New NASHP Model Legislation Helps States Bring Transparency to Pharmacy Benefit Managers
The National Academy for State Health Policy (NASHP) has released model legislation to help states shed light on the opaque business practices of pharmacy benefit managers (PBMs). States can use the model bill to require the licensing of PBMs, ban gag clauses that prevent pharmacists from sharing lower-price drug options with consumers, and require more transparency into who profits from rebates.
• Read or download NASHP’s model pharmacy benefit manager legislation here.
• Read a Q&A about NASHP’s pharmacy benefit manager legislation here.
• Explore NASHP’s other model bills designed to curb Rx costs here.
• Read a Q&A about NASHP’s pharmacy benefit manager legislation here.
• Explore NASHP’s other model bills designed to curb Rx costs here.
This year alone, more than 80 PBM bills have been introduced in state legislatures across the country and 26 became law. NASHP developed its new PBM transparency model act in consultation with its Pharmacy Cost Work Group following a review of these recently-enacted PBM laws.
States have implemented PBM legislation in response to its current business model, which has been criticized as anti-consumer and anti-competitive.
Examples include:
- Formulary design that increases PBM revenue at the expense of consumers. A formulary is an insurance plan’s list of covered prescription drugs that usually includes multiple tiers with varying copays. This tier pricing, designed by PBMs, produces financial incentives to drive consumers to purchase “preferred” drugs.
- Some PBMs penalize consumers by charging them more for shopping at pharmacies that they do not have an ownership stake in.
- Some PBM contracts prevent pharmacists from providing lower-priced drug options to consumers.
- Some PBMs have reimbursement practices that are not fair to pharmacists; and
- Some PBMs may not always serve the financial interest of their health plan clients.
The PBM business model appears to have a very basic conflict of interest – the rebates that drug manufacturers pay to PBMs are based on a percentage of the drugs purchased by the PBM. The result? Higher drug prices translate into higher rebates paid to PBMs, and only a portion of those rebates are shared with the PBM’s health plan clients or consumers. While higher drug prices generate more net revenue to PBMs, higher drug prices also mean that the health plan, pharmacy, and consumer end up paying more for prescription drugs. And, those rebate negotiations all take place under the cloak of confidentiality. This lack of transparency appears to benefit drug manufacturers, allowing them to negotiate prices without any public disclosure of discounts.
In the complex structure of prescription drug markets, “payers” are not always “purchasers.” Purchasers are pharmacies, hospitals, clinics, and nursing facilities that provide drugs to patients. Payers (insurers and their PBMs) reimburse purchasers for the drugs they dispense to patients. Drug manufacturers don’t give their deepest discounts to purchasers because these discounts are not typically passed from the purchaser (the hospital, pharmacy, etc.) to the ultimate payer (the insurer or its PBM).
Rebates allow manufacturers to focus their price concessions on the payers who can help or harm a manufacturer’s drug sales. Manufacturer price concessions don’t necessarily show up at the pharmacy counter as discounts that benefit consumers. As drug costs continue to rise, consumers pay more and more for their drugs because what consumers pay is based on the cost of the drug to the pharmacy.
Transparency measures in NASHP’s model PBM bill seek to provide answers to some key questions, including:
- Who really benefits from rebates and how much do they get?
- How are rebates and price concessions used?
- Do rebates reduce insurance premiums or do they boost PBM company stock prices?
It is hard to assess the impact of a PBM’s business model on health care costs, but there is growing concern that PBMs do not really add value to health care systems and may instead be contributing to rising health care costs. This is why states, who are major purchasers of drugs through their Medicaid programs, want more transparency into what PBMs do and how they do it.
While investigating the PBM’s business model is necessary, this legislation is just one strategy for states to combat ever-rising drug prices. Drug manufacturers’ price increases are not solved by policies aimed only at PBMs or insurers. The PBM business model is simply one component of the drug supply chain’s market dysfunction – but it is not the most significant. Explore NASHP’s Center for State Rx Drug Pricing for other model legislation that can help address drug prices, including drug affordability review (rate setting), manufacturer drug price transparency, and wholesale drug importation here.
Pharmacy Benefit Manager Model Legislation: Questions and Answers
These questions and answers explain the role pharmacy benefit managers (PBM) play in the drug supply chain and highlight NASHP’s model PBM legislation that states can use to better oversee PBMs and protect consumers.
What are pharmacy benefit managers?
Pharmacy benefit managers (PBMs) contract with health plans to administer their pharmacy benefits. Depending what a health plan needs for pharmacy services, a PBM can:
- Set up a health plan’s pharmacy network (which can include “preferred” pharmacies) to supply drugs and services to members;
- Design its formulary — the plan’s list of covered prescription drugs that can include multiple tiers with varying copays that act as financial incentives to drive consumers to preferred drugs;
- Establish how much health plan members pay out-of-pocket (copays) for prescription drugs; and
- Pay the pharmacy claims, which the health plan reimburses.
While PBMs do not buy drugs directly from manufacturers (wholesalers or distributors perform that task), when they create drug formularies for their health plan clients, they designate which “preferred” drugs the insurance plans will cover, which puts them in a powerful bargaining position. PBMs can insist on discounts or rebates from manufacturers in exchange for placing their drug products in a health plan’s formulary. If a manufacturer’s drug is not in a formulary, insurers won’t cover the drug and physicians won’t prescribe it, so PBMs have great leverage when negotiating prices.
These negotiations, which are confidential, result in rebates paid by the manufacturer to the PBM based on the volume of drugs dispensed to the PBM’s health plan enrollees. However, these rebates are not discounts that are shared with consumers at the point of service. Instead, PBMs share some portion of their rebates with their health plan clients. Some of the manufacturer rebates do go to lower the net cost of drugs to the health plan, but it’s not clear how much of that discount is shared with consumers. The three largest public PBMs in the United States (CVS Caremark, Express Scrips, and OptumRx) control 72 percent of the US market.
Why are states legislating PBM business practices?
Many aspects of the current PBM business model have come under scrutiny as anti-consumer and anti-competitive because some PBMs have:
- Designed drug formularies that benefit the PBM at expense of consumers;
- Required consumers to purchase drugs only from PBM-controlled pharmacies;
- Restricted how much price and cost information pharmacies can share with consumers; and
- Failed to act as the fiduciary and safeguard the financial interest of their health plan clients.
Most important, the typical PBM business model appears to have a very basic conflict of interest – the rebates a PBM receives from drug manufacturers are based on a percentage of the drug’s price – so the higher the price, the higher the rebate – and only part of the rebate is shared with health plans . While higher drug prices generate more net revenue for the PBM, health plans, pharmacies, and consumers end up paying more in higher prices .It is hard to determine the impact of the PBM business model on health care system costs, but there is growing concern that PBMs do not add value to the health system and may, in fact, be contributing to rising prescription drug costs. This is why more transparency is needed about how PBMs operate.
Why are concerns about PBMs surfacing now?
Today, PBMs select and manage formularies (the lists of prescription drugs covered by each insurance plan) and pharmacy networks. PBMs pay drug claims, and they negotiate rebates with drug manufacturers that they share with their health plan clients. As a result, PBMs can have a significant impact on consumers. They can determine which drugs are included and/or preferred (and available at a lower cost) in the formularies they design and manage. They often select (and may own) the pharmacies that are part of the health plan’s network, and they can control how much patients pay in out-of-pocket costs (copays, deductibles, coinsurance). PBMs tend to take on more of these functions for smaller health plans while larger plans retain more of control over their pharmacy benefit designs.
The PBM business model has evolved over years. Originally, the PBM industry contracted with health plans to run their retail pharmacy benefit. For example PBMs would put together the pharmacy network, negotiate pharmacy-dispensing fees, and pay claims on behalf of the health plans. Today, it is a massive industry that has an increasing ability to raise revenue from drug manufacturers in the form of rebates. There is concern that this rebate model has a perverse impact on pharmacy costs and patient out-of-pocket costs.
What is the big concern about drug rebates?
Rebates are confidential price concessions between a PBM and a drug manufacturer that occur after a drug has been dispensed and the pharmacist reimbursed. The PBM’s rebate based on a percentage of the price of the dispensed drug. The higher the price of the dispensed drug, the higher the PBM’s per unit rebate. The more units dispensed, the more revenue a PBM gains.
Because of recent industry consolidation – today just three companies control 75 to 80 percent of insured lives – PBMs’ negotiating clout with manufacturers has grown. PBMs’ ability to use formulary design to generate greater rebates may dictate which drugs they place on lower-cost formulary tiers (which cost consumers less out-of-pocket) and which drugs they placed on higher-cost tiers (which cost consumers more out-of-pocket). The ability to place a manufacturer’s drug on a formulary tier gives PBMs the ability to affect a drug manufacturer’s market share.
While tier placement represents the PBM’s net cost (after rebates), tier placement does not necessarily mean lower-tier drugs are the least-costly for consumers. Consumers pay the list price – without rebates factored in to reduce prices.
Some portion of rebates is shared with a health plan, and some is retained by PBMs as revenue. However, it is not clear what percentage is retained by PBMs and what percentage is passed on to health plans.
The bottom line is transparency is needed to understand the impact of PBMs’ complex financial arrangements on health care spending, consumer access to drugs, and consumer costs.
What would the NASHP PBM model act do?
The NASHP Pharmacy Benefit Manager (PBM) Model Act is a compilation of provisions from proposed and enacted state legislation. In 2018, for example, there were more than 80 PBM bills introduced in state legislatures across the country and 27 became law as of Aug. 1, 2018. Here are some of the model act’s components :
State licensure: States have a long history of licensing other parts of the drug supply chain, such as pharmacies, wholesalers, and similar entities, but only recently have they begun to license and regulate PBMs. This section of the act requires a PBM operating in a state to become licensed.
Fiduciary responsibility: The model act requires PBMs to have a fiduciary duty to its health plan clients. This means PBMs have a legal responsibility to protect the financial interests of their health plan clients.
Gag clause ban: This bans PBM contract provisions that limit a pharmacist’s ability to inform customers about the least expensive way for customers to pay for a prescription. For example, some current PBM bans prevent a pharmacist from telling consumers when they will spend less if they pay in cash rather than use insurance or select a less costly generic drug or a therapeutic alternative.
Patient out-of-pocket costs: This section prevents a health plan or its PBM from setting patient copays or coinsurance at a higher level than the actual cost of the drug to the health plan (or its PBM).
Conflict of interest: The model act requires a PBM to notify health plan clients if the PBM has a conflict of interest. For example, when a PBM owns its own pharmacy operations, it may want to drive business there, instead of focusing on the most cost-effective drug distribution for its health plan client.
Protecting consumers from conflicts of interest: The model act prohibits penalizing patients who do not use pharmacy services in which the PBM has an ownership stake or other financial interest.
Rebate transparency: The model act requires a PBM to report rebates and fees in a variety of ways. The state would make public the reported information that is not a trade secret.
Limiting PBM requirements on pharmacies: Some PBM contracts limit which drug wholesaler or distributor a pharmacy can buy from. Those PBM-specified distributors may serve the PBM’s financial interests more than a pharmacy’s. The model act would prohibit a PBM from establishing pharmacy network requirements that exceed what are defined by state law.
Has the PBM industry ever sued a state after it approved PBM legislation?
To date, there has been one challenge of a state’s PBM legislation. In July 2017, the PBM industry challenged two North Dakota 2017 laws (SB 2258 and SB 2301) (PCMA v Mylynn Tufte et al July 2017. Docket No. 1:17-cv-00141 and No. 1:19-02.1-16.1). The industry’s suit claims North Dakota’s laws violated the federal preemption of the Employee Retirement Income Security Act (ERISA). The court denied the industry request for an injunction in November 2017 and the case is currently pending.
Interestingly, there were 12 lawsuits filed against the PBM industry in 2016 and 2017. Many of these are consumer class action suits. These lawsuits focused on PBMs’:
- History of charging consumers more than the PBM’s actual cost of the drug;
- Lack of transparency about rebates; and
- Other business practices.
Stronger state regulation of PBMs may obviate the need for future consumer lawsuits.
States’ Prescription Drug Transparency Laws Open the Black Box of Drug Pricing
Shutterstock.com
Several states have passed drug price transparency laws that require drug makers to report the reasons behind dramatic price increases. These laws are an important first step to shine a light on why drug prices are rapidly climbing. To address a problem, state health policymakers need to understand it, but transparency laws don’t yet give states much enforcement muscle when it comes to actually halting big price hikes or demanding refunds.
The National Academy for State Health Policy (NASHP) has compiled a chart comparing transparency laws in Vermont, Nevada, California, and Oregon against NASHP’s model transparency legislation and Maryland’s more aggressive anti-price-gouging law that includes strong enforcement measures.
The new transparency laws enable states to collect many common data elements about drug pricing. The new requirements provide a unique opportunity to effectively implement coordinate work across states to capture and analyze important price-related information. Common data elements required by transparency laws usually include:
- Data about both brand-name and generic drugs;
- Drug prices and percentage increases over time;
- Production costs including manufacturing and marketing;
- Sales revenue and profit; and
- Amount spent on patient assistance programs.
As states gather this important data to better understand the scope and rationale behind industry price hikes, other states are moving ahead with more aggressive measures that include enforcement against high prices, such as Maryland’s anti-price-gouging law.
The Maryland law takes a step beyond transparency’s information-gathering focus. It empowers its attorney general to ask the circuit court to penalize drug manufacturers that raises the price of generic drugs by 50 percent or more within 12 months by fining the company and returning funds to patients and payers. The pharmaceutical industry is currently challenging Maryland’s new law in federal court, but despite that legal pushback, similar bills have been introduced in other states (WA, CO, MN, WI, IL, LA, MS, VA, NJ, RI, and NH).
The drug industry’s aggressive and well-funded efforts to oppose states’ cost-controlling legislation has led to states taking incremental steps to curb drug price hikes, and transparency laws are effective first steps that can help position states to work to lower drug costs. Transparency provides an important starting point, shining a light on industry practices and potentially revealing whether pricing strategies have more to do with “what the market will bear” than science.
Transparency laws create a great opportunity to coordinate and develop systems to capture and report key drug price data. For example, the ability to track a class of drugs, such as those used to treat HIV, could uncover a pattern that a price increase by one manufacturer is often quickly followed by similar price increases by competitors.
Transparency laws demand explanations for price increases and may open the door for action to address unjustifiable price increases through more effective measures, such as implementing anti-price-gouging laws and drug rate-setting commissions.
Click here to view NASHP’s new chart that compares four states’ transparency legislation with Maryland’s law that penalizes companies for price gouging and requires them to refund overcharges.
Bracing for an Uncertain 2018, States Can Apply the Flexibility and Innovation Learned in 2017
The federal political and funding uncertainties that affected state health insurance coverage in 2017, including the potential repeal of the Affordable Care Act (ACA), are expected to reverberate through 2018. But this year, state health care policymakers have some lessons learned about the value of state flexibility and innovation as they navigate another tumultuous year.
Last October, several sessions at the National Academy for State Health Policy’s (NASHP) Annual State Health Policy Conference focused on states’ efforts to improve or ensure coverage in an uncertain federal political environment. Officials, representing Medicaid agencies, insurance departments, health insurance marketplaces, and executive offices, from nine states* highlighted how their states were responding in the current, challenging policy environment and described their aspirations to improve coverage and health in their states.
Below, NASHP recaps the actions that conference speakers took in 2017 that can also be used in 2018.
States proactively took action to address urgent health care issues spurred by federal uncertainty.
State officials described having to analyze various scenarios involving significant changes to their health coverage and markets as a result of federal actions – or in some cases inaction. Although Congress recently provided long-term federal funding for the Children’s Health Insurance Program (CHIP), states faced several months of uncertainty after funding for the program expired in September 2017.
To mitigate potential coverage losses, Colorado developed detailed contingency plans to inform families and stakeholders early on about possible coverage changes in CHIP. Its Department of Health Care Policy & Financing also worked closely with the state’s health insurance marketplace to craft plans to seamlessly transition CHIP-enrolled children to marketplace coverage if that became necessary.
Uncertainty over the Trump administration’s payment of cost-sharing reductions (CSRs) each month, as well as questions about the future of the ACA, posed significant challenges for state insurance regulators who were concurrently negotiating rates with insurers for the 2018 coverage year. In this confusing environment, both regulators and insurers were required to commit to coverage offerings despite the lack of key information that would influence market composition and costs.
New Mexico invoked an existing state requirement that requires insurers who provide major medical coverage to offer at least one plan statewide to ensure that consumers – including those in rural areas — would have a choice of insurance products in 2018. In Massachusetts, insurance marketplace officials communicated regularly with insurance carriers and the state’s Division of Insurance to examine options, which allowed the state to quickly implement a plan to load CSR-adjusted rates into its silver-level marketplace plans, thus mitigating the effect of CSR losses once the administration finalized its decision to cease CSR payments in October 2017.
States across the country face similar challenges as they analyzed the effect that proposed administrative actions could have on their 2019 markets, including the proposed association health plan regulation, the pending regulation on short-term insurance plans, and the administration’s decisions affecting enforcement of the individual mandate—each of which could significantly impact the stability of state individual insurance markets.
States are adaptive and take action to address the needs of their coverage markets. Knowing their regulatory authority and market characteristics, state leaders often have the best perspective about the needs of their coverage programs. In 2017, several states used their flexibility and authority to design policies or initiate programs that safeguarded their citizens and markets. Alaska has long struggled with issues of cost and providing sufficient access to coverage, intensified by the state’s geographic composition and lack of access to providers. Faced with escalating premiums and the danger of issuer exits, Alaska took the lead as the first state to use 1332 waiver authority to create a reinsurance program. The program was structured as a two-year plan, giving the state time to develop a more sustainable solution to meet its market challenges. By taking this action, Alaska maintained the number of issuers participating in its individual market and reduced proposed premium increases. Several states, including Oregon, Washington, and Wisconsin, are exploring implementing similar reinsurance programs using 1332 waiver authority in 2018.
The resources states used to respond to federal uncertainty distracted them from achieving other health policy improvements. While federal action can be necessary to address significant health care system issues, state officials point out that large-scale federal reforms also distract states and prevent them from tackling other priorities or addressing needs of greater importance to their states. Several officials noted that the time and effort needed to develop new policies and educate legislators, constituents, and other stakeholders about the potential implications of federal changes required a significant expenditure of resources during 2017. This included dedicating considerable resources to conduct analyses of “the dramatic change” that could have resulted from any of the proposed federal actions debated in 2017, including repeal of the ACA, state officials explained. Instead, officials noted they could not focus on issues like addressing the underlying drivers of health care costs, exploration of value-based purchasing models, state-based strategies to increase insurer competition and choice while maintaining quality, and initiatives to reduce pharmacy costs.
States work to build or improve bridges across a coverage continuum. State officials at the conference addressed the effect that increases in coverage—spurred by Medicaid expansion and the availability of subsidized plans through the health insurance marketplaces—have had on their populations and coverage programs. Specifically, they noted that the changes have increasingly moved their programs toward creation of a nearly seamless system of coverage options. As a result, some officials are more actively engaged in how to align, coordinate, and better leverage their programs to improve efficiency, reduce consumer confusion, and increase the number of individuals who can access coverage.
While Idaho did not expand Medicaid, the state is now seeking federal approval for a proposal that would allow individuals with incomes below 100 percent of the federal poverty level (FPL) to purchase subsidized coverage on the marketplace, while also allowing individuals up to 400 percent FPL with complex health needs to qualify for Medicaid (for more details see, Searching for New Insurance Options, States Consider Medicaid Buy-In and Other Strategies).
Medicaid and insurance marketplace agencies in Washington, DC work closely to coordinate policy and manage cases of individuals transitioning between Medicaid and the marketplace. Washington, DC now has one of the lowest uninsured rates in the nation, and officials noted the importance of interagency coordination to resolve technical issues between programs and capture individuals who may otherwise lose coverage while navigating between programs. One official said, “the closer [our agencies] work on [policies], the more effective we can be.”
As state health officials plan for 2018, they will need to continue to be nimble to balance short-term, pressing issues while focusing on long-term, forward-focused plans that promote affordable and accessible coverage.
*States represented at the sessions included Alaska, Colorado, Washington, DC, Idaho, Massachusetts, New Mexico, Virginia, Washington, and West Virginia.
State Legislatures Start Out Strong in 2018 with Bills to Curb Rx Drug Costs
With the federal government continuing to take no action to curb drug costs, states legislatures across the country are intensifying their efforts in 2018 to staunch the financial hemorrhage to health care budgets caused by escalating prescription drug costs.
Three weeks into 2018, 43 bills designed to rein in prescription drug costs have been introduced in 20 states. This is a strong start considering there will be short legislative sessions in many states this year — four state legislatures will not meet at all and another six have not yet convened. In 2017, nearly 100 pharmaceutical pricing bills were proposed in 30 states across the country, and 25 became law.
Pharmacy benefit managers targeted: Many states are keenly interested in the business model and practices of the pharmacy benefit managers (PBM) industry, and how PBMs contribute to drug cost inflation. In the first three weeks of 2018, 25 PBM bills have been filed. Many advocates claim PBMs collude with drug manufacturers over rebates and unfair pricing practices, which has contributed to rapidly rising drug costs. The goals of these PBM bills is to limit how much consumers pay, so they pay no more than what a pharmacy will be reimbursed for the drug. These bills also allow for fuller disclosure in pharmacy-consumer communications – they outlaw “gag rules” embedded in PBM contracts that prevented pharmacists from telling consumers about alternative and less costly medication options.
Drug transparency legislation: Interest in how and why manufacturers decide to institute large price increases on existing drugs or charge high prices for new drug prices remains a focus of many bills. There are currently 10 price transparency bills pending and two bills closely follow Maryland’s 2017 price gouging bill.
Drug Importation: Bills in four states would authorize or require the development of a program to seek federal approval for a state-administered, wholesale importation program of drugs from Canada. These states are interestingly very diverse politically and include Utah, Vermont, Missouri, and Colorado. The importation legislation is under active review in Vermont and Utah, which modeled their bills after the National Academy for State Health Policy’s (NASHP) model legislation.
Four states have bills that would require the study of bulk purchasing – multi-state agency purchasing and/or state and private purchasing. New Mexico’s volume-purchasing legislation passed in 2017, but was vetoed by the governor. New Mexico lawmakers said they will introduce the legislation again in 2018.
Last week, Maryland legislators announced their plan to introduce a bill to create a drug cost rate-setting commission bill (based on NASHP’s model legislation), that would create an all-payer rate system that limits what the state and others would pay for a select group of high-priced drugs.
This year lawmakers are expected to build on their 2017 track record, when 25 bills were passed. Louisiana alone enacted three separate bills. Of the bills that became law last year:
- Seven target PBM business operations;
- Six require manufacturer price transparency;
- One prohibits brand-name manufacturer discount coupons;
- One prohibits generic drug price gouging;
- Three allow generic or biosimilar substitutions by the pharmacist or provider;
- Five require studies of drug prices;
- One limits what its state Medicaid agency will spend on drugs in a year; and
- One permits the collection and redistribution of unused drugs.
California, Maryland, and Nevada enacted laws that promote brand-name and generic drug price transparency and address price increases – and drug manufacturers are now suing all three states. The industry claims the laws violate the Interstate Commerce Clause, patent laws, the Uniform Trade Secrets Act, and other laws in an effort to derail implementation of the laws – even those that implement modest levels of pricing accountability.
Interestingly, despite the industry’s legal pleas to halt implementation of these bills immediately, to date no court has found these three state laws to be so “injurious” to the industry to warrant their postponement until a formal court decision is made.
As 2017 ended strong with major accomplishments, 2018 is starting aggressively with a high level of legislative activity and very diverse approaches. These legislative initiatives do not include state administrative initiatives to contain drug costs, such as value-based contracting efforts in several state Medicaid agencies, which will be addressed in future articles.
NASHP tracks state legislation addressing prescription drug costs impacting states, consumers, and payers. A national map with detailed listings and status of state legislation is available here.
Maryland Lawmakers Submit Drug Cost Review Bill Based on NASHP’s Model Legislation
Maryland’s Statehouse in Annapolis
ANNAPOLIS — State lawmakers are scheduled to introduce a bill today that empowers Maryland to regulate prescription drug costs by evaluating the affordability of certain drugs and imposing limits on what the state and commercial health plans will pay them.
Based on model legislation created by the National Academy for State Health Policy (NASHP), the proposed bill establishes a Drug Cost Review Commission and an advisory board to closely evaluate drug prices to determine if rate-setting oversight is needed, based on a drug’s cost and affordability.
“Consumers continue to be outraged by the price of necessary prescription drugs, and the federal government has not acted to stem the cost of drugs,” NASHP Executive Director Trish Riley observed. “States can be great laboratories for innovation and this is a great opportunity for Maryland to be a national leader and develop new approaches that can be adopted by other states and ultimately by the federal government.”
The drug review commission would play a similar role to Maryland’s Health Services Cost Review Commission (HSCRC), an innovative agency that regulates hospital rates on behalf of all government and private payers in order to curb health care costs. Many states, including Maryland, have been hard hit by escalating drug prices. An estimated 25 percent of state budgets go to fund Medicaid, and spending on Medicaid prescription drugs alone increased 25 percent in 2014 and 14 percent in 2015.
Maryland’s prescription drug rate-setting bill would regulate what the state’s Medicaid program, state employee health insurance plans and commercial health plans pay for certain drugs – not what manufacturers charge for them. States as employers and purchasers of health care have watched the rising and unpredictable growth in pharmaceutical costs impact their budgets. In Maryland and across the nation, spending on Medicaid prescription drugs alone increased 25 percent in 2014 and 14 percent in 2015. As in most examples of health care rate setting, the commission could pressure pharmaceutical wholesalers and distributors to negotiate better deals with drug manufacturers.
According to the legislation, based on NASHP’s Model Drug Price Transparency Act, the commission would first gather information about drug prices when manufacturers first release them or when a drug price increases dramatically to determine if rate-setting oversight is needed. If a drug’s price reaches a certain threshold and poses a financial burden on the state’s health care system, then manufacturers would be called on to justify those prices.
During this affordability review, the commission would gather additional cost information from the manufacturer and get input from the advisory board, payers, providers, and consumers. If the commission determines a drug’s cost was excessive, the commission would have the authority to establish an “upper payment limit” for the product. All commercial and public payers in Maryland would then be prohibited from paying more than this upper limit.
By taking this approach, the commission does not regulate drug prices – it simply establishes the maximum price that payers can pay for the drug.
The proposed act mirrors the same approach that HSCRC takes in controlling hospital costs. HSCRC does not regulate what hospitals charge, instead it imposes a limit on what payers will pay regardless of what the hospital charges. Similarly, all public and private payers in the Maryland health care system would have to abide with the drug commission’s upper payment limits, exactly as all payers must pay the HSCRC’s established hospital rates.
The proposed bill does not stop payers from negotiating better deals through the traditional rebate and other manufacturer price concession models. However, the upper payment limit guarantees that the cost of the drug is limited throughout the health care system – down to the consumer and patient level, which would be an improvement over the current haphazard, back-channel manufacturer discounting to large payer organizations.
“The current back channel rebates are not transparent, and more importantly, do not necessarily benefit consumers,” said Riley. “This legislation would define what health plans pay pharmacies, what consumers pay when paying out-of-pocket, and what pharmacies will pay for drug inventory and what they will be reimbursed by payers. This would be an improvement over the current complicated system of rebates and other price concessions that only benefit some parts of the health care system.”
The promise of lower prescription drug costs has generated strong support from various consumer groups for the bill, spearheaded by the coalition of groups behind the Maryland Citizens Health Initiative.
“Last year, Maryland made history by enacting the first-in-the-nation prohibition on price-gouging by manufacturers of generic and off-patent drugs,” said state Sen. Joan Carter-Conway. “I am thrilled to be the lead Senate sponsor of legislation to build on this success by making all high-cost prescription drugs, including brand name and specialty drugs, more affordable for Marylanders.”
This NASHP model legislation is one of three legislative models created by NASHP’s Pharmacy Costs Work Group and highlighted in its October 2016 report, States and the Rising Cost of Pharmaceuticals: A Call to Action. The report presents 11 different state approaches to address costs of important drug treatments. Click here for more information about NASHP’s transparency legislation model.
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NASHP’s Center for State Drug Price Action: Provides technical and strategic assistance to states to reduce their prescription drug spending and regularly convenes its Pharmacy Costs Work Group to address policy and strategic issues. The work group is made up of leaders from governors’ staff, state legislatures, Medicaid programs, public employees, attorney generals’ offices, state-based insurance exchanges, comptrollers’ offices, and corrections departments. The group explores new approaches to limit pharmaceutical costs by examining the many levers state governments have as policymakers, regulators, and purchasers.
About NASHP: The National Academy for State Health Policy (NASHP) is an independent academy of state health policymakers. It is dedicated to helping states achieve excellence in health policy and practice. A non-profit and non-partisan organization, NASHP is the “United Nations of state health policy,” providing a forum for constructive work across branches and agencies of state government on critical health issues.
Reining in Rx Drug Costs: What States Achieved in 2017 and Where They’re Heading in 2018
In a year of tense partisan debate over the future of health care, one issue has achieved rare bipartisan agreement — the need to curb rising prescription drug costs. Polls show again and again that Americans, regardless of political affiliation, view the high costs of drugs as one of their chief health care concerns. Reviews of state budgets show that increased spending on drugs in Medicaid and other public programs is untenable. As often occurs when a political crisis emerges, states led the way in 2017 to tackle rising drug costs and their advance is expected to continue in 2018.
While 2017 was a year of unprecedented legislative action, states will face many challenges in 2018. Some states, such as Nevada and California, that succeeded in passing legislation are now defending their new laws in court, while others are implementing and building new programs despite challenges. In this blog, the National Academy for State Health Policy (NASHP) reviews and explores the trends and challenges that are expected to shape state prescription drug policymaking in the year ahead.
A Year of Progress in State Legislatures
Despite intense pharmaceutical industry opposition, more states than ever passed legislation addressing prescription drug costs in 2017. State legislatures across the country introduced more than 130 bills designed to address the rising cost of drugs. In 2018, NASHP expects there will be an even greater increase in actions to control drug costs as more states look to their neighbors for successful strategies.
Transparency: Transparency legislation was the largest trend in state government policymaking in 2016 and 2017:
- California SB 17 requires drug manufacturers to provide advance notice and justification for significant price increases.
- Nevada’s SB 539 specifically targets high-cost diabetes medication, and includes requirements that patient advocate groups disclose sources of funding to expose conflicted lobbying efforts.
- Maryland’s HB 631 empowers the state’s Attorney General to review the pricing actions of manufacturers who engage in “unconscionable” price increases of off-patent or generic drugs and refer them to the courts as appropriate.
While transparency legislation is a necessary starting point for states to raise awareness and gain a better understanding of what drives rising drug costs, by itself it is ultimately insufficient to fully address the problem. Maryland’s bill, which takes on industry “price gouging” is a step towards greater action, but additional efforts are needed in order to move the cost needle.
Pharmacy Benefit Managers: Another legislative trend NASHP expects to gain momentum in 2018 is an increasing focus on other participants in the drug supply chain, specifically pharmacy benefit managers (PBMs). PBMs administer drug programs for commercial health plans and state government plans, including Medicaid in some states. Nevada’s SB 539 includes provisions that set new standards for PBM business practices, such as requiring them to disclose to their contracted insurers all rebates they receive from manufacturers. In Connecticut, SB 445, which passed in July, prohibits PBMs from inserting gag clauses into their pharmacy network contracts that would bar pharmacists from informing consumers when their copay is actually more than the price of the drug, and then “clawing back” the excess money paid.
Importation: Utah last year passed a bill authorizing a study of prescription drug importation, with the ultimate goal of creating a program to import lower-cost drugs from Canada. The sponsor, state Rep. Norman Thurston, said a bill will be introduced once the legislative session begins in late January 2018. NASHP has released model legislation that would create a wholesale importation program that meets federal criteria in order to certify an importation program. This model act, and other model legislation generated by the Pharmacy Cost Work Group, can be found at NASHP’s website.
Formularies: States are expected to continue to explore ways to achieve better drug pricing deals through their formularies (their list of approved drugs). Massachusetts has a request pending for a Medicaid Section 1115 waiver that would enable it to exclude drugs with high costs and low treatment value from its formulary, and use the formulary as leverage to negotiate larger rebates than can be negotiated today. This year, New York established a cap on its Medicaid drug spending, which when exceeded triggers state action to identify drug products that contribute significantly to the excess spending and either negotiate for an additional, price-lowering rebate or conduct a “value assessment” of the drug. If a supplemental rebate is still not reached after that assessment, the state may remove the drug from its managed care formularies. The fate of the pending Massachusetts waiver, and the implementation and impact of New York’s novel proposal for reigning in Medicaid costs, will be monitored carefully by NASHP and other states in the new year.
State Administrative Approaches
While most eyes are on state legislative action, states also have a wealth of opportunities available to them through administrative action. In October, NASHP awarded $300,000 in grants to Colorado, Delaware, and Oklahoma to help the states develop innovative policy solutions to tackle high prescription drug prices:
- Colorado is surveying physicians to better understand acquisition costs for physician-administered drugs (e.g., drugs and therapies administered in hospitals or clinics) and will use that information to implement acquisition–cost reimbursement for physician-administered drugs.
- Delaware is creating a common, preferred drug list of several classes of drugs for its Medicaid and corrections programs, state employees, and hospitals.
- Oklahoma is exploring value-based payment contracts for drugs that would allow the state to claim supplemental rebates if the drugs failed to deliver agreed-upon outcomes.
None of these proposals require enabling legislation, yet all have the potential to deliver substantial savings to states. NASHP will continue to report on best practices and lessons learned through these initiatives to empower states to enact prescription drug policies.
Challenges and Opportunities: The Courts
As states implement innovative policies to address drug costs, they will have to contend with persistent legal opposition from the pharmaceutical industry. The complicated prescription drug industry intersects with regulatory and constitutional barriers that can impede state efforts. However, states may be able to preempt legal challenges with carefully-crafted legislation, taking into account lessons from previous lawsuits and the guidance of experts in patent and Commerce Clause law. While many of the laws passed in 2017 have already become embroiled in legal challenges, initial rulings have been positive for states. NASHP will continue to release research documents that delve into the largest legal roadblocks to state innovation.
The pharmaceutical trade group PhRMA has sued to block implementation of the transparency laws in California and Nevada, arguing the laws create such a negative impacts that they should not be implemented. A federal judge has allowed Nevada to move forward and implement its program, meanwhile, arguments about the constitutionality of the law will continue in 2018. A similar story is playing out in Maryland, where the Association for Accessible Medicines, a trade group that lobbies on behalf of generic drug manufactures, is appealing an October ruling that allowed the price-gouging law to take effect.
The Maryland and Nevada court cases both hinge on an argument that the laws unconstitutionally regulate business deals that happen outside the state, a violation of the Commerce Clause. The October, Maryland ruling rejected that portion of the lawsuit, but the pattern indicates that issues surrounding the Dormant Commerce Clause will remain a significant component of legal battles against states. In November, NASHP released The Dormant Commerce Clause: What Impact Does It Have on the Regulation of Pharmaceutical Costs?, a brief that provides insight and analysis into case law and highlights how state policymakers can navigate the legal landmines in this issue. Early next year, NASHP will release more guidance on patent law issues and how states can craft legislation that will hold up under judicial scrutiny.
The Year Ahead
As the prescription drug cost crisis shows no signs of ending, state policymakers will continue to generate new and innovative policies to relieve the pressure on stressed state budgets, and states will continue to serve as laboratories of innovation to inform federal policymakers. Policy trends will, however, be shaped by the ultimate outcomes of the pending lawsuits in Nevada, Maryland, and California. Meanwhile, these and other states, including New York, will move forward to implement their programs. States will also be watching how the federal government responds to Massachusetts’s Section 1115 waiver request. Finally, the upcoming midterm elections may significantly impact this policy area.
As state action continues, NASHP, through its Center for State Rx Drug Pricing, will monitor and track states legislative efforts. Building on the 11 policy recommendations issued by the Pharmacy Costs Work Group, a group of state officials convened in 2016 to identify the most promising options for states facing drastic increases in drug spending, NASHP will also continue to release model legislation and serve as a resource for state policymakers. To learn more visit our resource center.
This blog, produced by NASHP Pharmacy Costs Work Group, was made possible with support from the Laura and John Arnold Foundation.
Is It Safe and Cost-Effective to Import Drugs from Canada?
States are considering importing prescription drugs from Canada, but is it safe? Will it save money? Can it be done? Three, easy-to-read infographics explain what state leaders need to know if they’re interested in drug importation legislation.
1. Is it safe to import drugs from Canada? Yes, 40 percent of all drugs sold in the United States are already imported and 80 percent of active ingredients used in US drugs come from abroad.
2. Will states save by importing drugs from Canada? States and their consumers can reap large savings by paying Canadian prices. For example, Lyrica costs $6.04 in the United States and 63 cents in Canada, Xarelto cost $12.44 here compared to Canada’s $2.11 price, and Eliquis costs $6.21 compared to $1.60 north of the border.
3. How does a state implement a drug importation program? The federal government can authorize importation if it is safe and saves consumers money. NASHP has crafted model importation legislation and clarified the steps state policymakers can take to initiate drug importation.
Request for Proposals: State Drug Spending and Pricing Policy Initiatives
The National Academy for State Health Policy (NASHP), with support from the Laura and John Arnold Foundation, today launched the Center for State Rx Drug Pricing. Building on the work of the Pharmacy Costs Work Group, the Center will provide technical and strategic assistance to states, leverage legal and actuarial expertise as needed, distribute funding to a subset of states, and convene state leaders as part of a work group.
As part of this launch, NASHP is requesting proposals from states for initiatives to develop and implement innovative approaches to contain the costs of prescription drugs. This is a multi-year project to assist state executive, legislative, and independent agencies and offices with prescription drug pricing policies.
Applications are due July 14th. Please send completed Letters of Intent to Corinne Alberts at calberts@oldsite.nashp.org.
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