Academic journal article Northwestern Journal of Law and Social Policy

The Fox Guarding the Henhouse: The Regulation of Pharmacy Benefit Managers by a Market Adversary

Academic journal article Northwestern Journal of Law and Social Policy

The Fox Guarding the Henhouse: The Regulation of Pharmacy Benefit Managers by a Market Adversary

Article excerpt

INTRODUCTION

Although most people have never heard of a "pharmacy benefit manager," 95% of insured Americans have prescription drug coverage that is administered by one.2 Pharmacy benefit managers (PBMs) act as the middlemen among pharmacies, drug manufacturers, insurers, and consumers with prescription drug coverage. They influence how much consumers pay for drugs, which pharmacies they use, and even which drugs they take. By negotiating discounts with pharmacies and manufacturers, substituting less expensive drug alternatives when appropriate, and filling prescriptions for chronic conditions by mail, PBMs save consumers and third parties that pay for prescription drugs billions of dollars each year.3

However, recent regulatory developments in some states threaten to disrupt the PBM industry and the cost savings they currently produce for consumers of prescription drugs. The regulatory scheme currently in place in Mississippi-and under legislative consideration in several other states-gives regulatory control over PBMs to the states' Boards of Pharmacy. Although this regulatory scheme is innocuous on its face, pharmacists-who serve on the Boards of Pharmacy-are market adversaries of PBMs. In several different areas of the prescription drug market, PBMs and pharmacists are in direct competition over profits. Thus, the pharmacist-controlled Boards of Pharmacy have both the incentive and the opportunity to exert their regulatory authority in ways that benefit pharmacies at the expense of PBMs. Indeed, although the Mississippi Board of Pharmacy has only had regulatory authority over PBMs for a little over a year, examples of regulations that harm PBMs have already emerged. Unfortunately, this regulatory scheme will do more than just hurt the PBM industry, it will also increase the prices that consumers and third parties pay for prescription drugs.

PBMs administer the prescription drug benefits for health plan sponsors such as employers, labor unions, and Health Maintenance Organizations (HMOs). PBMs engage in various activities to manage their clients' prescription drug benefit efficacy and costs. For example, PBMs negotiate discounts on prescription drug prices from pharmacies in exchange for the pharmacy's placement on the preferred network for plan participants. PBMs also negotiate discounts and payments from drug manufacturers in exchange for the manufacturers' drugs placement on the preferred list of medication for various ailments. In addition, PBMs interact electronically with pharmacists that are filling prescriptions to substitute generic drug substitutes or lower-priced alternatives when appropriate. These practices that are central to the PBM business model produce lower prices for prescription drugs. Indeed, research shows that consumers with PBM- administered prescription drug coverage pay between 15% and 50% less for drugs than do non-insured customers buying the exact same drugs. 4

Yet, despite evidence of the significant cost savings that PBMs generate for consumers and health plan sponsors, critics of the PBM industry have successfully lobbied state legislatures for increased regulation of these companies in recent years. These regulations include a variety of rules related to licensing, investigations, duties to clients, disclosures of financial terms with manufacturers, and the extent to which savings must be passed on to consumers. Until 2011, despite the various regulatory schemes, all states gave regulatory authority over PBMs to a neutral insurance commission. In 2011, Mississippi became the first and only state to shift regulatory authority over PBMs from the Insurance Commission to the Board of Pharmacy. The Board of Pharmacy is composed entirely of pharmacists.5 Legislatures in Oregon, Hawaii, and Oklahoma are currently considering proposals to allow the state Boards of Pharmacy to regulate PBMs. In the last legislative session, Washington, New Hampshire, Alabama, and Louisiana considered similar proposals. …

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