Increasing regulations could raise managed drug plan costs

Dr HerrickIncreasing unnecessary regulations on drug plans could inflict higher costs on the 220 million Americans who get their medications through a managed drug plan, according to a new report.

The report, by National Center for Policy Analysis Senior Fellow Devon Herrick, PhD, found that much of the legislative activity in states, with respect to drug plan regulations, is protectionism.

“This often boils down to local professional associations for pharmacies and pharmacists lobbying state legislators to pass laws that protect them from competition-or strengthen their bargaining power in negotiations with drug plans,” Herrick says.

Herrick conducted an economic analysis of drug plans and drug plan regulations, in addition to a review of the literature on drug plan regulations. He also compared the economic cost/benefits of common regulations.

• In early 2014, the Centers for Medicare and Medicaid Services proposed a ban on exclusive “preferred networks,” where seniors are offered lower cost-sharing in return for patronizing a preferred pharmacy network. Many industry observers believed the proposal was due to lobbying by pharmacy trade groups that preferred to avoid competitive bidding for inclusion as a network provider.

• Also in 2014, California debated and narrowly avoided perverse regulations that would have forced health plans to use unqualified pharmacies to administer the most advanced, specialty drug therapies; and made it harder to offer discounts for mail-order drug delivery to enrollees’ homes. 

• In early 2015, the Colorado Senate introduced a bill to prohibit health plans from offering financial incentives (for instance, lower-cost sharing) to fill costly specialty drugs at designated network pharmacies or by health plans’ lower-cost, mail-order pharmacies.  

• Arkansas just passed a new law increasing the paperwork burden on drug plans and allowing pharmacies to refuse to fill those prescriptions deemed unprofitable - despite prior agreements to participate in the plan.

“Community pharmacists are entrepreneurs who pay taxes, collect sales taxes, employs people and vote,” Herrick says. “They are valued constituents who are viewed very favorably when they visit their local representative at the state capitol. On the other hand, an insurer or national PBM are not viewed nearly as sympathetically-some are even out of state.

“Some of the regulations pharmacy trade associations convince legislators to pass are self-serving,” Herrick says. “A great example is anti-mail order regulations.  PBMs like to steer plan members with chronic conditions to mail-order drug dispensing. Local pharmacies like to restrict this practice with regulations that: 1) make mail-order voluntary; 2) sometime even ban differences in cost-sharing (that is, drug plans in New York cannot offer a discount to enrollees who agree to receive drugs by mail). It obviously is not in a drug plan member’s best interest to ban discounts and lower cost-sharing.”

NEXT: "1% of all drugs are so-called specialty drugs, but they account for one-quarter of all drug spending."

The idea that local or state regulations against restrictive drug plans are a form of protectionism that could hurt consumers ignores the economic reality of an oligopoly in PBMs within the United States that creates a financial benefit to PBMs from these same restrictive drug plans, according to Robert Taketomo, Pharm.D., MBA, president and CEO, Ventegra.

“For example, since there are no restrictions to potential conflicts-of-interest arising from PBMs owning mail order and specialty pharmacies and competing directly with those they purportedly support [eg, the pharmacies], there could be a financial incentive for such PBM entities to create or support restrictive drug plans that drive business to the PBM-owned pharmacies-and the PBM gets to set special pricing for these pharmacies,” Taketomo says. “Many of these large PBM-owned pharmacies lie outside of the geographic market being served, and the amount of prescription drug business-employment, taxes-that is being exported out of states is enormous. The financial and clinical value of such exporting of prescription drugs from states has not been definitively proven. Thus, it could be argued that regulations against restrictive drug plans are a means to help consumers by countering an oligopoly within the PBM industry.”

Increasingly Herrick sees the battle has shifted to specialty drugs.

“Currently 1% of drugs are so-called specialty drugs, but they account for one-quarter of all drug spending,” he says. “By the end of the decade, half of all drug spending will be on specialty drugs, biological, oncology, etc. Drug plans want to carefully manage these super-expensive drugs to negotiate better deals and ensure quality. However, there is a Gold Rush among pharmacies and other service providers to force PBMs to allow any willing specialty drug provider. This could affect hospitals since hospitals are increasingly buying physician practices and many of these specialty drugs are physician-administered-think oncology.

Specialty drugs will create a whole new series of incentives and regulatory/policy turf battles, he says.

“Cost-sharing is one area that I believe will become a major issue in the coming years. A related issue: Which is more important, the choice of a wide range of drug therapies, or access to affordable drug therapies? Understandably, drug makers argue ‘choice’ is more important. However, insurers, PBMs and drug plans argue that if two similar therapies have to compete against each other to become the preferred therapy on a formulary, the incentive for drug makers is to compete vigorously. I’m seeing more of these types of policy debates,” Herrick says.

“When a group-any group for that matter-is lobbying for a legislative agenda, carefully examine who stands to benefit. Just because something is called a consumer protection doesn’t mean it’s primarily designed to protect consumers.  In some cases a proposal is designed to protect consumers’ convenience at the expense of consumers’ wallets.”

Another trend Herrick sees are states moving Medicaid populations into managed care. States are also weighing whether to “carve-in” management of drug benefits into Medicaid enrollees’ health benefits.

“Managed care executives tend to favor this since drugs can substitute for - unnecessary hospital admissions. Be aware of these initiatives when they are being pursued in your state,” he says. “Fee-for-service Medicaid tends to pay drugstores better than negotiated contracts with drug plans, so there will be lobbying to decide how to structure these programs.”