Pharmacy Benefit Managers A Growing Force in Medicare

By Joel B. Finkelstein, American Medical News

August 2, 2004

States investigate these companies' practices, while PBMs point out the savings they provide to the health system.

Pharmacy benefit managers are coming under increasing scrutiny by the states just when the federal government is expected to turn to them to administer the new Medicare drug benefit.

PBMs have arisen as a market force at a time when high prescription drug costs are increasingly becoming a concern for patients and physicians. The affordability problem is especially acute among seniors, who are more likely to have chronic conditions often requiring multiple medications. These worries helped drive passage last year of the Medicare outpatient drug benefit. 

PBMs design formularies and pay claims, but the drugs are still distributed to patients by local or mail-order pharmacies. Pharmacy benefit managers are to drugs what managed care companies are to doctors and hospitals.

And like managed care companies, PBMs have generated concern among some consumer advocates that cost-cutting strategies can go too far, potentially undermining patient care. Many of the companies have developed strategies to change patients to alternative drugs, reportedly without the patient's or the physician's consent in some cases.

Additionally, pharmacists are being bogged down in the paperwork required by PBMs and have less time to act as effective liaisons between physicians and patients, said Susan Winckler, vice president of policy and communications at the American Pharmacists Assn.

Nevertheless, pharmacy benefit managers are expected to administer the Medicare drug benefit when it is launched in 2006. PBMs have the experience, said a spokesman for the Centers for Medicare & Medicaid Services.

Even now Medicare is taking advantage of that experience. In June, CMS announced the launch of a Medicare demonstration project that gives patients with cancer and chronic diseases early access to the drug benefit. Caremark Rx, a PBM located in Nashville, Tenn., was given the contract to administer the demonstration.

State worries

Caremark is not only the second-largest PBM in the country; it is also the second national company to come under investigation by state attorneys general for its business practices.

The largest pharmacy benefit manager, Medco Health Solutions, recently agreed to pay close to $30 million to settle charges brought by 20 state attorneys general that the company switched patients' medications without their knowledge and then pocketed the savings.

The investigations have spurred lawmakers in some states to introduce legislation to rein in PBM practices, including changing patients' medications to lower-cost drugs in the same therapeutic class.

But PBMs argue that they provide a valuable service by keeping drug prices in check and improving quality. According to a recent industry report, state legislation designed to restrict pharmacy benefit managers' techniques would eliminate billions of dollars in potential savings to both patients and the Medicare program.

"With an estimated $1.3 trillion in savings over the next decade, PBMs are helping to free up resources that can be used to enrich existing benefits, cover the uninsured, create new jobs and fund other priorities," said Mark Merritt, head of the Pharmaceutical Care Management Assn., the PBM trade group that sponsored the report by PricewaterhouseCoopers.

For example, a nationwide ban on therapeutic interchange, which according to the report always requires the prescribing physician's approval, would abolish $6.9 billion in drug savings next year, the report finds.

Another cost-cutting strategy being questioned is the PBM practice of providing patients incentives to encourage them to get their prescriptions through mail-order pharmacies. Some lawmakers worry that this will put small local pharmacies out of business.

The pharmacy benefit managers also have come under fire for refusing to disclose information on the prices they pay for drugs. Their critics say that the companies are not passing on savings from rebates and discounts they receive from pharmaceutical manufacturers. PBMs counter that they need to keep such pricing information secret to remain competitive in the market.

Times are changing

State regulatory efforts aren't the only pressure pharmacy benefit managers face. Their work with Medicare could force many of their practices into the light, said the APhA's Winckler.

The law mandating the program's drug benefit has certain transparency requirements that will force participating PBMs to provide some of the now-proprietary pricing information to the secretary of the Dept. of Health and Human Services, she said.

The design and structure of formularies also will come under increased oversight by the department, which has plans to compare them against a model in development by the U.S. Pharmacopoeia.

Other concerns were raised in a recent Kaiser Family Foundation analysis highlighting potential problems with the Medicare drug benefit. Will there be a set process for adding newly approved drugs to the formularies in a timely manner? Will patients with chronic diseases, such as AIDS, have access to off-formulary drugs when they need them? And will PBMs limit off-label use of drugs?

"I'm sure there will be bumps in the road," Winckler said. To be successful, the program will require diligent oversight by both CMS and Congress, she added.


Cost-cutting strategies

Pharmacy benefit managers make use of several cost-control techniques, some of which have come under increasing scrutiny from state governments. A recent report sponsored by the industry estimates the amount of money these sometimes controversial strategies could save for 2005:



Switching therapeutically equivalent drugs

$6.9 billion

Various drug-management techniques

 $6.4 billion

Incentives for use of mail-order pharmacies

$4.0 billion

Keeping contract terms and pricing data proprietary  

$8.2 billion

Source: PricewaterhouseCoopers


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