Balto: Transparency Will Lead to Major Savings for the Federal Drug Benefit

Posted February 23, 2010 at 11:13am

In his Guest Observer earlier this month (Congress Considering Risky Changes to Federal Employees’ Health Benefits), Mark Merritt of the Pharmaceutical Care Management Association attempted to paint the Prescription Drug Integrity, Transparency and Cost Savings Act as an overreaching regulation that would simply burden the pharmacy benefit managers that administer drug coverage for federal employees, diminishing competition and leading to higher costs.

[IMGCAP(1)]This could not be further from the truth. The bill simply imposes reasonable disclosure requirements so the Federal Employee Health Benefits Program can better monitor and reduce its prescription drug spending. Many public and private plan sponsors already require these disclosures from the PBMs they use. Transparency is critical to making markets work, and it is not surprising that competitors do not like transparency. While transparency may be an annoyance for the PBMs, it will enhance the federal government’s ability to hold them accountable and reduce waste in prescription drug spending.

The bill sponsored by Rep. Stephen Lynch (D-Mass.), chairman of the Oversight and Government Reform Subcommittee on the Federal Workforce, Postal Service and District of Columbia, will strengthen and not disrupt PBMs’ ability to serve the FEHBP. Instead, it will require them to pass on the discounts and rebates accrued on behalf of federal employees, and it will give the federal government access to the information it needs to track prescription drug spending.

Without transparency, the incredibly complex system of prescription drug economics simply works in the PBMs’ favor: The PBM does not tell plan sponsors how much drugs really cost, because of the lack of transparency they can engage in deceptive conduct costing consumers and plans, and any perceived savings may be minuscule in comparison to the profits the PBM earns from the FEHBP’s health plans. Without transparency, we have no way of knowing what value the PBMs’ services add to our federal employees’ health benefits, or making sure those benefits accrue to the plans, the government and government employees. In their role as middlemen, PBMs pass money from health plans to manufacturers and pharmacies, and back again. Unless they are held accountable, PBMs can easily abuse their position at the center of these high-value financial exchanges.

Merritt suggests that these requirements will take the FEHBP down the wrong track, comparing it to the Medicaid system, which he disparages as a “program for the poor.” In comparison, he holds up Medicare Part D as the gold standard of federal prescription drug benefits and compares its market-driven structure to the decentralized FEHBP — under which 266 health plan carriers hold individual contracts with PBMs, giving the Office of Personnel Management little oversight. What Merritt fails to mention is that drugs cost much more under Medicare Part D than under Medicaid: A 2007 study by the House Oversight panel found that the federal government would save as much as $156 billion over a decade if Medicaid’s transparent, pass-through pricing system was used for Medicare Part D.

Along with Medicaid programs, a number of major plan sponsors, including major corporations and states, have achieved significant savings by enacting transparency in their contracts with PBMs. The state of New Jersey, for example, anticipates savings of more than $500 million over five years by requiring transparency in its contract for the state’s employees drug benefit. And the state of Texas enacted transparency legislation for its plans in 2009 and anticipates savings of $265 million.

These examples stand in stark contrast to the lack of evidence that transparency leads to higher costs. Merritt refers to the purely theoretical argument that widely available pricing and rebate information might hurt PBMs’ ability to bargain with manufacturers and pharmacies. Chairman Lynch’s bill, however, includes strict confidentiality requirements to ensure that the pricing information that OPM can access is not made available to the public.

Merritt claims that Chairman Lynch’s bill would diminish PBMs’ ability to lower drug costs by switching patients to lower-cost drugs or informing physicians when these alternatives are available. This simply is not the case, and the bill in fact requires that physicians are fully informed when a PBM attempts to switch their patients’ prescriptions. To curb waste and prevent unnecessary costs, the bill includes a no-nonsense provision prohibiting PBMs from switching patients to drugs at a higher cost to the plan or engaging in drug switching without physician approval. PBMs won’t like this provision: More than 30 states have brought cases against the three major PBMs for this type of deceptive drug switching, paying more than $370 million in penalties to date.

Merritt also warns that requiring pass-through rebates and discounts will diminish the major PBMs’ incentive to participate in the FEHB. To the contrary, the FEHB plans represent a large and lucrative amount of business; no PBM is going to pass this by. With transparency, however, true competition may finally break out between the PBMs vying for these contracts, a guaranteed means of reducing costs.

Almost 8 million federal employees get their health coverage through the FEHBP. The federal government should be the savviest of plan sponsors and should be able to leverage its buying power to enjoy substantial discounts from drug manufacturers and pharmacies. It is estimated, however, that the FEHBP costs 15 percent to 45 percent more than any other federal drug benefit program. The inspector general for OPM lamented the agency’s inability to gain access to information about their spending on prescription drugs and called for greater transparency in testimony before the House Oversight Committee this past June. It is unfortunate that legislation is necessary to remedy this situation, but when the federal government is clearly getting a bad deal on prescription drugs, we must remove the layers of fog that lie between those paying for this benefit — taxpayers and the government — and the PBMs profiting off of them. The proposed FEHB reforms are a necessary first step.

David Balto is a senior fellow at the Center for American Progress and a former policy director of the Federal Trade Commission.