The Pill Game

By Rita Pyrillis

Oct. 10, 2013

For most employees, buying medication is as easy as dropping off a prescription and shelling out a small copayment. But for employers, managing a pharmacy benefit plan is anything but simple.

What employees pay for their Lipitor or Wellbutrin, whether they take a brand name or generic and which drug store they get it from is determined by a series of complex negotiations between a pharmacy benefit manager, the drug-makers and the pharmacies. It is “an extensive process of contract negotiation, cost-benefit analysis, corporate haggling, manufacturer rebates, and the artful salesmanship of pharmacy benefit managers,” one legal expert said.

These pharmacy benefit managers, or PBMs, are the middlemen between the employer and the other players in the health care system. They can save companies significant dollars by using the buying power of enrollees to bargain for lower prices from drug-makers and to contract with pharmacies. They can also help patients adhere to their medications through specialty pharmacies and disease management experts. In general, they are the employer’s guide through the increasingly complex world of prescription drugs.

Nearly every employee with health insurance in the country — 90 percent — gets drug benefits through a PBM, according to a recent study, but few employees have ever heard of them, and many HR managers have only a basic understanding of how they operate. Yet, PBMs are a multibillion-dollar industry and one of the most influential players in the pharmaceutical supply chain. How they make their money is the focus of increasing scrutiny from legislators, federal regulators, pharmacists and consumer groups. A number of states have passed or introduced laws to better regulate the industry, which is “shrouded in a fog of confusing contracts and complex payment arrangements that make it hard to determine if employers are really saving money,” according to antitrust lawyer David Balto.

“They are hiding their relationships with the drug manufacturers, and they don’t disclose their relationships with the pharmacies,” said Balto, a former policy director for the Federal Trade Commission who now serves as general counsel for the Independent Specialty Pharmacy Coalition. “The fundamental elements for a competitive market are transparency, choice and a lack of conflicts of interest. The PBM industry fails on all three dimensions. There are relatively few choices, and there isn’t transparency. It’s the one profoundly unregulated area in the health care market.”

A number of PBMs, including Caremark, Express Scripts and Medco, have been the subject of major court cases alleging fraud, secret rebates, drug switching, kickbacks and other charges, Balto said. While several of these cases resulted in damages, no PBM has admitted wrong-doing.

Tips for Negotiating
a PBM Contract

Understanding pharmacy benefit manager contracts can be a challenge. Here are some tips to help employers cut through PBM terminology and mechanics.

Define brand and generic drugs: Require the PBM to classify brand and generic drugs based on a national pharmaceutical market research service, such as First DataBank Inc., and ask for specific coding requirements.

Defining “claims”: Propose language that specifies that claims will not include duplicate, reversed or rejected claims to ensure that the PBM reimburses when money is due and will not overcharge on processing fees.

Understanding prices: Require the PBM to explain pricing methodologies for all of its covered drugs.

Conflicts of interest: Ask the PBM to disclose financial arrangements with drug manufacturers, like rebates, and with pharmacies and other interests.

Receiving rebates: Ask the PBM to identify and pass along all sources of rebates.

Audits: Establish a method to review the PBM’s performance.

Short contracts: Review or renegotiate your PBM contract every two years.

Classifying specialty drugs: Obtain a list of the PBM’s specialty drugs and request approval rights before changes are made to the list.

Mail order and specialty drugs: Many PBMs operate their own mail-order pharmacy. Ask that the price you pay for a mail-order or specialty drug is the same as what the PBM pays. If the PBM refuses, ask to see the price difference between your costs and the reimbursement received by the mail order pharmacy.  If that fails, negotiate for lower administrative fees.

Fee breakdown: Ask for an explanation of the PBM’s administrative fees. Some charge a flat fee for all services and others charge individual fees.

Copayments: Copays should not be higher than the cost charged by the pharmacy.

Plan updates: Ask your PBM to update the plan on a quarterly basis as new drugs enter the marketplace.

Source: “Contracting Negotiating Tool: Information on Contracts With Pharmacy Benefit Managers,” Pharmacists United for Truth and Transparency and Georgetown University’s Harrison Institute for Public Law, 2012

However, with the majority of employers spending 16 percent or more of their total health care budget on prescription drugs, a growing number of companies are turning to PBMs to manage those costs, according to a recent study by Buck Consultants. The number of employers using a PBM increased from 47 percent in 2009 to 61 percent in 2013, the survey showed. About 68 percent cite cost savings as the primary reason they contract with a PBM.

PBMs make money in a number of ways. The most straightforward methods are by charging health plans service fees for processing claims and selling prescription drugs through their own mail-order pharmacies. Less clear and more lucrative are their relationships with drug-makers and pharmacies.

Part of a PBM’s job is to create the list of drugs that a health plan offers to an employer, also known as a formulary. In order to promote a particular product, drug-makers trying to secure a preferred spot on that list pay PBMs a percentage of the drug’s price, which is known as a rebate. Calculating that figure is an eye-glazing process for the layman.

The FTC breaks it down like this: “[P]harmaceutical manufacturers use ‘formulary payments’ to obtain formulary status, and/or they use ‘market share payments’ to encourage PBMs to dispense their drugs. Both payments are often specified as a percentage of the drug’s wholesale price (e.g., a percentage level of 10 percent means the manufacturer will pay the PBM 10 percent of a measure of the drug’s wholesale price multiplied by the quantity dispensed).”

Whether the employer sees any of that revenue is the subject of debate.  

The other major revenue source is the mark up between what the PBM pays the pharmacy for a drug and what it charges the employer, a practice called “spread pricing.”

“Price spreading is where a PBM will pay me $5 for drug A, but the employer gets billed $80,” said Jason Wallace, president of Pharmacists United for Truth and Transparency, or PUTT, an independent watchdog group. “That and rebate retention is where they make the majority of their money.”

Employers often don’t know what kind of deal they are getting because PBM contracts are laden with confusing language and terminology, Wallace said. In an effort to cut through all that, the group and Georgetown University’s Harrison Institute for Public Law released a guide last year to help employers understand their contracts.
However, Charles Coté, spokesman for the Pharmaceutical Care Management Association, a national PBM group, argued that PBMs are upfront about how they operate and, if something is unclear, all employers have to do is ask.

“Transparency and confusion gets thrown around a lot by critics, maybe because of the success of PBMs in lowering prices and increasing competition,” he said. “PBMs will provide any information that the employer wants. What they don’t do is disclose information that their competitors want.”

Dr. Steve Miller, chief medical officer for Express Scripts Holding Co., the nation’s largest PBM, said that clients have “full visibility” and can audit Express Scripts’ performance at any time.  “Our employers know what percentage of the rebate they get back,” he said. “For them there is real clarity about what happens with those rebate dollars. Rebates create unbelievable confusion in the marketplace, but the HR professionals understand it.”

Express Scripts clients can choose a spread pricing arrangement or pay a set service fee called a “pass through” depending on what they are trying to achieve, Miller said.

“If you’re a trucking company having tough times and you want to push people into a very narrow drug list of only generics, you might want a pass-through deal,” he said. “On the flip side, if you are a tech company and you want your members to have access to any drug they want, you would want a price-spread arrangement with us incenting the patient to take the generic. We’ll do it either way and let you audit it.”

He said about 40 percent of Express Scripts’ clients opt for a pass-through deal.

Benefits consultant Paul Burns of Buck Consultants said employers are aware that dealing with PBMs can be complicated, but they also believe that they “do a better job of managing the pharmacy benefit than a large health plan could.”

“It’s the most utilized benefit, and employer groups are very aware of costs, but they aren’t as aware of their contract,” he said. “Perhaps they don’t understand all the ways PBMs are making money, but at the end of the day they feel that they are getting a better product and service.”

Industry Overview
PBMs have a come a long way since the 1970s when they were primarily claims processors that charged a single transaction fee. They dramatically improved the way employers managed their pharmacy benefits, according to Dave Marley, the former president of PUTT.

“Before PBMs, people went to the pharmacy, got their meds, kept their receipts and submitted them to HR to get reimbursed,” he said. PBMs “made everyone’s life easier.  You wouldn’t have to bother the HR department anymore.”PBM chart

But as the industry grew, it became harder for PBMs to distinguish themselves on the basis of  “one simple computer transaction,” Marley said. “If you’re a company deciding which one to go with, you want the one with the lowest fee. PBMs realized they needed to find an alternative revenue stream.” That’s where the current system of formularies and rebates comes in.

Consolidations have changed the industry. Last year, Express Scripts bought Medco Health Solutions, creating the largest PBM in the United States. Today, Express Scripts and its leading competitor, CVS/Caremark Corp., which is the product of a merger between a drugstore chain and a PBM, represent more than half of the market. The Express Scripts deal triggered antitrust complaints, but the FTC approved it despite expressing concerns that the merger could substantially reduce competition.

That deal was followed by SXC Health Solutions Corp.’s merger with Catalyst Health Solution Inc. Last month the new company, now called Catamaran Corp., announced plans to acquire Restat, a Milwaukee-based PBM.

The number of PBMs operating at any given time is hard to gauge, but experts put the number between 60 and 100. And as consolidations continue, the industry is likely to grow more influential, especially when it comes to negotiating with pharmacies, according to Myron Winkelman, a benefits consultant and pharmacist in West Bloomfield, Michigan.

Winkelman points to Walgreen Co.’ s decision in 2012 to end its relationship with Express Scripts over a contractual dispute. Walgreen’s stock plummeted and its Express Scripts customers fled to other drug chains. After the Medco merger, “Walgreens came back with their tail between their legs,” he said.

PBMs have also asserted their power in the legislative arena where states like Maine and Vermont have passed or introduced bills to regulate the industry. So far, 20 states have laws governing PBMs, and several more have introduced them, but getting the laws passed is an uphill battle, according to Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices.

“I think PBMs are as politically powerful as the drug industry,” she said. “Passage of legislation is very difficult.” In fact, Maine’s law, which was considered to be the first comprehensive PBM law in the country when it was passed in 2003, was repealed two years later. The law required PBMs to disclose financial information, which industry leaders argued would benefit their competitors and ultimately lead to higher health care costs.  

The call for greater transparency in the health care industry in general and in pharmacy benefits in particular has led to the growth of smaller, independent PBMs that charge service fees only, avoiding spread-pricing schemes.

One of them is ApproRx in Waynesville, Ohio. Kyle Fields, president and chief operating officer, said the firm was founded in 2000 by his pharmacist father after “seeing reimbursement rates dropping at the pharmacy level and patients’ bills going up at the same time. He saw that there’s a massive spread between the cost of the drug and what the employer was actually charged. We thought we can do better.”

Fields said ApproRx discloses everything to its client, such as receipts from drug manufacturers and pharmacies, something that large PBMs rarely do, he said. “With publicly traded PBMs you don’t have access to that bill, but you still have to pay it. However, that data is available to shareholders.”

He said that it’s hard to say how many independent PBMs there are, but that the industry is growing gradually. The biggest obstacle is education, he said. Few people know what a PBM is, and the larger firms have a vested interest in keeping it that way, Fields said.

But many employers are happy with the way things are, and have helped PBMs fight industry regulation, Treat said.

“The employers show up at [legislative] hearings and say, ‘We don’t need this law; we don’t need to be protected,’ ” Treat said. “The PBMs go to them and say, ‘This [law] will mess up our relationship’ to the extent that they even understand what that relationship is. If you talk to the consultants, they will tell you that most of them don’t.”

Rita Pyrillis is Workforce’s senior editor. Comment below or email Follow Pyrillis on Twitter at @RitaPyrillis.


Rita Pyrillis is a writer based in the Chicago area.

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