Some Employers Look to Break the PBM Habit

By Jeremy Smerd

Oct. 9, 2006

Earlier this year, the University of Michigan terminated its relationship with Caremark Rx after the university decided it could save more money by dumping the pharmacy benefit manager and managing its own prescription drug spending.

The university expects to save $2.5 million by handling the estimated $60 million it will spend this year on prescription drugs. Most of the savings come from eliminating fees from the university’s former pharmacy benefit manager and using the claims data of the 80,000 people it provides insurance for—data the PBMs do not share with their clients—to help school officials negotiate better drug prices.

By managing its pharmacy benefit plan, the university is considered the first employer in the country to wean itself off pharmacy benefit managers, the middlemen of the prescription drug world. Critics have argued for several years that PBMs do not deliver the kind of savings large employers could reap if they aggressively managed their own pharmaceutical spending.

Though it may seem like a function beyond the expertise of most benefits administrators, some consultants contend that cutting out the middleman is possible for anyone looking to contribute to a company’s bottom line by reducing one of the fastest-growing costs in health care spending: prescription drugs.

“Why rely on a middleman?” says Chiara Bell, president of Clarus Inc., a health benefits consultancy in West Palm Beach, Florida. Clarus is among the handful of consultancies working with companies to help cut out pharmacy benefit managers. “At the end of the day, employers can build their own in-house piece.”

The University of Michigan, for one, will see its drug costs increase 6.5 percent this year, says Keith Bruhnsen, who manages the school’s prescription drug plan. When compared with the 13.8 percent increase expected nationally, according to an annual survey published by the Segal Co., the school’s cost containment efforts seem to pay off.

The three-year transition from PBM dependency to “insourcing” Michigan’s own drug benefits required Bruhnsen to hire a data analyst, a pharmacist and other support staff. Bruhnsen mined his newfound data to learn which drugs the school’s insured population consumed most. Armed with detailed information about its drug spending habits, the pharmacist built the drug formulary and set up co-pays that would encourage the use of certain drugs. Finally, Bruhnsen, who was already on staff, was able to play the role of PBM and negotiate the prices the school was willing to pay for chain pharmacies to dispense the drugs.

“If (employers) are not managing their claims and looking at their data, they are not going to be managing their drug trend and therefore their overall costs,” Bruhnsen says. “Are employers willing to take on the challenge?”

The Pharmaceutical Care Management Association, the industry group representing the estimated 50 PBMs nationwide, says the marketplace has determined that PBMs save money for employers by offering a service outside the core expertise of most.


“The reason everybody uses a
PBM, though no one is required to,
is because of the savings. If
employers can do it and find new way to build a better mousetrap, more power to them.”
–Mark Merritt, president, Pharmaceutical Care Management Assn.


“The reason everybody uses a PBM, though no one is required to, is because of the savings,” says association president Mark Merritt. “If employers can do it and find a new way to build a better mousetrap, more power to them.”

Bruhnsen says companies with 5,000 or more employees should be managing their own pharmaceutical spending.

Smaller companies and unions can still do so, Bell says, by forming coalitions—which requires cooperation and data sharing.

Bell argues that when a company owns its claims data, it can negotiate prices with manufacturers just as easily as a small or startup PBM.

“The real power lies in who owns the data,” Bell says.

Coalitions, however, do not always succeed. In 2004, the HR Policy Association made a big splash by announcing it was going to eliminate PBMs. By the end of the year the association realized the effort was “unfeasible,” says spokeswoman Marisa Milton. Part of the problem was that while employers pooled their purchasing power, each insisted on administering its own program. As a result, each manufacturer had to deal separately with each employer.

Similarly, Health Insurance Plan of New York tried to manage its pharmacy benefit plan several years ago, but ran into static from manufacturers and chain pharmacies. Manufacturers preferred to deal with pharmacy benefit managers because PBMs, which represent millions of consumers, purchase more drugs, says Edward Kaplan, a health care consultant at the Segal Co.

For companies and coalitions looking to cut out PBMs, the market may be more accommodating now than it has been in recent years. Today, PBMs have also become mail-order pharmacies, which is beginning to change the dynamic of the industry. Mail order is a growing business that competes directly with chain pharmacies like CVS and Walgreens. Employers that eliminate PBMs and negotiate directly with chain pharmacies will likely find a willing partner, Kaplan says.

“It just depends on how aggressive you want to be,” Bruhnsen says. “For us, we went full-tilt.”

Workforce Management, September 25, 2006, p. 34Subscribe Now!

Jeremy Smerd writes for Crain’s New York Business, a sister publication of Workforce Management.

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