Legal Eagle’s Specialty is Writing Ironclad PBM Contracts that Preclude Egregious Pricing

A veteran PBM litigator explains how she uses airtight contracts to help employers fight PBM shell games, inflated rebates and hidden markups.

It takes a legal eagle to crack the code on pharmacy benefit manager (PBM) contracts and derail a shell game of spread pricing, rebates on inflated discounts and back-room revenue-sharing agreements.

Meet Linda Cahn, an attorney who initiated the nation’s first class-action litigation against PBMs in 1997. While litigating against PBMs for nearly a decade, she was privy to hundreds of thousands of PBM internal documents that included contracts with drug manufacturers, pharmacies, employers and requests for proposal (RFP). Those experiences proved to her that PBMs are a bitter pill that she did not want her clients swallowing.

Linda Cahn, the chief executive of Pharmacy Benefit Consultants, at home in Morristown, N.J., on Tuesday. She said that benefit managers were not transparent about what share of fees they keep. | PHOTO CREDIT: Bryan Anselm for The New York Times

Cahn is president of Pharmacy Benefit Consultants, which provides legal, clinical and financial expertise, and CEO of the National Prescription Coverage Coalition, whose members have access to a negotiated-contract template with more than 1,600 price guarantees. Her firm helps employers by putting in place an airtight and innovative PBM contract – which can reduce their costs from 10% to as much as 30% when ongoing services are provided and her firm’s drug recommendations are implemented.

The following interview was edited for clarity and space.

Prescription drugs have long been considered the fastest-growing portion of health care costs. How can self-insured employers draft contracts with PBMs to ensure that they’re receiving transparent prices with meaningful discounts for retail and mail-order drugs?

CAHN: Nearly everyone, whether they’re federal or state governments, private employers or insurers, have PBM contracts that contain totally worthless price guarantees. For example, every contract is filled with essentially the same types of 12 average annual guarantees for “brand drugs” and “generic drugs,” ingredient costs and dispensing fees in retail, retail 90-day supply, and mail-order pharmacy channels. But the contracts all contain “fishy” definitions for the two terms “brand drugs” and “generic drugs,” which allow PBMs to slip drugs in and out of the guarantees.

Thus, more than a thousand contracts are written that state that the PBM has a “proprietary algorithm” to decide what is a “brand drug” and “generic drug.” That means that the PBM gets to decide which drugs will be considered “brand drugs” or “generic drugs,” and the PBM can move drugs in and out of each category. Since “brand drug” guarantees for ingredient costs tend to range from [average wholesale price] AWP-16% to AWP-21%, but “generic drug” guarantees tend to range from AWP-86% to even AWP-90%, if PBMs move drugs from the “generic drug” category to the “brand drug” category, the effect is pernicious. Our firm often finds very commonly used generic drugs being included in the brand drug guarantees, allowing the PBM to grossly overcharge for drugs.

How does this spill over into the area of specialty drugs, whose escalating costs are top of mind for employers and employees alike?

Specialty drug guarantees in PBM contracts are also largely or entirely worthless. There are roughly 1,600 national drug codes that are specialty drugs. To ensure that an entity can control its specialty drug pricing, our firm obtains what we call drug-by-drug “minimum guaranteed discounts” for each of those drugs. And our clients have a contract right to obtain a new minimum guaranteed discount for any new-to-market specialty drug. Also, our clients have the right to “carve out” any specialty drug and have it dispensed from an alternative specialty drug pharmacy. Together, those contract provisions allow our clients to control their specialty drug prices.

But virtually all PBM contracts are missing meaningful price controls over specialty drugs. Many PBM contracts contain a single, average AWP discount across all specialty drugs. But this ignores the fact that for some specialty drugs, an AWP discount is only available of AWP-16%, but for many others, PBMs could be providing AWP discounts of AWP-30%, AWP-60% or even AWP-90%. A single average AWP discount for all specialty drugs enables a PBM to manipulate the single guarantee. For example, if the PBM contract requires an “average” AWP discount across all specialty drugs of AWP-20%, the PBM can give a discount of AWP-40% on a drug that only costs $500 and an AWP discount of 0% on a drug that costs $50,000, and still satisfy the contract guarantee.

Many PBM contracts do contain drug-by-drug AWP guarantees for, say, 200 specialty drugs, or 800 specialty drugs, or even 1,200 specialty drugs. But in each instance, that means there are no guarantees for hundreds of specialty drugs, or for any new-to-market specialty drugs. That means the PBM can charge whatever it wants for hundreds of specialty drugs and for all new-to-market specialty drugs. As a result, PBMs are routinely charging $2,000 and $3,000 for specialty drugs that should cost $50 or $100, or routinely invoicing $20,000 for drugs that should cost $10,000.

Can you describe the problems that are taking place with manufacturer rebates?

Virtually every PBM contract contains “rebate guarantees,” which are almost always written as four different “per-brand drug claim” guarantees. Thus, a contract might contain four guarantees that state for every brand-drug claim dispensed from a retail pharmacy: $250 per claim; for every brand-drug claim dispensed from a retail 90-day pharmacy: $700 per claim; for every brand-drug claim dispensed from a mail pharmacy: $750 per claim; and for every brand-drug claim dispensed from a specialty drug pharmacy: $2,100 per claim.

But remember, I told you that PBMs can manipulate the drugs the PBMs categorize as “brand drugs” by writing a very ambiguous definition for that term. Therefore, PBMs can reduce the number of brand drugs that will be counted when calculating each rebate guarantee, allowing the PBMs to pay far less in rebates. PBMs are also manipulating the drugs that are called specialty drugs by writing an ambiguous definition for that term too, and if you review the numbers I cited as being typical for specialty drug rebate guarantees, you’ll see that PBMs are typically paying the highest amount in rebates for specialty drugs.

Note, too, that PBMs can implement a different proprietary algorithm for deciding what is a brand drug and what is a generic drug for the different guarantees in a contract. Therefore, they can shift lots of drugs into the brand drug category when calculating satisfaction of average annual guarantees, but PBMs can shift lots of drugs out of the brand drug category when calculating satisfaction of rebate guarantees.

What is your view of so-called transparent or fiduciary PBMs like Mark Cuban’s company, and to what extent might they be able to gain enough market share to change the entire marketplace?

CAHN: Cuban’s idea of obtaining better pricing for specialty drugs is outstanding, and it will be fantastic when he expands the list of high-cost drugs for which he is getting far better pricing. His marketplace offer on brand drugs and high-cost generic drugs also likely provides an opportunity for employers to obtain lower costs. What’s of less utility is Cuban’s offer to provide discounts on low-cost generic drugs, because once a mailing price is added onto the cost of the drug, a client’s total drug costs may be lower if the drug is simply purchased at a retail pharmacy. Cuban’s profit margin may be very small on these drugs, but the mailing charge can become a problem on a drug that may only cost $4 a script.

PBMs have joined Big Insurance, pharmaceutical manufacturers, hospital systems and retail pharmacy chains as targets of lawmakers, regulators and the public at large – epitomizing what’s wrong with a dysfunctional system. Are we now at a tipping point where at least the Big Three PBMs can no longer hide from their opaque models and will be forced to follow the lead of scrappy competitors?

CAHN: We’re at a higher exposure point, but in my view we’re not at that tipping point. We’ll hit the necessary tipping point when several large government purchasers, and/or large corporate clients or coalitions, conduct PBM RFPs and demand the kind of contract terms that I’ve described. Several such entities that provide coverage to hundreds of thousands of covered lives, and thus spend $1 billion annually on prescription drugs, will have the leverage to obtain airtight contract terms and guarantees. Then those entities need to make their contracts public so others can replicate them. If the Department of Defense or a large state government were to take those actions, this would change the PBM industry.

We’ve seen class-action lawsuits against Johnson & Johnson, Wells Fargo and other high-profile cases that suggest employers need to be more careful fiduciaries of health and welfare benefit plans, including prescription drugs. What can we expect from this troubling trend and what should employers be doing to avoid litigation?

CAHN: I don’t think most employers are going to get sued. At this point in time, these lawsuits remain an aberration. They are not commonplace. Until it’s clear that the J&J plaintiffs have won their suit, or have a strong possibility of winning it, I don’t see lawyers filing a lot of these lawsuits. There are far better lawsuits for lawyers to file against PBMs to win large damage awards. However, having said that, in our view no client should sign a PBM contract that gives the PBM the right to implement its “standard” formulary and prior authorization, step therapy and quantity limit programs.

PBMs are making too many “standard” decisions that are counter to the interests of their clients. Therefore, clients need to ensure that they have the contract right to customize their formularies and their programs. And then clients need to actually implement customization.

Which types of drugs are the biggest cause for concern and why?

CAHN: I’d say all high-cost specialty drugs, and even lower-cost specialty drugs that PBMs are charging $2,000 for that should cost $50 or $100. Multiply that price differential by a lot of scripts, and you’ve suddenly lost a lot of money.

Bruce Shutan is a Portland, Oregon-based freelance journalist who has written about employer-provided group health benefits for 36 years. He is the former managing editor of Employee Benefit News and a regular contributor to The Self-Insurer magazine, published by the Self-Insurance Institute of America.