PBMs - Pharmacy Benefit Managers

By Corporate Truth Squad

Pharmacy Benefit Managers: Health Care Cost Containment or Consumer Rip-Off?
Corporate Truth Squad Alert #12 – August 13, 2004

Prescription drug prices are the fastest growing segment of runaway health care costs – increasing at double-digit rates over the last seven years, according to the Kaiser Family Foundation. Consumers, especially older Americans, are paying ever-higher prices with no end in sight. And a July 2004 study concluded that the cost of prescription drugs has risen so sharply that the average share of income (or the drug cost burden) spent by individuals on prescription drugs has increased from .8% in 1990 to 1.2% in 1998, accelerating to 1.8% in 2002. [1]

Pharmacy Benefit Managers (PBMs), greatly impact access to and the costs of prescription drugs. They are an outgrowth of the managed care industry intended to keep drug costs down and to ensure quality of care, use their buying power to negotiate rebates from drug manufacturers and discounts from retail pharmacies. But there are new and troubling questions about what PBMs do with those savings. Are the savings being passed on to consumers or used to ensure the highest quality of drugs? Or are they being used to enrich PBMs?

What’s At Stake?
The stakes are enormous. PBMs administer and manage prescription drug benefit programs for a wide range of clients – HMOs, employers, preferred provider organizations, Medicaid and other state programs, and other health plans. PBMs play a major role in the purchasing and distribution of drugs. They purchase drugs in huge volumes through a large network, negotiating rebates from the drug manufacturers and discounts from retail pharmacies, and process hundreds-of-millions of pharmaceutical claims a year. At the same time, however, they also run their own mail-order service centers.

State governments have a particular interest in the practices of PBMs as they increasingly use the bulk purchasing power of Medicaid beneficiaries, the uninsured or other groups in their state to negotiate lower drug prices. Bur since PBMs administer these programs, states may not be reaping the full savings of their market power.

And, PBMs will play a major role as administrators of the new prescription drug provisions in the 2003 Medicare Modernization and Improvement Act. A September 2003 study concluded that PBM self-dealing could cost the Medicare program and beneficiaries as much as $30 billion from 2004 to 2013. [2]

According to the Centers for Medicare and Medicaid Services, spending for prescription drugs in America totaled $162.4 billion in 2002. That’s four times higher than total spending since 1990. PBMs have enormous power in this lucrative arrangement. The New York Times reported on January 5, 2002 that there are 60 PBMs in America administering drug plans for about 200 million consumers – equaling 84% of individuals who have health insurance.

Case Study: Do PBMs Profit at Expense of Their Clients and Consumers?

Recent state investigations and several lawsuits have begun to raise the question of who benefits the most from PBMs. Do PBMs keep the savings they negotiate for their own profits rather than passing them on to consumers? Do they pad their profits by steering consumers to more costly drugs instead of the highest quality drugs at the lowest cost?

Although 60 PBMs administer drug plans nationwide, three companies (Caremark, Express Scripts, and Medco) control close to half of the business. According to financial data submitted by these three companies, they enjoyed billion dollar earnings in 2003. Caremark had revenues of $9.1 billion managing more than 114 million prescriptions. Advance PCS recently merged with Caremark, but before the merger rolled up $14 billion in annual revenues and managed 502 million prescriptions. Express Scripts had $13 billion in revenues and processed more than 410 million pharmacy claims. Medco had revenues of $34 billion and administered 532 million prescriptions.

A pilot study conducted for the Journal of the American Pharmacists Association found wide gaps between what a PBM pays a pharmacy for a drug and what it bills the end user. While the study concluded that PBMs average a $5 to $10 markup on generic and brand name drug transactions, it also found some much larger gaps, including one case in which a PBM billed an employer $215 for a generic stomach medicine, Ranitidine, but only paid the pharmacy $15 for the drug. [3]

In addition, PBMs may be using financial incentives to choose which drugs they offer. One study found that drug companies pay rebates to PBMs for placing their products on special usage lists called formularies. PBMs typically retain up to 30% of the manufacturers’ rebates, so they have an incentive to swap for drugs that pay higher rebates even if the drug costs the end user more. [4]

State Investigations Raise Questions about PBM Business Practices
The business practices of all three major PBMs are being investigated by a number of states around the country. On July 28, 2004, the St. Louis Post-Dispatch reported that twenty states are investigating Express Scripts, one of the nation’s largest PBMs. The article also indicated that 19 other states are seeking documents related to a wide range of its business practices. Since then, New York has also filed suit against them, alleging the company breached its contract with the state and broke other civil laws. The New York state litigation is centered on the practice of switching patients from one drug to another in order to boost its own profits. In April, Medco, another large PBM, agreed to a $29 million settlement with 20 states, including New York, from litigation alleging the same abuses. According to an August 5, 2004 article in the Kaiser Daily Health Policy Report, “Caremark Rx announced last month that it is being investigated by attorneys general from 19 states . . . .” On August 12, the Wall Street Journal reported that an additional four states had requested information about how Caremark Rx (which subsumed Advance PCS on March 24, 2004) is meeting requirements of their consumer protection laws.

State Attorneys General are stepping in to investigate PBM abuses even though PBMs are not comprehensively regulated by state or federal agencies. Unlike pharmacies, no states require licensing for PBMs – except when they dispense medication directly through mail-order activities. Also, states don’t regulate PBMs through their insurance regulations as they do the managed care industry.

As questions have arisen regarding possible conflict of interests in the dual roles PBMs play, the National Legislative Association (NLA) on Prescription Drug Prices – currently comprised of 10 states – has decided to work towards the formation of an independent non-partisan Pharmacy Benefit Administer that will “facilitate aggregating the purchasing power of states, businesses, and individuals.” [5]

Consumer Advocates Join the Fight to Reduce Rx Drug Prices
The Prescription Access Litigation (PAL) Project has joined forces with the American Federation of State, County and Municipal Employees (AFSCME) to sue the four largest PBMs in the nation, charging they are responsible for higher prescription drug costs. The four PBMs named in the lawsuit are Advance PCS; Caremark Rx, Inc.; Express Scripts; and Medco Health. The April 2003 complaint alleges that these four companies pocket savings on their drug purchases instead of passing them on to health plans and their members. According to the lawsuit, the PBMs have “willfully contributed to escalating drug costs, and have failed in their fiduciary duty to those client health plans.” [6]

In addition, PAL has joined with the AARP Foundation Litigation and the Legal Counsel for the Elderly in a friend of the court (amicus) brief supporting the District of Columbia’s efforts to regulate PBMs and make them more accountable. The amicus brief describes the enormous power that PBMs have:

PBMs do not manufacture, distribute, prescribe, or ultimately even pay for prescription drugs, yet they often determine what drug a patient will receive and at what price. [7]

PBMs have consistently refused to disclose their pricing structures and the deals they negotiate with drug companies. According to AARP and the Legal Counsel for the Elderly, studies have shown more transparency would save consumers money:

What seems clear from this navigation of the PBM maze is that prescription benefit plan sponsors (either private employers or government entities) should insist on full disclosure of cash flows to and through the PBM that is administering their drug benefit. Without this level of scrutiny, the plan sponsor cannot be sure if its PBM is providing good service for a fair price or is acting primarily in its own interest. [8]

The PBM industry successfully fought back efforts to include strong transparency provisions in the new Medicare law, according to the Corporate Research Project of Good Jobs First. (See “Cost Cutters or Con Artists? Pharmacy Benefit Managers Under Fire,” Corporate Research E-Letter No. 42, December 2003) Instead, Congress adopted a weaker provision, requiring that the Federal Trade Commission study whether PBMs will have a conflict of interest in providing the new Medicare prescription drug benefit through their own mail order pharmacies, thereby resulting in increased Medicare spending.

The Corporate Truth Squad (CTS) Alert is a project of USAction. The CTS Alert highlights how our civil justice system gives ordinary citizens the power to stand up against corporations that commit fraud, abuse or other wrongdoing. We will distribute the CTS Alert regularly to all state legislators, Members of Congress and the media, with documentary evidence of corporate indifference to predictable illness, injury and death, uncovered by ordinary citizens seeking justice through the courts.

USAction, 1341 G St. NW, 10th Floor, Washington, DC 20005
P: (202) 624-1730 F: (202) 737-9197 email: usaction@usaction.org

For more information about this alert, the Corporate Truth Squad Campaign, or for a PDF version of this document, please call Helen Gonzales, USAction Policy Director, at 202-624-1730.


[1] Alan Sager and Deborah Socolar, “Poorer, Sicker States Face Heavier Drug Cost Burdens - - Rising Burdens Mean Pressure for Action Likely to Grow,” Boston University School of Public Health, July 14, 2004
[2] James Langenfeld & Robert Manes, “The Cost of PBM ‘Self-Dealing’ Under a Medicare Prescription Drug Benefit,” [hereafter “The Cost of PBM Self-Dealing Report”] September 9, 2003.
[3] Robert Garis & Bartholomew Clark, “The Spread: Pilot Study of an Undocumented Source of Pharmacy Benefit Manager Review,” Journal of the American Pharmacists Association, Jan/Feb. 2004
[4] “The Cost of PBM Self-Dealing Report”
[5] See National Legislative Associations ’s web site at: http://www.e-guana.net/www.nlarx.org/index.php3?home
[6] First Amended Representative Action and Complaint for Violation of the Unfair Competition Law, Superior Court for the State of California for the County of Los Angeles, Case No. BC 292227
[7] Amicus Curiae Brief of AARP, Legal Counsel For The Elderly, And The Prescription Access Litigation Project In Support Of The District Of Columbia; Civil Action No. 04-0182(RMU) at page 6
[8] Citations excluded. Amicus Curiae Brief at pages 8- 9

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