Pharmacy Benefit Manager Regulatory Issues (B) Subgroup

OVERVIEWof

Pharmacy Benefit Manager Industry and NAIC Activities

July 18, 2019

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History and Evolution of Pharmacy Benefit Managers

Historically, pharmacy benefit managers (PBM) are third-party administrators of prescription drug programs.

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History and Evolution of Pharmacy Benefit Managers

Pharmacy Benefit Managers (PBMs) have evolved over time to much more when providing administrative services to insurers and other entities into these principal areas, some of which are meant to help control costs:

Administrators of prescription drug cards.

Claims processing.

Drug formulary development.

Mail order pharmacy operation.

Retail pharmacy network development.

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History and Evolution of Pharmacy Benefit Managers

Over time some PBMs added clinical services, such as drug utilization review to prevent adverse drug interactions.

Also, PBMs began negotiating and obtaining rebates from drug manufacturers in return for inclusion and low-cost designation of their drugs on the plan’s formularies.

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Industry Acquisition and Consolidation

Between 2007 and 2013, approximately 60 PBMs operated in the U.S.

By 2016, there were approximately 30. In 2014, Express Scripts accounted for 33.8% of the

market, CVS Caremark accounted for 22.1% of the market, and Catamaran accounted for 12.3% of the market.

By 2017, Express Scripts accounted for 28% of the market, CVS Caremark accounted for 26% of the market, and OptumRx + Catamaran accounted for 19% of the market.

This is the result of market consolidation.

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Industry Acquisition and Consolidation

In 2015, OptumRx and Catamaran merged.

In 2012, Express Scripts acquired Medco Health Solutions.

In less than a decade, three PBMs account for over 70% of the market: Express Scripts, CVS Caremark and OptumRx.

The latest trend is PBM vertical integration with insurers. Examples: In 2018, CVS acquiring Aetna and Cigna acquiring Express Scripts.

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PBM Regulation PBM activities are regulated by numerous

regulations at both the federal and state level. These regulatory requirements are applied directly

or indirectly based on the functions the PBM is performing. Because of the way PBMs conduct their business

and their client relationships, a number of regulations affect PBM functions by imposing requirements on the entities with which they have business relationships.

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PBM Core Functions

Typically, pharmacy benefit managers (PBMs) offer a set of core services to clients designed to contain drug expenditures that include: Claims administration; Pharmacy network management; Negotiation and administration of product

discounts, including manufacturers’ rebates; Mail-order service pharmacy; and Possibly specialty pharmacy services.

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PBM Strategies and ToolsPBMs provide a range of services designed to improve the value of their clients’ prescription drug benefits:

Claims administration

Pharmacy networks

Mail-service pharmacy

Specialty pharmacy services

Formularies

Therapeutic substitution

Benefit design and management

Discount and rebate negotiation

Drug utilization review

Disease management

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PBM Strategies and Tools

Claims administrationo A core activity of PBMs is the processing of pharmacy benefit

claims, which allows them to adjudicate claims on a real-time basis permitting the PBM to interact with the pharmacist for cost-management and quality interventions.

Pharmacy networkso Another PBM core management activity is the establishment

and maintenance of retail pharmacy networks.

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PBM Strategies and Tools

Formularieso Another important tool PBMs have developed to manage

prescription benefits for quality and cost are drug formularies. A formulary is a list of prescription drugs approved for reimbursement by the PBM’s client.

Benefit design and managemento Another PBM core management activity is benefit design and

management. The PBM will work with a client to design the client’s specific benefit design, which will include decisions related to: 1) formulary choice; 2) generic options; 3) pharmacy network; 4) coverage rules; 5) cost-sharing; and 6) plan limitations and exclusions.

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PBM Strategies and Tools

Discount and rebate negotiationo Another important function a PBM performs is obtaining

discounts on brand-name drugs for their clients through the negotiation and administration of manufacturer purchase and rebate agreements.

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PBM Strategies and Tools

Consumer

Pharmacy

Wholesaler

Health Plan

PBM

PharmaceuticalManufacturer

Premiums

DrugsDispensed

Cost-sharing amount

Price Discounts for Enrollees

Payment for plan’s share

Payment for drugs (at negotiated amount)

Rx Drugs Rebates

% of manufacturer rebates

Payment for drugs and admin

Source: “Issues in Designing a Prescription Drug Benefit for Medicare,” The Congressional Budget Office,October 2002.

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PBM Strategies and Tools

Disease managemento Some clients will contract with PBMs to manage the cost and

treatment of enrollees with specific chronic illnesses, such as asthma, diabetes and hypertension.

o Disease management programs are intended to improve the cost-effectiveness of drug therapies and outcomes, which in turn will reduce the overall cost of treating the disease.

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PBM State Legislative Activity

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Challenges to PBM Legislation Legislation enacted by the states have been the

subject of numerous legal challenges. Most of these challenges have centered around state statutes and provisions involving “maximum allowable cost” (MAC) pricing.

These challenges to MAC list legislation centered around federal ERISA preemption and Medicare Part D.

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Challenges to PBM Legislation Pharmaceutical Care Management Association v.

Rowe, Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294 (1st Cir. 2005), challenged provisions of Maine’s Unfair Prescription Drug Practices Act (UPDPA). The Court found that the UPDPA was not preempted under ERISA. The UPDPA did not preclude the ability of plan administrators to administer their plans in a uniform fashion and did not act exclusively upon ERISA plans.

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Challenges to PBM Legislation Pharmaceutical Care Management Association v. District of

Columbia, Pharm. Care Mgmt. Ass’n v. District of Columbia, 613 F.3d 179 (D.C. Cir. 2010), challenged provisions of the Access Rx Act of 2004. The Act imposes several requirements on PBMs, including a fiduciary duty, disclosure of conflicts, usage pass backs and disclosure of substitutions.

The Court found partial preemption. Provisions imposing a fiduciary duty on PBMs were preempted by ERISA as they apply to a PBM under contract with an employee benefit plan (EBP) because they relate to an EBP.

Other provisions of the Act requiring usage pass back and disclosures upon request were not preempted by ERISA because each may be waived by the EBP in its contract with the PBM. Additionally these provisions did not make “reference to” ERISA plans or create an enforcement mechanism for the rights provide by ERISA.

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Challenges to PBM Legislation Pharmaceutical Care Management Association v. Gerhart,

Pharm. Care Mgmt. Ass’n v. Gerhart, 852 F.3d 722 (8th Cir. 2017) challenged provisions of an Iowa law enacted in March 2014, regulating PBMs.

The act amended an existing law to authorize the Commissioner of Insurance to require a PBM to submit information related to its pricing methodology for maximum reimbursement amounts using a maximum allowable cost (MAC) method for generic drugs.

The law also limited the types of drugs to which a PBM could apply those MACs and required PBMs to amend their pharmacy contracts to include pricing methodology and appeal procedures for pharmacies to contest ‘‘incorrect’’ amounts and to be retroactively reimbursed a ‘‘correct’’ and higher amount.

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PCMA v. Gerhart continued

For purposes of the ERISA “connection” issue, the insurance commissioner attempted to distinguish the group health plan and PBM contract on the one hand, as separate from the PBM and pharmacy contract on the other.

The State then asserted that these transactions are ‘‘not connected’’ for purposes of the Supreme Court’s established ERISA ‘‘relates to’’ preemption test.

The Court rejected this characterization finding that the definitions included in the law itself that existed prior to the 2014 amendments were key to the law’s own preemption.

The Court found “if the effect of a State law is to exclude some employee benefit plans from its coverage, that law has a prohibited reference to ERISA and is preempted.”

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PCMA v. Gerhart continued

The court also found the law had a prohibited connection with ERISA because it regulated ERISA’s reporting, disclosure and recordkeeping requirements by requiring PBMs to report their methodology for establishing reimbursement amounts for certain generic drugs, it limited the drugs to which PBMs could establish maximum reimbursement amounts and limited sources from which they could obtain pricing information, and it required PBMs to let network pharmacies contest and appeal reimbursement rates and allowed retroactive payment if such rates were applied incorrectly.

Overall the court found that the Iowa law was preempted because it interfered with matters central to plan administration and nationally uniform plan administration.

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Challenges to PBM Legislation Pharmaceutical Care Management Association v. Rutledge,

Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109 (8th Cir. 2018), challenged provisions of Arkansas’ Act 900 of 2015. PCMA challenged the Act alleging that provisions of the Act regulating how PBMs created maximum allowable cost (MAC) lists, which set reimbursement rates to pharmacies dispensing generic drugs, was preempted by ERISA and Medicare Part D.

The Act mandated pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies' cost for the drug, based on the invoice from the wholesaler. It further imposed requirements on PBMs in their use of the MAC lists by requiring them to update the lists within at least 7 days from the time there has been a certain increase in acquisition costs. The Act also contained an administrative appeals procedure and a “decline-to-dispense” option for pharmacies.

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PCMA v. RutledgeContinued

The court found Arkansas’ Act 900 was preempted by ERISA finding that the sate law both related to and had a connection with employee benefit plans. Following Gerhart, the Court found an implicit reference to ERISA through regulation of PBMs who administer benefits for covered entities that are necessarily subject to ERISA regulation.

The court also found the state law was preempted by Medicare Part D as it acted with respect to the Negotiated Prices Standard by regulating the retail price of drugs and the appeals process did not make price contingent, and it acted with respect to the Pharmacy Access Standard under federal law as it would interfere with convenient access to prescription drug availability.

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PCMA v. RutledgeContinued

Overall, the Arkansas law was preempted by ERISA and Medicare Part D.

The court disallowed mandating pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug based on the wholesaler. It also disallowed requiring PBMs to update their MAC lists within at least 7 days from the time there was a certain increase in acquisition costs and allowing pharmacies to “decline-to-dispense” if they would lose money on a transaction.

Arkansas has filed a writ of certiorari with the U.S. Supreme Court.

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Challenges to PBM Legislation Two challenges to North Dakota PBM law in 2017 and 2018. In

the Pharmaceutical Care Management Association v. Tufte, Pharm. Care Mgmt. Ass’n v. Tufte, 297 F.Supp.3d 964 (D.N.D. 2017), the District Court upheld provisions of two North Dakota Senate bills, S.B. 2258, 2017 Leg., 65th Sess. (ND 2017) and S.B. 2301, 2017 Leg., 65 Sess. (ND 2017). The PCMA asserted the bills were preempted under ERISA.

The laws regulate PBMs and pharmacies. According to North Dakota, the legislation “sought to define the rights of pharmacist in relation to [PBMs], and to regulate certain practices by PBMs.” See Docket No. 39-1, p. 2. The legislation contains provisions concerning (1) the practice of pharmacy; (2) pharmacy accreditation and credentialing; and (3) perceived self-dealing and abusive practices on the part of PBMs.

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Challenges to PBM Legislation With respect to ERISA preemption, the District Court

distinguished North Dakota’s law from the Gerhart case, noting that neither bill contained central matters of plan administration.

Ruling has been appealed to the Eighth Circuit Court, which could possibly overturn it, given its Iowa and Arkansas findings. But, for now, the District Court allowed provisions regarding the practice of pharmacy, provisions concerning pharmacy accreditation and credentialing, and provisions regarding perceived self-dealing and abusive practices. The abusive practices provisions include prohibitions on retroactive fees, clawbacks, and ownership interests in patient assistance programs or mail-order specialty pharmacies with conditions. It only disallowed provisions concerning PBM disclosure obligations to plan sponsors.

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NAIC PBM Activities Model #22 (B) Subgroup discussions throughout 2016 and

2017.

Pharmacy Benefit Manager Regulatory Issues (B) Subgroup established.

2019 Charge: “Consider developing a new NAIC model to establish a licensing or registration process for pharmacy benefit managers (PBMs). The Subgroup may consider including in the new NAIC model provisions on PBM prescription drug pricing and cost transparency.”

Adopted Request for NAIC Model Law Development to develop new NAIC model to establish a licensing or registration process for PBMs.

Executive (EX) Committee will consider Request at Summer National Meeting.

Subgroup will have one year from approval of Request for NAIC Model Law Development to complete the model.

Health Policy Alternatives, Inc., prepared for the Pharmaceutical Care Management Association (PCMA) “Pharmacy Benefit Managers (PBMs): Tools for Managing Drug Benefit Costs, Quality, and Safety,” August 2003Joanna Shephard, The Fox Guarding the Henhouse: The Regulation of Pharmacy Benefit Managers by a Market Adversary, 9 NW. J. L. & SOC. POL'Y. 1 (2013); Allison Dabbs Garret & Robert Garis, Leveling the Playing Field in the Pharmacy Benefit Management Industry, 42 VAL. U.L. REV. 33 (2007).Health Strategies Group, Pharmacy Benefit Managers, https://www.healthstrategies.com/sites/default/files/resources/Pharmacy_Benefit_Managers.pdf.Colorado Health Institute, Understanding Pharmacy Benefit Managers, Sept. 6, 2018, https://www.coloradohealthinstitute.org/research/understanding-pharmacy-benefit-managers.Optum, OptumRx, Catamaran Complete Combination, July 23, 2015, https://www.optum.com/about/news/optumrx-catamaran-complete-combination.html.E.B. Solomont, Express Scripts, Medco complete $29 billion merger, St. Louis Business Journal, Apr. 2, 2012, https://www.bizjournals.com/stlouis/blog/2012/04/express-scripts-medco-complete-29.html.Colorado Health Institute, Understanding Pharmacy Benefit Managers, Sept. 6, 2018, https://www.coloradohealthinstitute.org/research/understanding-pharmacy-benefit-managers.Hall Render, The Wave of PBM and Insurer Integration Continues as Cigna and Express Scripts Announce a Merger of Their Own, Mar. 16, 2018, https://www.hallrender.com/2018/03/16/the-wave-of-pbm-and-insurer-integration-continues-as-cigna-and-express-scripts-announce-a-merger-of-their-own/.

Sources

Jolie MatthewsSenior Health and Life Policy Counsel jmatthews@naic.org ─ 202-471-3982

Holly WeatherfordLegislative Affairs Counselhweatherford@naic.org ─ 816-783-8676

Questions?