In health care, PBMs are crucial — but not regulated

They are called pharmacy benefit managers, or PBMs, and while relatively few people have ever heard of them, it turns out that they are a critical factor in the cost of medical care.

The PBMs originated in the 1960s to help health plans, self-insured employers and government entities, among others, to negotiate prescription drug prices and efficiently distribute medications.  “The original intent of PBMs was to assist insurers and employers in managing prescription drug benefit programs acting as third party administrators,” said a legislative analysis.

California has no such regulations for PBMs, unlike 18 other states that have specific statutes requiring PBMs to regularly disclose information.

Since then, they have evolved into a money-making industry without regulations, experts say. By one estimate, three major PBM companies had a staggering $270 billion in revenues in 2014.

“That’s billion with a ‘b’,” said Assemblyman Jim Wood, D-Healdsburg, who is pushing legislation to regulate them.

Health care advocates believe that information needs to be disclosed by PBMs in California, partly to determine their impact – if any – on drug costs.

Beth Capell, lobbyist and policy advocate for Health Access California, said it is unclear if there is a correlation between increasing drug prices and PBMs, but “in order to help understand why health care costs are going up, we shine a light on it.”

Pharmacists, pharmacies and drug and insurance companies are highly regulated in California, but the state currently has no such regulations for PBMs, unlike 18 other states that have specific statutes requiring PBMs to regularly disclose information about their finances and operations.

Pharmacy benefit managers create formularies that efficiently administer prescription drug plans for 266 million insured Americans.

“The reality is that there is no oversight over these business entities and they’re making a huge amount of money,” contends Wood.

PBMs and their allies say the entities provide efficiency, expertise and reliability in a key sector of the health care market, crafting agreements that serve consumers and help limit costs. Although they negotiate rebates and discounts from drug manufacturers and stores, according to Wood, it is unclear how much they charge for negotiations or how any excess money from the discounts is distributed in California.

His AB 315 requires PBMs to be licensed by the Department of Managed Health Care — the same state agency that regulates HMOs — and to publicly disclose financial information, including drug acquisition costs, rebates from pharmaceutical companies and the drug prices negotiated with pharmacies.

The bill, which passed through the Senate Health Committee and was referred to the Appropriations Committee this week, also requires a PBM to exercise good faith and fair dealing in performing contractual duties.

Express Scripts, OptumRx and CVS Caremark are the top three PBMs that control nearly 80% of the market place.

“They started as a benign claims processing company and over the years they’ve created this market where they touch every component of the drug delivery system.” — Jon Roth

The Pharmaceutical Care Management Association (PCMA), which represents PBMs, says pharmacy benefit managers create formularies that efficiently administer prescription drug plans for 266 million insured Americans and determine out-of-pocket costs.

PCMA, which lobbies on behalf of PBMs, says that not all transparency is helpful in cutting costs. Government requirements that give drug companies and stores pricing information could help collude with their competitors to drive prices up, a process that PCMA believes Wood’s bill could exacerbate.

“In its current form, AB 315 is a special interest mandate that will increase prescription drug costs for California’s consumers and employers,” said PCMA spokesperson Greg Lopes.

Representatives for the three major PBMs were not immediately available for comment.

In attempt to create transparency on PBM’s negotiations and rebates, Wood said he’s faced the strongest backlash of anything he’s ever worked on.

Critics contend that the PBMs have grown into a major economic piece of the health care industry with scant oversight.

“They started as a benign claims processing company and over the years they’ve created this market where they touch every component of the drug delivery system,” said Jon Roth, CEO of California Pharmacists Associations. “They’ve become this goliath in the supply chain of getting medications to people.”

One of the biggest health plans in the country, UnitedHealth Group – which owns OptumRx — has drawn skepticism about PBMs’ contractual relationships.

“Dollars are moving back and forth in these corporations and it’s very troublesome because they operate in a black box,” said Roth.

In attempt to create transparency on PBM’s negotiations and rebates, Wood said he’s faced the strongest backlash of anything he’s ever worked on.

“If you are the good guys that you claim to be, PBMs, why should you be pushing back on this? You should be happy to prove to your clients you are what you say you are,” he said.

Wood’s AB 315 is one of several related measures dealing with health care industry issues. Another is SB17, authored by Sen. Ed Hernandez (D-West Covina) and co-sponsored by Health Access California. Hernandez chairs the Senate Health Committee. Both bills received bi-partisan support.

SB 17, which was referred to the Assembly Appropriations Committee, aims to expand transparency of insurance premiums and drug pricing increases and decisions. It also requires drug makers to share drug purchasing data and give advanced notice on significant drug price increases.
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Ed’s Note: Anna Frazier is a Capitol Weekly intern from the University of Arizona.