Changing the Game: Groundbreaking Drug Benefit Purchasing Standards for Large Employers

October 13th, 2023
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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:

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.

PBM Reform Act a Critical First Step in Ending PBM Abuses, Key Fiduciary Requirement Missing

May 11th, 2023
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The bipartisan Pharmacy Benefit Manager (PBM) Reform Act advanced out of a key congressional committee this week, paving the way for eventual floor debate of the landmark legislation. The bill has major implications for large employers’ ability to control rising drug costs and preserve employer-sponsored health benefits, a vital lifeline for nearly half of all Americans.

The marked-up bill, which was passed by the Senate Health, Education, Labor and Pensions (HELP) Committee, contains three broad provisions that employers believe are critical to PBM reform. These include:

Employers have broadly supported these reforms and view them as a critical baseline for fixing the dysfunctional prescription drug market and ensuring employee access to affordable medications.

However, a fourth requirement that is arguably the most essential for compelling changes in PBM behavior – that PBMs be held accountable as fiduciaries – was not included in the legislation. Without being legally held to the same standard as employers to act in the best interest of employees and ensure only reasonable fees are expended, PBMs will be free to continue exploiting their market power to maximize profits and drive up drug costs.

Employers and reform advocates committed to lowering prescription drug prices and increasing PBM accountability will therefore continue to demand that the fiduciary standard be included in any final legislation.

The importance of a PBM fiduciary requirement

Due to new pricing transparency laws and regulations, employers now have enhanced fiduciary obligations and more data available to help them serve as good stewards of their health care benefits and act in employees’ best interests by minimizing costs. To fulfill this obligation, employers believe the ultimate backstop to end present and future PBM industry abusive practices is to hold PBMs to the exact standard that employers face.

Without requiring PBMs to function as fiduciaries, the large companies that control much of the prescription drug market will likely continue to develop revenue-driven strategies that enable them to thwart the spirit and letter of the law.

One only needs to look at PBMs’ past behavior in drawing this conclusion. In the face of growing pressure to pass through drug rebates, PBM business models have evolved in recent years to significantly boost revenue from other sources. Chief among these are new and higher fees paid by drug manufacturers (over and above rebates), pharmacies and other supply chain entities.

PBMs also have created new middlemen – quasi-independent rebate aggregators or group purchasing organizations (GPOs) – that help enhance the opacity surrounding rebates and fee structures. This makes it more difficult for employers and manufacturers to monitor performance. Significantly, two of the three GPOs controlled by the three largest PBMs were established outside the U.S., a fact which will likely make regulatory and employer oversight even more challenging.

For too long, employers, employees and even drug manufacturers have been in the untenable position of essentially operating in the dark when it comes to drug pricing.  Strong bipartisan support exists in Congress to shine a bright light on PBM behavior and end the tricks that have allowed PBMs to enrich themselves at the expense of all other stakeholders.

PBMs must not be allowed to escape fiduciary responsibility in order to continue leveraging their market dominance to perpetuate inflated drug costs.  That’s why it is essential that Congress codify PBM’s fiduciary role.

The Hidden Cost of PBMs in the Health Care Industry

April 25th, 2023
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Pharmacy benefit managers (PBMs) play an essential role in managing prescription drug benefit plans for employers and health insurers. But too often, these corporate middlemen are using tactics that drive up drug prices, limit patient access to needed medicines and contribute to health risks. PBM profiteering is hurting patients, and Congress needs to enact measurable reforms now.

The Role of PBMs

PBMs are organizations that manage prescription drug programs for employers who provide health benefits for their workers.  They are supposed to use their purchasing power to negotiate discounts from pharmacies and pharmaceutical companies on behalf of employers, and this should bring down the costs for employers and patients. However, PBMs do not always pass along to their customers all the savings they negotiate.

How PBMs Game the System

PBMs employ a variety of tactics designed to increase profits at the expense of patients and often profit more when higher cost medications are used. One example is when PBMs charge a co-pay or deductible amount higher than what they paid for a medication. They then keep the difference as profit instead of passing it along to their customer or patient. Another tactic is “spread pricing,” or paying pharmacies less than what they’ve charged the health plan, employer or patient.  The intentional complexity and lack of transparency in the current system allows PBMs to benefit from high-cost drugs and results in employers, and ultimately patients, paying more.

Impact on Patients and Employers

These tactics have serious implications for both patients and employers. Patients may be forced into costly treatments or have to switch medication because a higher-cost drug offers a PBM a higher rebate, and PBMs determine which prescription drugs patients have access to. In addition, employers are left footing the bill and are most times prohibited from even auditing the PBM to see if they are getting a fair deal and paying a reasonable price. All this can lead to higher risks for patients and increased out-of-pocket costs leading some people to have to make the choice not take necessary medications.

What’s Needed

The nation’s employers are purchasing life-saving health benefits for American workers in a market that is not functioning as intended. The result is that employees and their families are being denied access to affordable prescription drugs. Federal action is essential to curb PBMs’ anti-competitive practices and to require accountability for the industry. 

These actions must include:

  1. Require full and complete transparency and reporting: PBMs and their parent companies should be required to provide strong reporting to employers on costs, fees and total manufacturer revenue, and ensure employers have the right to audit their PBM with an auditor of their choosing. PBMs should not be allowed to engage in workarounds or legal games that skirt these laws.
  2. Ban spread pricing: PBMs should not be allowed to charge employers, health plans or patients more for a drug than the PBM paid the pharmacy for that drug.
  3. Require PBMs to pass-through 100% of all rebates, discounts and fees: PBMs should be required to pass on 100% of all rebates and volume or access-based administrative fees to employers and plan sponsors.
  4. Hold PBMs accountable the same way employers are held accountable: Employers are required as plan fiduciaries to be good managers of the health care benefits they provide employees and act in a manner that minimizes costs. PBMs should be held to the same level of accountability as employers and health insurance plans.

Read more about how PBMs are failing American workers.

4 Key Employer Health Trends for 2023

January 4th, 2023
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With the pandemic’s grip finally easing, employers are shifting their focus toward key objectives that can support sustained improvements in health care quality and meaningful reductions in cost. Here, the top four trends for large health care purchasers to watch as we head into 2023.

1. Improving health equity

COVID-19 exposed major disparities in the U.S. health care system and helped fuel an employer commitment to tackle the systemic inequities faced by underserved and minority communities. Employers understand that by focusing on health plan design, care access and social determinants of care, they can make important strides toward providing more equitable and cost-effective care.

In the coming year, more large companies will be looking to cover preventive medications and services, supporting pregnancies through doula services, developing data capabilities to identify and help address social determinants, improving remote chronic disease management, and making benefits and health care simpler to access and navigate for underserved populations.


2. Strengthening primary care

Employers realize that robust primary care provides the foundation for a healthy workforce and is an essential starting point of high-value health care system. Studies show that advanced primary care, or primary care systems that incentivize integrated and coordinated care, can lower overall health utilization, improve outcomes and reduce costs.

Key strategies employers are expected to target to bolster primary care include supporting consistent advanced primary care standards for payers, providers and health care purchasers to incentivize high-quality, lower-cost primary care. Other employer efforts are likely to focus on working with policymakers to advance the development and application of alternative payment models that support and enable advanced primary care. Equally important will be the continued evolution of tools and systems that enhance consistent access to behavioral mental health in the primary care setting.

To support purchasers in their efforts to identify and work with top-performing primary care practices, PBGH recently issued a first-of-its-kind collective request for information (RFI) on behalf of members to identify provider practices that meet established standards of advanced primary care and that are willing to partner — the results of which will be used in network design and/or in direct contracting arrangements.


3. Taking fiduciary responsibility for health care

The Consolidated Appropriations Act (CAA) of 2021 imposes fiduciary obligations for employers who self-insure under the Employee Retirement Income Security Act of 1974 (ERISA). That means self-insured employers will need to demonstrate that the health care services they purchase for employees are cost-effective and high-quality. As a result, employers will be working to harness newly available hospital price information to drive cost-effective, quality care. Critical to these efforts will be tools that can make newly transparent price data meaningful and actionable. In addition, collective employer efforts to identify specific examples of overpricing will likely emerge to support negotiating leverage with hospitals and providers. Ultimately, employers’ new fiduciary obligations may spawn a shared national database with companion analytics that purchasers can use for evaluating pricing variation to help determine fair prices.


4. Reforming pharmacy benefit managers (PBMs)

A key legislative objective for purchasers in 2023 will be passage of legislation similar to the last Congress’s Pharmacy Benefit Manager Transparency Act of 2022. Comprehensive federal legislation would empower the Federal Trade Commission to increase drug pricing transparency and hold PBMs accountable for numerous unfair and deceptive practices that increase consumer costs and limit access of prescription drugs. In addition to expected action from Congress, a Federal Trade Commission investigation into PBM business practices is underway. Employers, meanwhile, will increasingly be looking to new market entrants that promise more transparent PBM services and put employers in control of their data to gain greater control over rising drug costs and employee access to quality care. PBGH is working across multiple channels to raise awareness about the extent to which PBMs have distorted the prescription drug supply chain – actions which put lives at risk, constrain employee access to medications and add billions of unnecessary costs to employers’ health care expenses.

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: