Opportunities for Pricing Reform through Pharmacy Benefit Manager Regulation

1. Opportunities for Pricing Reform through Pharmacy Benefit Manager Regulation Prepared by David Balto 1350 I St. NW Suite 850 (202) 577-5424 david.balto@yahoo.com

2. The Role of Pharmacy Benefit Managers (PBMs) • PBMs act as middlemen between individuals, plan sponsors and drug manufacturers. • They have the potential to achieve significant savings by using the purchasing power of enrollees to bargain for lower prices and larger rebates from manufacturers.

3. The Role of Transparency • Plan sponsors and their enrollees don’t necessarily see these savings, though, thanks to a lack of transparency: • PBMs “play the spread,” charging plan sponsors more per prescription than what they reimburse the pharmacy for it. • PBMs do not necessarily pass on rebates to plan sponsors in the form of savings. • Without transparency, plan sponsors have no idea if their PBM is really saving them money.

4. PBM Profits are Skyrocketing • Between 2003 and 2007, the profits of the “Big Three” PBMS, ExpressScripts, Medco and Caremark, nearly tripled: Over $900 million … to over $2.7 billion • “The Big Three” hold over 80% of the market.

5. Transparency is Growing in Popularity • Plan sponsors across the country have chosen to negotiate transparent PBM contracts: • Corporations like 3M and McDonalds • States like Texas, Maryland and New Jersey • The University of Michigan • Huge federal plans like TRICARE • Unions like New York’s DC-37

6. These Plan Sponsors Enjoy Huge Savings • New Jersey anticipates savings of over $550 million over six years by enacting transparency on their plan, which covers 600,000 employees, retirees and dependents.

7. These Plan Sponsors Enjoy Huge Savings • TRICARE saved nearly $1 billion in 2007 by negotiating their own drug prices and rebates with manufacturers.

8. Without Transparency, a “Layer of Fog” • The First Circuit court of appeals observed, in support of Maine’s PBM transparency legislation: • “Although PBMs afford a valuable bundle of services to benefit providers, they also introduce a layer of fog to the market that prevents benefits providers from fully understanding how to best minimize their net prescription drug costs.”

9. Behind the Fog, Fraudulent and Deceptive Conduct • Between 2004 and 2008, the “Big Three” have paid over $370 million damages to states, plans and patients in six major court cases.

10. Charges Include… • Government fraud • Secret rebates • Drug switching • Failure to meet state quality of care standards • Kickbacks • Submission of false claims • Deceptive trade practices • Repackaging • …and more

11. PBM REFORM • United States v. Merck & Co., Inc., et.al – $184.1 million in damages for fraud, secret rebates, drug switching, and failure to meet state quality of care standards. • United States v. AdvancePCS (now part of CVS/Caremark) – $137.5 million in damages for kickbacks, submission of false claims, and other rebate issues. • United States v. Caremark, Inc. – pending suit alleging submission of reverse false claims to government-funded programs. • State Attorneys General v. Caremark, Inc. – $41 million in damages for deceptive trade practices, drug switching, and repackaging. • State Attorneys General v. Express Scripts – $9.5 million

12. An Model for Transparency in Texas • 2006 hearing on PBMs led to an audit report • Audit report found significant discrepancies: Two separate Employee Retirement System plans • Plan managed by Medco cost $994 per enrollee • Plan managed by Caremark cost $2737 per enrollee • Found other inefficiencies: • State could not conduct regular, meaningful audits • Unclear pricing structures

13. Texas Enacts Transparency • In response to the audit’s findings, Texas enacted legislation requiring transparency for state plans. • Texas anticipates savings of over $260 million.

14. What Does This Mean? • These plan sponsors chose transparency because it leads to greater savings. • Smaller plan sponsors do not have the bargaining power to demand transparency.

15. The bottom line: • There is no evidence that transparency leads to higher drug prices. • Mounting evidence shows that transparency leads to lower costs and greater accountability.

16. PPACA Healthcare Reform: PBM Transparency Applies to plans in the state-operated exchanges (private and FEHBP administered plans) and Part D plans NAIC to develop model legislation (model policies) to provide to the states for the exchanges. Need to meet with OPM because will sponsor 2 multi-state plans in each state NAIC also charged with developing uniform enrollment form for use by all exchanges

17. PPACA Health Reform: PBM Transparency • PBMs to report to the Secretary and contracting plans on: • Retail vs mail; generic dispensing rates; • Aggregate manufacturer rebates earned and passed through to the plan • Aggregate payments from plans to PBMs and subsequent payments to pharmacies

18. Ongoing developments in PBM Transparency

19. PCMA v. DC • 2004- DC passed a law mandating PBM transparency • PCMA filed suit seeking to block enforcement of the law • ERISA, Commerce Clause, Unconstitutional Taking • Court found in favor of PCMA • DC filed appeal, DC Circuit affirmed

20. Department of Labor Regulations • DOL is currently considering extending ERISA fee disclose to welfare benefit plans to PBMs • They should use broad definition of “fee” • Discounts received by a PBM with respect to its acquisition of goods and services for resale or in connection with service to be rendered by the PBM and any related profits; • Income earned by a service provider with respect to the provision of plan benefits; and • Fees received by a service provider for services performed for or on behalf of a third party, provided that the services performed are part of an independent fee for a service relationship.

21. Contact David Balto 1350 I St. NW, Suite 850 Phone: (202) 577-5424 Email: david.balto@yahoo.com