Recent Updates Transforming Plan Sponsor Relationships With Pharmacy Benefit Managers

Pharmacy benefit managers (PBMs) play a significant role in the drug supply chain and can be valuable tools for employee benefit plan sponsors – if certain cost-inflating PBM tactics are curtailed. Recognizing this reality, California enacted SB-41, a groundbreaking piece of legislation aimed at enhancing transparency, imposing fiduciary duties on PBMs and ultimately reducing costs for employee benefit plans and their beneficiaries.

Why SB-41 is Necessary

Historically, the pharmacy benefit industry has been characterized by complex arrangements that often lack transparency. PBMs, acting as intermediaries between drug manufacturers, pharmacies and plan sponsors, have been criticized for practices like mischaracterizing manufacturer rebates as various types of fees owed to the PBM and spread pricing, where PBMs charge plans more than the amounts paid to pharmacies and pocket the difference. To illustrate, Cigna recently announced that it would cease providing rebate programs for commercial plans in attempt to demonstrate transparency and alignment of PBM and plan interests. While the shift away from rebates could benefit commercial plans and their beneficiaries in the long run, it does demonstrate that complex rebate arrangements have been used by PBMs to increase profits at the expense of their plan clients for far too long. These practices can significantly inflate drug costs, ultimately burdening both employer plan sponsors and employees or beneficiaries.

SB-41 arose from growing concern over these common PBM practices, along with the recognition that plan sponsors and beneficiaries were often unaware of them, the true costs of their benefits and the financial flows involved. The new California law endeavors to mitigate these issues by mandating transparency, establishing fiduciary duties for PBMs and promoting fairer, more predictable pricing models.

Key Provisions of SB-41 and How PBMs Will Operate Differently

The implementation of SB-41 fundamentally alters the operational landscape for PBMs in California. Traditionally, PBMs relied heavily on spread pricing and rebate arrangements to generate revenue, often with little or no transparency for plan sponsors. SB-41 addresses these opaque arrangements through critical provisions aimed at the heart of common PBM tactics such as:

• Transparency Mandates – SB-41 requires PBMs operating within California to disclose detailed information regarding drug pricing, rebates and administrative fees. PBMs must provide plan sponsors with clear, accessible reports that detail the actual costs of drugs, the rebates received and net costs after rebates. These reports and the transparency mandate enable plan sponsors to make more informed decisions and accurately evaluate the true value of PBM services.
• Fiduciary Duty Imposition – One of the most significant aspects of SB-41 is the imposition of fiduciary duties on PBMs, aligning their responsibilities and interests with those of plan sponsors. PBMs will be legally required to act in the best interests of the plan and its beneficiaries, prioritizing cost savings and quality of care over unilateral profit motives. This shift aims at reducing conflicts of interest and incentivizing PBMs to adopt more equitable practices.
• Restrictions on Spread Pricing – SB-41 explicitly targets spread pricing by prohibiting PBMs from charging plans more than the actual cost of the drug plus a transparent administrative fee. This limits the ability of PBMs to generate revenue through opaque spread pricing, thereby reducing unnecessary cost inflation borne by the plan and its beneficiaries.
• Recordkeeping and Reporting Requirements – SB-41 mandates rigorous recordkeeping, with PBMs required to maintain detailed documentation of all transactions, rebates and administrative fees. These records must be made available for audits and review by plan sponsors and state regulators.

As a result of these provisions, amongst others, industry stakeholders, including PBMs can expect PBMs to drastically alter their current practices. For instance, due to the enhanced accountability and fiduciary responsibilities imposed by SB-41, PBMs will be held to higher standards and required to prioritize cost savings and formulary management that benefits the plan and its beneficiaries. Consequently, PBMs will likely shift toward more transparent pricing models that clearly delineate costs and rebates. This shift will likely lead to more PBMs transitioning to pass-through pricing models, where rebates and costs are directly passed to plan sponsors or beneficiaries, rather than retained as profit by the PBM.

The implications of SB-41 cannot be overstated. A critical gap in the regulation of PBMs allowed these entities to thrive off of a lack of transparency and accountability, where the true costs of drugs and PBM revenue streams were hidden from plan sponsors. With limited visibility into PBM practices, plan sponsors could not effectively manage their prescription benefit plan or control costs effectively. The prohibition on common practices like spread pricing and imposition of fiduciary duties upon PBMs will lead to more effective plan management and ultimately reduce costs for plans.

How Plan Sponsors Can Use SB-41 to Their Advantage

SB-41 has the potential to generate significant cost savings for employee benefit plans as well as provide opportunities for plan sponsors to leverage certain provisions to reduce costs and improve plan outcomes. Cost savings opportunities are plentiful as a result of SB-41, as PBMs can no longer engage in spread pricing and are more likely to rely on pass-through pricing models and pass-through rebate models. In addition, the imposition of fiduciary duties will force PBMs to optimize formulary design and utilization management strategies that prioritize cost-effective, clinically appropriate therapies.

Aside from cost savings opportunities, plan sponsors can utilize the provisions of SB-41 as a tool to take back greater control of their prescription benefit plan from these PBMs. To illustrate, due to the increased transparency and reporting requirements, plan sponsors are encouraged now more than ever to audit these reports and additional PBM records to identify any unnecessary expenses, overcharges, or inefficient rebate arrangements. Likewise, SB-41 provides plan sponsors with additional leverage when negotiating contracts with PBMs, where plan sponsors are better positioned to demand transparent pricing models, pass-through rebate arrangements, access to critical data and fixed administrative fees.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.