There’s an interesting article in AISHealth.com’s Business News of the Week called Why the Plans of a Major Drug Purchasing Coalition Did Not Work. The quick story is that a group of employers got together in late 2004 and made an attempt to negotiate pricing direct with the pharma companies.  The pharma companies, who are quite happy with the way they work with the PBMs, and who also realized that this coalition was too small (only 53 companies and 5 million lives) to matter, and that they could easily face them down. And that’s what happened.

But instead the companies involved were rounded up by their benefit consultant (Hewitt) and demanded a more transparent approach from their PBMs. So they have got that with some smaller PBMs (Medimpact, Aetna & Walgreens) offering to supply "transparent" services.  That is, tell them what rebates they are getting and therefore the true price they are paying for drugs. Now this is very very early days. No one has actually switched over to using these plans yet and won’t until next year. Plus more importantly given the buying power of the big 3 (Medco, Caremark and Express Scripts) it’s very likely that the transparent PBM will still have a price disadvantage overall. And that is before the big 3 target the transparent guys in a price war for their clients.

However, we may be seeing a bigger sea change as a Federal Appeals court yesterday upheld a Maine state law that said that PBMs must reveal to their Maine customers what rebates they get, and must have the best interests of their clients at heart when they negotiate with drug companies. (Stop and think about what that last sentence says about the PBMs’ behavior thus far!!)

Now this information does not have to be made public (and I’m sure PBMs will design contracts banning their clients from revealing that information). The PBMs of course will fight this to the Supreme Court and fight it state by state. And of course if you believe their public statements, all this fuss about them making money off rebates and price gouging their clients (not to mention bribing health plans) can’t possibly be true. No sir, No way. Here’s what Express Scripts’ CEO Barrett Toan said about these accusations in Health Affairs earlier this year.

Atlas: Let’s turn to some challenges to the PBM business model. Critics of PBMs assert that PBMs’ way of doing business is inherently at odds with the interests of their customers. Recent actions by various state governments and others seem to bear out this concern. Practices that at minimum raise eyebrows are (1) accepting rebates and administrative fees from drug manufacturers whose products PBMs give preferential status in their formularies, and then retaining unspecified portions of these sums rather than passing them along to customers; (2) paying health plans, ostensibly for data on plan members’ prescription drug usage, in return for securing the health plans’ business; and (3) leveraging the purchaser relationship to steer business away from retail pharmacies to mail-service pharmacies that the PBMs themselves own and that in fact generate large percentages of PBMs’ profits. How do you respond to these critics?Toan: Those are theories. To understand the actual PBM practices, you need to know the details. Those kinds of concerns are overblown because the actual marketplace will not allow those practices to exist.First, the rebates. Express Scripts will not accept any other form of revenue from a manufacturer except in the form of rebates, which are actually discounts from their prices plus administrative fees that are associated with those rebates. We negotiate at arm’s length through a closed bid process run on a two-year cycle. Those bids are opened, and we essentially have our rebates defined. We make those rebate offers known to our customers; that helps them shape their formularies. We pass on a majority of the rebate dollars to the plan sponsor, which can audit the actual payments made by the manufacturers. There’s a great degree of transparency in the rebating process. The idea that these are secret deals, black boxes, is a canard coming from people who oppose what we’re doing—which is making drugs more affordable and a little bit safer.On the issue of whether PBMs should pay plan sponsors for data, we have a very strict policy on that, and I would assume other PBMs have similar policies. First, the amount of money that’s paid to help a group implement its program—for instance, if it has to issue new ID cards or send around new formularies—is reimbursed at fair value. Each of our clients certifies that these are legitimate costs, so that we can be sure that we’re reimbursing for services that had to be provided. Paying data fees is not a practice we would be comfortable with unless there were a very big direct benefit. We do some research that requires an integrated database, so having de-identified medical records can be useful in performing important research. But again, any consideration that might be given for something should be strictly justified based on the actual value to the PBM.

I’ll have more to say about this when the piece Jane Sarasohn-Kahn and I have written on The Prescribing Infrastructure comes out soon, but suffice it to say that "he would say that wouldn’t ‘e". (For those of you who don’t know the quote, go read your early ’60s British scandal history) But in some senses, this battle is part of the last war.  The bigger PBMs are slowly turning to making their money via their mail order services and doing more generic substitution. And of course they now have the Medicare program to mine. Although eventually, I think that will hurt their margins….but eventually is a long time!