Drug Pricing Forecast: Continued Stormy Weather 

Apr 28 2022

Questions about prescription drug pricing and distribution have been hotly debated in the US for years – and the conversation is only getting more intense. However you get your news—radio, TV, online, or in print—most days there will be some story about prescription drugs. There are a number of divisive issues:

  • The public and private sectors buy drugs differently—but neither thinks they get a good deal
  • Prices for individual drugs in the US are often many times higher than drugs in other developed countries – consider that the US accounts for 5% of the world’s population but 41% of global drug spend
  • Some employers feel their pharmacy benefit managers (PBMs) are not always acting in their best interest
  • Gridlock in the US Congress makes any possible solution virtually impossible to achieve

All of these factors combine to create a “perfect storm” in the current US drug market.

What happens in a perfect storm

Given these dire conditions, states are tackling drug issues themselves. After all, they aren’t seeing any federal solutions and consumer discontent remains high. However, state activity is different than it was in the past. One reason is a noticeable shift in the perception of how ERISA preemption impacts state PBM laws.

In late 2020, the US Supreme Court’s Rutledge decision held that ERISA did not preempt an Arkansas law that regulated PBM reimbursement to local pharmacies. Many state legislatures have taken a broader view of the ruling by proposing bills that restrict many more PBM activities than before. Specifically, many bills now include self-funded ERISA group health plans within their regulatory scope. Previously, legislative activity focused primarily on fully insured plans.

Some of the more typical provisions include:

  • Eliminating common cost-control options such as preferred cost-sharing for mail-order drugs or use of specialty pharmacies
  • Requiring the most common pricing methodology—Average Wholesale Price (AWP)—to be replaced  by methods that rely on voluntary pharmacy surveys 
  • Banning a very common PBM contract structure known as “spread pricing” (paying pharmacies less than the amount the PBM pays for the drug)
  • Requiring all drug rebates to be applied at the point of sale

While these actions may be well-intentioned, they reduce plan sponsor autonomy with no recourse and may actually result in higher costs.

Employer options and influence

Various lobby groups are active in state legislatures, including independent pharmacists and hospital associations, as well as lobbyists for PBMs and carriers. However, the stakeholders that pay the bills—employers—often do not raise their voices. The reasons vary, but often employers do not learn of these bills until after they are enacted into law. We believe this needs to change. Two recent situations illustrate the power of the employer's voice. In March, the Kentucky House passed a questionable bill (HB 457) that severely limited several pharmacy management practices. The House vote was 88-3. Mercer’s Louisville office quickly organized an informational call attended by nearly 100 employers. Mercer helped draft an opposition letter, signed by many employers and sent it to Kentucky legislative leadership. Other employer groups, like the Kentucky Association of Manufacturers, also expressed concern. The combined clout stopped this bill in its tracks.

In April, employers throughout Oklahoma reached out directly to legislators and Governor Terry Stitt when two pharmacy-related bills (SB 737 and SB 1860) were sent to him for his signature. The huge outpouring of opposition resulted in SB 1860 (the more comprehensive bill) being withdrawn despite having passed both houses by wide margins. Approval of SB 737 occurred only after major changes were requested by employers. 

The employer’s voice matters – and it can change the outcome! The basic message – that many of these bills will increase plan costs, which will adversely affect all participants – resonates with lawmakers.

How can employers help? In most cases, many voices are stronger than one. You will find that local business groups on health, industry organizations, and other advocacy groups can be good aggregators of employer concerns. By working together with like-minded organizations, employers can multiply and magnify their influence.

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