Drug Discount Peddlers

Earlier this month Express Scripts Inc., one of the top three managers of employer-sponsored prescription-drug benefits, made headlines by announcing that it would erase Lipitor from its list of preferred drugs. The move marked a sea change in relations between the pharmacy benefit managers (PBMs) and the big drug companies, according to some observers. If they're right, that change is being driven by employers' growing awareness about where their drug-benefit dollars are going.

In brief, Express Scripts (ESI) removed Lipitor, Pfizer's huge-selling cholesterol-cutting drug, in favor of Zocor, according to published reports. The reason? Merck, which manufactures Zocor, will lose its patent-protected rights to produce it in June 2006. Once generic-drug makers begin selling their own versions of Zocor, ESI would be able to recommend the much cheaper generics. That option wouldn't be available for Lipitor, which doesn't come off-patent until 2011.

From its point of view, ESI was only proceeding on a well-worn path, according to press accounts. By replacing brand-name drugs with generics, it would be doing just what employers have long hired PBMs to do: provide deep discounts in pharmaceutical costs while administering employers' prescription-drug programs. At the same time, PBMs make out handsomely by recommending generics, which offer wider profit margins than brand-name drugs for their manufacturers. Those wider margins enable the PBMs to get a bigger piece of the "spread" between what a drugstore chain charges for a prescription and what an employer pays for it.

The arrangement, even PBM critics agree, has largely served both employers and employees well. According to a 2003 report by the Government Accountability Office that examined three drug-benefit managers, PBMs were able to bargain down retail pharmacies by 18 percent below the average cash price that customers would pay at pharmacies for 14 name-brand drugs — and by 47 percent for four generic drugs. The GAO did caution that its findings might be read to overstate that bargaining success; if companies had no access to PBMs, observed the watchdog agency, companies would likely try to negotiate discounts on their own.

Even so, by gathering and automating huge amounts of pharmacy pricing data and making it widely known, PBMs have certainly exerted a strong downward pressure on retail drug costs. And they have helped employer drug programs fit nicely into managed-care plans, bringing the co-payment features typical of health maintenance organizations into the pharmaceutical-benefits arena — in turn, providing an incentive that's valuable in hiring and retaining employees. At the same time, many employers have gained negotiating efficiency by "carving out" drug benefits from HMOs and broader health insurance programs, then dealing directly with PBMs.

Despite such advantages, however, employers' image of PBMs has taken on some tarnish — and, perhaps, influenced ESI's switch from Lipitor to Zocor. ESI and the other two pharmacy-benefit giants, Caremark Rx and Medco, have suffered through lawsuits and bad press regarding rebates they receive from drug manufacturers. Pharmaceutical companies dole out those payments to PBMs that add the companies' name-brand drugs to the PBMs' formularies, or preferred lists.

In one case, New York Attorney General Eliot Spitzer charged ESI in August 2004 with hiding and pocketing "millions of dollars in rebates and other payments from pharmaceutical manufacturers" that rightfully belonged to the Empire Plan, the state's main employee health program. ESI masked much of the rebate money under such rubrics as "administrative fees," "data fees," and "formulary compliancy fees," according to Spitzer. Another of his charges was that ESI schemed to boost generic drug prices to enrich itself at the expense of the plan. ESI has filed a motion to dismiss the complaint. (An ESI spokesperson didn't return phone calls requesting comment on the Lipitor decision and on Spitzer's lawsuit.)

Caremark and Medco have likewise had their days in court. In September, Caremark agreed to pay the federal government $137.5 million to settle charges made in 1999 that its AdvancePCS subsidiary asked for and got kickbacks from pharmaceutical makers and paid kickbacks to potential customers. Under the terms of the settlement, Advance PCS, which was acquired by Caremark in 2004, denied all wrongdoing.

For its part, Medco is still contesting portions of a lawsuit filed by the U.S. Attorney's Office for the Eastern District of Pennsylvania in 2003. Among other things, the suit alleged that the company accepted payments from Merck and other drug makers to favor their products even though other drugs were cheaper or more effective. Merck spun off Medco in 2003.

Complaints against PBMs have also included allegations of manipulated price spreads and cloudy reporting of arrangements with drug companies and employers.

Perhaps spurred by lawsuits if not complaints, the big PBMs might be beating a hasty retreat from the special relationships they've had with big drug makers. "What we're seeing is PBMs walking away from rebate revenues," says Sean Brandle, prescription-drug consulting practice leader of The Segal Company in New York. Increasingly, the drug-benefit managers will try to make money by pushing rebate-less generics, he predicts.

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