NMHA Issue Update: November 30, 2004

Recent Legal Settlement Creates Framework For How PBMs May Operate In the Future

Medco, a pharmacy benefit management (PBM) company, and 20 state attorneys general reached a settlement in April 2004 in a case involving Medco’s drug interchange practices. The attorneys general alleged that Medco encouraged prescribers to switch patients to different drugs, but failed to pass on the resulting savings to patients or drug plans. The PBM also failed to inform patients and prescribers that the drug interchanges would increase rebate payments that Medco received from manufacturers. The settlement gives extensive injunctive relief, as well as monetary damages, to the states involved in the lawsuit.

The settlement is important because there is currently no regulatory framework for governing PBM practices. PBMs are often employed by states to manage their pharmacy benefit programs. The injunction imposes limits on Medco’s practices involving drug switches, as well as requires Medco to disclose financial information to patients and prescribers. With the Medicare prescription drug benefit set to begin in 2006, and more PBMs beginning to operate as a result of the program, the injunction in the Medco case is likely to become the “gold standard” for how PBMs will operate in the future.

The injunction prohibits Medco from soliciting drug switches when:

• The net cost of the proposed drug exceeds the cost of the prescribed drug;
• The prescribed drug has a generic equivalent and the proposed drug does not;
• The switch is made to avoid competition from generic drugs; or
• A switch is made more often than once in two years within a therapeutic class of drugs for any patient.

The injunction also places many requirements on Medco’s practices, including:

• Disclosing to prescribers and patients in a “clear and conspicuous” manner the cost savings and/or difference in copays when a drug switch is proposed.
• Disclosing the existence of rebate relationship in all communications to clients, physicians, and patients; if the savings are not passed on to the client, Medco must disclose that it receives such compensation.
• Obtaining express verifiable authorization from a prescriber for each potential drug switch.
• Not representing that the provider initiated the drug interchange solicitation if he/she did not.
• Disclosing to prescribers the material differences in side effects between prescribed drugs and proposed drugs.
• Informing patients that they may decline a switch and receive the initially-prescribed drug.
• Reimbursing patients for all out of pocket costs for drug interchange-related health care costs incurred.
• Adopting an ethical code of conduct for its pharmacists and professional standards for the company.

Finally, the settlement requires Medco to pay $20.2 million to the states participating in the lawsuit. This money must be used to benefit low income, disabled, or elderly prescription drug consumers, to undertake consumer education efforts regarding medication costs, or to fund other programs targeted to benefit those affected by the conduct that the settlement covers. Additionally, Medco must pay $6.6 million in litigation costs and attorneys fees.

For more in-depth information about PBMs, NMHA is releasing a PBM Toolkit, which will be available soon. For further information about the Medco case, please contact Sarabeth Zemel, Policy Analyst, at szemel@nmha.org or 703-838-7532.

National Mental Health Association
2000 N. Beauregard Street, 6th Floor
Alexandria, VA 22311
Phone 703/684-7722
Fax 703/684-5968
Mental Health Resource Center 800/969-NMHA
TTY Line 800/433-5959