Updated May 16, 2018 - Health

What New Jersey's drug plan do-over says about the industry

Stocked medication on shelves in a pharmacy.

Pharmacy benefit managers approve and pay for prescriptions. Photo: Brendan Smialowski/AFP via Getty Images

Last year, New Jersey awarded pharmacy benefit manager OptumRx a $6.7 billion contract to oversee prescription drug benefits for the state's 835,000 public employees, retirees and dependents. But now New Jersey has to redo the process after a court said OptumRx "improperly hedged" its contract.

The big picture: There's reason to believe this type of financial hedging exists in most contracts involving the big PBMs.

Driving the news: The New Jersey court faulted OptumRx for inserting a clause that would have guaranteed the PBM's profits by giving it the right to "modify financial contracted terms" if the state tinkered with drug benefits — for example, if the state altered how specialty medications are covered.

  • The judge said the language gave OptumRx, which is part of UnitedHealth Group, "a clear competitive advantage."
  • CVS Caremark, Express Scripts and OptumRx — the three PBMs that bid on the New Jersey contract — did not respond to questions about the court's ruling, their proposals or the state's rebid.

Between the lines: This is like saying you'll sell your house for $200,000, but that price could go up if certain events happen. No buyer would agree to that.

  • Yet "virtually all PBM-client contracts contain language allowing the PBM to change pricing terms and guarantees unilaterally," said Linda Cahn, an attorney who consults with employers on their drug contracts.

Go deeper: According to a contract template Axios obtained earlier this year, Express Scripts has the right to change "rates, administrative fees and/or rebates, solely as necessary to return (Express Scripts) to its contracted economic position" if the following events with their employer clients occur:

  • "A material change in: (i) the conditions or assumptions stated in this agreement; or (ii) the size, demographics or gender distribution of sponsor's membership compared to data provided by sponsor."
  • "Sponsor changes its formulary, benefit designs...or otherwise takes an action that has the effect of lowering the amount of rebates earned."
  • "Sponsor elects to use on-site clinics or pharmacies to dispense prescription drugs to members which materially reduces rebates and/or the number of covered drug claims submitted online."
  • "More than 5% of claims are incurred in Massachusetts, Hawaii, Alaska, or Puerto Rico."
  • "Rebate revenue is materially decreased because brand drugs move off-patent to generic status or due to a change in law."

Translation: Express Scripts could potentially overhaul its drug pricing contracts if employers recruit too many women, or if rebate dollars decrease unexpectedly.

The bottom line: These are large, complicated drug contracts. Dominant PBMs craft the deals in ways that will always be in their interests.

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