Opinion: Carolina Journal Opinions

PBMs deserve scrutiny, not excessive regulation

The latest debate in the North Carolina General Assembly is one over pharmacy benefit managers or PBMs. Senate Bill 257 and a House committee substitute (PCS) to that bill represent similar but competing visions of regulating PBMs. Though sometimes villainized, PBMs play an important role in the U.S.’s third-party payer health care system. PBMs deserve scrutiny, not regulation to the point where the service they provide is rendered ineffective.

Just as insured Americans outsource their purchasing power to a third-party insurer for health claims, health insurance plans outsource their purchasing power to PBMs to handle all of the pharmacy benefits for an insurance network. Health insurers rely on PBMs to negotiate drug prices, create a formulary for covered drugs, contract with pharmacies to develop insurance networks to get their prescriptions, and process and pay prescription drug claims.

It’s important to remember that PBM contracts entered into by pharmacies, insurers, and employers are all voluntary, private contracts. Employers and insurers use these entities to negotiate discounted drug costs for health plans that otherwise might not be there. Sure, there are patient horror stories where PBMs deny paying for claims or refuse to cover drugs. But one can find those about all major sectors in the health care industry. As Dr. Marty Makary often says, “we have good people working in a system filled with bad incentives.” However, bad incentives are no reason to overregulate.

Despite often working together to get patients their prescriptions, there remain points of contention between pharmacists and PBMs. These center on the provisions in contracts that dictate what information can be shared between a pharmacist and a patient, how and where a patient can obtain a prescription, and the price paid to the pharmacist for filling the prescription. Pharmacists contend that PBMs have too much influence over the drugs patients can get and at what price. PBMs and insurers argue that this influence is what allows them to keep costs down. North Carolina statutes already have sections dealing with some of these issues.

If lawmakers intend to regulate PBMs further, there should be careful consideration not to pick winners and losers in the market. There is plenty of protectionism already in the health care industry; lawmakers should avoid anymore. Furthermore, as I have argued with telehealth benefits, health plans need to have wide latitude in deciding what types of benefits to include in their plans, including pharmacy benefits. Insurance regulations that limit this ability usually raise costs and hamper competition.

Despite some regulations already on the books, the two bills attempt to calm the battle between pharmacists and PBMs with updated provisions to relevant statutes. In both bills, there is a new requirement for state licensure of PBMs. Also, there are new provisions in the sections for consumers’ and pharmacists’ protections, maximum allowable cost calculations, and the network adequacy section.

The House PCS goes substantially further in the number of mandates on insurers and PBMs compared to the Senate version that passed unanimously on June 1st. As is the case with most health care regulations, the House PCS is well-intended. But some of the provisions may result in the unintended consequence of higher health care costs for North Carolinians.

Health plans need the flexibility to design benefit plans to keep costs low. There are already numerous benefit mandates on the books in federal and state law. The House PCS would impose several new mandates to which employers and insurers would have to comply, including self-insured ERISA plans.

For example, the House PCS would prohibit PBM contracts from restricting pharmacists from dispensing any drugs. This provision removes one cost-containment tool employers and insurers use to keep pharmacy benefits affordable – picking which drugs a health plan covers.

Similarly, a section of the bill would require insurers, if they cover a biosimilar of a prescription drug, to cover all of the biosimilars of that drug. If insurers or employers have to offer blanket coverage of a drug or its biosimilars, it results in concentrated benefits and diffused costs. Plans will have to spread the cost of compliance across all covered lives.

There are several other examples of costly mandates in the House in addition to the two above. Still, the point remains the same: mandates that take power away from insurers and employers to craft benefit plans should be rejected. Entities offering health plans need the flexibility to meet the needs of their covered lives for as low of a cost as possible. These negotiations should be done between the parties entering the contracts, not through additional regulation.

Preserving free-market contract interactions to the greatest extent possible in the health care space should be the guiding principle for lawmakers when considering reform. PBMs offer a service that adds value to health insurance. As with any sector of the health care industry, there are bad incentives. Let’s not use government to dictate how business gets done in our pursuit of larger health care reform.

*The House proposed committee substitute to SB 257 passed on the House floor on 8/18/21. The bill will go back to the Senate where they will not concur, initiating the conference committee which will negotiate the differences between the original SB 257 and the House proposed committee substitute.