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Federal and state governments tackle prescription drug pricing

In an effort to learn about rising prescription drug costs, the U.S. Senate Finance Committee invited the five largest pharmacy benefit managers to Capitol Hill this week.

In an effort to learn about rising prescription drug costs, the U.S. Senate Finance Committee invited the five largest pharmacy benefit managers to Capitol Hill this week.

Until now, few knew of pharmacy benefit managers' role in the health care system.

North Dakota was one of the first states to pass legislation regulating them, the North Dakota Pharmacists Association said.

Pharmacy benefit managers, or PBMs, negotiate lower prices from manufacturers and pharmacies for their beneficiaries. PBMs also decide which drugs a prescription plan will cover.

Mike Schwab, executive vice president of the North Dakota Pharmacists Association, says PBMs may be doing the opposite.


"We're seeing PBMs not actually passing all discounts back to the employer," Schwab said.

The Senate Finance Committee's chairman, Republican Sen. Chuck Grassley from Iowa, and its top Democrat, Sen. Ron Wyden of Oregon, invited Cigna Corp., CVS Caremark, Humana Inc., OptumRx and Prime Therapeutics LLC, which is the PBM for all Blue Cross Blue Shield of North Dakota plans. OptumRx is the PBM for the state's Sanford Health Plan.

PBMs have been in the news in other states. In Ohio, the state is suing OptumRx for overcharging the state. Lawmakers in Illinois found PBMs were charging taxpayers 23% more for generic drugs than they were paying pharmacies for those drugs, Schwab said.

Spread pricing

A practice called "spread pricing" is why taxpayer dollars are staying with PBMs, Schwab says.

A PBM will pay a pharmacy one price for a drug and bill the state or employer buying plan a higher price. The difference in what the PBM pays the pharmacy and charges the beneficiary on its plan is the "spread." Because PBMs and their beneficiaries are in contractual agreements, the exact price PBMs pay for prescription drugs is not easily known, Schwab said.

"If we're seeing some of these activities in other states, why are we not doing anything to stop them here?" Schwab said.

Schwab says OptumRx engages in "spread pricing," charging NDPERS, the state's benefit program, more than it is paying for the drugs it gives to those on the insurance plan.


"Ideally, it would be nice if the state had some more transparency," Schwab said. "(Optum) is not giving all the rebates back to NDPERS."

David Root, vice president of government affairs, told the Herald after the hearing that Prime does not engage in spread pricing.

PBM executives during the hearing also denied using the spread pricing model.

Root said Prime is a "pass through" entity, meaning those on the health plan have knowledge of all products offered to them. Prime's clients have audit rights to see "that the health plan is being administered they way they want it administered," Root said.

"The bottom line is that we generate value to our health plans through savings. We are not required to generate earnings from Wall Street," Root said.

Schwab says PBMs are paying pharmacies across the country less and increasing the amount patients have to pay.

"Patients are paying more, pharmacies are getting less and everyone is scratching their heads saying, 'Where the hell is all the money going?'" Schwab said.

PBMs Express Scripts, CVS Caremark and OptumRx account for nearly 85% of the market.


Various senators focused on the seeming lack of competition in the industry, but each executive disagreed. "The industry is extremely robust," Root said.

There are more than 60 national PBMs, in addition to regional PBMs across the country.

The system is predicated on "heavy, aggressive competition," Root said.

"The market is extremely price conscious. Payers want specific actionable items, and they won't settle for a PBM that won't offer those services," Root said. "It is very important to understand a payer dictates what they want and determines how much money they are able to pay for the benefit. Competition is what makes the whole system work."

The state of North Dakota, for example, has had three different PBMs in the past 10 years, according to Root.


Root said taxpayers likely could see legislation on transparency come out of this week's hearing.

At the hearing, executives said they were opposed to more transparency when it comes to the way they do business.


"There's this notion of 'good' transparency and 'bad' transparency," Root said.

PBMs are in favor of the "good" transparency, Root said, which is actionable for the plans' consumers and health plans.

Bad transparency, executives said in the hearing, could end up hurting consumers.

"Imagine the state of North Dakota is building a road. They would use sealed bids because if I don't know what the other construction companies are bidding, it drives people to bid the lowest possible price," Root said. "If I know you bid $3 million to build that road, I can offer $2.9 million to build the road. I'd not be taking much of a hit but I'm still lower than you. That's exactly what takes place in the drug space."

Root said letting manufacturers know discounts up front will only incentivize them to go slightly lower, ultimately not giving consumers the best deal possible.

In North Dakota, Schwab said legislators have been "well in tune" with PBMs but get uncomfortable getting involved with a contractual agreement.

Schwab said the Legislature is trying to pass House Bill 1374, which would move PBM services in-house with the Department of Human Services. The bill would require the NDPERS board to conduct a performance audit of Sanford's preferred PBM.

Ultimately, those wanting transparency would like to see federal action.


"It's patchwork with all the different states passing legislation," Schwab said. "We really need some movement from Congress to reign these guys in."

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