Changing the Game: Groundbreaking Drug Benefit Purchasing Standards for Large Employers
October 13th, 2023
Between mounting legislative efforts, new purchaser tools and an increasingly untenable status quo, the pharmacy benefit manager (PBM) industry today faces an historic and long-overdue reckoning. Yet genuine PBM reform is not guaranteed and can only occur if large employers and other health care purchasers are unrelenting in their push for change.
For decades, pharmacy benefit managers have leveraged their middleman role in the drug supply chain to maximize profits at the expense of prescription drug affordability, leaving U.S. patients and employers to pay 2.5 times as much for life-saving medications as those in other high-income nations. Unchecked PBM profiteering has contributed to rising medication costs, threatened the sustainability of employer-sponsored health insurance and, in some instances, jeopardized patient health.
How to Address the Problem
Over the past 40 years, U.S. drug costs have climbed more than ten-fold, from $30 billion in 1980 to $348 billion in 2020. While pharmaceutical manufacturers are frequently blamed for rising costs, an undeniable link exists between price increases and the ever-expanding supply-chain dominance of PBMs. PBGH’s PBM initiatives and policy reform efforts are designed to help employers rein in out-of-control pharmaceutical spending.
PBMs employ a multitude of strategies to leverage their intermediary role in pursuit of outsized profits. Because these activities occur behind a veil of secrecy and ambiguity, most stakeholders have remained largely uninformed and uncertain about whether and how to challenge the status quo.
But that hesitancy is changing now, thanks to a growing public understanding of abusive business practices and concurrent efforts to compel accountability and reform. Rare political consensus at both the federal and state levels is driving legislative initiatives that impose key structural changes on the PBM industry. In the marketplace, new transparency rules, along with the fiduciary obligations for large employers offering employee health benefits, are triggering unprecedented scrutiny of PBM costs, fees and client representations.
Success in rolling back PBM abuses ultimately will depend on emerging legislative reforms led by employers and purchasers, in partnership with consumer groups, and a critical mass of employers using their market power to force fundamental change across the industry. This requires increased awareness from benefit departments and their senior leadership of the problems PBMs create, as well as practical, iterative steps to resolve them. Both objectives are priorities for PBGH members.
Setting the Standard
PBGH’s latest effort – the PBM Purchasing Standards – builds on a long history of combatting rising pharmaceutical costs and helps employers and other health care purchasers combat abusive PBM contracting practices.
The standards were developed by PBGH’s Pharmacy PBM Workgroup, which includes representatives from member companies, as well as ERISA attorneys, pharmacy industry specialists and PBGH expert staff. The document’s sample provisions offer a starting point for organizations seeking to establish a solid contractual footing in their PBM relationships.
The PBGH PBM Purchasing Standards offers guidance for leveraging these mandates in preliminary discussions with PBMs and pharmacy advisors. Recommendations include insisting on access to all direct and indirect compensation paid to benefit consultants and/or brokers by PBMs, as well as details about the purchaser’s pharmacy spend, historical drug costs and the financial impact of rebates on plan premiums.
Four categories of purchasing standards further inform the guidelines and underpin model provisions that can help plan sponsors meet their fiduciary obligations. The four standards include:
- Transparency that supports a clear understanding of drug cost, drug utilization and revenues paid by the plan to the PBM.
- Clarity of definitions that cannot be manipulated to mislead plan sponsors and allow PBM profiteering.
- Customization that allows plan sponsors to provide an excellent benefit that optimizes clinical outcomes and cost-effectiveness.
- Client- and member-centric customer and account management that prioritizes member clinical outcomes, financial well-being and member satisfaction and that supports plan sponsors with trustworthy strategic guidance.
Sample contract language in support of each standard and tied to the transparency standard address two of PBMs’ primary avenues for profiteering: rebate retention and spread pricing.
All told, the guidelines include more than 140 model provisions or sub-provisions that contain specificity on everything from PBM reporting requirements and drug definitions to prior authorization, pharmacy network creation, formulary development and audit rights. The document also includes detailed definitions of multiple terms commonly used in PBM contracts.
Read more about the PBGH PBM Purchasing Standards and the organization’s history of fighting against outrageous drug costs.
PBGH recommends that plan sponsors interested in using the guidelines share the document with a specialized PBM ERISA attorney or expert pharmacy consultant. All advisors should review the document and attest to their alignment with both the spirit and letter of the guidelines.
What Employers Need to Know About Removing Gag Clauses from Health Care Contracts
August 1st, 2023
Before the clock strikes midnight on December 31, 2023, private employers and other public health care purchasers will have been required to attest to their benefit plan contracts being free of gag clauses. There is more than meets the eye to this requirement.
Service agreements with third-party administrators (TPA), pharmacy benefit managers (PBM) and other vendors have long included “gag clauses,” which are contractual restrictions that prevent employers from accessing and sharing their own health care price and quality data. The presence of these gag clauses has restricted the data and information employers need to monitor their vendor partners and assess the value of the health care services they are buying for employees.
Section 201 of the Consolidated Appropriations Act (CAA) made it impermissible for employers to have gag clauses in their service agreements. In this way, the CAA significantly highlighted the need and opportunity for employers to access and use their health care data, which is reflected in the surge of headline-grabbing lawsuits over the past 12 months.
The burden of ensuring contracts are free of gag clauses rests entirely on employers, not their vendors. Access to previously confidential information also binds employers to use that data to drive improvements and make informed decisions for the plan as a core part of their fiduciary obligations.
The Attestation Requirement
In February, the tri-agencies responsible for enforcement issued an FAQ that clarified many uncertainties around the CAA’s gag clause provision. This provided confirmation that:
- The first upcoming December 31, 2023 attestation deadline covers the entire three-year period dating back to the CAA’s passage on December 27, 2020.
- PBM agreements are covered under the purview of the requirements.
- Contract phrases that indirectly function as gag clauses are also impermissible.
- Self-insured employers completely retain the liability of attesting, no matter if a third-party submits it on their behalf.
Four Emerging Obstacles for Employers
Gag clauses have been prevalent in most service provider agreements to date. These contract phrases serve the interests of vendors, such as health plans, PBMs, TPAs and consultants, who benefit from not having to provide employers with strategically important information on health care price and quality. As a result, employers have unsurprisingly found it difficult to comply with their requirement to remove all gag clauses.
Here are four examples of such obstacles:
- Service providers are taking the position that they have removed all gag clauses from their service agreements with little or no context on what has changed.
- Service providers are offering to attest compliance on behalf of their self-insured clients without any accompanying discussion of whether all gag clauses have been removed.
- Service providers are removing gag clauses from their service agreements only to then include them in their confidentiality agreements and/or NDAs.
- Service providers are providing incomplete or partial data to employers, which gives the appearance of cooperation without the substance needed to properly attest.
These challenges complicate the ability of employers and purchasers to attest by the end of this year. Those who have encountered one or more of these obstacles are in an awkward position. They currently have no other option but to consider submitting a false attestation or none at all.
However, a recently introduced House bill called the Health DATA Act provides necessary improvements to the gag clause removal portion of the CAA. Specifically, it would elaborate purchasers’ right to fully access their data, introduce service provider accountability through civil penalties for noncompliance and, perhaps most importantly, let employers submit a reasoned explanation of their circumstances in lieu of attesting.
How Employers Can Take Charge of their Attestations
In the meantime, employers can take several concrete steps to tackle their requirement to strip gag clauses out of their service agreements:
- Gather all service agreements and vendor contracts that concern health care price and quality, including your PBM contract.
- Enlist the help of a trusted, independent third-party that is well-versed in reviewing benefit plan service provider contracts for gag clauses.
- Identify impermissible gag clauses in service contracts (two illustrative examples are set out in departmental guidance).
- Negotiate the removal of gag clauses from all service provider contracts, confidentiality agreements and NDAs.
- Negotiate contract amendments to ensure vendor cooperation in meeting your fiduciary obligations, especially those related to the CAA’s gag clause provisions.
Taking these steps and documenting them appropriately will not only improve employers’ contracts but will go a long way toward demonstrating prudence and good-faith compliance with the CAA’s requirements. Additionally, if vendors still prove uncooperative in removing gag clauses from existing service agreements, these steps will be an important component of employers explaining why they were unable to attest.
Navigating the gag clause removal and attestation process will most likely result in uncomfortable conversations between employers and the vendors they’ve long relied on to provide quality health care benefits to their employees, and will call into question long-standing assumptions about health care data ownership, or lack thereof. Through it all, employers will gain clear line-of-sight into whether their vendors are a help or a hindrance in fulfilling their clarified fiduciary obligations under the CAA.
Advice from a Purchaser Who Took on Health Care’s Status Quo and Won
April 14th, 2022
Read and re-read your contracts, and don’t agree to anything that will keep you from fulfilling your fiduciary responsibilities.
Dig into the data. Read the fine print. Follow the money.
That’s Marilyn Bartlett’s advice to employers and purchasers struggling to contain soaring health care costs and looking to gain greater transparency from plans, third-party administrators (TPAs), pharmacy benefit managers (PBMs) and brokers.
“You need to become aware of the full range of costs, including all the hidden fees and incentive arrangements used by health care providers, middlemen, service providers and vendors. You’re the fiduciary, so you have a responsibility to understand where the money goes.” -Marilyn Bartlett
Bartlett knows what she’s talking about when it comes to driving down health care costs. As a certified public account and the former administrator of Montana’s state employee health plan, Bartlett rescued the 31,000-member state plan from impending insolvency by carefully examining existing contracts and reviewing stakeholder financial data to drive better deals for the state.
Here, the contractual terms she found that were unnecessarily adding millions of dollars annually to the cost of health care, and the approach she recommends employers and purchasers take to carefully examine the contractual commitments they make with their vendors.
Use all available tools
According to Bartlett, new tools—notably hospital price transparency rules and the prescription drug reporting requirements for self-insured employers contained in the Consolidated Appropriations Act (CAA)—can give purchasers much better insight into how their health care dollars are spent. For instance, brokers will be required to disclose direct compensation paid by TPAs, PBMs and others. But it is important to push for disclosures on indirect, non-cash compensation, too. That information, combined with what brokers are required by law to disclose, can help employers determine exactly who the broker is working for.
The CAA also contains a prohibition on gag clauses that have traditionally restricted purchaser access to provider cost and quality information. This should help level the playing field when it comes to provider and plan negotiations.
Throw away the chargemaster
Bartlett took over Montana’s state health plan in 2015 in the wake of a $28 million loss the previous year. Actuaries were projecting the insurer would be insolvent by 2017. A former controller for a Blue Cross/Blue Shield plan and chief financial officer of a TPA, Bartlett drew from her experience to systematically disassemble and rebuild the plan’s provider and vendor arrangements.
Her first step was to review the wildly varying prices the plan paid to hospitals. One hospital, for instance, charged four times the amount of another for a knee replacement, and virtually all relied on discounts off their chargemaster, or internal price list, to set rates. Using this methodology, some facilities were charging as much as five times the Medicare rate for the same service.
As a result, the plan imposed a new, take-it-or-leave-it reference pricing model that tied all reimbursements to Medicare rates: Hospitals would receive, on average, about 230% of Medicare and the amounts could only increase if Medicare raised its baseline payments for the same service.
“We knew their financial condition and where their break-even points were” by reviewing Medicare cost reports, Bartlett said. “So, we were eventually able to get them to agree. We pulled rates down and got immediate savings.” Hospital cost savings reached $4.6 million in 2016, $12.7 million in 2017 and $15.6 million in 2018. Today, the plan routinely generates a surplus and premiums haven’t been increased since 2017.
The National Academy for State Health Policy recently launched its interactive Hospital Cost Tool, which provides data on a range of measures to offer insights on hospital profitability and breakeven points calculated using annual Medicare Cost Reports. This provides purchasers with an important tool to model the actions taken in Montana that significantly lowered costs.
Re-read the contracts
In addition to scrutinizing hospital pricing, Bartlett urges purchasers to dig deep into the health plan’s TPA, PBM and consulting contracts. She was appalled by what she found in Montana. Some of the more egregious contract language included clauses that:
- Gave the TPA authority to unilaterally pay non-covered services if they received pushback from a provider or patient.
- Allowed the TPA to keep prescription drug rebates as “reasonable compensation” for its services.
- Restricted the plan’s ability to perform its fiduciary duty by prohibiting it from seeking recovery of network provider overpayments.
- Prevented the plan from directly contacting any health care provider without involvement of the TPA.
- Imposed numerous constraints on how the purchaser could audit TPA claims data.
- Enabled the TPA to sell the purchaser’s data to outside parties.
- Allowed the TPA to pay affiliated third-party vendors without any purchaser knowledge or oversight.
- Allowed the TPA to pay providers less than the claim amount collected from the purchaser and pocket the difference.
- Routed drug manufacturer rebates through a third-party “rebate aggregator” that collected up to 25% of the rebate before sending the balance on to the health plan.
- Allowed PBMs to contract with pharmacies they own.
Read and re-read your contracts, and don’t agree to anything that will keep you from fulfilling your fiduciary responsibilities. Even if not explicitly banned by the CAA, hidden contract terms or contract terms that limit the availability of data place employers at risk for failing to meet their fiduciary responsibilities. This, in turn, can put them in both regulatory and legal jeopardy.
Bartlett said she believes the CAA disclosure requirements will go a long way toward helping purchasers—and the country—get control health care spending.
“All the money in the system; that comes from employers, employees, consumers and the taxpayer. It’s all of us, and it’s just horrible how much waste there is. So, I think these transparency rules can give us the leverage we need to finally start reducing that waste.” -Marilyn Bartlett
Today, Bartlett is helping state health plans pursue the same cost-saving tactics she employed in Montana in her role as a senior policy fellow with the National Academy of State Healthcare Policy.