Through several consumer-focused class action lawsuits, we have seen numerous deceptive schemes by different players in the drug industry to manipulate the complex national drug pricing system for profit.  One solution to these fraudulent and deceptive schemes has been exposure of the lack of transparency in the determination of actual drug costs.

Our blog last week reported on a provision in the House Energy and Commerce Committee’s health care reform bill that would establish transparency in the transactions by PBM’s, the middlemen that manage pharmacy benefits for health plans.  Consumer advocates have criticized PBMs, which were originally intended to manage prescription drug formularies to reduce costs, for engaging in practices that retain possible savings for their own profit, and driving up costs.  For instance, PBM’s negotiate significant rebates with drug makers in exchange for placement of the drug in a preferred place on the PBM’s formulary. But lawsuits by PAL members and numerous state Attorney Generals have discovered that the PBM failed to pass on these rebates to their health plan clients.  In addition, PBM’s have been accused of unfairly inflating their charges to a health plan in comparison to what the PBM actually pays a pharmacy to dispense a drug.

 This health reform bill’s PBM transparency provision would require PBM’s to make a confidential annual disclosure to their client health plans, and to the federal government, that would expose both of these potential conflicts of interest. PBM’s would be required to disclose both the rebates they recieve from drug manufacturer’s in return for placing drugs in preferred spots on the PBM’s formulary, and the differences betweeen what the PBM’s costs for prescriptions filled, and what they bill their client health plans.

This Wednesday’s Wall Street Journal reported on the PBM transparency provision.   

Some Democratic lawmakers looking for ways to overhaul the nation’s health-care system are targeting the companies that handle drug benefits for more than 210 million Americans, setting off a lobbying battle over how much pricing information the companies should disclose.

One version of the health legislation passed by the House Energy and Commerce Committee last month includes provisions that could overhaul how pharmacy-benefit managers — middlemen hired by insurers to administer prescription-drug benefits — operate. It would require them to inform the government or federally approved health plans about differences between the average cost of drugs to the PBM and what the PBM charges insurers. It would also require PBMs to disclose rebates they receive from drug makers for pushing certain pills and say whether those rebates are passed on to insurers.

The goal of the provisions is to drive into the open any cases in which PBMs are earning improper profit margins or rebates, said Rep. Anthony Weiner (D., N.Y.), the lead sponsor of the provisions. He said his legislation will “cut down on inside deals that benefit only the PBMs and the drug companies.”

PBMs use their buying power to wring lower prices from drug makers and say they save money for employers, the government and others who pay for health care. Most health-insurance companies, including those running Medicare’s drug plans, hire PBMs to manage drug benefits.

Typically, pharmacy-benefit managers have carried out pricing negotiations behind closed doors, leaving insurers and other outsiders little idea of the actual prices PBMs negotiate for drugs or their profit margin.

The WSJ article then provides the contrary position of the PBM trade association, Pharmaceutical Care Management Association,  whichs asserts that transparency will hurt consumers and drive up prices based upon a number of questionable and unsupported assertions: secrecy is necessary to negotiate lower prices, because it allows PBM’s to play drug companies off one another and get big discounts. In short, secrecy is essential to allow competition to drive down costs.

Unfortunately these self-serving critiques are simply a red herring, because the transparency provisions of the House legislation would not affect the PBM’s alleged need for secrecy in their negotiations with drug manufacturers.  The House legislation only provides for transparency between the PBM and their clients — health plans that contract with the PBM.  The measure would require the PBM to inform their clients, and a department of HHS,  of the costs and charges related to a health plan, and of their rebates.  Drug manufacturer’s have no access to this information under the proposal.

 The provision has also sparked interest in the Senate.  The WSJ reports that “Maria Cantwell (D., Wash.), a member of the Finance Committee, said she wanted her committee’s health-care bill to include similar disclosure requirements for PBMs.”

And the growing support does not end there, WSJ notes.

Some companies that offer drug benefits to employees are taking action on their own. Nearly 60 large employers accounting for more than $4.9 billion in annual drug spending, including McDonald’s Corp. and International Business Machines Corp., have banded together to demand greater transparency from pharmacy-benefit managers. They have signed on 15 PBMs, including industry leaders Medco Health Solutions Inc. and CVS Caremark Corp., that are willing to disclose to the companies their acquisition costs for drugs and pass along any additional discounts they get.”
A final sector in support of this reform are the small independent pharmacies, who have less bargaining power in negotiating prices and dispensing fees with PBMs.
Independent pharmacies, which have lost money as PBMs expanded into Medicare’s drug benefit in recent years, said secretive pricing techniques benefit PBMs more than employers and consumers. A prescription, for example, costs the pharmacies more under a PBM system because they often have to hire other middlemen to make sure PBMs aren’t underpaying them.
The National Community Pharmacists Association, an industry group, has beefed up lobbying against PBMs, hiring outside lawyers and increasing political contributions, said spokesman Kevin Schweers.
Consumer advocates have already responded in support of the measure. a letter was sent yesterday to House Speaker Nancy Pelosi and to the House leadership by the National Legislative Association on Prescription Drug Prices(NLARX), US Pirg, and The Consumer Federation of America in support of the transparency measure. Their letter notes that the need for such transparency “is straightforward and compelling. PBM’s represent the most rapidly growing segment of health care spending, and yet they are the only part of the health care market that is unregulated.” The letter describes the record of fraudulent and deceptive practices by PBMs as revealed by six major enforcement actions brought by state Attorney Generals between 2004 and 2008, resulting in “over 371.9 million in damages….” The letter also describes the possible savings that would result from transparency.  For instance, the state of New Jersey has projected a savings of “$540 million over five years” by switching to a more transparent system for their state employees alone.

The potential savings on health care costs are significant. Numerous State agencies have found millions of dollars in annual savings on drug costs for state employees or beneficiaries of state programs that have switched to more transparent systems. Accordingly, the savings in the private market, which insures many more people, are potentially far greater. 

The WSJ article also privided the following diagram of the PBM’s role in drug reimbursement.  

[pharmacy-benefit managers]