging its PBM overbilled the states’ Medicaid programs for pharmacy services. In March, Centene called the allegations “unfounded.”

The PBM industry, used to being on the defensive, is fighting back against the state efforts. In an emailed statement, the Pharmaceutical Care Management Association, a PBM trade group, said “the focus for state policymakers should be to examine brand drug manufacturers’ pricing strategies” because PBMs “are the only member of the prescription drug supply and payment chain working to reduce costs for patients.”

OptumRx and CVS Caremark referred questions on state scrutiny of PBMs to the trade group, while a request to Express Scripts went unanswered.

Federal slowdown in regulatory efforts

Efforts at the federal level have been more mixed. In late 2020, the Trump administration released a rule that would require PBMs to disclose the net prices they negotiate with drugmakers, and another that would eliminate the safe harbor from federal anti-kickback laws for Part D drug rebates, which drugmakers offer to PBMs in order to participate in their formularies.

“Rebates are a big mystery,” Cubanski said. “We just don't have a good handle on how much we're actually paying for drugs, and who gets discounts.”

But the Biden administration put the rebate rule on ice in January, and this month, the Senate voted to delay it even further in order to generate $49 billion in government savings to help pay for the bipartisan infrastructure bill. Industry players now hope it’ll be scrapped entirely.

The Pharmaceutical Care Management Association is also suing the federal government to block an insurer transparency rule that would require PBMs to report the historical pricing data on prescription medicines, arguing it would drive up costs by giving drugmakers access to each others’ rebate data and allow them to “discount less deeply as they realize their price concessions went beyond those of competitors.”

The rule was scheduled to go into effect in January, but this week, the Biden administration delayed enforcement of key parts of it for six months, until July 1, 2022.

Ultimately, Ciaccia said he expects the Biden administration to “go after some of the lower-hanging fruit” like promoting transparency and enacting a ban on spread pricing – a practice where middlemen boost their profits by charging health insurers more and paying pharmacies less for medicines – which was included in a bipartisan drug pricing proposal in 2019.

Sen. Ron Wyden (D-Ore.), who’s been leading drug pricing efforts for Democrats’ upcoming $3.5 trillion spending plan, wants the partisan bill to include a measure that would “discontinue certain rebate practices that limit competition and patient access to affordable drugs” and provide more transparency into the prescription drug supply chain, he said in a policy wishlist released in June.

But other federal PBM legislation introduced this year hasn’t gone far, despite the bipartisan interest in pinning down their role in the prescription drug pipeline. Sens. Chuck Grassley (R-Iowa) and Maria Cantwell (D-Wash.) reintroduced legislation this spring to study “potentially abusive behavior” and consolidation among PBMs and report policy solutions to Congress. But that legislation has stalled in the Senate; so has a bipartisan bill led by Sen. Jon Tester (D-Mont.) that would keep PBMs from extracting additional fees from pharmacies after they’ve been reimbursed.

“This legislation will mandate transparency and accountability so that we can protect pharmacies and patients and ensure that folks in rural America can continue to get the prescriptions they need,” Tester said in a statement.

The dynamics are complicated, though. Tester also helped craft the bipartisan infrastructure bill, which would further delay the Part D rebate rule. His office declined to elaborate on why he supported the inclusion of the measure.

PBMs in the public consciousness

As PBMs become more visible, the crusade against them is also spilling over from one involving industry watchers to one directly appealing to the public. Future Majority, a political action committee that backs Democratic causes, spent about $320,000 to run a commercial in June accusing PBMs of “cheating Americans at the pharmacy counter.”

It was one of the country’s most expensive TV ad campaigns on health policy in the past six months, according to AdImpact, an advertising analytics firm.

Mark Riddle, Future Majority’s president and a Democratic strategist, said the group decided to run the ad after its polling showed support among swing district voters for a federal investigation into whether PBMs are “rigging the system to raise prices of prescription drugs.”

The finger-pointing between PBMs, drug companies and insurers is nothing new, Cubanski said, and ultimately “patients are the ones who are just kind of left paying the price.”

For now, the states are the testing ground for efforts to realign the scales.