05/25/22

The Rigged Contract Games that PBMs Play

WithMe Team

Pharmacy benefit managers (PBMs) have come under intense scrutiny in recent years for opaque contracting practices that critics say boost PBMs’ bottom line at the expense of plan sponsors and members. Because these PBM practices work against the interests of their customers, they are often hidden. Uncovering them is made more difficult by the audit limits that PBMs include in contracts. But the first step is knowing what to look for!



Traditional PBMs are playing games - at your expense.

PBMs have become the 800-pound gorilla in the pharmaceutical marketplace, controlling access to covered medications used by tens of millions of Americans. The three largest PBMs dominate 80% of the market. And while in business to control pharmaceutical costs, PBMs have created a market in which drug costs and pharmacy spending trends continue to outpace other healthcare categories.


A recent trends report from consultancy Segal points to a forecasted 13% increase in the specialty pharmacy trend, with specialty now accounting for 53% of spend. Furthermore, a report from Berkeley Research Group, funded by PhRMA, found that more than half of total spending on brand medicines went to supply chain players, mainly PBMsfor the first time ever, more than the amount going to manufacturers.


What can be done?

Many states have drafted legislation that aims to end PBMs’ most egregious practices. But plan sponsors can’t afford to wait for legislation. Purchasers of pharmacy benefits should be on the lookout for common (and unfair) “games” that PBMs play when devising contracts. Knowing how to interpret these complex practices and putting strong contract language in place can result in significant savings.


Here are six contracting games to be aware of:

1. Spread Pricing: When PBMs invoice plan sponsors at a higher rate than they pay network pharmacies and keep the difference.


Typically, these spreads are undisclosed in the contract. A blog post by attorney group Frier Levitt urges plan sponsors to require the PBMs to identify and use either the lowest pricing source for each drug or the pricing source that represents, on average, the lowest Average Wholesale Price (“AWP”) prices.

2. Rebate Re-Naming: What’s in a name? A lot, it turns out.


Sometimes a PBM simply renames manufacturer rebates. According to Axios, PBMs may instead call portions of rebates “administrative fees,”, “inflation payments,” or numerous types of “other pharma revenue.” The article quotes an industry source as saying, “There are so many carve-outs of what they consider a rebate that it’s very murky of what’s being kept and what’s being passed through (to clients).”


3. Rebate Aggregators: PBMs may say they are not keeping the rebates, but their subsidiaries are.


Many PBMs employ what are known as rebate aggregators, which they own or control. PBMs delegate collection of manufacturer rebates to rebate aggregators that keep a large portion of the manufacturer rebates without telling plan sponsors. Unless demanded through strong contractual terms, “PBMs are not obligated to disclose the rebates they receive from rebate aggregators, even those that the PBM wholly owns.”


4. Rebate Walls: The ways drug manufacturers and PBMs negotiate rebates can have a tremendous impact on the cost of a drug - and therefore the member’s access to it.


Rebate walls result from negotiations between drug manufacturers and PBMs. In return for their drug receiving preferred - or even exclusive - status on a PBM’s formulary, a manufacturer will guarantee the PBM an enormous rebate, driving down the effective price of their drug relative to competitors. The result is that members lose coverage for other clinically equivalent drugs that are no longer price competitive. A 2020 Federal Trade Commission report states, “... rebates can become a ‘trap’ for payers and providers, causing them to make decisions about coverage and utilization for their beneficiaries due to the financial incentives created by the rebate structure.”

It goes (almost) without saying: this is not in a member’s best interests.


5. Audit Limitations: PBM contracts can – and often do – limit the plan sponsor’s ability to audit the PBM.

According to the PBM Accountability Project, contracts can include provisions that limit auditor access to documents, allow only auditors approved by the PBM, or preclude payor auditing of PBM contract compliance altogether. Frier Levitt stresses the imperative of plan sponsors to have full audit rights to all PBM network pharmacy contracts, claims data, manufacturer rebate and administrative fee contracts, mail service purchasing invoices, clinical coverage criteria, and formulary decision-making records. Moreover, depending on the contractual terms, Plan Sponsors may not have the right to conduct a rebate audit on PBMs. “It is critical to have a carefully drafted contract, reviewed by experienced healthcare counsel,” the attorneys say.


And those are just a few of the games that traditional PBMs play.

The majority of these games can be avoided by shifting to a full pass-through, transparent PBM model. That’s the PBM model at WithMe Health. But even in that model, we see one more big game being played by other PBMs…


6. Piecemealed Clinical Programs: Like when buying a car, often you have to pay a lot more than list price to get the features you really want.


You may get a really attractive offer in your RFP process from several pass-through, transparent PBMs, and more than likely the offer will focus on pricing. The admin fee will be low, and the offer may even come with attractive pricing guarantees. But the PBMs that offer these lowest-cost admin fees more than likely will do two things: 1) exclude most clinical programs, aside from basic prior authorization and other UM edits and 2) attempt to up-sell you these clinical programs, so the PMPM and per claim fees will add up quickly.


Utilization is the biggest driver of pharmacy trend now, not price. And the only way to optimize utilization is hands-on management of members through a robust clinical program model. You shouldn’t have to pay more for what’s necessary.



Want to understand these games better? We'd appreciate the chance to share more details with you. Contact us HERE or connect us with your broker or consultant.