Tag: PBMs

PBMs: Some Employers Look to Break the PBM Habit

wolverines!Earlier this week referring to the WSJ piece on PBMs (which one ex-reporter suggested to me was investigative journalism that pushed on open doors) I mentioned the University of Michigan which did the math and fired its PBMs, and is pocketing the savings. Here’s more from Jeremy Smerd at Workforce Management on how Some Employers Look to Break the PBM Habit. The somewhat indignant Chiara Bell of Clarus Consulting who’s got the PBMs in her sights, makes a noteworthy appearance in her quest to derail the monster.

But I love this quote:

The Pharmaceutical Care Management Association, the industry group representing the estimated 50 PBMs nationwide, says the marketplace has determined that PBMs save money for employers by offering a service outside the core expertise of most.

Well they would say that, wouldn’t they.  But the next quote is gambling on the dumbness of the American employer

"The reason everybody uses a PBM, though no one is required to, is because of the savings," says association president Mark Merritt. "If employers can do it and find a new way to build a better mousetrap, more power to them."

I know no one ever went broke underestimating the intelligence of the public, but that is pushing it! It reminds me of W’s line “Bring it on”. Well they might live to regret it.

PBMs: Why I will stay poor forever

I just don’t understand Wall Street. The FirstDatabank/Mckesson story clearly was bad news for pharmacies/ PBMs are essentially big pharmacies and it was bad news for them as even your punk blogger here pointed out on Friday morning. But that was known at the open of the market on Friday and the stock fell heavily on Friday. But why the heck did it fall further today?



Wasn’t that information already in the market? Apparently not—because a downgrade from an analyst based on that information meant that the stocks fell another 3–5% from Friday’s levels today?  So if you realized that the market was even dumber than the employers who use PBMs, then you too could have gone short on Friday and cleaned up this morning. (Yes of course I didn’t).

PHARMA/PBMs: How dumb is the customer? Barbara Martinez tells you the answer

Everyone knows that hospitals have a “list” price that only a very few totally powerless uninsured patients pay (and in California that hospitals are bizarrely required to report that price to the state). Then there’s an actual amount that Medicare pays them, which is a real “price”, and then there’s the amount that they actually get from insurers. All figured out by market power, and all being challenged by the transparency movement.

Now Barbara Martinez, continuing her swath through the nether reaches of the drug business in the WSJ, has figured out that AWP (avg wholesale price) which is the fictional equivalent of hospital “list” price for the pharmacy business, is actually a real number. Or rather not a real number, but a fake number with real implications. Real in that that several insurers and health plans are actually paying a discount from AWP for their drugs. So that when McKesson (the biggest wholesaler) told First Databank, the dominant price reporter, that it was putting up AWP by 5%, effectively it was increasing the amount the pharmacies got paid for the drugs they sold. (FDB apparently was supposed to be surveying all the wholesalers but was actually just taking McKesson’s pricing).

This increase happened in 2002. Now eventually some of those payers figured out that their prices had increased for no good reason, and went after the pharma manufacturers. But they weren’t getting the increase—that was sticking with the pharmacy. McKesson, the wholesaler which sells all manner of stuff to pharmacies, was happy enough to make its customers happy, and point it out to them when their wholesaling contracts came up for renewal. So the result was that after chasing down a null result at the pharma manufacturers, the payers went after First Databank, which today fessed up to doing a not-too-thorough job on finding out just what AWP actually really was, and agreed to give up publishing about it at all  in 2 years.

Here’s what Martinez writes about one “victim”

Mark Erlich, executive secretary-treasurer of the New England Regional Council of Carpenters, is one of the plaintiffs settling the case with First DataBank. He expects the settlement will save about $400,000 a year for his union’s health fund, which covers 22,000 people and spent $10 million on prescription drugs last year. Mr. Erlich calls the earlier rise in First DataBank’s published prices "a rip-off of consumers across the country." It affects the union, he says, because its contract with the company managing its pharmacy benefits specifies that the drug prices the union pays will be based on First DataBank’s AWP benchmarks.

Now I bet you a nickel that the “company managing its pharmacy benefits”  was a PBM, which meant that it also owned its own mail-order pharmacy, and so it too was benefiting from the increase in AWP. I’m also not too sure that even now Mr Erlich the chippy realizes that, but it’s the PBM he ought to be flipping mad with.

But here’s the real point. Why the hell is an end payer agreeing to pay a discount from a notional price that it allows someone else to control in the first place? And even more so, why is the middle man, that is after all being paid to allegedly lower its drug costs, allowing its client to be reamed in that way. This is the equivalent of boasting that you “got it on sale” without noting that the company was marking up the pre-sale price. Why wouldn’t you figure out what it cost at Costco (or the equivalent cheapest outlet) and see what your market power could get you in comparison. After all that’s how real market pricing works.

Well you don’t have to be too suspicious to think that the PBMs did fine out of this little arrangement—presumably because it allowed them to mark up the cost of the drugs they were selling at mail order—and that the more they can obscure both the true costs of the drugs that they allegedly get at such a discount and also their own incredible profitability, the better for them. And so long as they have clients dumb enough to not question what they’re buying and the way they’re buying it, what do you expect to happen?

But if the University of Michigan can figure it out, should the rest of corporate America be so far behind?




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!

PBMs/HEALTH PLANS: Medco makes out; Kaiser not so pretty

So Medco is making even more money by switching to generics.

Medco Health Solutions Inc. reported a 24 percent jump in second-quarter earnings and raised its profit forecast, citing speculation that a generic version of the top-selling blood thinner Plavix may soon be available. Net income rose to $170.9 million, or 56 cents a share, driven by an increased number of customers and higher sales of generic drugs.

You wonder how long their customers will take to figure out that what they’re giving back in rebates they’re taking in spreads that they charge on generics. Apparently the answer is, a long time!

Meanwhile, Kaiser had not such a good quarter, in that their revenues and membership went up but their profits went down to $272m for the quarter.

Kaiser Permanente’s hospital and health plan units saw membership and revenue climb in the second quarter, but quarterly profits plummeted by $91 million or 25 percent from a year earlier, the giant health-care system reported Friday. Officials at Oakland-based Kaiser attributed the steep net income decline to increased operating expenses, "including those associated with the continued investment in facilities expansion, seismic retrofitting and care delivery programs." George Halvorson, chairman and CEO of Kaiser’s health plan and hospital operations, said in an Aug. 4 statement that the giant system is using its earnings "to make important investments" in programs, services, facilities and technology. No further details were immediately available. Systemwide revenue for the quarter jumped from $7.7 billion last year to $8.5 billion this year, a nearly 10.4 percent increase. Enrollment jumped by nearly 44,000 members to about 8.59 million nationwide, more than 75 percent of them in California.

Of course that’s not necessarily a bad thing — it may mean relatively more money was spent on patient care — and at least they avoided the real bloodbath that seemed to be developing at the end of last year when it lost $211 million in Q4. But there remains a whopping big fine to come for the kidney transplant fiasco, so they’re not out of the woods yet.

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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HEALTH PLANS/PBMs: Don’t be evil?

I’m in Miami to talk to the Blues Association about blogging and new media. I think my theme is that You Shouldn’t Be Evil (or whatever the Googlers say…)

But it looks like Caremark is joining United and ACS in options woes. Given the shenanignas going on at those two places— and unnecessary shenanigans as it turned out—perhaps a bunch of others have been playing that game. And as McGuire himself said "If we can’t find new ways to provide value, we won’t grow". But then again around here THCB fans know that Wall Street hates healthcare services but doesn’t know it.

Of course it’s not the evil liberal blogosphere that’s found out all this dirt. It was real journalists—Charles Forelle and James Bandler. Meanwhile fellow WSJounralista, Barbara Martinez is hot on the trail of the PBMs. So perhaps the answer is not to blame the blog, but to call your PR flacks and ask why the MSM, or SCLM, hasn’t been warned off the way you wanted?

PBMs: Is the edifice crumbling–not yet!

Conundrum—It was reported in their most recent 10K that what Medco got in rebates from manufacturers went down, and that really hit profit from that sector of their business in the most recent quarter. But their overall profits went up?  How did they manage it?

Well I know (and told a private client all about it in research report) and have given you some hints before about where they make their money. But now Barbara Martinez at the WSJ has figured it out—their margins on generics are huge. And of course they control that channel by pushing their clients into mail order where they can make the generic substitutions as soon as the rebates go away. So the more generics they sell, and the more mail order they sell, the higher their margins are —even if they keep less of the rebate on the branded product.

And, as the WSJ article says, luckily for them their clients are too dumb to figure it out. (Other than Horizon Blues of New Jersey which is suing Medco)

But wait there’s a little more. Remember last year? That’s when the trade association of the big PBMs (PCMA) put out a report explaining what great savings mail order provided for purchasers of drugs. But the entire report neglected to mention that mail-order pharmacies are significantly more profitable then regular pharmacies, and it further neglected that the owners of the major mail-order houses are, of course, the big PBMs.

PBMs: More on the enigma of how PBMs make money

California Healthline had an article about PBMs role in Medicare Part D. (Hat tip Joe Paduda). Not entirely un-coincidentally, the report that I wrote with Jane Sarasohn Kahn on The Prescribing Infrastructure: Are we ready for eRx, which CHCF published last week also had a little section on PBMs.  However, for space reasons much of the research that I did for that piece didn’t make the cut. So as promised last week, here’s a longer version of what I wrote about what’s going on behind the veil of the PBM.

Pharmacy benefit management companies have become the hidden giants behind the current prescribing infrastructure. After several mergers, three dominant companies have emerged; Medco, Caremark and Express Scripts. How these companies make money has been a major source of controversy, leading to the slow emergence of the “transparent PBM movement.”  PBMs sell their services based on their ability to lower drug costs for their clients. Typically a PBM is not a risk bearing entity, but officially gets paid for providing three services to their clients, who are usually health plans or self-insured employers, and managing the pharmacy use of the “member” (the employee or insured).

The three main ways PBMs make money are via:

  • Transaction processing,including managing the eligibility files, benefit information and payment transactions connected with an Rx.
  • Network and formulary management, such as negotiating with both pharmaceutical companies and pharmacies over pricing, and ensuring that the most cost-effective drugs and most appropriate therapies are available to the member. This includes techniques such as generic substitution, pre-approval, step therapy and compliance programs–all of which tend to add administrative complexity to the current prescribing infrastructure.
  • Mail-order pharmacies, which typically supply lower-cost 90 day supplies of chronic medications to the member

Controversy in PBMland — Channel-switching, the Spread & Rebates 

There has been considerable controversy as to how effective PBMs actually are at lowering drug costs, and how they actually make their money. Some of these issues have been raised by their competitors: retail pharmacies are losing business to mail order PBMs, and are also being forced de facto to spend a lot of unpaid time on the phone with physicians’ offices sorting out formulary issues. Many protests are also being raised by their customers -– both employers and end-user consumers/enrollees.

One frequently heard complaint is that PBMs are restricting consumer choice by forcing members to receive their drugs only from their own mail order pharmacies. In fact, the creation of SureScripts by the largest pharmacy chains was in direct reaction to the initial creation of RxHub by the PBMs, which the pharmacies thought was an attempt to turbo-charge this channel switching by controlling access to online pharmacy channels. These fears were somewhat overblown, and the two networks are working in cooperation together. The truth is that this channel restriction is done with the approval of the benefit plan sponsor (usually the employer), and may actually be a rational method of controlling costs and increasing efficiency. Mail order drug operations are highly automated and require substantially fewer pharmacists per Rx than traditional retail pharmacy.

But the major accusations are that PBMs are withholding information from their clients about the “spread” and their “rebates.”

The spread is the difference between the price the PBM tells its client that it is paying for the drug (or in effect the price its client is charged) and what it actually is paying the pharmacy. Critics accuse PBMs of paying much lower actual prices to pharmacies than they reveal to their clients, and also of giving clients only a small fraction of the extra profit they make when they dispense a drug via mail order. For more on this see Robert Garis, et al Shining The Light On Non-Transparent PBM Cash Flows in America’s Pharmacist, November 2004

The rebate is a payment from a pharmaceutical company to a PBM for driving more volume to its branded product by putting it higher on formulary. There are two separate controversies about the rebates.

    • First, while the revenue from the rebates are officially passed back to the end client, the accounting behind that process is extremely opaque and has been very difficult for customers to audit. PBMs have been commonly accused of either short-changing their clients, or colluding with health plans to keep rebates back from their customers. For instance, Medco paid Oxford Health Plans $87m allegedly for data, but this was widely presumed to be connected to hiding the rebates from its customers, including the government. (As reported in Barbara Martinez U.S. Maintains Medco Offered Insurer a Kickback Wall Street Journal December 3, 2004) –in effect keeping drug prices higher than they need to be. Michael J. Rudolph, Pharm.D., of the University of Southern California School of Pharmacy, noted that one of the three largest PBMs (Medco) admitted in its annual report that of about $3 billion in rebates garnered in 2004, it passed only $1.7 billion to health plan providers. "This is the story that is not being told, and I venture to say most of the plan sponsors do not understand this," he said’. (source is Frank Celia Chains ponder responses to mandatory mail order Drug Topics Apr 18, 2005)

    • The second controversy is that the rebate agreements have been “bribes” that have resulted in the PBMs creating formulary incentives, or campaigns that in fact favor branded products over cheaper generic equivalents. For example, the Detroit Free Press reported that the University Michigan concluded that PBMs working with the university often steered customers towards more expensive brand name drugs and accepted payments from drug companies to promote their products. As a result, the University has moved to a single PBM and is tightly monitoring drug spending. The school has saved $8.6 million as a result. I found this info in Katie Merx U-M’s changes cut drug expense: Pharmacy benefit managers who drove up costs are replaced Detroit Free Press May 18, 2005 (Article is no longer online, although I have a copy if anyone is really interested)

When Sen. Maria Cantwell (D-Washington) suggested that, in order to participate in Medicare Part D, PBMs should be forced to reveal information about these contracting arrangements, their opposition was very vocal, and it was supported by a GAO report. While the PBMs said that this disclosure would prevent their ability to contract on behalf of their clients, cynics drew a different conclusion.

Some studies are now starting to support some of these accusations, and it may be that the tide is slowly turning against PBMs. One survey showed that over 47% of their customers thought that PBMs did not get them the best drug costs Hewitt Associates “Health Care Expectations: Future Strategy and Direction 2005” Executive Summary of Hewitt Teleconference November 17, 2004) but several interviewees we spoke to in the course of this report suggested that PBMs’ customers had in general been slow to try to do anything about these practices. There is though an ongoing legal suit in Illinois (Melissa David "Loyalty Strained at Caremark" The 2/1/2005), and the slow emergence of the “transparent” PBM movement, such as the breakaway group of employers lead by Hewitt Associates, (Melissa David "Medco and Its Peers Brace for a Flank Attack" The 8/16/2004).

Overall the trend towards transparency will will probably push PBMs away from looking to rebates and other games with pharma clients. Instead they will try to drive more revenue by switching fulfillment to their mail order businesses, and by more aggressively moving to generic substitution. But it’s still a business that requires more aggressive customers overseeing what’s going on behind the curtain.

PBMs: Is PCMA learning AHIP’s tricks?

I’m so fond of analyzing "research" by AHIP that I’ve missed some from PCMA, the trade group of the PBMs. But if you go to their site you’ll learn that you, the consumer, are about to save $1.3 trillion over the next ten years because of our brave PBMs.

Well at least they haven’t taken to AHIPs trick of claiming savings for their consumers when their costs were going through the roof.  I mean, who can dispute that the presence of PBMs is saving their consumers money? Well some people might but they can’t tell us what will happen in the future can they!  After all, who knows what will happen in the future? No one! So what they say can’t be challenged!

You may guess that I’ll have a little more about this coming up. For now, hunt about in the section on PBMs in the CHCF report that came out yesterday, before I introduce you to some folks who’ve been overturning the rocks in the PBMs’ backyard.


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