CMS proposal would limit industry practice that raises costs for some Medicare drug plan beneficiaries

Jul 23 2008

A CMS proposal under consideration would limit a practice used by pharmacy benefit managers known as "lock-in pricing" that can increase costs for beneficiaries enrolled in the Medicare drug benefit and bring them into the so-called "doughnut hole" coverage gap more quickly, the Wall Street Journal reports.

The doughnut hole begins when total annual drug spending by beneficiaries and their health insurers reaches $2,510. When in the doughnut hole, a beneficiary is responsible for 100% of prescription drug costs until total spending reaches $5,726 for the year.

Under lock-in pricing, PBMs charge a higher rate to insurers with whom they have contracted to administer their drug benefit than what they pay pharmacies to dispense the drugs to beneficiaries, according to the Journal. The PBMs then keep the difference.

Beneficiaries can reach the doughnut hole faster under lock-in pricing because the insurer is charged more than a drug's actual cost, increasing total annual spending more quickly. According to the Journal, the proposal would mitigate that effect by requiring insurers to break down PBM payments into two rates: the cost of the drug and an "administrative" cost. The administrative cost would be the difference between a PBM's drug price and the insurer's payment. The proposal would not ban lock-in pricing.

CMS estimates that about 19% of drug benefit plans are using lock-in pricing. The agency says the practice affects about 14% of the 25.8 million beneficiaries enrolled in the drug benefit program. According to the Journal, the price difference from using lock-in pricing is much higher for generic drugs than brand-name drugs.

The Journal reports that CMS officials have been attempting to counter the effect of lock-in pricing almost since the inception of the Medicare drug benefit. Abby Block, director of the Center for Drug and Health Plan Choice at CMS, said that the agency thought lock-in pricing was prohibited when the drug benefit was created. "We thought we had a clear policy," Block said, adding, "We learned that there are different ways of interpreting a policy statement." CMS plans to make a final rule later this summer that would go into effect in 2010.

PBMs, Insurers Defend Practice

According to the Journal, some PBMs defend lock-in pricing, saying that it is common in the private insurance market and that they use the extra money to encourage beneficiaries to use less expensive drugs. Some insurers say they will be forced to increase premiums if they are not permitted to add the extra charge to plans' total annual drug spending, the Journal reports. Steve Littlejohn, a spokesperson for the PBM Express Scripts, said the company's overall per-prescription profit margin from using lock-in pricing is a "single digit" percentage. He also said that the company's pricing on generics "is generally far better than (uninsured) cash-paying customers obtain on their own" (Rubenstein, Wall Street Journal, 7/22).