Historic Drug Legislation Passed: What It Means for Employers and American Workers

August 18th, 2022
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The landmark drug pricing reforms passed by Congress and signed into law by President Biden on August 16 will provide needed relief from the burden of prescription medication costs for many Americans by enabling Medicare to negotiate prices for certain high-cost drugs and limit further price increases.

This was an historic step in curbing what most Americans agree is an issue that Congress has long needed to address. Unfortunately, based on arcane Senate rules, the drug price provisions in the Inflation Reduction Act will not extend protections to the 180 million Americans with commercial health coverage.

Here, a look at what the law will and won’t do, and the steps large private employers and public purchasers of health care can take to help mitigate rising drug costs in the wake of legislation, that at least for now left them behind.

What the Law Accomplishes

The new law includes a provision that will enable the Centers for Medicare and Medicaid Services (CMS) to begin negotiating prices in Medicare starting in 2026 for a limited number of high-cost drugs that lack generic or biosimilar competition.

This marks a significant break from the existing prohibition on negotiation, which was a condition for drug manufacturers’ support for the creation of Medicare Part D nearly 20 years ago. That prohibition, combined with the market exclusivity for new drugs granted under the Hatch-Waxman framework, has allowed drug companies to set prices without competition or negotiation. This law begins to pierce the monopolies drug companies have long enjoyed, an important first step in pursuing further legislative action. CMS previously estimated that an earlier version of the negotiation proposal could reduce Medicare enrollee cost-sharing expenses by more than $102 billion by 2029.

Two other key provisions of the law include a $2,000 cap on out-of-pocket spending for Part D enrollees and a reduction in Medicare beneficiaries’ portion of total drug costs below the $2,000 out-of-pocket cost threshold from 25% to 23%.

Further, the bill requires manufacturers to pay rebates to CMS if drug prices charged to Medicare increase faster than the rate of inflation. This will apply to all drugs over $100 covered by Medicare Part D and single-source drugs and biologics covered by Part B. The penalty is expected to discourage drug makers from raising prices in Medicare, thereby reducing out-of-pocket costs for Medicare beneficiaries and constraining Part D premium increases.

What the Law Does Not Do

While this legislation is step in the right direction toward controlling prescription drug prices, it does not protect the 180 million Americans who get their health insurance coverage either through their employer or on the private market. Therefore, large employers and public purchasers that provide coverage to working Americans must remain vigilant and be ready to call attention to any adverse effects of this new law once it is implemented, including the potential of dramatic increases in the launch prices of new drugs and for existing medications, which would indicate manufacturers are charging high prices to make up for lost Medicare revenue.

We have seen this kind of cost-shifting before in the hospital sector, with ample evidence demonstrating that large private employers and public purchasers pay an average 224% more than Medicare for the same services. PBGH and its members will be watching prescription drug prices for evidence of cost-shifting to make up for lost Medicare revenue. This could lead to future opportunities for additional policy changes.

6 Steps Large Health Care Purchasers Can Take to Mitigate Cost Increases

In the absence of further policy changes, PBGH recommends six steps employers and purchasers can take to address the exceedingly high-cost burden of prescription drugs:

  1. Engage in a detailed negotiations with pharmacy benefit managers (PBMs) related to rebates and insist that all earned rebate dollars are passed back to you as the employer/purchaser.
  2. Take your PBM out to bid at the end of every contract cycle and consider working with new market entrants that have adopted a more innovative, transparent approach aligned with the needs of employers and American workers.
  3. Scrutinize your PBM contract and ensure you have access to the data ownership and audit rights you need to evaluate and optimize your pharmacy benefit.
  4. Look at total manufacturer revenue, not just rebates, and push for a guarantee of a major percentage of all manufacturer revenues, or the higher of, the guaranteed rebate amount or actual manufacturer rebates earned.
  5. Ensure your PBM contract has contractual terms clearly defined in an all-inclusive Definitions section, using the readily accessible industry standards as the source, and include a clause dictating that the terms and their definitions are only available once.
  6. Use your purchasing power to ensure your PBM is consistently working in you and your employees’ best interests.

You can learn more about how to evaluate the drug supply chain and your PBM performance here.

6 Things Every Employer Should Know About Their Pharmacy Benefit Manager

May 11th, 2022
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Pharmacy benefit managers (PBMs) ostensibly work on behalf of self-insured employers to manage drug spending and ensure employee access to preventive and curative medications. But an industrywide lack of transparency, coupled with complex and often-confusing policies and contract terms, has opened the door to PBM profiteering. Large, self-insured employers – and their employees – are the ones paying the price.

Here are six things employers should keep in mind when evaluating the drug supply chain and PBMs:

1. The higher the drug price, the more money the PBM makes. Like drug manufacturers and wholesalers, PBMs are paid a percentage of retail drug prices. They’re incentivized to exclude lower-cost drugs and promote higher-cost medications in their approved drug lists or formularies. This means employers often end up paying higher drug prices for branded medications when clinically equivalent generic drugs exist. Branded drugs will at times, be needed, knowing that, every employer should engage in a detailed negotiation related to rebates and insist that all earned rebate dollars are passed back to the employer.

2. Industry consolidation is contributing to reduced transparency and higher costs. The three leading PBMs are controlled by national health care enterprises, managing nearly 90% of prescription claims in the U.S. These consolidations create potential conflicts of interest between business units and make it nearly impossible to trace the flow of funds surrounding prescription drug costs. Every employer should take their PBM out to bid at the end of every contract cycle and consider working with new market entrants that have adopted a more innovative, transparent approach, aligned with the needs of employers and their employees.

3. The big three PBMs are adding cost and opacity by layering on new organizations that contract directly with drug manufacturers. The three leading PBMs all have group purchasing organizations (GPOs) to serve as intermediaries between drug manufacturers and their respective PBM operations. Even though it’s not clear what, if any, value the GPOs will create, research suggests they’re expected to extract an added 5-8% in fees from the drug supply chain. Additionally, because they’re replacing PBMs as the organizations that contract directly with drug manufacturers, the GPOs will help insulate PBM operations from audits and potential legislative cost remedies, including new transparency requirements of the Consolidated Appropriations Act. Every employer should scrutinize their PBM contract and ensure they have access to the data ownership and audit rights they need to evaluate and optimize their pharmacy benefit.

4. Employers should focus less on rebates and more on total manufacturer revenue. In PBM contract negotiations, large employers typically want a guarantee that they will receive 100% of manufacturer rebates, often missing the contractual loophole that caps these rebate payments at a fixed dollar amount, preventing the employer from collecting on total rebates earned. This is money PBMs have long kept for themselves to boost profitability. On top of an employer’s rebate dollars, a PBMs collection of administrative fees has also increased, with transaction and claims processing fees as recent additions to client invoices. Employers should comfortably question every fee that gets included in their PBM contract. To implement the strongest possible contract, every employer should push for a guarantee of a major percentage of all manufacturer revenues, or the higher of, the guaranteed rebate amount or actual manufacturer rebates earned.

5. Each PBM creates its own definitions of brand and generic drugs. Almost every single PBM contract begins with a Definitions section. PBMs have long used widely varying definitions for categorizing drug types to maximize their rebate earnings. To make matters more confusing, the initial Definitions section isn’t the only place PBMs define contractual terms; they might do so in several other spots throughout the contract. In doing this, PBMs are guaranteeing they maximize their opportunities to make decisions that continue to fuel their profits. Every employer should be vigilant about their PBM’s defining and redefining of contractual terms as it directly impacts the employer’s financial plan performance. Your contracts begin with an all-inclusive Definitions section, using the readily accessible industry standards as the source, and include a clause dictating that the terms and their definitions are only available once.

6. Three critical questions should be asked and answered before signing a contract. PBMs have long thrived in an environment characterized by inordinate complexity and a lack of transparency. For this to change, every employer must become more informed and proactive to use their purchasing power to ensure PBMs are consistently working in the best interests of the employer and its employees.

Use this information and the following set of questions in your upcoming discussion with your PBM:


Greg Baker, R.Ph. is the co-founder and CEO of EmsanaRx. A pharmacist by training, Greg brings a strong clinical focus to pharmacy benefit management. Throughout his 25 year career, he has been a leader in direct pharmacy services with a focus on optimizing patient outcomes. Greg has genuine care and concern for the wellbeing of patients. His commitment to improving patient outcomes led him to co-found EmsanaRx. Greg values honesty, integrity and clarity in business practices. These values, paired with the operational knowledge and insight of an industry insider, position him to be a positive force for change in the health care industry.