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Pharmacy benefit managers such as Express Scripts are middlemen who negotiate prices between health plans and drug companies.
The Centers for Medicare & Medicaid Services (CMS) has proposed a new rule that would attack one of the key tactics enriching the middlemen who keep prescription drug prices high and make it difficult for independent pharmacists to survive.
The rule could dent the profits of pharmacy benefit managers (PBMs), middlemen who negotiate prices between health plans and drug companies, and in the process use their knowledge advantage to skim off the top from virtually everybody.
These companies, three of which control around 80 percent of the market, have come under fire at the state and federal level for betraying their promise of securing lower drug prices. They are part of the tangle of interests in the pharmaceutical supply chain, which has patients paying exorbitant rates for lifesaving medications. Independent pharmacies that are unaffiliated with PBMs have been hit particularly hard, with low reimbursement rates for distributing drugs, high and often random fees, and an inability to earn back above costs. Many such pharmacies have shut their doors, particularly in rural areas where they are a key element of the health system.
The CMS rule isn’t the first effort at tackling PBMs. But it may be one of the most important because of what it’s targeting: a particularly pernicious part of the PBM arsenal known as direct and indirect remuneration (DIR) fees, which these middlemen often pocket.
These fees, which are payment adjustments made after a prescription drug is sold, are imposed by PBMs and other participants in the drug supply chain as part of separately negotiated arrangements. They include rebates from drug manufacturers, legal settlements that affect the cost of Medicare Part D drugs, and other price concessions. But in the process, PBMs got the DIR fees to legally apply to pharmacies as well, giving them a way to make them pay clawback money months after drugs are sold.
PBMs have gotten away with their practices for so long because of the lack of transparency.
Under DIR, pharmacies with better performance of their drugs—determined by factors like whether patients stay on their medications—are supposed to get reimbursement bonuses. Pharmacies with worse performance get hit with DIR fees, which the PBM takes out of reimbursement checks every quarter. But the fees for poor performance are much higher than the bonus payments for good performance. The fees can be high enough to reduce pharmacy profits by as much as 50 percent on a single prescription. The average pharmacy pays nearly $100,000 per year in DIR fees. And they can be random and uncertain, meaning pharmacists cannot plan for them in their budgeting.
In addition, it’s difficult for pharmacists to intervene to ensure good patient outcomes, as they are not doctors and may not command that kind of authority. In reality, DIR fees are a way for PBMs to extract cash from pharmacists who are at their mercy, and who cannot opt out of the DIR process because the provision is included in all take-it-or-leave-it PBM contracts.
By law, CMS must get a full report of DIR fees, to help Medicare understand the true net cost of all drugs purchased through its Part D prescription drug benefit. But PBMs hide the fees by calling them “network variable rates” or “pharmacy performance payments.” This cranks up costs for patients in particular, in complex ways.
Medicare determines a patient’s co-payment based on how much they pay at the point of sale. Patients don’t get the benefit of any after-the-fact reduction in price, meaning that they pay more at the pharmacy counter than necessary. Plus, higher point-of-sale prices mean that patients hit various thresholds, like the catastrophic care phase, more quickly. So even though the PBM is taking out DIR fees, the patient is paying more.
The new rule attempts to protect both pharmacies and patients. CMS notes that “pharmacy price concessions,” their term for the process discussed above, are among the fastest-growing type of DIR fees, growing from 0.01 percent of gross drug costs in Part D ($8.9 million) in 2010 to 4.8 percent ($9.5 billion) today. CMS’s changes would standardize how pharmacy price concessions are applied, to make sure patients aren’t paying higher prices that PBMs eventually take in profits.
CMS would effectively ban clawback fees, and help consumers by building in the anticipated pharmacy price concessions to the price patients actually pay when they buy prescription drugs. This would make it harder for PBMs to run away with the fees, and should lower co-payments for patients. Plus, it would give certainty to pharmacists on what their reimbursement will actually be, making it easier for them to recoup a reasonable rate for their services.
“The new proposed rule from CMS addressing pharmacy DIR Fees is a bold move to rein in corporate power while lowering drug costs and helping small businesses compete on a level playing field,” said Zach Freed of the American Economic Liberties Project in a statement. Similarly, the National Community Pharmacists Association responded encouragingly to the proposed rule. “After many years and multiple administrations, this is as close as we’ve ever come to reforming pharmacy DIR fees,” said B. Douglas Hoey in a statement.
The Trump administration took a different approach to reforming PBMs, going after the rebates PBMs negotiate with drug companies. These rebates have run up rapidly in recent years, and they lead to higher list prices and subsequently higher co-payments for patients. It’s all in service to PBMs skimming more profits.
The Trump “rebate rule” would have eliminated the safe harbor for rebates from anti-kickback statutes. This would have made the PBMs’ negotiations with drug companies transparent, and let patients benefit from lower costs.
But the Congressional Budget Office scored this rule as raising costs in Medicare, on the assumption that rebates would disappear and drug costs would rise. This is a somewhat odd assumption—is the idea that PBMs wouldn’t negotiate anything to justify their existence anymore?—but the fact that it was scored as a cost meant that repealing the rebate rule would be a government savings, to be stuck in spending bills as a “pay-for.” That’s exactly what happened as the Biden administration and congressional Democrats have scrambled for ways to pay for their ambitious programs: The bipartisan infrastructure bill delayed the rebate rule for two years, and the Build Back Better Act would, if passed, repeal it permanently.
This delay and possible repeal leave the new proposed rule on DIR fees as the one remaining federal tool to chip away at PBM power. It’s an important one, considering that PBMs’ power has grown. All three of the top PBMs have partnered with a giant insurance company: CVS (Aetna), Express Scripts (Cigna), and Optum Rx (UnitedHealth). This gives PBMs more power over patients and particularly over pharmacies. With a pharmacy chain, an insurance company, and a PBM all rolled into one, the post-merger CVS (Aetna) can jack up costs for independent pharmacies and increase market share for themselves.
PBMs will still have the ability to impose fees on transactions at the pharmacy counter, even if they get built into the point-of-sale price. The rule change is not a perfect solution. But PBMs have gotten away with their practices for so long because of the lack of transparency. If they’re going to gouge pharmacists and consumers now, they’ll have to do it in the open.
States have been going after PBMs as well, despite federal hostility in previous administrations. New York just passed a law establishing licensing and regulation of the industry, following other states that have tried to protect their Medicaid programs and patients. But federal action is helpful because it’s not piecemeal. The action shifts now to whether the industry will impose loopholes in the final rule, which CMS is aiming to finalize for the 2023 plan year.
The rule change was made in conjunction with President Biden’s executive order on promoting competition within the U.S. economy, with which it fits quite well. PBMs are a concentrated, obscure industry that has been jacking up the cost of prescription drugs and causing difficulty for independent pharmacists. It’s high time their practices were exposed, and truncated.
