Pharmacies Say Low Reimbursement for Generics Costs Money, Customers

Andrew Kitchenman | November 16, 2015 | Health Care
Bill would add pricing transparency, but third-party benefit managers say measure would mean higher costs for insurance providers, patients

Over the past 20 years, insurance plans have increasingly relied on companies known as pharmacy benefit managers to negotiate discounts from drug manufacturers. In effect, PBMs leverage the economic clout that comes with representing a large number of consumers to drive down prices.

But one strategy used by PBMs to set the price they pay for generic drugs is drawing criticism from pharmacy owners. They say that the PBMs aren’t reimbursing them the full price they pay for generics, forcing them to lose money on a transaction.

Now, a bill that’s intended to address these issues has itself become the subject of a lobbying battle between pharmacies, consumer groups, and organizations that represent doctors that support the bill and PBMs, insurers, and employer groups — all of which oppose it.

Supporters say that S-2301/A-3522 will make it easier to see how drug prices are set, ease financial pressure on pharmacies, and reduce what they see as excessively large profits that PBMs derive from generics. But opponents say the bill comes with a large price tag for care providers, limiting a strategy that PBMs have successfully used to lower drug costs and leading to an additional $120 million cost for health plans administered by the state.

PBMs started in the 1970s as companies that process prescription transactions, but during the 1990s and 2000s insurers increasingly relied on PBMs to negotiate discounts for drugs and manage the medications used by the insurer’s members. PBMs build networks of retail pharmacies to provide prescriptions at discounted rates and also deliver medications to members’ homes. Many employer-provided health plans — including the State Benefit Health Program — contract with PBMs to determine how much their the pharmacies their members use are reimbursed for their prescriptions.

The strategy PBMs use is conventionally called “maximum allowable cost pricing.” (The bill calls it “multiple source generic drug pricing.”) PBMs set the maximum amount that they will pay for a generic drug. If a pharmacy has paid less than that to stock a generic, then the PBM will reimburse it for the full amount. But PBMs aren’t required to tell pharmacies how much they will reimburse them before pharmacies stock the drugs. With generics, pharmacies frequently pay more to stock the drugs than they will be reimbursed.

And since the pharmacies have contracted with the PBMs, they can’t simply charge them the full price. Ironically, they’ve signed those contracts in the first place to get lower prices for medicine. This leaves them in a difficult spot: They can struggle to stock drugs that they won’t be fully reimbursed for, or they can decide not to sign contracts with PBMs, which will cost them customers. The only way many people get prescriptions through their health insurance is via a PBM.

Bill sponsor Sen. Linda R. Greenstein (D-Mercer and Middlesex) said she was concerned that pharmacy customers would be hurt without changes. If a pharmacy no longer has a contract with a PBM, many customers would not be able to shop there.

“I am concerned that the current system is unsustainable,” Greenstein said, noting that generic prices have risen by as much as 8,000 percent in recent years.

Experts say that the reason generics are getting more expensive is complex, but in many cases is related to a lack of competition among producers of drugs that traditionally weren’t very profitable.

Greenstein noted that 24 other states have enacted similar bills to regulate the PBMs’ practices, and that the federal government will be imposing similar regulations on Medicare Part D prescription drugs in January.

While PBM representatives have expressed an interest in working with pharmacies to increase the amount of information they provide — including providing more frequent updates to pricing information — they say the bill goes too far.

Heather Cascone, state government-relations director for the PBM Express Scripts, said her company opposes a provision of the bill that “severely limits” the types of drugs subject to maximum allowable cost pricing. In order for maximum allowable pricing to apply to a generic, it would have to be made by at least three manufacturers and have the same active ingredients as the name brand.

When PBMs are not allowed to set generic prices through maximum allowable cost pricing, they are essentially forced to reimburse more for these drugs. This would benefit pharmacy owners, since they would be reimbursed more when costs go up.

Express Scripts serves as the PBM for the State Health Benefit Program. Cascone estimates that the bill would raise the $2 billion annual prescription-drug cost to the state by 6 percent, or $120 million. Advocates for pharmacy owners disputed this, saying that PBMs could use other strategies to keep costs down.

Other PBM representatives raised concerns with other provisions of the bill that would make it easier for pharmacies to appeal a claim and require PBMs to publish the methodology they use to set their prices.

David Root, senior director of state affairs for Prime Therapeutics, said each PBM relies on its ability to have a unique, proprietary methodology. His company is the PBM for Horizon Blue Cross Blue Shield of New Jersey.

“It would be akin to requiring Coca Cola to publish their recipe on the side of every can,” Root said of the provision.

Root added that this bill does nothing to address the escalating prices of generics, which are set by manufacturers.

Laurie Clark, representing the New Jersey Pharmacists Association and Garden State Pharmacy Owners, emphasized that the federal Centers for Medicare and Medicaid heard many of the same industry concerns after it proposed similar regulations and decided that the new rules would serve the public. She also said that the law is focused on the relationship between pharmacies and PBMs.

“They can pay us whatever they wish — all they have to do is tell us what we will be paid,” so that pharmacies can avoid being stuck paying for drugs that will cost them more than they will be reimbursed, Clark said.

And Anthony Reznik, lobbyist for the Independent Pharmacy Alliance, said PBMs have shifted the cost of rising generic drug prices onto brick-and-mortar pharmacies, and then told employers that they could lower costs by moving to mail-order pharmacies.

New Jersey Association of Health Plans President Wardell Sanders reinforced the points made by the PBMs, saying that limiting their ability to set their reimbursement prices would lead to consumers paying more in out-of-pocket costs for drugs. He pointed to the generic anti-diabetic drug metformin, which would no longer be subject to maximum allowable cost pricing because it’s made by only two drugmakers, as opposed to the three required under the bill.

Sanders said PBMs have priced metformin at $260 per month, compared with the $439 per month under standard drug price discounts.

Three large employer groups — the New Jersey Business & Industry Association, New Jersey Chamber of Commerce, and Commerce and Industry Association of New Jersey — opposed the bill.

NJBIA vice president of health and legal affairs Mary Beaumont said employers hire PBMs to pool their purchasing power and would oppose limiting the techniques that benefit managers use.

Greenstein said that she’s committed to meeting again with stakeholders to address their concerns with the bill.

The Senate Commerce Committee released the bill on a 5-0 vote last week. Sen. Gerald Cardinale (R-Bergen and Passaic) abstained, saying that he needed more information on whether the additional costs cited by the PBMs would occur. The Assembly version of the measure has been referred to the Assembly Financial Institutions and Insurance Committee.