I’m listening to the webcast of the KFF Forum on Medicare, and in the middle Karen Ignagni comes out with this gem.
But Karen Ignagni, president and CEO of America’s Health Insurance Plans, countered that so far, health insurers are beating Uncle Sam at the negotiating table. "I’m hearing shock from (state) Medicaid directors that we’re getting better prices than they are," she told UPI. "I don’t know of any other government program where the real costs are less than the estimates," she said, arguing that the plans are offering "affordable products" with low premiums and low deductibles.
Ignagni is either lying here (or massively overstating the truth from a few anecdotes), or going to find a few men in sharp suits from the rich part of K street funded by big Pharma coming down to see her carrying baseball bats.
You see, Medicaid plans get from pharma manufacturers what’s known as “best price”. In other words if they give a better price to another customer, they also have to give that price to Medicaid. Medicaid is still of course buying its drugs for its non-Medicare dual eligible population. The drug companies know this, so I doubt that what she’s saying is true. But if it is true that Ignagni’s health plan members are getting a better price than the states are, then the states can go back to the pharma manufacturers to get a better rebate — oh, and also prosecute Pharma companies for fraud over not giving them best price, as has happened many times.
So the numbers on national health expenditure are out, and health spending plummeted by 50% in 2004!! Oops, what I meant to say was that health spending only went up by 7.9% — barely enough to trouble the scorers (as they say in cricket). But wait — you all think that health spending went down in the 1990s and up by 15% in the early 2000s. That’s not true. That’s what happened to private sector insurance premiums. The overall news (as can be seen in the NY Times chart) is that spending growth in the whole health care sector never went up much over 9% even in the worst years of 2001–2 but it hasn’t slowed down to the mid 1990s when it came down to 5%, which was near the same growth as the rest of the (nominal) economy.
Of course where there has been slowing in costs in the last year has been in pharmaceuticals. Some of you might think that’s because lots of drugs went off patent and relieved consumers switched to generics, but you’d apparently be wrong.
“Mark Merritt, president of the Pharmaceutical Care Management Association, said the new data vindicated the techniques used by members of his organization to manage drug spending”
In other words, it’s another great triumph of the PBMs. Funny, I don’t remember Mr Merritt being quoted in this type of article in the late 1990s when drug costs were going up much faster than the rest of health care spending. Were there no PBMs back then? Oh well, he might as well claim credit as apparently the rest of the health care system is now out to undermine his brave members in their feverish attempts to lower drug costs.
But, Mr. Merritt said, at the federal and state levels, "lobbyists for brand-name drug makers, chain drugstores, trial lawyers and others are working to undermine many of the tools we have used to reduce the rate of growth in drug spending." For example, he said, brand-name drug companies have resisted state laws that encourage the substitution of generic drugs.
It takes a slightly cooler head to respond to what’s really going on. Paul Ginsburg from HSC noted that:
"The rate of growth in health spending slowed in 2004, but it’s still substantially higher than trends in earnings, which are the key to being able to afford health care," Mr. Ginsburg said. "Health insurance is becoming less affordable to more people." As usual, health spending grew faster than the economy or consumer prices. The Consumer Price Index, a widely used measure of inflation, increased 3.3 percent in 2004.
For those of you keeping score at home the count is now $1.9 trillion spent on health care in the US — an average of $6,280 a person, and 16 percent of GDP. Another area in which America proudly leads the world!
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!
Friday’s news that Caremark was settling with the Feds over a whistle-blower over rebates at AdvancePCS gave me some pause for thought. For a start, the number is $135m, and for a relatively low margin business like a PBM, that’s not nothing — especially as this was just for Federal employees and there are a hell of a lot more state employees than Federal ones (not to mention private sector employees) waiting in the wings with their lawsuits. AdvancePCS (which Caremark bought after the bad deeds were already done) was taking rebates — or what the rest of us might call bribes — from pharmaceutical companies to move volume from one branded product to another, and then hiding those rebates as administrative charges rather than passing them on to their clients. When the client is the Federal government, that effectively becomes fraudulent in a way that a smart whistle-blower (or in this case three of them) can can file a Qui Tam suit about it and become millionaires. But many similar suits are pending and many private clients of the big PBMs may start wondering how much of the rebates that the PBMs got were they passing along. And the answer is not much.
It gets worse, in that a recent study by the University of Michigan found that their PBM was not only taking rebates to move market share from one branded product to another, but was working with big pharma to move share to branded products from generics! In other words although they were supposed to be acting as the University’s agent to reduce its drug costs, the PBM was taking money from pharma and the result was that their client ended up paying more.
I’ve been working on a piece that highlights some more of these cases and which has some numbers (all publicly available) to back them up. I’ll let that do most of the talking when it’s out in a few months. However, many of the games that the PBMs have been playing to make money are being found out. Of course they still have the advantage of being able to buy drugs in great bulk and they still run highly efficient and profitable mail-order facilities, to which their clients are captive (even if their clients don’t understand quite why their that profitable). Meanwhile the transparent PBM movement is in its infancy, so I’m not exactly sure that their gravy train is running off the tracks. But I think this settlement marks a big change in how PBMs have to behave, especially as come next year they’ll be working for the government a whole lot more. Watch this space.
On a day when Caremark’s stock continues up into the stratosphere, and the earnings machines that are PBMs seem unstoppable even before they get their hands on all that lovely government money next year, a report came out yesterday about mail order pharmacy. The full report from the Lewin Group is here (PDF) and a exec sum press release is here.
The report says what is fairly obvious. Mail order drug distribution is cheaper, probably safer (in terms of error reduction) and probably doesn’t really impact negatively on the patients outcome or experience — despite a lot of guff from pharmacists about the value their in-person counseling brings to patients. And Lewin, which has the reputation of being the arbiter of all public policy budget analysis, while being available to paying clients (a kind of private sector CBO), says that mail order will be 23% of Medicare drugs and that this will save the government money, as we sit around watching baseball and eating apple pie with our mothers.
But there’s a somewhat odd thing about this press release. While it’s clear that the PBMs’ trade association paid for the study, and that those paying the tab for drug costs, who you might think would include the PBMs, would be better off using mail order, it isn’t exactly explicit about the relationship between PBMs and mail order pharmacies. In fact it doesn’t even mention it once in all 11 pages.
Of course it’s no secret that PBMs are in general not at risk for the pharmaceutical benefit they administer for their clients. So, whatever they say, it doesn’t matter to them if their clients drug costs go up — in the last five to eight years or so drug costs have exploded and so have PBMs’ profits and stock prices. It’s also no secret, despite the complete absence of its acknowledgment in this report, that the combination of greater efficiency and bulk-purchasing makes mail-order pharmacy operations much more profitable than their retail equivalents despite the lower prices they charge. So if the recommendations from learned reports like this one from consultants working for people claiming to be pharmaceutical purchasers are followed, then mail order pharmacies will be making even more money.
And who runs the biggest mail order pharmacies? Well you can work that one out on your own.
(Note. A piece I’m working on that will be publicly available in the Fall reviews PBMs’ role in much greater detail, so I’ll let THCB readers know about it when it’s out)
It’s a wacky day on Wall Street. Since Aetna’s quarterly announcement that it made a decent profit hitting expectations, the entire sector has gone a little doolally. And not all at once but over the course of the day. Look at this chart below and you’ll see that all the big health plans are up following Aetna’s lead.
And if that wasn’t crazy enough, the PBMs are doing even better. Express Scripts came in with lower revenue than expected but beat forecasts on profits. That took it through the roof today, and its now up 10% in the last week! Caremark and Medco are following. Pity I didn’t buy them all back in 2001.
One day I’ll figure this stock market thing out. But then again last night I went to see Enron: The Smartest Guys in the Room, and I don’t necessarily think that Wall Street gets it right all the time!
We haven’t heard much about the plans that will end up being the Medicare Part D quasi-PBMs. These are known in CMS-speak as the Participating Prescription Drug Plans [PDP], and they’re going to be selling plans/enrolling seniors and then administering their benefits similarly to the way that PBMs do it for the private sector now. The first enrollment date is November 15th. I looked diligently in this CMS document advising the plans but I couldn’t tell when the applications to qualify had to be in by, but suffice it to say that they are well under way and CMS will presumably soon be announcing which plan is up in which area when.
On the other hand if (as we can assume they will) the current PBMs get into this game, they may have to think twice about continuing some of their business practices. Caremark, for example, is facing even more whistleblower suits about reselling returned stock. Supposing that the Federal government is now the end customer, I suspect some clean up needs to go on across the PBM industry which has sailed very close to the legal wind in recent years and has several state AG suits in process to show for it.
UPDATE: Promoted from the comments, (thanks Matt!) Forbes ran an article last month that I missed on how and why the scams will increase as Medicare Part D takes shape. It’s really worth reading the whole thing. As my old boss Ian Morisson use to say, a claim is an agreement made between a doctor and a patient to defraud an insurer!
Writing in The Street Melissa David says that a 6 year-long investigation of Caremark receiving overpayments for Texas Medicaid is about to result in indictments. Caremark stock reacted poorly to the rumors.
Of course indictments and charges are nothing new in the PBM industry, and will only become more common when Medicare Part D is introduced next year. Why? Well the whole industry runs on secrets, and no-one really understands what’s going on, despite the attempt to develop "transparent PBMs".
From the "why does this keep happening?" file, it looks like the PBM sector is continuing to remain very profitable. Today it’s the turn of Express Scripts to announce that its earnings were up 13 percent. It also revised up expectations for next year. The stock rallied about 7%.
THCB continues to be baffled at how the PBMs and other health plans are getting away with this. After all this is a group that has had no success in saving its clients’ money on drugs in the last 10 years, and a recent survey showed that fully one-quarter of employers believe that PBMs are responsible for increasing their drug costs. But with the Medicare drug benefit giving the PBMs increased visibility and access to a whole new market of customers, it would be a brave short seller to look for the top to the stock here.
I’m not a great believer in the effectiveness of PBMs to hold down drug prices. My evidence is that since PBMs have become important drug prices and the share of health spent on them have gone through the roof. Of course, no one can prove that they wouldn’t have gone higher without PBMs in the picture. But in the middle of this rather fun hatchet job on Caremark from Melissa David at The Street.com there’s this great stat she’s dug up:
The companies claim to save their clients large sums of money by using their bulk purchasing power to negotiate deep discounts from drug manufacturers. But a growing crowd of industry critics, pointing to the rocketing cost of prescription drugs, have voiced their doubts. They believe the PBMs are unfairly keeping much of the savings for themselves. Indeed, a recent survey by Hewitt Associates showed that only 53% of employers believe that PBMs lower prescription drug costs — and that nearly one-quarter believe the PBMs raise the costs instead.
So 25% of their customers think that PBMs do the exact opposite of what they say they do. And don’t forget that next year the taxpayer (i.e. us) becomes their biggest customer.
Meanwhile the NY Times reports on a new initiative where 30 big employers who use Medco have bullied the PBM into letting them monitor the inner workings of its deals with its suppliers. Presumably the members of the "RxCollaborative" are not as happy as they might be about how they’ve been treated so far.