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CMS to Crack Down on "Lock-in Pricing" Policies in U.S. Medicare
23 Jul 08
A proposal to increase transparency in the drug pricing discount structure has been met with increased scrutiny from the Centers for Medicare and Medicaid Services (CMS).
Global Insight Perspective | | Significance | The proposal seeks to examine the "lock-in pricing" practice among insurers and pharmacy benefit managers (PBMs). Among the concerns is the potential for an increased spread of generics as opposed to branded drugs. | Implications | The CMS's attempt here to ensure discounts are being passed on to beneficiaries, to avoid them slipping into the "doughnut hole". | Outlook | The proposal, which is expected to be taken up later this year, will be opposed by PBMs and insurers. If implemented, the legislation may provide a rare insight into the pricing discount structures between PBMs and health insurers. |
The U.S. Centers for Medicare and Medicaid Services (CMS) is seeking to curb practices known as "lock-in prices" in the federal insurance programme Medicare Part D through a new proposal. The Wall Street Journal notes that the CMS is looking to force pharmacy benefit managers (PBMs) and health insurers to disclose the price discounts that may not be passed on to beneficiaries. "Lock-in price" refers to the payments PBMs receive from health insurers. The price may not take into account drug costs for the PBM from pharmacies. The source notes that the proposal does not outlaw the practice used by many PBMs—including CVS Caremark, Express Scripts, and UnitedHealth—but wants the discounts to be reflected in beneficiaries' treatment costs. Presently, the proposal involves listing the discounts as "administrative costs" that the health insurance plan will pay the PBM. The main rationale behind the move is reportedly the potential costs faced by the beneficiary, which will potentially bring them closer to the "doughnut hole"—the level from which beneficiaries will be required to shoulder the full cost of the medication or treatment. The CMS has concluded that lock-in pricing is used in 19% of Medicare drug plans, affecting 25.8 million beneficiaries. The report also states that the CMS has attempted to curb the practice but has been met with strong resistance from PBMs and health insurance firms. Furthermore, the CMS is still putting the final touches to the legislation, which, if approved, is expected to be implemented by 2010. Outlook and Implications The main premise of the legislation is to provide a wider transparency to the pricing structure, which is currently shrouded in secrecy between the PBMs and health insurers. The industry has put forth its arguments, that the current system should not be changed in order to preserve flexibility and choice, according to the Wall Street Journal. However, the CMS's attempts will shed light on the potential discount levels gained by the PBM. It is not clear, though, how administrative costs can define the profitability of the practice with reference to the PBM. With greater awareness of the practice, it is possible that other drug plans that do not currently incorporate this will gain some positive mileage among beneficiaries. The practice itself is not expected to be completely eliminated, but if the decree is approved, pricing discounts between pharmacies and PBMs could face pressure. Low-cost generic drugs packaged by supermarket chains such as Wal-Mart will be encouraged by the decision involving lock-in prices. This is because beneficiaries will be prompted to buy generic drugs for chronic conditions to avoid the doughnut hole. Besides the lock-in price practice, some drug plans use "pass-through pricing", reflecting the discounts received by PBMs from pharmacies. This practice is expected to gain momentum, even as beneficiaries increase pressure for further disclosure from PBMs on the pricing structure as a whole.
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