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States Take Action to Regulate PBMs

Donna Young

Some of the largest pharmacy benefit management companies (PBMs), including AdvancePCS, Express Scripts, Caremark RX, and Medco Health Solutions, claim that they save insurance companies, self-insured employers, and state agencies money by promoting the use of lower-cost generics over brand-name products.

But PBMs have recently come under fire from consumer groups, health care advocates, state governments, and federal investigators, who claim that the private firms drive health care costs upward by promoting brand-name products and changing prescription orders to more expensive products without notifying consumers or their physicians before making the medication switch.

PBMs are private firms that administer health plans' prescription drug programs and process claims and are supposed to help clients control costs through competitive pricing methods. Pharmaceutical manufacturers provide rebate payments to PBMs in exchange for having their products included on health plans' approved drug lists.

PBMs generally do not release the amounts of the rebate payments they receive, claiming that information is proprietary.

Assistant U.S. Attorney James G. Sheehan, civil division chief for the Eastern District of Pennsylvania in Philadelphia, reportedly has been heading an ongoing investigation since 1998 that is examining PBMs' drug-switching practices and drug manufacturers' rebate payments that some critics allege are nothing more than kickbacks.

"Switching a patient from a prescription drug that a physician has decided is the best for him or her because it provides the most efficacy and is also the most affordable is the same as practicing pharmacy without a license," said John M. Rector, senior vice president of government affairs and general counsel for the National Community Pharmacists Association.

"There has been a lot of real questionable conduct occurring by PBMs, and that's why there is a need for investigation and regulation," he said.

Georgia is the first state to pass legislation to regulate PBMs. The bill, HB 585, was signed into law by then-Governor Roy Barnes in May 2002.

The new law requires PBMs to be licensed as a pharmacy and authorizes Georgia's board of pharmacy to inspect the premises of PBMs, "whether those premises are located within or outside" the state.

At least seven other states—Alabama, Illinois, Iowa, Maryland, Missouri, New Jersey, and New York—have introduced similar legislation to regulate PBMs, said Rector, who wrote a "model bill" that is the basis of those states' legislation. Legislators from two other states, Arkansas and Texas, plan to introduce legislation based on Rector's model this year, he added.

A key feature of Rector's legislation model, he said, is that the licensing fees paid by PBMs will provide enough revenue to fund monitoring activities of state investigators.

"It will be self-paying and won't cost the state anything," he said.

Rector's model legislation also gives state insurance agencies some responsibilities in regulating PBMs, such as overseeing claims-processing activities.

Some states have laws that regulate claims processing done by third-party administrators, Rector said. But most states, he said, fail to enforce those regulations when dealing with PBMs.

States should require PBMs to be licensed as third-party administrators, said Gerry Purcell of Pharmacy Partners in Atlanta, Georgia, who consults with businesses and state agencies about selecting PBMs. The firms should also be required to disclose information about rebates and other financial incentives they receive from drug manufacturers for any contracts that involve health plans for government-funded agencies.

"How can you trust that PBMs are truly containing costs and appropriately managing benefits when they are not disclosing the financial incentives they receive," he said.

West Virginia Sues PBM

West Virginia filed a lawsuit in November 2002 against Medco Health Solutions, a subsidiary of Merck & Co. Inc., for unjust enrichment, fraud, and breach of contract.

Medco had been hired in July 2000 to administer a prescription drug program for the state's Public Employees Insurance Agency (PEIA). PEIA ended its contract with Medco on June 30, 2002.

In its complaint, the state alleged that Medco steered PEIA members to purchase Merck-manufactured products, even though those products were more expensive than therapeutically equivalent drugs, according to West Virginia Attorney General Darrell V. McGraw Jr.

The state also alleged that Medco kept $6 million in drug manufacturers' rebates and discounts that should have been passed onto PEIA and its members.

Medco's conduct, McGraw said in a statement, was "unlawful and has caused harm to the citizens of West Virginia by increasing their prescription drug costs."

Before the state filed its suit, Medco reportedly sued PEIA in October, arguing that the agency owes the PBM $700,000.

At press time, neither suit had gone before a judge.