The Right Prescription for Reforming PBMs in California

05/30/2017 10:35 am ET

Consumers, legislators, drug manufacturers, and others can all agree: prescription drug prices are far too high and harming tens of millions of Americans. The reasons for this are many, but one of the biggest contributors is the role played by pharmacy benefit managers (PBMs) in driving up drug costs.

Theoretically, PBMs should play a role in reducing prices. The idea is that these companies will aggregate drug purchasing power from the payers (consumers, insurance companies, and businesses) and use that power to negotiate lower prices from drug manufacturers and lower fees from pharmacies. For this system to work PBMs have to be free of conflicts of interest and to have clear incentives to reduce prices.

But the reality is very different. The PBM market lacks competition, transparency and accountability. Three companies, ExpressScripts, Optum, and CVS Caremark, control around 80% of the market share. And they use their power to restrict consumers to their own mail order and specialty pharmacies, reducing choice and quality of care for many patients.

PBMs are supposed to be honest brokers that secure the lowest prices and best services, but the largest PBMs own mail order operations and specialty pharmacies. This is a huge conflict of interest.

And in recent years PBMs have made their profits from the rebates they receive from drug manufacturers and do not pass on to their consumers. Since 2003 the two largest PBMs—ExpressScripts and CVS Caremark—have increased their profits by 600% from $900 million to nearly $6 billion. They have a powerful incentive to increase drug prices, since the higher the prices, the higher the rebates. PBMs therefore profit from higher drug costs. State authorities have also repeatedly sued PBMs for making secret agreements with drug manufacturers to force consumers to buy higher cost, less effective drugs in order to maximize rebates.

There is very limited federal regulation of this industry. The FTC has adopted a hands-off approach, and voted to approve a massive merger of two PBMs back in 2012. In fact, it has sometimes sent letters to states arguing against additional regulation and oversight. States have increasingly stepped into the gap to protect consumers, but stronger measures are needed.

PBMs are also grabbing greater profits through underhanded conduct. They take back arbitrary fees from pharmacies months after claims have been adjudicated, use audits as a way to secure greater revenue, and manipulate generic drug reimbursement rates. This forces pharmacies to dispense drugs below cost. Express Scripts and CVS have been the subject of several major federal or multidistrict cases for misrepresenting plans to their sponsors, patients, and providers, committing fraud, enriching themselves through kickbacks, and failing to abide by ethical and safety standards.

Combine a highly concentrated market, little or no transparency, and a lack of effective regulation, and you get market failure. PBMs have lobbied furiously against efforts to hold them accountable, to promote competition in the industry, or to determine how they make their profits. When asked how they are obtaining savings for consumers since drug prices are going up, they respond, “Trust us.”

Right now California has no regulatory agency with the power to regulate PBMs. Bill A.B. 315, introduced by Assemblymember Jim Wood, would fix that and appropriately put this power in the hands of the Department of Managed Health Care (DMHC). Consumers need a strong regulator of PBMs and the DMHC possesses the resources to perform that job.

Moreover, to further protect consumers, plan sponsors and providers from mischievous and opaque PBM conduct, this bill would require PBMs to obtain licenses from DMHC. The Director of DMHC would be tasked with assessing civil penalties on PBMs that conduct business in California without a current license, and revoking or placing a PBM’s license on probational status when warranted. The bill further requires PBMs to exercise a duty of good faith and fair dealing in the performance of their contractual duties, including disclosure of conflicts of interest. The bill requires PBMs to disclose data regarding drug costs, rebates, and fees earned to their clients upon request. And finally, the bill stops PBMs from prohibiting network providers from informing consumers of alternative medication options or from dispensing a certain amount of prescribed medication so long as the PBM’s own pharmacy dispenses that same medication.

A.B. 315 is a solid first step toward regulating PBMs and ensuring that they truly help consumers. This industry is extremely opaque and unaccountable, and this bill would begin the journey toward informing payers, protecting consumers, and ensuring savings for all.

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