HEALTH PLANS/PBMs: Employers are dumb and therefore get punked

I couldn’t write about this yesterday because I spent the day hanging out in airports, but plenty of people emailed me about Barbara Martinez of the WSJ and her continued journey into the seemy side of employer benefits. As I’ve mentioned before Martinez is the best investigative journalist working in health care, and she consistently shines her large flashlight on some of the murkier goings-on in the health plan and PBM world. Yesterday she had two articles (one of the front page). The first looked at the scummy practice of consultants providing advice about which health plan to use. And just like in the Marsh & Mclennan scandal in New York, yet again the consultant/broker allegedly working for the employer is instead in the pay of the insurer. The only difference here is that the insurer was willingly colluding with the consultant rather than in the M&M case apparently extorted by them, but that’s a fine, fine line. And of course, true to many of its recent business practices the main insurer she finds involved is UnitedHealth Group—while most of the consultants involved are small regional outlets. Pity this poor Ohio school district:

Payments to a consultant are at issue in an Ohio case involving the South-Western City School District, which encompasses suburbs southwest of Columbus in the central part of the state. In 1996 the district hired Joseph James & Associates of Dublin, Ohio, to help it choose a health insurer. The district had fired its previous consultant after learning he had financial ties to health insurers. Superintendent Kirk Hamilton says the district made clear that it expected Joseph James not to take money from district health-care vendors. “We wanted to make sure the people representing us were solely working in our best interest,” he says.

Each time the health-insurance contract came up for bidding in subsequent years, Joseph James managed the process. Each time, UnitedHealth won the business. Over 10 years, the district paid the consulting firm about $380,000 for its services. Earlier this year, Dr. Hamilton discovered that Joseph James also was getting paid by UnitedHealth. The district quickly sued both the consultant and the insurer in Franklin County Common Pleas Court. Documents filed in the suit showed that Joseph James was receiving 1% of premium dollars paid by the district. The consultant received more than $645,000 from UnitedHealth from 1999 to 2004 for bringing in the district’s business, according to the documents. Joseph James, in court filings, says it became eligible for the bonus as part of a “recognition program” by UnitedHealth rewarding its “overall contributions.”

But she doesn’t stop there. In particular in the PBM world, she also notes that several of the big benefits consultants are also working both sides of the street—helping the PBM with pricing while auditing them for their clients. Mercer, Hewitt et al brush off the allegations by saying that the work is from different business units and there’s no conflict of interest. That’s not a bad argument. Until of course little incidents like this crop up:

Joseph Sawicki Jr., the comptroller of Suffolk County on Long Island, N.Y., discovered the ties between consultants and PBMs after the county sought a routine audit of its PBM, Express Scripts Inc., in 2003. The county hired Mercer for the job. Mr. Sawicki says officials didn’t realize at first that Mercer also serves as Express Scripts’s employee-benefits consultant and had other consulting arrangements with the PBM. Mercer says it did disclose the ties.

Mr. Sawicki wasn’t happy with the audit’s results, which initially found that Express Scripts had overbilled the county by more than $1.1 million but later suggested that the overbilling amounted to only $14,000. Mercer charged the county $93,000. Mr. Sawicki withheld half the payment and asked Mercer to return the half it already had received, saying he doesn’t pay for “shoddy” work. A spokeswoman for Mercer, Stephanie Poe, says Mercer made clear its initial estimate was likely to be reduced and it did a good job on the audit although it wasn’t allowed to complete its work. The dispute over the $93,000 is unresolved.

The county didn’t pursue any refunds from Express Scripts in connection with the billing Mercer had audited. It then hired another auditor to review Express Scripts’s billing in subsequent years. That review led to a settlement in which Express Scripts paid the county $865,000. A spokesman for Express Scripts said the company has saved “millions of dollars” for Suffolk County. He declined to comment on the settlement.

The second Martinez article asks even more about an area she’s been following as long as THCB has, the role of PBMs in “adding value” to their clients. Or Not. She highlights the work of a consultant called Pharmaceutical Strategies Group which actually gets openly paid by the PBM on a per member basis for handling its clients contracts. 

Mr. Watson says clients are getting their money’s worth. “If you paid us $500,000 and we saved you $50 million, how do you feel about the $500,000?” he asks. In an emailed statement, the carpenters’ union concurred with Mr. Watson’s analysis, saying it expects to save more than $30 million under its new prescription-drug program and is “extremely satisfied” with it.One blue-chip client of Pharmaceutical Strategies is Exelon Corp., an electric utility in Chicago with 17,000 employees. A 2003 internal document from a consulting firm later purchased by Pharmaceutical Strategies says the firm received revenue of $629,012 from a PBM, Caremark Rx Inc., of Nashville, Tenn., in connection with the Exelon business. The document doesn’t specify a time period. Exelon’s head of health benefits, Carole Schecter, says the company ended the arrangement last year and now pays Pharmaceutical Strategies directly. The company declined to discuss its reason for the change, and Caremark declined to comment.

Last year I tried to get a very savvy major Fortune 100 CEO to tell me what he thought of PBMs, and he told me that they were run by smart people and must be doing something right but couldn’t say quite what. Given that he’s one of the better ones, I’m quite prepared to believe that the carpenters et al are a couple of 2 by 4s short of a full load on this issue. Of course the really smart employers (and there aren’t many of them) have kicked out the PBMs altogether. University of Michigan is the poster child.

But as long as most employers don’t look too closely at their PBMs or their health plans — and the value they bring, then we can expect Martinez to stay very busy!

Categories: Uncategorized

Tagged as: ,

5 replies »

  1. Doubtful scenario. More importantly, the problem is with the actual “consultant” in the first place. You are correct in that the largest, most sophisticated employers in the country do use PBMs. However, they are equally unsophisticated in this costly area for a number of reasons. Wal-Mart and Walgreens in fact have their own, in-house, subsidiary PBMs that provide drug purchasing and management to other payors, including employers.
    Warren Buffett best articulates my position on the “value” demonstrated by many of the consultants contracted with employers:
    Indeed, owners must earn less than their businesses earn because of “frictional” costs. And that’s
    my point: These costs are now being incurred in amounts that will cause shareholders to earn far less than
    they historically have……
    Today, in fact, the family’s frictional costs of all sorts may well amount to 20% of
    the earnings of American business. In other words, the burden of paying Helpers may cause American
    equity investors, overall, to earn only 80% or so of what they would earn if they just sat still and listened to
    no one.
    Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir
    Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can
    calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this
    loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole,
    returns decrease as motion increases.
    Employers should heed Buffett’s advice…20% is an astounding number.

  2. cmb,
    I’m not sure I understand. If one school district pays a consultant $100K and the PBM that wins the business pays the consultant another $100K for landing the business and a second school district paid the consultant $200K but that consultant received no incentive payments from the PBM and all other contract terms are essentially the same, how is the business model flawed? The consultant gets $200K either way. The PBM’s expenses under the 2nd scenario are $100K lower which should be reflected in slightly lower administrative fees or price spreads.
    There may be legitimate political reasons why a given school district might want to minimize the line item for consultant fees and pay for it through less visible PBM administrative fees or price spreads instead. If there is complete transparency, it is at least making an informed choice.
    The largest, most sophisticated employers in the country use PBM’s to administer their prescription drug benefit. Nobody including Wal-Mart and Walgreens has much leverage with the major drug companies in buying brand name drugs. The PBM’s get rebates to influence market share. The differentiation comes in how well they can buy generics, what they charge for them and how good a job they do in substituting a generic for a brand when one is available. How do you suggest that the PBM business model be changed or the way employers contract for prescription drugs?

  3. to BC – WRONG!!! Do you not think that school districts are PAYING the fees directly out of their budgets?? Do you not think that the PBM re-builds that “fee” into the contract with the employers via higher admin fees and/or larger price spreads. The lesson here is that the business model is fundamentally flawed and employers need to get smart and take control back of this procurement process.

  4. I think the most important issue here is the need for complete transparency regarding how much money the consultant is being paid by whom. If payments from PBM’s were prohibited, school districts and other customers would, presumably, have to pay much higher fees directly out of their own budgets which may not sit well with them either.
    PBM’s, for their part, have some customers who want to recapture all of the drug rebates attributable to their account and pay higher administrative fees while others let the PBM keep a chunk of the rebates and pay less in other fees.
    One way or another, the vendor has to get paid enough to sustain the business model. The key is to be transparent about it.