WASHINGTON - To cut their prescription drug costs, America's
health insurance plans sought a decade ago to win price breaks based
on volume discounts.
For a while, the strategy worked. Middleman companies called
pharmacy benefit managers played drug companies against one another
by promising them millions of the health plans' customers in return
for the lowest possible prices.
By pressuring doctors to prescribe only drugs on which they'd
gotten the best deals, pharmacy benefit managers, known as PBMs, cut
pharmaceutical costs up to 30 percent for some health plans.
In short order, PBMs managed the prescription drug choices of
more than 200 million Americans.
But the big savings have dwindled. Today, prescription drug
spending is the fastest-growing sector of U.S. medical outlays. And
critics now regard PBMs, the supposed cost cutters, as part of the
Many PBMs that once earned most of their revenue by holding down
drug costs for health plans now earn a large portion of their money
from drug companies that pay them undisclosed rebates and other
financial incentives for promoting certain medications. Sometimes,
critics charge, those medications aren't the most cost-effective for
the PBMs' clients.
"That's the crux of the issue," said Gerry Purcell, a pharmacy
benefits consultant in Atlanta and a former PBM executive. "They're
negotiating hidden deals for their own benefit, while at the same
time telling employers `we're here to represent you.' "
The side deals and undisclosed payments may account for as much
as 10 percent of the $161 billion that Americans are estimated to
have spent on prescription drugs in 2002, said Purcell, who has
worked as a consultant for plaintiffs in several lawsuits against
The legality of drug-company payments to PBMs and other PBM
industry practices is in dispute and probably will be decided in
court. The U.S. Attorney's office in Philadelphia has been
investigating PBMs' business practices since 1998. The probe focuses
on the cost and health effects of rebates on patients "and the
broader cost effect on (employer health) plans," according to
Assistant U.S. Attorney James Sheehan, who's leading the
One of the PBMs being investigated, AdvancePCS of Irving, Texas,
wrote in a Securities and Exchange Commission filing last year that
Sheehan's case centered on whether rebates and other drug-company
payments to PBMs, or payments that PBMs make to retail pharmacies or
others, "may violate the anti-kickback laws or other federal laws."
The SEC document says Advance believes its practices comply with
all applicable federal laws and regulations. After initially
challenging investigators' requests for documents and employee
interviews, company officials are cooperating with the probe.
Officials of Medco Health Solutions, of Franklin Lakes, N.J.,
another focus of the investigation, wrote in similar SEC filings
last year that they also believed they were complying with federal
laws. But "different interpretations and enforcement of these laws
could require us to make significant changes to our operations," the
In numerous lawsuits across the country, health plan
representatives want PBMs to repay millions of dollars in rebates
and other financial incentives that they claim should have been
passed on to their health plans. Some of the lawsuits accuse PBMs of
steering clients to higher-priced drugs for their own profit and of
failing to act in their plans' best financial interests.
A suit filed by the West Virginia Public Employees Insurance
Agency accuses Medco, its former PBM, of, among other things, hiding
drug company rebates by listing them as various fees.
"They were calling them `data fees,' `management fees' and
`administration fees.' Anything but rebates," said agency director
Medco denies hiding any rebates and has sued the agency for
nonpayment of $2 million. The company also denies Susman's claim
that it improperly withheld about $12 million in rebates from 2000
Without admitting any wrongdoing, Medco and plaintiffs in five
other lawsuits have agreed to a settlement that, among other things,
calls for Medco to pay $42.5 million. A sixth plaintiff, represented
by New Orleans lawyer Russ Herman, rejected the offer as inadequate.
In court, Herman said analysts he hired to review Medco financial
documents concluded that Medco withheld $2.85 billion in rebates
from clients from 1995 to 1999.
Medco, which reported nearly $2 billion in rebates in 2000 and
$2.5 billion in 2001, denies wrongfully withholding any funds from
In response to clients' concerns about rebates, many PBMs,
including Medco, now share a portion of the rebates with their
clients, said LaVarne Burton, president of the Pharmaceutical Care
Management Association, a trade group that represents the PBM
PBM industry officials continue to say, however, that undisclosed
rebates are legitimate and should remain confidential if they aren't
covered in their clients' contracts.
"We have to make some money," said David Machlowitz, senior vice
president and general counsel for Medco, the country's
second-largest PBM. "I don't understand why they're asking us to be
We don't claim to be not-for-profit.
a business. We're not a charity hospital."
PBMs have resisted clients' attempts to audit those undisclosed
rebates. "If it is not part of our deal with them, and they're
getting what they contracted for, and it's not something we've done
on their behalf, why would they be auditing that?" Machlowitz said.
More than 100 PBMs operate in the United States, but the industry
is dominated by four: AdvancePCS (75 million people covered), Medco
(65 million), Express Scripts, of St. Louis (40 million), and
Caremark Rx, of Birmingham, Ala. (20 million).
With those numbers, said Purcell, the pharmacy benefits
consultant, PBMs can essentially tell drug makers, "'If you want to
market your drug, you have to do business with us or we're gonna
shut you out of 40, 50 or 60 million lives. They have amassed so
much power, you have to deal with them."
When the first PBMs appeared in 1969, they simply processed drug
claims for health plans in return for a few cents per prescription.
As drug spending soared in the `90s, PBMs began negotiating lower
prices with drug companies for their clients. The drugs on which
they got the best deals were placed on a list of "preferred" drugs
that the plans provided the highest level of coverage for, called a
formulary. For medications that weren't on the formulary, the
coverage level generally was lower or even nonexistent, depending on
Drug companies, hoping to increase sales, often offered rebates
and other incentives to PBMs in return for placing their medications
on drug plan formularies. PBMs also can receive rebates when drug
sales increase due to greater usage by health plan members. In
addition, drug makers sometimes pay PBMs to promote certain
medications to doctors and patients.
In time, these incentives rivaled clients' fees as the prime
revenue source for many PBMs. Drug companies, seeking to control the
middleman, began buying PBMs in the early `90s. The Federal Trade
Commission, concerned that PBMs owned by drug companies would favor
medications made by their parent companies, acted to discourage the
acquisitions. Today, Merck & Co. of Whitehouse Station, N.J.,
Medco's owner, is the only drug company that owns a PBM.
The Bush administration wants to restrict the financial
incentives that drug companies give PBMs for promoting their
products. The drug industry is fighting the measure, saying the
changes would disrupt a time-honored system that isn't broken and
doesn't need fixing.
Despite all the criticism, PBMs may be in for a new federal
windfall. President Bush and congressional Republicans are keen to
pass some kind of prescription drug coverage for 39 million Medicare
recipients early next year. If they succeed, they want PBMs to
administer the program.
Many doctors are staunchly resistant to PBMs, generally when PBM
monitors ask them to change their prescriptions. This typically
occurs when a physician prescribes a medication that's not preferred
on the formulary.
Sometimes the prescription change is sought because the formulary
drug is cheaper than the one the doctor likes. But drug
substitutions also might be requested because a PBM may have
negotiated a better rebate for itself to promote another medication,
said Dr. Martin Trichtinger of Jenkintown, Pa., a critic of the
When a patient's prescription is switched to a similar but
slightly different drug, adverse side effects can occur, according
to the American Medical Association, which represents about 300,000
doctors. The risk is even greater for patients with chronic
illnesses whose bodies have adapted to long-term use of a specific
In one instance, Trichtinger said, he informed a PBM that he was
prescribing a more expensive drug because his patient once had a bad
reaction to the medication the PBM preferred. PBM representatives
phoned twice urging him to switch to their drug. Each time
Trichtinger refused. When the PBM called again on the weekend,
another doctor OK'd the switch, unaware of the patient's history.
"Fortunately, the patient recognized the medication and didn't
take it," Trichtinger said. "But I felt that it was duplicitous for
the PBM to call on a Saturday when they had talked to me twice
during the week.
PBMs are not one of my favorite things."
Last year, Trichtinger protested to the AMA that PBMs' practice
of "hassling physicians and patients to switch to a less expensive
alternative is unethical, immoral and dangerous to the health of the
Trichtinger said some PBMs changed patients' medications to
different brands several times a year, depending on the savings they
"When we're looking for ways to prevent errors and mistakes,"
said Trichtinger, "PBMs' constant flipping of medications to what is
cheapest is an accident waiting to happen."
Burton, the Pharmaceutical Care Management Association president,
said PBMs might suggest switching a patient to "an appropriate and
less costly alternative prescription, but this is only a
"The physician always has the final say," she said.
The AMA, in a report on PBMs, countered that the phone calls and
paperwork that were needed to challenge a PBM's decision could be so
"administratively burdensome" that "physicians often will not pursue
it. While this saves money in the drug budget for the PBM, the
patient may not receive optimal therapy."
As Dr. Ron Davis, an AMA trustee from Detroit put it: "The hassle
factor sometimes becomes unbearable. There are so many
administrative burdens on physicians these days that every little
bit can be quite painful."
For HMOs, health insurers and employers with self-insured drug
plans, PBMs' undisclosed deals are the biggest complaint. But other
lawsuits against PBMs allege other controversial practices.
For example, the lawsuit by the West Virginia Public Employees
Insurance Agency claims the agency's drug costs rose from $65
million to $108 million from 2000 to 2002, in part because Medco
allegedly steered plan members to more costly drugs made by Medco's
parent company, Merck & Co.
Medco vice president Machlowitz denied the claim, saying West
Virginia's costs increased because plan members' prescriptions
increased and the state decided to lower the amount that enrollees
paid for drugs, called a co-payment or co-pay.
In 1998, the Federal Trade Commission found that Medco was
favoring Merck drugs over those of its competitors. In a consent
agreement, Merck admitted no wrongdoing, but Medco agreed to
maintain an open formulary that includes drugs selected by doctors
and pharmacists with no financial ties to Merck. The agreement also
requires Medco to accept discounts and rebates from other drug
companies in exchange for placing their drugs on Medco formularies.
In addition, Merck and Medco agreed not to share information they
receive from competitors, such as drug prices.
Medco spokesman Jeff Simek said Medco was adhering to the FTC
In an SEC filing last July, Medco acknowledged that it had a
financial agreement to promote Merck products. The document said
Medco had to pay damages to Merck "if we fail to maintain a market
share for Merck products at specified levels."
Medco's damage-payment clause is unique to its agreement with
Merck, Simek said. But Medco has similar market-share agreements -
minus the damage clause - with other companies.
Simek said Medco doesn't steer its clients to higher-priced Merck
drugs. He said industry competition was too great for Medco to favor
Merck products at its clients' expense.
"If we were in arrangements that raised costs for our clients,
that would quickly become evident and we would not have a (customer)
retention rate in the mid-90 percent range," Simek said. " . . .
Medco Health can succeed only by putting the needs of its clients
and members first, and could never succeed if it improperly favored
any single drug company's medication."
(Knight Ridder Newspapers correspondent Josh Goldstein
contributed to this report.)
For more information on pharmacy benefit managers, go to the
Pharmaceutical Care Management Association Web site, at " http://www.pcmanet.org/ "
For information about getting the most out of your prescription
drug plan, check the AARP Web site at " www.aarp.org/hcchoices/9ways/six.html "
(c) 2003, Knight Ridder/Tribune Information Services.