Point: A case for state regulation of PBMs

May 17, 2007
By: Reginia Grayson Benjamin, Esq
Managed Healthcare Executive

State regulation of pharmacy benefit managers (PBMs) would benefit states and consumers by providing a regulatory framework for the only entity involved in delivery of a healthcare benefit to the consumer that is largely unregulated. Currently states regulate insurers, physicians, pharmacists, pharmacies, laboratories, third-party administrators and insurance agents. The state, primarily the insurance department, has mechanisms in place to handle and investigate consumer complaints. The departments have the authority to review records and take action against individuals and/or entities that violate the laws. However, because states do not have regulatory authority over PBMs, those safeguards are not available to consumers.

Because of a lack of regulatory oversight, the PBM industry is currently "regulated" by litigation and settlements. For example, between 2004 and 2006, nearly $378 million was paid in settlements, not including interest, by two PBMs (this is not a complete list of all settlements and litigation concerning PBMs during this time frame):

• American Medical Security Holdings, Inc. v. Medco Health Solutions, Inc. – $5.85 million – March 2004.
• Settlement by Consent Order with Medco and 20 state attorneys general (Arizona, California, Connecticut, Delaware, Florida, Illinois, Iowa, Louisiana, Maine, Maryland, Massachusetts, Nevada, New York, North Carolina, Oregon, Pennsylvania, Texas, Vermont, Virginia and Washington) – $28.5 million (April 2004.)
• Gruer, et al. v. Merck-Medco (also referred to as In re Medco Health Solutions, Inc.) – $42.5 million (May 2004).
• United States of America, et al. v. Advance PCS Inc. – $137.5 million (September 2005).
• State Teachers Retirement System of Ohio v. Medco – $7.8 million (suit ongoing as to whether additional payment is due for punitive damages) (December 2005).
• Settlement by Consent Order with the U.S. Justice Department with Medco –$155 million, plus interest (October 2006).

In the view of the National Community Pharmacists Assn. (NCPA), representing the nation's community pharmacists and supporting the adoption of laws to regulate PBMs, these settlement amounts are healthcare dollars. Those dollars should have been spent to provide healthcare to patients and lower the cost of the prescription drug benefit for employers and patients. The investigations and the resulting lawsuits take years to be completed and once resolved, their overall value to the patient and employers is oftentimes limited.

Most of the attorneys generals in the 20-state investigation of PBMs, had to rely on their state consumer protection laws or deceptive practice acts for their authority. States do not have a mechanism in place to handle consumer complaints about PBMs and consequently patients and pharmacists on their behalf are primarily left on their own to try to resolve their issues with PBMs.

The consent order with the attorneys general addressed the issue of switching consumer's prescriptions and required extensive procedures before switching can occur including the need to obtain approval of the prescriber. According to South Dakota Attorney General Larry Long (R), Medco switched patients from certain cholesterol-lowering medications to another drug that required patients to receive follow-up blood tests at additional costs to the patient.

The other major component of the Consent Order was to require transparency and disclosure of revenue streams received by the PBMs from manufacturers. Many PBM customers are unaware of the magnitude of revenue received by the PBMs from manufacturers and the attorneys general believed that customers have the right to that information.

NCPA believes that PBMs can play an important role in performing the administrative tasks associated with prescription drug programs; however, NCPA is concerned when PBMs engage in activities that can be characterized as the "practice of pharmacy" without the benefit of regulatory oversight. Some of those activities include drug utilization review, formulary management, interaction screening and therapeutic substitutions. Another area of major concern is the ability of PBMs to self-refer to their own wholly owned mail-order facilities without any government oversight. The mail-order operations are the source of increasing patient complaints.

The National Legislative Association on Prescription Drug Prices (NLARX) is a nonpartisan organization of state legislators that works jointly across state lines to reduce prescription drug prices and expand access. In addition to NLARX, AARP, the National Mental Health Assn., NCPA and many state pharmacy associations have worked to educate legislators, company benefits managers, labor unions, and other purchasers about PBMs.

Two NLARX members sponsored laws enacted in Maine and the District of Columbia to regulate PBMs. Those laws are the most stringent, to date, and have survived numerous court challenges by the PBM industry. Other members of NLARX have sponsored similar legislation in their states. Eight states (Georgia, Kansas, Maine, Maryland, Mississippi, North Dakota, Rhode Island, and South Dakota) and the District of Columbia have enacted laws that attempt to provide some regulatory oversight of certain PBM business practices.

Over the last several years while PBMs have been "managing" the prescription drug benefit, the cost of that benefit has continued to outpace all other healthcare benefit spending and patient copayments and deductibles continue to increase. Yet in a recent article, it was reported that the CEO of the largest PBM received $8.9 million in compensation in 2006.

Regulatory oversight that would require:

• Licensure or registration for PBMs and authorization for review by a regulatory body.
• Some form of transparency and disclosure.
• Guidelines for substitutions of prescriptions including the requirement that the prescriber must authorize the substitution.
• A consumer complaint mechanism.
• Guidelines for referrals to wholly owned mail-order facilities.

Transparency and disclosure has resulted in many customers making better-informed decisions and saving healthcare dollars. NCPA supports and the courts have upheld the right of states to regulate PBMs.

Reginia Grayson Benjamin, Esq., is director, government affairs (state) for the National Community Pharmacists Assn.