SCOTUS to Hear PCMA Case Concerning PBM Reforms

For those of you who have followed the long saga of pharmacy benefit managers (PBM) excesses, and state efforts to reign them in, may be aware that the question of the permissible scope of State regulation of PBMs has been slowly winding its way to the United States Supreme Court. After a false start last year by the Trump Administration’s threat of federal regulation, PCMA, the PBM industry group, chose a showdown with Arkansas at the SCOTUS O.K. Corral over state reforms that impacted pharmacy reimbursement mechanisms. PCMA claims the Arkansas Law Act 900, was pre-empted by the Employee Retirement Income Security Act (“ERISA”) because it improperly impacted federal regulation of ERISA plans. In essence, Act 900 requires PBMs to discontinue their use of unfair business practices by reimbursing pharmacies for generic drugs at prices equal to, or higher than the pharmacy acquisition cost.

After the Eighth Circuit granted PCMA’s motion for summary judgment, and held that Act 900 was preempted by ERISA, the Eighth Circuit affirmed the federal district court’s ruling. Subsequently, the Attorney General for the State of Arkansas petitioned the U.S. Supreme Court for certiorari. The U.S. Supreme Court, using its “phone a friend” (i.e. “amicus”) option, called upon the Solicitor General to weigh in on whether the Court should hear the case. The result was a brief to the Court recommending that the Supreme Court hear the case because the issue presents one of legal significance where there is a split of authority. The Solicitor General further recommended that the Arkansas Law be upheld on various grounds.

Most recently, on January 10, 2020, the Supreme Court granted the Attorney General’s petition for review of the Eighth Circuit’s controversial holding, which, among other things, has broad implications for states’ ability to keep a cap on drug prices, while simultaneously disallowing PBMs to use ERISA pre-emption as a shield against unfavorable regulations.

All in all, this is a very good sign for state PBM reform efforts, but probably not a free pass for more aggressive reforms that would directly, or more explicitly regulate the plans themselves.

Author Information:

Linda is Barclay Damon’s health care controversies team leader. A nationally recognized litigator with over 20 years of experience, she serves as lead litigation counsel as well as national, regional, and local counsel in the prosecution and defense of claims brought in state and federal courts on behalf of large groups of business and institutional clients.

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Linda J. Clark, Esq.

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Barclay Damon attorneys team across offices and practices to provide customized, targeted solutions grounded in industry knowledge and a deep understanding of our clients’ businesses. With nearly 300 attorneys, Barclay Damon is a leading law firm that operates from a strategic platform of offices located in the Northeastern United States and Toronto.

Post-sale Clawbacks by PBMs

A new type of post-sale recoupment has taken the center stage: Generic Effective Rate (“GER”). This is the latest method in which PBMs continue to squeeze independent pharmacies.

Post-sale clawback by Pharmacy Benefit Mangers (“PBMs”) have become a huge issue for independent pharmacies.  Traditionally, these include audit-associated recoupment and performance-based recoupment such as Direct and Indirect Renumeration (“DIR”) fees that are charged to the pharmacies.  Recently, another type of post-sale recoupment has taken the center stage and has caused grave financial harm to the independent pharmacies.  PBMs call it Generic Effective Rate (“GER”). 

GER is a contractual rate set forth by PBMs for the reimbursement on generic claims.  Notwithstanding, the scope and extent of generic claims are dictated by the contract language and can be different from the widely accepted definition of generic claims.  The theory behind GER is to enforce stability around the reimbursements that pharmacies receive in a given calendar year.  In stark contrast, GER has only brought financial harm and burden upon the pharmacies and many pharmacies had no choice but to close and sell their stores (often to PBM-owned/affiliated chain pharmacy well below the fair market value).  

Many pharmacies first became aware of GER in late 2018 when their Pharmacy Services Administrative Organization (“PSAOs”) indicated that PBMs will begin reconciling overpayments made to the pharmacies in excess of the contractual rate.  PBMs wanted their money back on claims that they claim the pharmacies received reimbursements over the payment threshold (i.e., contractual rate).  More troubling, GER has been applied retroactively as well as at the point-of-sale.  As noted above, the pharmacies became aware of GER in late 2018 because some PBMs and PSAOs have alleged that the pharmacies were overpaid on generic claims above the GER threshold and began withholding payments to offset the alleged overpayment.  Notably concerning, these were claims that the pharmacies already dispensed prescriptions to the patients.  Thus, the pharmacies were not only forced to return the reimbursements but also could not make up the acquisition costs of the medications.  Moreover, a number of PSAOs and PBMs have begun applying GER at the point-of-sale to escrow and reserve funds in anticipation of the year-end GER reconciliation and any resulting adjustment/liabilities fall upon the pharmacies.     

Generally, PSAOs, on behalf of the member pharmacies, negotiate and enter into an agreement with PBMs in order to enable the pharmacies to adjudicate claims and receive reimbursements.  In vein, GER is borne by a contract negotiated and entered between PSAOs and PBMs.  However, PSAOs do not necessarily have the comparable bargaining power when negotiating with PBMs, which manage the drug benefits for approximately 95% of the US population or 253 million American lives.  Hence, pharmacies, especially the independently owned retail pharmacies, have zero bargaining power when it comes to PBM contracts.  Recognizing this disparity in bargaining power, several states have implemented laws and regulations to monitor and manage PBMs.  In particular, Tennessee recently enacted HB 786 effective July 1, 2019, a comprehensive PBM reform bill which, among other beneficial terms in favor of pharmacies, added Tennessee Code § 56-7-3115, which provides: “A covered entity or pharmacy benefits manager shall not charge a pharmacist or a pharmacy a fee related to a claim unless it is apparent at the time of claim processing and is reported on the remittance advice of an adjudicated claim.” 

In the current climate, pharmacists and pharmacy stakeholders must be cognizant of the different types of post-sale clawback.  It is very difficult for an independent pharmacy to operate by only focusing on the patient service.  Hence, pharmacies should also focus on the administrative and business aspect of the pharmacy practice and be in compliance with different regulations and PBM requirements.

Author Contact Information:

Dae Y. Lee, Esq.

A.J. Barbarito, Esq.

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Frier Levitt is a national boutique healthcare law firm, providing comprehensive regulatory, transactional and litigation counsel to the Healthcare and Life Sciences industries.