Generic Entry Influences Allowance Levels

The brand manufacturers generally stopped making payments upon generic entry. ⁴⁹ Some manufacturers, however, continued to make payments to PBMs after a generic equivalent drug entered the market.⁵⁰

44 See, e.g., PBM contract with pharmaceutical manufacturer (market share scales and definitions for a variety of drugs). See also CBO, supra note 4, at 24.

45 See PBM contract with pharmaceutical manufacturer. In this example, the summed allowance was not large enough to trigger a new Medicaid “best price.” See also 42 U.S.C. § 1396r-8(c)(1) (2000) (allowances above the Medicaid minimum rebate of 15.1% may set a new “best price” and thus be available to Medicaid). PBM contracts with pharmaceutical manufacturers typically capped such payments so that they would not set a new “best price” under 42 U.S.C. § 1396r-8(c)(1)(C) (2000)). This report does not address compliance with Medicaid “best price” requirements.

46 See PBM contract with pharmaceutical manufacturer.

47 The change suggests that the manufacturer believed that its drug would not be able to maintain the market share it had prior to the new competition. See PBM contract with pharmaceutical manufacturer (despite absence of requirement for an annual adjustment, amendment lowers drug product share requirements because of competition).

48 See PBM Interviews.

49 See, e.g., PBM contracts with pharmaceutical manufacturers.

OWNERSHIP OF MAIL-ORDER PHARMACIES

Brand manufacturers occasionally included generic products equivalent to their own drugs in the defined market for calculation of market share, and continued to make market-share payments after generic entry.⁵¹ One manufacturer agreed to continue making market-share payments after generic entry only if the PBM maintained the drug’s market share relative to national market share.⁵² In another case, the manufacturer specified higher allowance levels just before generic entry, but then discontinued the payments after generic entry.⁵³ Another brand manufacturer had a right of first refusal to match the price offered to the PBM by any

manufacturer of a generic equivalent to its drug. If the brand manufacturer matched the price of the generic drug, the PBM agreed to use the brand manufacturer as the exclusive provider of the drug for its mail-order pharmacy.⁵⁴

Brand manufacturers more frequently included generic products equivalent to competitors’ drugs in defined markets for calculation of market share. In one case, a manufacturer agreed to continue making payments to the PBM if the drug’s market share exceeded an agreed upon baseline, but if the market share dropped below the baseline, the PBM would have to pay the manufacturer.⁵⁵

V. MANUFACTURERS ALSO MAKE OTHER PAYMENTS TO PBMS FOR VARIOUS SERVICES

In addition to formulary and market-share payments, manufacturers paid PBMs for two other types of services: (a) administrative fees to compensate a PBM for managing the

formulary and for other services on behalf of manufacturers’ products; and (b) other fees to compensate PBMs for compliance, therapeutic interchange, and other programs relating to particular drugs. Certain lawsuits have alleged that PBMs sometimes categorize formulary and market-share payments as administrative or other fees to avoid a contractual obligation to pass these payments through to the plan sponsor.⁵⁶ These allegations are outside the scope of this

50 Some contracts gave manufacturers a right to renegotiate the agreement upon generic entry. See, e.g., PBM contracts with pharmaceutical manufacturers.

51 See PBM contracts with pharmaceutical manufacturers.

52 See PBM contract with pharmaceutical manufacturer.

53 See, e.g., PBM contract with pharmaceutical manufacturer.

54 See PBM contracts with pharmaceutical manufacturers.

55 See PBM contract with pharmaceutical manufacturer.

56 See Press Release, Office of N.Y. State Attorney Gen. Eliot Spitzer, Express Scripts Accused of Defrauding State and Consumers Out of Millions of Dollars: Lawsuit Alleges Pharmacy Benefit Manager Inflated Costs of Drugs and Diverted Rebates (Aug. 4, 2004), available at

http://www.oag.state.ny.us/press/2004/aug/aug4a_04.html.

CHAPTER III: THE ROLE OF PHARMACEUTICAL PAYMENTS TO PBMS 55

study and, moreover, the data the Commission collected does not provide a basis on which to offer observations on these allegations.

Manufacturers routinely paid PBMs to administer the pharmaceutical payments program and the formularies that included the manufacturers’ drug products. These fees were generally 3% of the wholesale price of all of the manufacturer’s drugs dispensed to members of plans administered by the PBM.⁵⁷ Some PBMs represented in their contracts with manufacturers that they have disclosed to their client plan sponsors that they received these fees.⁵⁸ Although this representation was not universal among the study participants, nearly all of the PBM/plan sponsor contracts that the Commission staff reviewed disclosed that the PBM might receive administrative and other fees from manufacturers.⁵⁹

Very few PBMs received manufacturer payments specifically for prescription

compliance, preferred drug management programs, therapeutic interchange services, or other similar activities. Indeed, PBM strategic plans and business planning documents indicated that by late 2003 PBMs had discontinued, or were about to discontinue, many of these programs.⁶⁰

One PBM contracted with several pharmaceutical manufacturers to undertake

prescription compliance programs for a number of drugs dispensed through the PBM’s owned mail-order pharmacy.⁶¹ Payments for these programs were based on the services rendered, with set fees based on a per mailing or phone call basis — up to a specified fee cap. The fee caps, which ranged from about $100,000 to $1,000,000, typically applied to the term of the agreement, usually a year.⁶² Most of these compliance programs involved drugs in large, competitive market classes, many of which included generic equivalents.

The same PBM also contracted to undertake therapeutic interchange programs for some of the same manufacturers.⁶³ The PBM agreed to carry out therapeutic interchanges in favor of certain formulary drugs, regardless of whether the covered drugs were dispensed by mail-order

57 See, e.g., PBM contracts with pharmaceutical manufacturers.

58 PBM contracts with pharmaceutical manufacturers.

59 See, e.g., PBM contracts with pharmaceutical manufacturers.

60 See PBM Interview.

61 See PBM contract with pharmaceutical manufacturer (for patients with new or continuing prescriptions for the designated drugs, the PBM sent letters explaining the importance of therapy compliance;for patients who failed to refill their prescriptions, the PBM sent a letter and followed up with a phone consultation asking the patient to refill the prescription according to his or her physician’s directions). See also PBM contracts with pharmaceutical manufacturers.

62 See, e.g., PBM contract with pharmaceutical manufacturer (therapy adherence program limiting a specified drug product to a $100,000/year cap); PBM contract with pharmaceutical manufacturer (therapy adherence program, listing five drug products at a $1,000,000/year cap).

63 As discussed in Ch. V, infra, plan sponsors have tools to ensure that therapeutic interchange programs are beneficial to the plans and their members.

OWNERSHIP OF MAIL-ORDER PHARMACIES

or retail pharmacies.⁶⁴ The PBM sometimes agreed to carry out an interchange program to encourage use of new formulary drugs after changes in the formulary.⁶⁵ Therapeutic interchange programs typically involved drugs in large, competitive market classes, called for set fees per PBM mailing, and had a cap on total fees. Such caps ranged from about $250,000 to $1,000,000 per year per program drug(s).⁶⁶

Because few manufacturers specifically contracted for these programs, their impact was limited. Nonetheless, PBMs asserted that such programs, or the threat of such programs, help them control drug costs because manufacturers pay higher allowance levels to avoid having their drugs targeted for an interchange in favor of another manufacturer’s drug.⁶⁷

VI. SHARING PHARMACEUTICAL PAYMENTS WITH PLAN SPONSORS

The extent to which contracts between PBMs and their plan sponsors explicitly provided for the sharing of formulary and market-share payments with the plan sponsor clients varied among contracts. The Commission staff also obtained data on the actual amounts shared by each study participant with its plan sponsor clients in 2003.