PBMs: Rebates are nearly dead; can the PBMs keep their generic margins?

Vanessa Furhman continues her swath through the PBM industry in the WSJ. The article is called Managers of Drug Benefits Agree To More Transparency in Pricing. Apparently bullied into this by fear of losing some big clients, both Medco and Caremark are going to disclose their prescription pricing.

Responding to pressure from some of their biggest corporate clients, two big pharmacy benefit managers agreed to provide more information to employers about the way they price and administer employee drug purchases. The two PBMs, Medco Health Solutions Inc. and Caremark Rx Inc., each handles the drug benefits for tens of millions of Americans. They have agreed to participate with eight smaller PBMs in a purchasing model that would require them to pass on to clients their own costs for acquiring retail and mail-order prescriptions. They also have agreed to pass along the price rebates, rarely disclosed in the past, that they receive from drug manufacturers.

Well actually Medco was making its total rebates clear and has begun passing back to its clients a significant chunk of its rebates last year, but its profits increased anyway because it made it up on the spread on mail-order generics. So will they start disclosing what they pay for those versus what they charge? Unclear:

Medco and Caremark both started the coalition’s process to become certified when it launched last year, but dropped out along the way. A big sticking point for them, according to some people working with the coalition, was the demand for full transparency and acquisition-cost pricing on generics ordered through the mail. PBMs enjoy some of their steepest markups and profits on mail-order generic drugs.

It’s not evident that they will be doing this, although smarter employers can find out market generic prices, see what they’re paying and figure out the difference. Something not many have bothered to do–to their great cost.

But if they succeed in beating the PBMs up on rebates and on generic spreads, the enormous profitability of the PBMs (Yup, it is enormous—around 50%  net margins if you don’t look at the cost of the drugs which are mostly a pass thru) can’t continue. So does Wall Street believe the end is nigh?

Judging by the change in their stock price, not exactly.




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2 replies »

  1. I was taking Lipitor 40 mg. and was saving $100/quarter by purchasing them through MedCenter Canada/National Drugs vs. going to the pharmacist.
    My doctor changed my prescription from Lipitor 40 mg. to Crestor 10 mg. When I called to ask her to change my prescription to Zocor (now generic) – she said no problem, but the dosage is different, so I’ll need 20 mg.
    She faxed my prescription for Zocor 20 mg. to my pharmacist, and I paid $110.79 for a 30-day supply ($3.70/pill).
    I called MedCenter Canada/National Drugs at 1-800-442-9585. They are providing 112 pills for $160 (including shipping) ($1.43/pill) of Zocor (Simvastatin) 20 mg. All my doctor has to do is fax the order # to 1-800-392-1789.
    That’s a savings of $2.27/pill or $828.55/year. Now, multiply that by all of the people in America who are buying statins through American pharmacies/drug companies.

  2. As I understand it, they did not agree to pass on their actual acquisition costs for generics through mail-service. Instead, they will use wholesale acquisition cost (WAC), which is somewhat similar to dealer’s invoice for a car. WAC is ~80% of the average wholesale price (AWP, another fictitious price), while the true acquistion cost for generics averages <10% of the AWP. What constitutes a rebate may not represent all drug company payments to the PBM. They often reclassify these payments to avoid having to pass them on.
    They also have the opportunity to protect profit margins by charging higher administrative fees and other services (e.g., clinical).