Education

Home / Education

Optimus Education Information

Common Practices in Pharmacy Benefit Management (PBM) Contracts: What Employers and Patients Should Know

Pharmacy Benefit Managers (PBMs) play a significant role in managing prescription drug benefits, but their practices often include strategies that can harm employers, patients, and pharmacies. Here’s a closer look at some of the key issues in PBM operations, broken into four categories for clarity:

1. Complex Contracting Practices

PBM contracts are often intentionally complicated, with clauses and terms that create challenges for transparency and fair pricing. Examples include:

  • Hidden Costs: Contracts may include unexpected charges, delayed savings or guarantees, and penalties for early termination.

  • Restricted Data Sharing: Employers are often prohibited from sharing or auditing claims data or engaging with other pharmacy-related services.

  • Pharmacy Gag Clauses: Pharmacies may be prohibited from informing patients when the out-of-pocket cash price for a drug is lower than their insurance copay, potentially leading to higher costs for patients.

2. Spread Pricing Practices

PBMs use spread pricing to increase profits by manipulating pricing agreements between pharmacies, drug manufacturers, and employers. Tactics include:

  • Undisclosed Price Differences: Paying pharmacies one price for a drug while charging employers a higher price, pocketing the difference.

  • Inflated Pricing Indices: Using outdated or inaccurate benchmarks like Average Wholesale Price (AWP) to artificially inflate acquisition costs.

  • Dual MAC Lists: Employing different Maximum Allowable Cost (MAC) lists for employers and pharmacies, creating pricing inconsistencies.

  • Reclassification of Drugs: Paying pharmacies for a generic drug while billing the employer for a higher-priced brand drug.

  • Clawbacks: Collecting patient copays that exceed the cost of the drug and reclaiming the difference from pharmacies.

    Manipulated Drug Codes: Changing drug identification codes to generate additional profit.

  • Overcharging for Supplies: Dispensing a 90-day drug supply but billing employers for a 100-day supply.

3. Rebate and Incentive Practices

Rebates from manufacturers, intended to lower costs, are often retained by PBMs rather than passed through to employers or patients. Key issues include:

  • Rebate Withholding: Retaining most or all manufacturer rebates, even in "full pass-through" contracts.

  • Rebate-Driven Formularies: Designing formularies to maximize rebates rather than prioritizing clinical efficacy or patient needs.

  • Delayed Payments: Paying rebates quarterly instead of monthly to benefit from the interest on those funds.

  • Rebate Aggregators: Using third-party intermediaries that take a portion of the rebates.

  • Selective Rebate Sharing: Keeping rebates for non-formulary drugs or medications like insulin.

  • Altered Rebate Calculations: Adjusting the number of drugs in rebate guarantees to manipulate payouts.

  • Unfair Charges: Charging employers fees for pharmacy services, such as vaccination administration, while not compensating the pharmacy.

4. Additional Concerning Practices

PBMs often engage in practices that prioritize profits over patient care and cost efficiency, such as:

  • Minimal Clinical Oversight: Limited review to ensure the right patient receives the right medication for the right reason.

  • High-Cost Formularies: Promoting high-cost, low-value drugs to maximize rebates.

  • Automatic Approvals: Approving expensive medications with little scrutiny to drive up costs.

  • Early Refills for Profit: Automatically refilling prescriptions early to generate additional revenue.

  • PBM-Owned Pharmacy Steerage: Directing patients to PBM-owned pharmacies, boosting PBM profits while limiting patient choice.

  • Regulatory Evasion: Using overseas Group Purchasing Organizations (GPOs) as shell entities to bypass regulations and divert funds.

How to Protect Against These Practices

  • Demand Transparency: Request clear, detailed contracts that disclose all fees, rebates, and pricing arrangements.

  • Audit Regularly: Ensure the PBM allows independent audits of claims and pricing.

  • Monitor Formularies: Advocate for evidence-based formularies that prioritize clinical outcomes over rebates.

  • Eliminate Gag Clauses: Require that pharmacies can share cash prices with patients.

  • Consider Alternatives: Explore PBMs or models that align incentives with cost reduction and patient care, such as fiduciary PBMs or direct purchasing options.

By understanding these practices, employers and stakeholders can take proactive steps to ensure fair and transparent management of pharmacy benefits.

ERISA (Employee Retirement Income Security Act) Fiduciary Obligations

Requirements:

  1. Exclusive Benefit Rule: Plan fiduciaries must act solely in the interest of plan participants and beneficiaries with the exclusive purpose of providing benefits to them and defraying reasonable expenses of administering the plan.

  2. Prudent Person Standard: Fiduciaries must perform their duties with the care, skill, prudence, and diligence that a prudent person familiar with such matters would use under similar circumstances.

  3. Diversification Requirement: Fiduciaries must diversify the plan's investments to minimize the risk of large losses unless it is clearly prudent not to do so.

  4. Adherence to Plan Documents: Fiduciaries must act in accordance with the plan documents, provided that those documents comply with ERISA.

Processes and Procedures:

  1. Plan Documentation: Ensure that plan documents are up-to-date and in compliance with ERISA requirements. This includes summary plan descriptions (SPDs), summaries of material modifications (SMMs), and annual reports (Form 5500).

  2. Investment Policy Statement: Develop and adhere to an investment policy statement that outlines the plan’s investment strategy and procedures for monitoring investments.

  3. Monitoring Service Providers: Regularly evaluate the performance and fees of service providers, such as investment managers, to ensure they are acting in the best interest of the participants.

  4. Participant Communication: Provide clear and accurate information to participants regarding their rights and benefits under the plan. This includes providing timely SPDs, SMMs, and benefit statements.

  5. Internal Controls: Establish internal controls to ensure that plan operations are compliant with ERISA, including timely remittance of participant contributions and proper handling of plan assets

Penalties for Non-Compliance:

  1. Civil Penalties: The Department of Labor (DOL) can impose civil penalties for fiduciary breaches. For example, a fiduciary who breaches their duties may be liable for up to 20% of the amount recovered by the DOL.

  2. Restitution: Fiduciaries may be required to restore any losses to the plan resulting from their breach and to return any profits made through the use of plan assets.

  3. Prohibited Transaction Penalties: Engaging in prohibited transactions can result in excise taxes imposed by the Internal Revenue Service (IRS), which can be significant.

  4. Personal Liability: Fiduciaries can be held personally liable for breaches of fiduciary duty, meaning their personal assets could be at risk.

Consolidated Appropriations Act (CAA) Fiduciary Obligations

Requirements:

  1. Transparency in Coverage: The CAA requires group health plans to provide greater transparency in plan information and pricing, including public disclosure of negotiated rates with providers and historical payment data.

  2. No Surprises Act: Protections against surprise medical billing, ensuring participants are not billed more than in-network cost-sharing amounts in emergency situations and for certain non-emergency services.

  3. Mental Health Parity and Addiction Equity Act (MHPAEA) Compliance: Ensuring that mental health and substance use disorder benefits are not more restrictive than medical and surgical benefits.

  4. Broker and Consultant Compensation Disclosure: Requires disclosure of direct and indirect compensation paid to brokers and consultants to the plan fiduciaries.

Processes and Procedures:

  1. Transparency Reporting: Establish procedures for the disclosure of plan information, including the publication of machine-readable files containing in-network rates, out-of-network allowed amounts, and drug pricing information.

  2. Surprise Billing Protections: Implement processes to ensure compliance with the No Surprises Act, including providing notice to participants about their rights and handling disputes related to surprise bills.

  3. Compliance Audits: Conduct regular audits to ensure the plan complies with MHPAEA and other applicable requirements. This may include comparing the treatment limits, financial requirements, and other metrics between mental health/substance use disorder benefits and medical/surgical benefits.

  4. Disclosure of Compensation: Develop procedures to collect, review, and disclose information about broker and consultant compensation to ensure that plan fiduciaries are informed about the costs associated with plan services.

Penalties for Non-Compliance:

  1. Civil Penalties: The DOL can impose civil monetary penalties for non-compliance with the transparency and disclosure requirements. For example, failing to provide required disclosures can result in penalties up to $100 per day per affected individual.

  2. Enforcement Actions: Non-compliance with the No Surprises Act and MHPAEA can lead to enforcement actions by the DOL, IRS, and other regulatory agencies, potentially resulting in significant financial penalties and required corrective actions.

  3. Legal Liability: Failure to comply with the CAA can expose plan sponsors and fiduciaries to lawsuits from participants and beneficiaries, which could result in damages and legal fees.

  4. Loss of Tax Benefits: Non-compliance with certain provisions could lead to the loss of tax advantages for the health plan, increasing costs for both the employer and employees.

Best Practices for Compliance:

  1. Regular Training: Provide ongoing training for fiduciaries and plan administrators on ERISA and CAA requirements.

  2. Consultation with Experts: Engage legal, financial, and compliance experts to review plan operations and provide guidance on complex regulatory requirements.

  3. Documentation and Record-Keeping: Maintain comprehensive records of all plan-related decisions, communications, and compliance efforts.

  4. Participant Education: Educate participants on their rights and benefits under the plan, ensuring they understand how to access information and what protections are in place.

  5. Periodic Reviews: Conduct periodic reviews of plan documents, service provider agreements, and compliance processes to identify and address potential issues before they become significant problems.

By adhering to these requirements, processes, and procedures, employers can effectively manage their fiduciary obligations under ERISA and the CAA, ensuring compliance and minimizing the risk of penalties.

© 2024 OptimusGroup. All rights reserved.