Pharmacy benefit managers are the middleman in the drug supply chain, but over the past few years, there's been a great deal of controversy with respect to their role. Kate Hardey, a partner at McGuireWoods, wants you to better understand the role of PBMs.
“When you think of a pharmacy, your insurance normally pays for your prescription,” she says on this episode of Across the Table with host Geoff Cockrell.
“A lot of times there's a pharmacy benefit manager in the middle who is negotiating the fees and the costs for that prescription between the insurer and the pharmacy.” The PBM contracts with employer health plans to negotiate prescription drug benefit plans. Additionally, they contract with the drug manufacturers to negotiate drug discounts.
Tune in to this episode of the podcast to understand what you need to know about pharmacy services and the role of PBMs if you’re looking to invest in this space. Kate explains the difference between a 503A pharmacy (think Walgreens or CVS) and a 503B pharmacy, which is a specialized type of pharmacy and which type of pharmacy could make for a better investment.
The episode also covers the issues that can arise when investing in this sector, such as a lack of compliance when it comes to FDA, HIPAA and PCI regulations, licensing (especially when crossing state borders) and managing costs.
Words of wisdom: “When you're doing diligence, understanding whether or not a pharmacy has had a history of issues with the state board is very important. And understand if anything needs to be cleaned up, or you might have issues with the pharmacy going forward.”
★ Take note and heed state-specific pharmacy rules. Each state requires a pharmacy to hold a license to practice. But if you're conducting pharmacy services in Colorado and you often ship pharmacy products to nearby Wyoming, for example, you will be required to be licensed in both states. State laws that pertain to pharmacies vary, which becomes very important in a transaction because the state’s pharmacy board is going to require at least notice and potentially require an entire new application to be submitted.
★ Dig into the complexities of all PBM contract terms. The area that requires some of the most diligence — when you're looking at a PBM business — is the various contracts and all of the key contract terms. It is critical to understand both the PBM relationships with manufacturers (their rebates, discounts, etc.) and the contract with the employer groups.
★ Keep your eye out for possible issues. You have to be on top of your game in this sector because you’re dealing with drugs and private health data, so stay compliant when it comes to not only HIPAA, but FDA regulations and the Payment Card Industry Data Security Standard.
[02:18] The role of PBMs: Pharmacy benefit managers are the middleman in the drug supply chain, but over the past few years, there's been quite a bit of controversy with respect to their role and drug price increases.
[04:48] The difference between 503A and 503B pharmacies: 503A pharmacies, which includes well-known companies such as Walgreens and CVS, is where Kate has seen more financial activity, versus newer 503B pharmacies that do compounded drug products for manufacturing.
[11:51] Do your homework on licensure before investing: Licenses are key in pharmacies, so it's very important in a transaction and also applies if you're doing or a stock deal. The state board of pharmacy could potentially require a new application to be submitted.
[14:31] Dealing with audits: If there is an issue, most pharmacies will get an opportunity to correct it. If issues are not corrected, occasionally they’ll be fined by the state board of pharmacy. It’s a fairly easy cleanup, but not something to let linger.
[16:44] Ensuring compliance: 503B pharmacies are 100% under the purview of the FDA. Kate discusses the frequency of inspections and how the FDA alerts pharmacies if they need to step up their game.
[23:21] PBM investor activity and diligence concerns: The biggest area of diligence with a PBM business is the various contracts and key contract terms.
[28:29] Be on the lookout for retail pharmacy spread and kickbacks: Ask the PBM for data on how payments are working if an employer or an insurer is being charged more for processing a drug, because then the pharmacy actually gets paid. So for that, you would want to ask for specific data from the PBM and how the payments are working.