Let me tell you my tale of woe over Krispy Kreme, a stock with a big hole in the middle that I was shorting off and on for the past year. I closed out all positions and went on holiday to Turkey and the stock plummeted 30%. And in another from the coulda, woulda, shoulda file — I’ve been more than a little cynical about PBMs in this blog, including as recently as yesterday. I’ve also been looking at ESRX as it traded up into the mid-70s over the past week or so as a potential short sale. Well Thursday 20 state AGs beat me to it and started investigations of Express Scripts — I assume they’d used some of those state bonds they’ve been issuing to go short first. 20 states versus Medco case) being the customers in question. If you haven’t noticed that means all three big PBMs are being sued/investigated for this practice at the same time, which makes me slightly cynical when the PCMA calls its industry "transparent". The stock which was at one point down down about $10 to the low 60s ended down $6.49 at $65 and change.
The allegations are the familiar ones of getting rebates and not passing them on to customers or switching drugs on customers, with presumably the state employees (as in the
After years of saying that PBMs need to do something else to maintain their value proposition, and repeating that concept last week, I realize that I’ve got it all wrong. You see, as this press release from the newly active PCMA (the PBMs trade assoc) shows, they have saved tons of money for Rx customers already. That’s because of the huge competition in the business–funnily enough confirmed just as number 2 and 3 in the business merge–leaving 3 giants and a ton of minnows. Of course, you have to actually read deep into the press release before you discover that PBMs have saved their customers a massive percentage compared to those who have to pay retail cash prices for drugs.
In other words they are saving tons compared to those completely powerless consumers who are getting gouged by the drug companies and aren’t going to Canada. That’s not exactly a tough bar to squeeze under. How about actually reducing drug costs for their members? Impossible? HMOs (love ’em or hate ’em) actually did reduce premiums for their members for a few years in the 1990s. But the PBMs have never come close to getting real price reductions for their clients. The best they can claim is that they’ve successfully designed plans which force people into using few drugs–they’re not using the same drugs at lower prices.
Oh, and by the way the studies claim that unregulated PBMs are better for transparency in the market than presumably, just for instance, PBMs regulated into disclosing what discounts they are getting and passing on to their customers:
"In general, vigorous competition in the marketplace for PBMs is more likely to arrive at an optimal level of transparency than regulation of those terms. Just as competitive forces encourage PBMs to offer their best price and service combination to health plan sponsors to gain access to subscribers, competition should also encourage disclosure of the information health plan sponsors require to decide with which PBM to contract."
Exactly who are they trying to kid? No one knows exactly who’s getting what in share of rebates from PharmaCos to PBMs. Certainly not their employer clients or their members, and generally not their health plan clients. Yet competition among PBMs has been apparently going for at least 15 years. When is this transparency going to happen, then?
Of course when you look at
the source for the majority of this press release it’s the entirely unbiased and unpolitically motivated Justice Department, which happens to be run by this
theocratic fascist fair-minded public servant.
You may not know this (I admit I didn’t) but there’s a trade association for PBMs called the Pharmaceutical Care Management Association which yesterday was one of the first to come out and laud the Administration’s call for improving the Nation’s Health Care Information Infrastructure. That reminded me of something old and something much more recent about PBMs. I’ve written pretty widely about PBMs in THCB, with the much shorter version being that despite the fact that they have totally failed in their stated mission to keep the lid on drug prices, and for that matter haven’t really done much to advance care management (or "health improvement"), they have made a business out of being decent claims processors and by inserting themselves firmly in the financial dealings between their clients and their "partners" in the pharma world. filed Monday against Caremark:
No wonder that the biggest PBM, Medco, is starting its first ever PR campaign. There’s no question in my mind that PBMs need to find what we consultants call a new value proposition–but then I’ve been thinking that for a while. What that new value prop is and whether they can get away with doing what they’ve been doing for a while longer while they figure it out is of course up in the air.
It’s interesting that the PBMs are now loudly backing the new health IT initiative (more on that from THCB tomorrow when I hear back from my spies in DC) as the data processing part of their business was indeed launched by the last major change to Medicare. That was the ill-fated Medicare Catastrophic Act which was passed in 1988 and repealed in 1989. One thing that its passage caused was the installation of what ended up being NDC and PCS’ pharma claims and editing transaction systems. So now when you go to the drug store, your claims and co-pay information is right there for the pharmacy tech to read off to you–no, you didn’t notice that happening in the doctor’s office! So it looks like PBMs have decided that the new Medicare "Modernization" Act with its somehow associated IT initiative will do something equally good for its business in the future.
They’d better hope so. Whatever the future holds, their present continues to come under increasing attack. THCB has mentioned before the attempt by large employers to go around the PBMs in negotiating rebates, and several of the bigger PBMs have been settling with trial lawyers and their customers over the extremely opaque nature of their rebate mechanisms. I thought that the plaintiff’s attorney put it rather well in a further lawsuit
The lawsuit says that Caremark keeps discounts from drug makers and pharmacies instead of sharing them with members of the Morrell benefit plan. It says Caremark secretly negotiates rebates for drugs and keeps that money. It also says that the company provides plan members with expensive drugs, instead of cheaper alternatives, to get rebates.
A while back Medco lost the FEBHP contract to Caremark. Now TheStreet.com reports that Medco is laying off some 7% of its workforce. And its stock has started to rally somewhat on the news.
THCB readers will know that I’ve never really understood what value PBMs add in the chain. It appears that with the announcement that 50 big employers are starting their own buying group, others share that view.
Medco today settled its ongoing lawsuit with several state attorneys-general at the relatively modest cost of $30m. The stock rose slightly on the news, although there is an another ongoing Federal lawsuit, that TCHB has covered before. While this looks like a kind of business as usual story of “company gests caught with hand in taxpayer cookie jar, company pays fine, stock goes up as investors are happy fine isn’t bigger”, some of my more jaded readers have been poking into the details. Matt Quinn writes about a different Medco settlement with Massachusetts:
Maybe I’m missing something, but it appears that Medco only had to pay back part of what it stole from the state of Mass:
“Medco Health Solutions will pay Massachusetts $5.5 million to settle allegations that the company cheated the state while it managed prescription drug benefits for nearly 200,000 state employees and retirees, according to documents expected to be filed in US District Court today.”
“Over the course of the contract, Medco passed along about $9 million in rebates, but kept another $10 million, the state alleges.” So, steal $10, pay back $5.5… Not a bad deal.
And, of course, this plot to make Medco millions of dollars was dreamt up and executed by a few “rogue employees”:
“Medco officials have acknowledged that the company had isolated problems with “rogue employees” at a mail-order pharmacy in Tampa, but said those problems were quickly corrected and did not affect drug costs.”
Of course this is nothing to the “business opportunities” those PBMs and their rogue employees will be looking at when they get to run the Medicare drug program after 2006.
I suspect the lawyers, state AGs and the DOJ have jobs for life.
If you’ve been reading THCB for a while you’ll know that I’m not overall bullish on PBMs. But of course in any market if you win an account from your competitor that’s responsible for over 14% of the competitors’ earnings, your stock will go up and theirs will go down! So when Caremark won the Blue Cross Blue Shield Federal Employees’ contract away from Medco, forcing Medco to lower its 2004 outlook, Caremark stock went up 5%, while Medco’s stock is down 10%.
Caremark’s (and AdvancePCS) stock jumped today because (as expected) the FTC has approved their merger. Both these stocks are at significant all time highs (or at least Caremark is up 8-fold since it got out of the physician business in 1997-8, and AdvancePCS is 50% above its high of 2001 and nearly 40% above where it was immediately after when the merger’s announcement last September).
The market has drunk the kool-aid (and likes it!) regarding the conversion of the AdvancePCS lives to mail-order (to increase margins) and the big opportunities in the Medicare PDIMA drug coverage market. No-one seems to be paying any attention to the various court cases in this market, or the inability of PBMs to control drug costs. My suspicion is that the PBMs will find the next few years to be fairly heavy sledding as they get ready for Medicare drug coverage, and the stocks will react accordingly–it’s tough to maintain P/E ratios in the high 20s and low 30s in the health care insurance business (United’s is 20 and Wellpoint’s is 17). Even Medco, which beat profit forecasts this morning but has since sold well off its early highs, has a P-E only in the low 20s. Where the top for the sector is exactly, I don’t know, but I think it’s sometime this year.
Unless of course PBMs can really innovate in health management and reap some rewards from that, which I doubt (but they don’t) and get someone else to pay them for it.
I’ve reported before on the suits against Caremark and Medco for all kinds of alleged shenanigans in drug pricing, rebates and other activities kept away from their clients’ eyes. There’s a bumper crop of news this week about the same topics. The latest version of Government Health News reports that the attorney general of Ohio has jumped in with his own suit accusing Medco of slanting drug purchases towards its (former) corporate parent, Merck. Meanwhile 2 unions in New York State are accusing Express Scripts of keeping rebates that it didn’t tell them about. Finally another study in the Journal of the American Pharmacists Association reports that PBMs have been overcharging on the spread between wholesale and customer prices for generic drugs.
It’s been fairly common knowledge around the drug industry for many years that not only are PBMs getting rebates to influence which drugs end up on their formulary, but that much if not most of the rebate money doesn’t go all the way back to the clients, and in fact is a fairly substantial chunk of the PBMs’ bottom lines. As I’ve opined before, whether or not it’s a legitimate business practice as the PBMs claim, when Medicare becomes the client that type of behavior is not going to survive the scrutiny of any even half-hearted Congressional investigation. At that point I find it hard to see how PBMs become little more than claims processors, and I’d expect their PE ratios to fall to match. The question is whether they can increase their revenues enough by adding the volume from Medicare clients to allow their stock prices at least to tread water. I doubt it, but it’ll be an interesting subtext in the implementation of NAIM.
As the careful regular reader will note, I’ve always been hazy on what value the PBM brings to the health care party. My old IFTF colleagues Ian Morrison and Robert Mittman were at least partially responsible for making sure some of our big pharma clients didn’t toss money away by buying PBMs in 1993-4, and while Merck eventually sold Medco for the $6bn they paid for it 10 years later, Lilly and Smithkline both took it in the shorts for their purchases of PCS (now Caremark/AdvancePCS) and DPS (Now Express Scripts). The losses for Lilly and SB were $2.4 bn and $1.6 bn respectively! (At the time Merck was not a client–Lilly and SmithKline were but ignored IFTF’s advice. If only we’d got a small share of what some of the others didn’t lose on those deals!)
The business problem in pharma’s relationships with the PBMs has always been that it’s the role of PBMs to carve-out their clients’ (employers or health plans) drug costs and reduce them. Those advocates of pharma companies buying PBMs viewed it as neutralizing the PBM’s power, and enabling it to get volume slanted towards its drugs. Many including the current plaintiffs against Medco felt that Merck was using Medco to slant business towards its drugs and also accepting pay-offs in the form of rebates, some of which were shared in a very dubious manner with its plan clients. All of this was not exactly visible to those plan’s end customers–employers, government and consumers (and those health plans not in on the deal).
More importantly, there was no overall visibility behind how much the PBMs were getting in rebates for switching how much business between different drug products. Now that PBMs are going to have the same role in Medicare, enquiring minds have wanted to know what they are and how big a role they’ll play–and of course how hard the PBMs are trying to reduce drug costs if a big chunk of their revenue comes from their suppliers. The most enquiring of those minds is dotcom millionaire Senator Maria Cantwell from Washington state who’s amendment to make PBM’s rebates transparent in Medicare drug coverage was in the Senate bill but of course disappeared from the final version.
However, even though her amendment didn’t make it into the deal, the heat is still on the PBMs over the rebate issue. Even the New York Times has sat up and taken notice, although to be fair to Milt Fredunheim he’s been writing about this for years now. The change now is that a combination of prosecutors who’ve been investigating the PBMs for years, and very upset clients like Ford and Verizon are actively demanding to know what’s going on under the hood. The PBMs of course are squawking that if their deals became public, prices would rise because their suppliers wouldn’t give them the best deal because then everyone would want it. But of course you can go all the way back to Adam Smith to discover collusion between those with more information meaning higher prices to those with less. Of course, the proof in the pudding is that while PBMs have been around drug prices have been the fastest growing component of health care costs. When you start making the argument that your actions saved a bad situation from getting worse (as the PBMs must if they are to justify their earnings for the last 10 years) then you’re going to be looking hard for sympathetic ears. Mind you, since the "end of managed care", health plans need to brush up the same argument.
In a New England Journal of Medicine article called The Effect of Incentive-Based Formularies on Prescription-Drug Utilization and Spending a team from Harvard found that three-tier formularies work. Three tier formularies are what PBMs and health plans introduced in response to rising drug uilization and prices in the late 1990s. In essence the PBM puts generics, and the branded drugs for which it has negotiated the best rebates, into the cheap first and second tiers ($5 or $10 co-pays) and charges huge co-pays for the others. Amazingly enough this means that people switch. In this study:
Among the enrollees who were initially taking tier-3 statins, more enrollees in the intervention group than in the comparison group switched to tier-1 or tier-2 medications (49 percent vs. 17 percent, P<0.001) or stopped taking statins entirely (21 percent vs. 11 percent, P=0.04).
While the only press article I could find on this in the Boston Globe, plays up the fear that patients will stop taking their drugs, my guess is that some of those people would have given up anyway. The key stat is that half the people switched. Presumably switching to another statin doesn’t make much difference on health. Medpundit has some interesting things to say about the clinical impacts of this switching (and, Sydney, we agree in this case!)
This is what Ian Morrison calls "the Ross Perot effect"–you can move people around for $10. (Apparently in 1992 Ross Perot spent $10 for each vote he got). Actually it’s a little more than $10 in this case, but it shows that therapeutic substitution based on money is very powerful.
My sense is that this shows that the power of the PBM has been underused. The PBMs have been mostly the handmaiden of the pharmas. For their health plans and employer clients they have in general been unwilling to really move people away from branded drugs, unable to get too many of their clients to move to very aggressive formularies, and unable to get doctors to prescribe according to the formulary. However, this study shows that the opportunity to move people between products is very real, and with Medicare formularies on the way (in the new PBM-managed formularies) they may become even more important.