When a broker that is not a "fiduciary" represents a plan sponsor in a request for proposal process, the resulting contract will likely advantage the PBM, and disfavor the plan. Image: Shutterstock)
Pharmacy benefit managers (PBMs) have created opaque manufacturer rebate arrangements, either directly or through wholly owned subsidiaries. These subsidiaries, known as "rebate aggregators," cost plan sponsors, beneficiaries and taxpayers staggering sums of money. A growing number of examples of PBMs causing economic harm to plan sponsors through rebate aggregators is publicly emerging.
Related: Vetting your contract: How to know what your PBM is really offering
Jonathan E. Levitt, Esq., is a founding partner with Frier Levitt. Recommended For You
In one such example, Lehigh County's audit report revealed a typical one-sided PBM contract term that has caused many plans to lose rebate revenue. Information asymmetry is to the advantage of PBM Rebate Aggregators and to the detriment of plan sponsors. Plans should be aware of rebate arrangements and learn from Lehigh's audit experience. PBMs generally offer two manufacturer rebate models. In a "pass-through" model, PBMs purport to relay 100% of rebates PBMs received back to the Plan, but in reality, PBM-owned rebate aggregators are known to retain a significant amount of manufacturer rebates.
Dae Y. Lee, Pharm.D., Esq., CBPS, is senior counsel with Frier Levitt. Under a "fixed model," PBMs pay plans a guaranteed fixed-dollar amount per brand claim regardless of the actual amount of manufacturer rebates PBMs collect. While the fixed rebate model provides minimum rebate guarantees, it may also cap manufacturer rebates that could have significantly lowered a plan sponsor's drug spend. Well-educated plan sponsors can avoid unfair contract terms by actively negotiating the rebate provision of the PBM Agreement.
Lehigh County's contract was opaque and strongly favorable to the PBM. The Lehigh County's audit report concluded, among other things, that the county could have received in excess of $700,000 in manufacturer rebates during the calendar year ("CY") 2019, had it not chosen the "fixed rebate" model. The report further notes that if the County had been allowed the option of receiving the higher of actual rebates earned versus a fixed rebate, the total rebate savings for CYs 2017 through 2020 would have been $1.6 million. Also, the County identified 200 cheaper prescription drugs for a total potential savings of over $650,000.
Plan sponsors can learn a great deal from Lehigh County's losses.
Why would the county agree to a fixed rebate arrangement? One likely scenario is that a non-fiduciary benefits broker "facilitated" the PBM favored terms and conditions. When a broker that is not a "fiduciary" represents a plan sponsor in a Request For Proposal (RFP) process, the resulting contract will likely advantage the PBM, and disfavor the plan.
According to Antonio Ciaccia, the chief strategy officer of 3 Axis Advisors, "while the giant ball of rebates and discounts flowing through the system is growing, the degree with which those concessions are being passed along to plan sponsors is highly dependent on whether you have somehow found an altruistic PBM and if you have tremendous sophistication and leverage. We have seen many winners and losers in the rebate game, and PBM price discrimination means plan sponsors have to be on their guard. And unfortunately, many of the brokers and benefits consultants advising employers on how to protect themselves are also conflicted, as they receive hefty compensation for referrals from the same PBMs and insurers who are over-inflating the costs of their medicines. The financial risks are massive, which is why eliminating the opacity in the drug supply chain is so crucial." Plans should heed Mr. Ciaccia's advice.
Indeed, here, the County allowed a broker to select health plans including pharmacy benefits for the County. The County's contract with its plan administrator, Highmark, contained the following unfavorable terms:
(i) the contract language prevented disclosure to the County of critical detailed prescription claim data;A
(ii) the contract terms and conditions were confidential and prevented disclosure of claim data;
(iii) any audit (and the actual person performing the audit) was required to be approved by Highmark before the audit was allowed to proceed; and
(iv) Highmark refused to disclose contract details such as pricing, claims paid, and other financial details that Highmark entered into with third-parties such as Express Scripts, Inc.
In essence, the County was unable to confirm the true amount of manufacturer rebates it should have received through the fixed rebate model (regardless of whether the rebates were negotiated and/or administered by Highmark or Express Scripts or Express Scripts' offshore Rebate Aggregator, i.e., Ascent Health Services). Ultimately, by allowing the broker to select Highmark and allowing Highmark to freely choose Express Scripts as their exclusive PBM, the County lost an opportunity to reduce total drug spend:
(i) rebate savings in excess of $700,000 and $80,000 in additional prescription drug and medical claim rebates for CY 2019;
(ii) rebate savings of approximately $1.6 million for CYs 2017 through 2020; and
(iii) prescription drug savings of $650,000 for 200 prescription drugs. Fiduciary relationships and competent counsel are key to avoiding these losses.
In sum, plan sponsors should obsessively control each phase of the RFP process and refrain from fully delegating contract negotiation and drafting to a broker/consultant and/or a PBM. Plan sponsors must lead and dictate the terms of the PBM agreement, removing loopholes including, without limitation, rebate aggregators, and vaguely defined contract terms and pricing guarantees. Otherwise, plan sponsors will not succeed in containing total drug spend.
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