Why Timing Matters When It Comes to PBM Contracting

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Plan sponsors should begin evaluation of PBM performance at least a year before the contract expires, say lawyers with expertise in PBM contracting.

Timing plays a critical role in any negotiations. This is especially true for plan sponsors, such as governmental entities, self-funded employers, insurers, and managed healthcare organizations, when it comes to negotiating PBM contracts. It is also true that contracting with PBMs is a daunting task and one that plan sponsors should not solely leave up to PBMs or nonfiduciary brokers. But plan sponsors have the ultimate responsibility to review the PBM contract terms and ensure that there are no vague contract terms that would hinder their ability to monitor their PBM’s performance, and more importantly, to ensure that they are in compliance with federal and state laws when providing pharmacy benefits to their beneficiaries. All of this means that plan sponsors must start the negotiation process after fully vetting PBMs performance.

Audit is one of the key tools — if not the most important tool — available to plan sponsors when evaluating PBM performance.It certainly requires time and effort from plan sponsor, even if the audit is conducted by a third-party auditor. Many PBM contracts contain contract terms substantially limiting full audit rights to plan sponsors; for example, with respect to audits regarding manufacturer rebates that PBM are supposed to pass on to plan sponsors, PBMs often conceal secretive relationships they have entered into with rebate aggregators.Rebate aggregators, sometimes referred to as rebate GPOs, are often affiliated with or owned by PBMs, such as Ascent Health Services (associated with Express Scripts) and the newly-created Zinc (owned by CVS Health).

It is extremely difficult to grasp the true rebate dollars collected by PBMs and rebate aggregators, in part because publicly raded PBMs carefully guard these revenue streams, and do not report them separately in their quarterly SEC filings.Some of these companies are, inexplicably, located offshore, for example, in Switzerland, making oversight even more difficult.

PBMs continue rebate schemes even in the federal payer space.Medicare Part D sponsors are required to submit Direct and Indirect Remuneration (“DIR”) reports to CMS every year for the prior calendar year disclosing the total amount of rebates, inclusive of manufacturer rebates and pharmacy rebates, retained by PBMs regardless of whether such rebates were passed to Part D sponsors. However, Part D Sponsors often solely rely on rebate data provided by PBMs when submitting DIR reports to CMS.

PBMs also play word games in PBM contracting.For example, PBMs often implement traditional pricing approach in their contracts, i.e., spread pricing or differential pricing. PBMs profit from the “spread” between what the plan sponsor pays the PBM and what the PBM, in turn, pays the pharmacy. However, ambiguous contract terms often preclude plan sponsors from figuring out the spread retained by PBMs.More specifically, PBMs tend to use two sets of maximum allowable cost MAC) drug pricing lists for generics. One MAC pricing list is paid to the pharmacy, and a different MAC pricing list for the same generic drugs is charged to the plan sponsor.  

Plan sponsors must evaluate PBM performance through full and complete audit prior to renegotiating PBM contracts.However, it can easily become more complicated and time consuming as PBMs play word games in the contracts and as often limit when audits may be conducted to a very narrow window throughout the year. Indeed, PBMs use complex contractual verbiage to limit their duties and obligation while creating hidden paths to increase their revenue and limiting plan sponsors’ ability to uncover hidden PBM cash flows. Therefore, plan sponsors should begin the evaluation of PBM performance and contracting process at least one year prior to the end of the current PBM contract. And, ideally, plan sponsors should have full audit rights to all PBM network pharmacy contracts, claims data, manufacturer rebate and administrative fee contracts, mail service purchasing invoices, clinical coverage criteria, and formulary decision-making records.

Jonathan E. Levitt, co-founded Frier Levitt LLC, a healthcare law firm with offices in New York City and New Jersey, in 2000. Jesse C. Dresser joined the firm in 2010. Dae Y. Lee, Pharm.D., CPBS, is a pharmacist attorney in the firm’s life sciences department and co-chairs its plan sponsor practice group.