Background

Congress has considered a variety of policy proposals to address the rising cost of prescription drugs in recent years. Several focus on pharmacy benefit managers (PBMs), who administer drug benefits on behalf of health plans and employers in both the commercial market and public programs like Medicare and Medicaid. Health plans and employers contract with PBMs to administer their pharmacy benefits, negotiate with pharmaceutical manufacturers to secure discounts and rebates, negotiate with network pharmacies to establish reimbursement rates, design prescription drug formularies, and implement a range of medication management and safety programs.  

Several legislative proposals focused on PBM practices have been under discussion in Congress in previous sessions and could be reconsidered this year.  

What is “Delinking?”

Delinking bills aim to restructure PBM contracting by prohibiting compensation arrangements “linked” to (1) prescription drug prices or (2) remuneration such as discounts and rebates (which may be volume-based). Instead, under the provisions in proposed bills, any PBM compensation would need to be in the form of flat, “bona fide” service fees that reflect the fair market value of services provided.  

Today, PBMs and their clients can choose from a variety of contracting models to suit their needs. One model aims to incentivize PBMs to negotiate deeper discounts by basing PBM compensation in part on the amount of discounts and rebates they negotiate on behalf of the plan or employer. This form of compensation would be prohibited by delinking bills, which allow only flat fees for specific services provided.   

Congress has considered delinking proposals in the context of Medicare Part D and the commercial market. For example, H.R. 2880 would have prohibited compensation to PBMs in Part D from being based or contingent, directly or indirectly, upon (1) the price of any covered part D drug or (2) discounts, rebates, fees, or other remuneration with respect to a covered drug. Similarly, H.R. 6283 would have prohibited compensation in the commercial market that is not a flat dollar amount.  

Considerations for Policymakers

If delinking legislation is considered this year in Congress, policymakers and stakeholders should examine how the bills could impact choices, incentives, PBM services, and prescription drug spending for health plans and employers.  

PBMs compete for the business of health plans and employer clients by offering a variety of services and compensation arrangements. Those supporting delinking bills assert that arrangements linking PBM compensation to drug prices could encourage PBMs to favor higher list price drugs with larger rebates rather than lower list price drugs, and that this hurts enrollees because cost sharing is generally based on the list price of a drug. Others note that PBMs compete for the business of employers and plans based on their ability to bring down the net cost of prescription drugs and that there is no correlation between rebates and prices of drugs. They also point out that enrollee cost sharing is a matter of plan design, and that plans and employers have the flexibility to allocate enrollee costs between premiums and cost sharing. 

In a contracting system of flat fee compensation arrangements, it may become challenging to differentiate between PBMs or their services as compared to others in the marketplace. Current innovative contracting models, such as pay-for-performance, risk-based contracting for gene therapies, and other value-based arrangements could become more complex to implement since these arrangements are often connected to drug costs, volume, or savings. In addition, since delinking bills would require the flat fee payments to PBMs to be based on “fair market value,” which generally requires a comparison to other similar arrangements, this too could inhibit innovative arrangements since, by definition, there likely would not be “comparable” pricing arrangements by which to determine fair market value.   

Implications of Delinking on Premiums, Cost-sharing, and Drug Expenditures

For more than a decade, the level of rebates negotiated by PBMs have been a factor in constraining overall spending on prescription drugs. While rebates do not lower drug list prices themselves, as the list price is set by a drug manufacturer, rebates and discounts negotiated by PBMs can reduce drug expenditures and net costs of medicine to payers. Policies that affect incentives and market dynamics related to rebates impact payer decisions about formulary and benefit designs. They could also affect net drug costs for payers which could translate into premium and cost sharing impacts for individuals and costs for the federal government (in the case of Part D).  Given the wide-ranging impact delinking policies could have on an array of contracting arrangements between PBMs, health plans, employers, and manufacturers, it is challenging to predict what the net effect will be on both Part D and commercial drug expenditures.  

From a federal budget perspective, the Congressional Budget Office (CBO) has not issued an analysis of delinking reforms in isolation, although it has been looked at within larger legislative packages that include transparency and other policies. It is unclear whether CBO’s analyses have considered downstream impacts to the broader healthcare market, which could affect federal spending and costs for plan sponsors, employers, or enrollees. For example, if delinking reduces the value of the rebates and discounts delivered by PBMs, resulting in drugs with higher net prices, Medicare and commercial costs for medicines could increase. Further, if employer plan premiums increase following delinking (i.e., due to lost rebates, higher administrative costs, uncertainty, or other factors), the policy could have revenue impacts due to the tax deductibility of employer-sponsored insurance.  

What’s Next

As Congress continues to debate legislative efforts like Budget Reconciliation, stakeholders should continue to monitor what policies are included and how it will impact entities across the healthcare system, including health plans, employers, PBMs healthcare providers and manufacturers. 

Funding for this research was provided by CVS Health, Inc. Avalere Health retained full editorial control.