More states have PBMs in their crosshairs

May 15, 2005

Attempts continue unabated in the courts and state legislatures this year to make the dealings of pharmacy benefit managers more transparent, to make the organizations personally liable as "fiduciaries" under the Employee Retirement Income Security Act (ERISA), or to otherwise regulate them.

Attempts continue unabated in the courts and state legislatures this year to make the dealings of pharmacy benefit managers more transparent, to make the organizations personally liable as "fiduciaries" under the Employee Retirement Income Security Act (ERISA), or to otherwise regulate them.

"The PBM industry appears to have stepped into the shoes of the managed care industry," in terms of receiving accusations of undisclosed arrangements or providing financial incentives not in patients' best interest, said William G. Schiffbauer, speaking at a Washington, D.C., forum, sponsored by the Pharmaceutical Care Management Association and the American Conference Institute.

Schiffbauer, the outside counsel to PCMA, said, "The PBM industry is now drawn into the litigation and regulatory thicket because, despite the cost-containment efforts of PBMs, prescription drug costs have experienced several years of consecutive increases."

Dubbed "the mother of all PBM regulation bills" by Peter Harty, VP of government affairs and policy for Medco Health Solutions, the law would give PBMs fiduciary duty to covered entities. It would obligate them to notify such entities of any conflicts of interest, as well as disclose the cost of drugs and any benefit to the PBM when a drug substitution takes place. It would also require disclosure of any kind of financial arrangements with manufacturers or labelers, including drug-switch programs, educational support, claims processing, formulary management, and pharmacy network fees that are charged from retail pharmacies and data sales fees.

If the courts allow the law to go into effect, Schiffbauer predicted, "You will see a proliferation of state laws."

Already, the number of bills proposed is increasing, noted Harty. Legislative sessions in 2002 saw five bills in five states, but he estimates in 2005 there are 40 bills in 15 states, with 15 bills in Texas alone. The bills make proposals such as imposing fiduciary responsibility, mandating disclosure, or giving comprehensive regulatory authority to the board of pharmacy or the state insurance department, he said. However, the Maine bill may be under injunction again and a similar Washington, D.C., law, is also under injunction, he noted. If they remain restricted by the courts, he said, that leaves only one, somewhat parallel, state law currently in play: legislation signed in South Dakota last year.

Beyond the battles over state actions, several other court cases are ongoing over whether PBMs play a fiduciary role, which would mean the organizations must work "solely" in the interests of participants and beneficiaries, Schiffbauer said. In the case of Minshew v. Express Scripts, for example, a plan participant is accusing that PBM of engaging in kickbacks from makers of high-cost drugs, operating mail-order pharmacies at undisclosed profit, and artificially inflating wholesale prices.

In a separate presentation, Julie Brill, Vermont assistant attorney general, noted that 20 states continue to work with the U.S. Department of Justice (DOJ) on enforcing a 2004 agreement with Medco that mandated disclosures about drug switches, P&T committees, and the total amount of rebates.

Along those lines, James Donahue, a Pennsylvania deputy attorney general, said DOJ and state attorneys general are looking at PBM transparency issues because they are finding that doctors, employers, and even health plans don't understand the contracts.

Despite these problems, the lawyers see PBMs' overall health status as good. Schiffbauer said he is generally encouraged by courts' attitudes toward the attempts, by state legislatures and others, to force PBMs to divulge what they consider trade secrets: "Courts seem to be recognizing that we cannot destroy this industry."

In addition, several speakers, including PCMA general counsel and assistant VP Barbara Levy, said the new Medicare prescription law "blesses and solidifies" the PBM structure.

Indeed, said Kevin McAnaney, a healthcare attorney who was previously in the Office of the Inspector General under the Department of Health & Human Services, implementation of Part D is HHS' No. 1 priority, taking precedence over everything else: "And PBMs are critical to that. CMS knows that very well."

Referring to opinions from the Federal Trade Commission and others that have opposed transparency requirements, McAnaney said, "If, in fact, the economists and FTC are right, that transparency ultimately costs money-it impedes price competition-it's toast. It's just not going to be there."