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PBMs: Even the New York Times notices rebate deals are a little odd

As the careful regular reader will note, I’ve always been hazy on what value the PBM brings to the health care party. My old IFTF colleagues Ian Morrison and Robert Mittman were at least partially responsible for making sure some of our big pharma clients didn’t toss money away by buying PBMs in 1993-4, and while Merck eventually sold Medco for the $6bn they paid for it 10 years later, Lilly and Smithkline both took it in the shorts for their purchases of PCS (now Caremark/AdvancePCS) and DPS (Now Express Scripts). The losses for Lilly and SB were $2.4 bn and $1.6 bn respectively! (At the time Merck was not a client–Lilly and SmithKline were but ignored IFTF’s advice. If only we’d got a small share of what some of the others didn’t lose on those deals!)

The business problem in pharma’s relationships with the PBMs has always been that it’s the role of PBMs to carve-out their clients’ (employers or health plans) drug costs and reduce them. Those advocates of pharma companies buying PBMs viewed it as neutralizing the PBM’s power, and enabling it to get volume slanted towards its drugs. Many including the current plaintiffs against Medco felt that Merck was using Medco to slant business towards its drugs and also accepting pay-offs in the form of rebates, some of which were shared in a very dubious manner with its plan clients.  All of this was not exactly visible to those plan’s end customers–employers, government and consumers (and those health plans not in on the deal). 

More importantly, there was no overall visibility behind how much the PBMs were getting in rebates for switching how much business between different drug products. Now that PBMs are going to have the same role in Medicare, enquiring minds have wanted to know what they are and how big a role they’ll play–and of course how hard the PBMs are trying to reduce drug costs if a big chunk of their revenue comes from their suppliers. The most enquiring of those minds is dotcom millionaire Senator Maria Cantwell from Washington state who’s amendment to make PBM’s rebates transparent in Medicare drug coverage was in the Senate bill but of course disappeared from the final version.

However, even though her amendment didn’t make it into the deal, the heat is still on the PBMs over the rebate issue. Even the New York Times has sat up and taken notice, although to be fair to Milt Fredunheim he’s been writing about this for years now. The change now is that a combination of prosecutors who’ve been investigating the PBMs for years, and very upset clients like Ford and Verizon are actively demanding to know what’s going on under the hood. The PBMs of course are squawking that if their deals became public, prices would rise because their suppliers wouldn’t give them the best deal because then everyone would want it. But of course you can go all the way back to Adam Smith to discover collusion between those with more information meaning higher prices to those with less.  Of course, the proof in the pudding is that while PBMs have been around drug prices have been the fastest growing component of health care costs.  When you start making the argument that your actions saved a bad situation from getting worse (as the PBMs must if they are to justify their earnings for the last 10 years) then you’re going to be looking hard for sympathetic ears. Mind you, since the "end of managed care", health plans need to brush up the same argument.

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Mike,
Yes, good point about the ambiguity of the phrase “account for.” Physicians are certainly the centerpiece of healthcare spending when you factor in what they prescribe, treatments they recommend and hospital admits they make.