Changing the Game: Groundbreaking Drug Benefit Purchasing Standards for Large Employers

Between mounting legislative efforts, new purchaser tools and an increasingly untenable status quo, the pharmacy benefit manager (PBM) industry today faces an historic and long-overdue reckoning. Yet genuine PBM reform is not guaranteed and can only occur if large employers and other health care purchasers are unrelenting in their push for change.

For decades, pharmacy benefit managers have leveraged their middleman role in the drug supply chain to maximize profits at the expense of prescription drug affordability, leaving U.S. patients and employers to pay 2.5 times as much for life-saving medications as those in other high-income nations. Unchecked PBM profiteering has contributed to rising medication costs, threatened the sustainability of employer-sponsored health insurance and, in some instances, jeopardized patient health.

How to Address the Problem

Over the past 40 years, U.S. drug costs have climbed more than ten-fold, from $30 billion in 1980 to $348 billion in 2020. While pharmaceutical manufacturers are frequently blamed for rising costs, an undeniable link exists between price increases and the ever-expanding supply-chain dominance of PBMs. PBGH’s PBM initiatives and policy reform efforts are designed to help employers rein in out-of-control pharmaceutical spending.

PBMs employ a multitude of strategies to leverage their intermediary role in pursuit of outsized profits. Because these activities occur behind a veil of secrecy and ambiguity, most stakeholders have remained largely uninformed and uncertain about whether and how to challenge the status quo.

But that hesitancy is changing now, thanks to a growing public understanding of abusive business practices and concurrent efforts to compel accountability and reform. Rare political consensus at both the federal and state levels is driving legislative initiatives that impose key structural changes on the PBM industry. In the marketplace, new transparency rules, along with the fiduciary obligations for large employers offering employee health benefits, are triggering unprecedented scrutiny of PBM costs, fees and client representations.

Success in rolling back PBM abuses ultimately will depend on emerging legislative reforms led by employers and purchasers, in partnership with consumer groups, and a critical mass of employers using their market power to force fundamental change across the industry. This requires increased awareness from benefit departments and their senior leadership of the problems PBMs create, as well as practical, iterative steps to resolve them. Both objectives are priorities for PBGH members.

Setting the Standard

PBGH’s latest effort – the PBM Purchasing Standards – builds on a long history of combatting rising pharmaceutical costs and helps employers and other health care purchasers combat abusive PBM contracting practices.

The standards were developed by PBGH’s Pharmacy PBM Workgroup, which includes representatives from member companies, as well as ERISA attorneys, pharmacy industry specialists and PBGH expert staff. The document’s sample provisions offer a starting point for organizations seeking to establish a solid contractual footing in their PBM relationships.

The PBGH PBM Purchasing Standards offers guidance for leveraging these mandates in preliminary discussions with PBMs and pharmacy advisors. Recommendations include insisting on access to all direct and indirect compensation paid to benefit consultants and/or brokers by PBMs, as well as details about the purchaser’s pharmacy spend, historical drug costs and the financial impact of rebates on plan premiums.

Four categories of purchasing standards further inform the guidelines and underpin model provisions that can help plan sponsors meet their fiduciary obligations. The four standards include:

• Transparency that supports a clear understanding of drug cost, drug utilization and revenues paid by the plan to the PBM.
• Clarity of definitions that cannot be manipulated to mislead plan sponsors and allow PBM profiteering.
• Customization that allows plan sponsors to provide an excellent benefit that optimizes clinical outcomes and cost-effectiveness.
• Client- and member-centric customer and account management that prioritizes member clinical outcomes, financial well-being and member satisfaction and that supports plan sponsors with trustworthy strategic guidance.

Sample contract language in support of each standard and tied to the transparency standard address two of PBMs’ primary avenues for profiteering: rebate retention and spread pricing.

All told, the guidelines include more than 140 model provisions or sub-provisions that contain specificity on everything from PBM reporting requirements and drug definitions to prior authorization, pharmacy network creation, formulary development and audit rights. The document also includes detailed definitions of multiple terms commonly used in PBM contracts.

Read more about the PBGH PBM Purchasing Standards and the organization’s history of fighting against outrageous drug costs.

PBGH recommends that plan sponsors interested in using the guidelines share the document with a specialized PBM ERISA attorney or expert pharmacy consultant. All advisors should review the document and attest to their alignment with both the spirit and letter of the guidelines.