Through several consumer-focused class action lawsuits, we have seen numerous deceptive schemes by different players in the drug industry to manipulate the complex national drug pricing system for profit.  One solution to these fraudulent and deceptive schemes has been exposure of the lack of transparency in the determination of actual drug costs.

Our blog last week reported on a provision in the House Energy and Commerce Committee’s health care reform bill that would establish transparency in the transactions by PBM’s, the middlemen that manage pharmacy benefits for health plans.  Consumer advocates have criticized PBMs, which were originally intended to manage prescription drug formularies to reduce costs, for engaging in practices that retain possible savings for their own profit, and driving up costs.  For instance, PBM’s negotiate significant rebates with drug makers in exchange for placement of the drug in a preferred place on the PBM’s formulary. But lawsuits by PAL members and numerous state Attorney Generals have discovered that the PBM failed to pass on these rebates to their health plan clients.  In addition, PBM’s have been accused of unfairly inflating their charges to a health plan in comparison to what the PBM actually pays a pharmacy to dispense a drug.

 This health reform bill’s PBM transparency provision would require PBM’s to make a confidential annual disclosure to their client health plans, and to the federal government, that would expose both of these potential conflicts of interest. PBM’s would be required to disclose both the rebates they recieve from drug manufacturer’s in return for placing drugs in preferred spots on the PBM’s formulary, and the differences betweeen what the PBM’s costs for prescriptions filled, and what they bill their client health plans.

This Wednesday’s Wall Street Journal reported on the PBM transparency provision.   

Some Democratic lawmakers looking for ways to overhaul the nation’s health-care system are targeting the companies that handle drug benefits for more than 210 million Americans, setting off a lobbying battle over how much pricing information the companies should disclose.

One version of the health legislation passed by the House Energy and Commerce Committee last month includes provisions that could overhaul how pharmacy-benefit managers — middlemen hired by insurers to administer prescription-drug benefits — operate. It would require them to inform the government or federally approved health plans about differences between the average cost of drugs to the PBM and what the PBM charges insurers. It would also require PBMs to disclose rebates they receive from drug makers for pushing certain pills and say whether those rebates are passed on to insurers.

The goal of the provisions is to drive into the open any cases in which PBMs are earning improper profit margins or rebates, said Rep. Anthony Weiner (D., N.Y.), the lead sponsor of the provisions. He said his legislation will “cut down on inside deals that benefit only the PBMs and the drug companies.”

PBMs use their buying power to wring lower prices from drug makers and say they save money for employers, the government and others who pay for health care. Most health-insurance companies, including those running Medicare’s drug plans, hire PBMs to manage drug benefits.

Typically, pharmacy-benefit managers have carried out pricing negotiations behind closed doors, leaving insurers and other outsiders little idea of the actual prices PBMs negotiate for drugs or their profit margin.

The WSJ article then provides the contrary position of the PBM trade association, Pharmaceutical Care Management Association,  whichs asserts that transparency will hurt consumers and drive up prices based upon a number of questionable and unsupported assertions: secrecy is necessary to negotiate lower prices, because it allows PBM’s to play drug companies off one another and get big discounts. In short, secrecy is essential to allow competition to drive down costs.

Unfortunately these self-serving critiques are simply a red herring, because the transparency provisions of the House legislation would not affect the PBM’s alleged need for secrecy in their negotiations with drug manufacturers.  The House legislation only provides for transparency between the PBM and their clients — health plans that contract with the PBM.  The measure would require the PBM to inform their clients, and a department of HHS,  of the costs and charges related to a health plan, and of their rebates.  Drug manufacturer’s have no access to this information under the proposal.

 The provision has also sparked interest in the Senate.  The WSJ reports that “Maria Cantwell (D., Wash.), a member of the Finance Committee, said she wanted her committee’s health-care bill to include similar disclosure requirements for PBMs.”

And the growing support does not end there, WSJ notes.

Some companies that offer drug benefits to employees are taking action on their own. Nearly 60 large employers accounting for more than $4.9 billion in annual drug spending, including McDonald’s Corp. and International Business Machines Corp., have banded together to demand greater transparency from pharmacy-benefit managers. They have signed on 15 PBMs, including industry leaders Medco Health Solutions Inc. and CVS Caremark Corp., that are willing to disclose to the companies their acquisition costs for drugs and pass along any additional discounts they get.”

A final sector in support of this reform are the small independent pharmacies, who have less bargaining power in negotiating prices and dispensing fees with PBMs.

Independent pharmacies, which have lost money as PBMs expanded into Medicare’s drug benefit in recent years, said secretive pricing techniques benefit PBMs more than employers and consumers. A prescription, for example, costs the pharmacies more under a PBM system because they often have to hire other middlemen to make sure PBMs aren’t underpaying them.

The National Community Pharmacists Association, an industry group, has beefed up lobbying against PBMs, hiring outside lawyers and increasing political contributions, said spokesman Kevin Schweers.

Consumer advocates have already responded in support of the measure. a letter was sent yesterday to House Speaker Nancy Pelosi and to the House leadership by the National Legislative Association on Prescription Drug Prices(NLARX), US Pirg, and The Consumer Federation of America in support of the transparency measure. Their letter notes that the need for such transparency “is straightforward and compelling. PBM’s represent the most rapidly growing segment of health care spending, and yet they are the only part of the health care market that is unregulated.” The letter describes the record of fraudulent and deceptive practices by PBMs as revealed by six major enforcement actions brought by state Attorney Generals between 2004 and 2008, resulting in “over 371.9 million in damages….” The letter also describes the possible savings that would result from transparency.  For instance, the state of New Jersey has projected a savings of “$540 million over five years” by switching to a more transparent system for their state employees alone.

The potential savings on health care costs are significant. Numerous State agencies have found millions of dollars in annual savings on drug costs for state employees or beneficiaries of state programs that have switched to more transparent systems. Accordingly, the savings in the private market, which insures many more people, are potentially far greater. 

The WSJ article also privided the following diagram of the PBM’s role in drug reimbursement.  

The White House, in its efforts to line up industry support for health reform, announced an agreement this spring with the Pharmaceutical Researchers and Manufacturers of America (PhRMA) to discount senior drug costs and save $80 billion over the next decade.  PhRMA has announced that it will finance new ads in support of health reform—it has helped advocates like Families USA with previous ad campaigns.  However, with House leaders now proposing to go further in reining in excessive drug costs, there is speculation that PhRMA might pull its support if the House drives too hard a bargain.  But PhRMA should be supporting health reform—it’s not only good for the country, but good for the industry when more patients are insured and become new customers for their products. 

While details are scant, a recently leaked memo describes the deal as including: $25 billion in savings through a half-price discount for seniors buying brand name drugs in the ‘donut hole’ under Medicare Part-D; $34 billion in increased rebates under Medicaid; $12 billion through an industry fee or tax, and some $9 billion in savings on biologics.  Any mechanisms to ensure oversight and reliable pre-discount drug pricing are not clear.  

Controversy has now erupted, however, over drug pricing issues that affect the cost of health reform.  House Speaker Nancy Pelosi has said that “the House was not bound by any industry deals with the Senate or the White House.”   House Energy and Commerce Committee Chairman Henry Waxman (D-CA) also said that the House would not be obligated to abide by the agreement.  On July 31^st House democrats added new drug provisions in the House Committee on Energy and Commerce mark-up of its bill,  America’s Affordable Health Choices Act of 2009, H.R. 3200.  

H.R. 3200 includes an amendment introduced by Representative Schakowsky (D-IL) which allows the federal government to negotiate lower drug prices on behalf of senior citizens and persons with disabilities covered under Medicare Part D.  PhRMA quickly cried ‘foul’ and claimed that part of their deal was the administration’s promise to not pursue any other cost-cutting proposals.  They claimed that Schakowsky’s amendment would be a ‘deal breaker.’  But proponents are quick to point out that the potential savings for consumers and government payors are significant, and could easily exceed the PhRMA deal’s $80 billion over-ten-years.  

In the days following the release of H.R. 3200, the White House seems to have pulled back on its previous description of the agreement with PhaRMA. Huffington Post   $8 million in annual savings on a yearly drug tab in excess of over $200 billion nationwide seems to leave a lot on the table that we hope will be up for negotiation over the course of hammering out a final health care agreement.  

Another important provision in the House health care reform bill was a successful amendment by Rep. Rush (D-IL) would prohibit the ‘pay-for-delay’ settlements that drug manufacturers have used to keep generic competitors off the market.  (See more info here). Thees anti-competitive agreements, also called reverse payment settlements, have kept generic versions of several drugs off the market since 2005. The FTC conservatively estimates that banning such ‘pay-for-delay’ or ‘reverse-payment’ settlements would save $35 billion dollars over the next decade.

In addition Rep. Baldwin (D-WI) successfully introduced an amendment that wouldrequire the disclosure of financial relationships between pharmacy benefit managers (PBMs) and drug manufacturers.  PBMs manage insurers’ prescription drug benefits, including creating formularies of preferred medicines, negotiating discounts with drug manufacturers, and negotiating reimbursement rates with retail pharmacies that fill prescriptions.  Under Rep. Baldwin’s amendment, all PBMs must provide, to both their client health plans and to the federal government, a confidential annual accounting of all payments and rebates they receive from drug manufacturers in relation to the prescriptions filled.  In addition, the PBM must report, in aggregate, how much they paid pharmacists to fill all prescriptions. 

These two classes of information are essential for health plans to ensure that their formularies are designed to lower costs and not to maximize rebates often alleged to be retained by the PBM.  It would help ensure that the conflict of interest that PBMs face is not working against the fundamental purpose of PBMs to manage formularies that reduce costs.  Similar disclosure provisions have been enacted under state law in Maine and the District of Columbia even withstanding legal challenges.  Maryland, Iowa, South Dakota, and Vermont have also enacted state PBM reform measures.  In South Dakota, the state saved more than $800,000 on health insurance costs in one year after enacting its law.  Kansas, Mississippi, North Dakota, Rhode Island, Tennessee, Connecticut, Georgia, Louisiana, and Arkansas have also taken steps towards PBM transparency.  For example, through an audit of the PBM which manages the state employee health program, Arkansas discovered that in a three-month period, the state was overcharged by nearly $500,000.  The experience of these states demonstrates that increased PBM transparency has the potential to yield significant savings for public and private insurers.  

Medical Device Safety Act would restore needed safeguards and allow victims to be compensated

When 2 ½ year old Avery DeGroh’s defibrillator shocked her nine times because of a broken lead, her mother “grabbed her to hug her, and…could feel all the electricity jolting back and forth, cycling through her body.” (Details here.) The defibrillator lead was soon recalled by manufacturer Medtronic, but the DeGroh family was still stuck with $30,000 in medical bills for the cost of replacing the device, not to mention the trauma of Avery’s experience. DeGroh’s mother explains that “as the law stands, we don’t have any way to seek compensation for what Avery has gone through…we were just asking for her hospital bills [to be paid].”

The DeGroh family and others testified before the Senate’s Committee on Health, Education, Labor, and Pensions on August 4 in support of the Medical Device Safety Act (MDSA), which will restore an injured patient’s right to sue manufacturers.

Without a change in the law, medical device manufacturers will continue to enjoy complete immunity from liability under the Supreme Court’s 2008 Reigel v Medtronic decision. This is true even if a defectively designed or manufactured medical device injures or even kills patients.

The MDSA, sponsored by Sen. Edward Kennedy (D-MA) and by Rep. Frank Pallone (D-NJ) and House Energy and Commerce Committee Chairman Henry Waxman (D-CA), would restore the right to seek justice in state courts for patients who are injured by faulty medical devices. MDSA (designated H.R. 1346 in the House and S. 540 in the Senate) would simply overturn the 2008 Supreme Court decision which found that a 1976 federal statute allowing FDA to regulate and approve the marketing and sale of medical devices also broadly preempts state authority, including those state laws that allow injured consumer to sue a manufacturer.

At the hearing, Dr. William Maisel, Director of the Medical Device Safety Institute at Beth Israel Deaconess Medical Center, testified that while “we are fortunate to have the preeminent medical regulatory system in the world,” the FDA must regulate “more than 100,000 different medical devices manufactured by more than 15,000 companies.” After approval, the FDA must rely on manufacturers to report problems because they simply do not have the resources to adequately monitor all of the devices on the market.

Before Riegel, lawsuits were the main incentive for device companies to report problems. But in light of the Riegel decision, manufacturers have little, if any incentive to report problems, because to do so might decrease sales. In short, now that consumers cannot sue, there is very little incentive for manufacturers to act responsibly and inform FDA as soon as they have evidence of public health risks associated with their devices.

Bill cosponsor Senator Harkin described the ability to sue manufacturers as an important “safety net” that is complementary to FDA regulation. “In our system of justice, access to the court system is critical in exposing dangers and bringing about remedies.” (Watch the hearing here.) Another victim of Medtronic’s defective defibrillator lead, Nick Evola, was shocked 43 times. According to his lawyer Wendy Fleishman, “Medtronic put profits ahead of patient safety. They were aware the device was failing at abnormally high rates but continued to market it as alleged in lawsuits filed against the company.” (See article here.)

The profits on medical devices are significant. In 2008, Medtronic’s revenue topped $13 billion, with $10 billion in profits, according to the American Association for Justice, an advocacy group supporting the MDSA.

In support of the bill, Dr. Maisel cautioned that “the Riegel decision eliminates an important consumer safeguard – the threat of manufacturer liability – and will lead to less safe medical devices and an increased number of patient injuries.”

Senator Harkin explained at the hearing that “this bill is really about real people, who have been…let down, sometimes catastrophically. Right now they have no access to justice and no ability to hold those that cause them harm accountable.”

Janice Baird, another supporter of the bill whose son died due to a defective pacemaker, explained that the law is needed because manufacturers “have to be responsible, and [because the law] will also, in my heart, give me some peace to know that Robert’s death was not in vain.” (See article here.)

More information can be found in our Fact Sheet on the MDSA, or at the website stopcorporateimmunity.org.

This week, a federal court in Massachusetts granted final approval for a $350 million settlement to reimburse consumers and insurers who were victims of the alleged scheme to raise the prices of hundreds of prescription drugs by 5%.  The settlement stems from the PAL member class action lawsuit that alleges that the drug wholesaler McKesson Corp. conspired with publishers First Databank and Medi-Span to artificially raise the prices hundreds of popular prescription drugs. These include Adderall, Advair, Allegra, Ambien, Celebrex, Clarinex, Claritin, Coumadin, Levaquin, Lipitor, Nasonex, Nexium, Ortho Tri-Cyclen, Plavix, Prevacid, Prilosec, Protonix, Prozac, Risperdal, Seroquel, Topamax, Valium, Valtrex, Zantac, Zyprexa and many others.

Allegedly these prices were wrongfully inflated by manipulating the mark-up factor McKesson used to determine the Average Wholesale Price (AWP), which is the benchmark used by insurers and the government to reimburse pharmacies.

In her order for final approval, Judge Saris of the U.S. District Court for the District of Massachusetts noted the “near-unanimous and “eye-popping” support for this settlement” and described the method of notifying class members as “innovative, expansive and reasonable.” $288 million will be distributed to non-government insurers, health insurance plans, union benefit funds, and self-insured employers who paid a pharmacy for any of the 386 prescription drugs on behalf of their members. Consumers who paid for the drugs out of pocket or through a percentage co-payment will receive the remaining $62 million. Consumers will be identified using information gathered from TPP’s filing claims, as well as from large chain pharmacies under subpoena. 

In addition to the money awarded to consumers and insurers, this lawsuit has exposed a unique vulnerability of our nation’s drug pricing system to manipulation for profit, spurring important changes in industry practice. This includes the prospective relief for consumers and insurers in the form of a rollback of prices for the current benchmark, the Average Wholesale price (AWP). This rollback should provide significant future savings for health plans, consumers, and state Medicaid programs, up to $1.04 Billion annually, but reduced gradually as more and more of these listed brand name drugs become available as generics. The rollback is currently scheduled to be implemented in mid-September 2009. 

Part of these future savings resulting from this class action on behalf of private party consumers and insurers will benefit government programs. For instance, as of June 30, 2009, over 36 state Medicaid programs continue to use AWP in their drug reimbursement formulae for pharmacies, while another 12 states include an AWP-based benchmark price as possible ‘best-price’ alternative. (See CMS data). All these states stand to realize significant savings on drug expenditures as a result of the rollback.  Such a result is especially critical to state budgets during the fiscal difficulties brought on by the current economic recession.

Efforts by state Medicaid programs to cut their expenditures on prescription drugs through changes in the drug reimbursement formulae can expose them to extensive political and economic pressure from the large corporate pharmacy chains.  For instance, a proposal by the Washington State Medicaid program to reduce Medicaid reimbursement rates by 6% drew serious opposition — a legal challenge, and a threat by Walgreens to cease service to Washington’s Medicaid customers.  In response, Washington has abandoned this proposal. (See article here.) Quite simply, many state Medicaid programs may choose not to initiate such savings for fear that the large chain pharmacies response may leave their low-income participants without easy access to the chain pharmacies. Fortunately, the nationwide AWP rollback in the First Databank and Medi-Span settlements will provide state Medicaid programs with reduced drug costs in a manner that is insulated from such political and economic pressures by the large chain pharmacies. 

The rollback may allow some small non-profit union benefit funds to have more power when negotiating prices for prescription prices in contracts with Pharmacy Benefit Managers (PBMs), which are middlemen between insurers and drug companies. The rollback at the very least has created an educational opportunity for insurers to understand and monitor how reimbursement ‘benchmark’ prices are selected by their PBMs. 

Another change in practice is the initial start of a shift away form AWP in favor of alternate benchmarks that are reliable and transparent. As we have blogged previously, Caterpillar Corporation has replaced their use of AWP with a benchmark based on actual costs.  While PAL supports this innovative pilot project by Caterpillar, we caution that other reforms and innovations shall become essential as the deadline for the publishers FirstDataBank and MediSpan to cease publishing AWP information in two years draws closer.

PAL is grateful to the participation of our coalition members AFSCME District Council 37 and New England Carpenters who were instrumental in bringing this lawsuit.