Drug Discount Peddlers

A Caremark spokesperson said, however, that she didn't know if the company planned to seek less of its revenue through rebates. Even so, when asked whether ESI's move might portend a broader change in the business model of the major PBMs, she said, "Caremark is a generics-first company; we would promote generics if appropriate." A Medco spokesperson was more definitive. As to whether the company might move to a rebate-less business model, she said the PBM "has no plans for any change of that kind at the moment."

But if such changes do occur, they will likely be initiated by increasing employer efforts to penetrate the fog surrounding PBM contracts. Indeed, both on their own and collectively, employers have begun a quest for more-transparent drug plans. EMC Corp. benefits director Delia Vetter, for instance, says that since her company joined the Health Policy Association's 52-member drug purchasing coalition, she's learned a great deal about PBMs' potential to hide revenues from clients.

For many employers, however, knowledge of such matters is still in its infancy. "That's one of the reasons we joined the coalition," says Vetter. "We don't know what we don't know."

Alpine Drug Costs
The main impetus for companies' new scrutiny of PBMs, of course, is the long, steep rise in drug-benefit costs. As of 2004, those expenses soared 83.4 percent during the previous half-decade, according to Mercer Health & Benefits figures cited in June by the The Wall Street Journal.

To be sure, the rise can be linked largely to macro-trends like the aging of the population and the surge of direct-to-consumer drug advertising. But corporate benefit executives are also wondering whether their relationships with intermediaries are also playing a role, as they look at cost drivers they can do something about themselves. "To retain quality and control cost, benefit managers need to look at every possible avenue where we can have an impact," says Vetter. Hence the recent interest in the arrangements between their companies and PBMs.

Indeed, it was skyrocketing drug costs that led the University of Michigan to shift PBMs twice in three years. In the late 1990s the university began to see 15 percent to 20 percent yearly increases in pharmaceutical costs at its three health-maintenance-organization plans and 20 percent to 30 percent increases at its two self-insured, traditional major-medical benefit plans. Between 2002 and 2003, total prescription drug outlays jumped 34 percent, from $33 million to $44 million.

A big part of the problem was the university's hands-off relationship with its five PBMs. Michigan officials learned of the drug-cost hikes only at annual coverage-renewal meetings with the HMOs and the major-medical plans, since those insurers had delegated management of the drug programs to the PBMs. However, the university's benefits staff wasn't privy to information about the insurer-PBM relationships, recalls Keith Bruhnsen, the school's assistant director of benefits and prescription plan manager.

Alarmed by the price increases, university officials started to demand that the insurers provide details of how the money was being spent. One thing they learned is that the HMOs had little incentive to push hard for cuts in drug spending, since benefit cutbacks might drive university employees to seek more generous coverage elsewhere, according to Bruhnsen.

In 2003, the university carved out responsibility for the drug plans from its overall health-insurance programs, replaced the five PBMs, and began to deal directly with a single one, Caremark's Advance PCS. By cutting red tape and its attendant costs, the change has helped Michigan to hold drug increases to no more than 10 percent per year, says Bruhnsen.

Drawing on the considerable expertise of its medical school faculty, the university also took the unusual step of assuming control of its plan's formulary and taking on the decision of picking the listed drugs. (Bruhnsen acknowledges, in something of an understatement, that "not every company has the expertise" to take a step like that.) Even further change is afoot: In 2006, Michigan will shed Caremark's full-service administrative approach for a stripped-down plan coordinated with SXC Health Solutions and Walgreens Mail Service, and requiring more involvement by the university.

Like other internal benefits managers, Bruhnsen has been poring over rebate arrangements. In many of those deals, the PBM agrees that the employer will ultimately receive most or all of the rebates that pharmaceutical makers pay out when their brand-name drugs appear in employers' formularies. Sometimes a rebate can be as much as 50 percent off a drug's average wholesale price, according to Creighton University pharmacy professor Robert Garis. He notes, however, that since that wholesale price is assigned by the manufacturer, it tends to be "tremendously elevated" above the price that the pharmaceutical company actually charges and that the employers pay.

Rebates can be a mixed blessing: They tend to align the interests of PBMs with those of drug makers rather than those of companies that sponsor the benefit plans. A whopping rebate, for instance, might prompt a PBM to recommend that an employer add a hot but costly brand-name drug to its formulary, says Bruhnsen. Even if the employer gets a big chunk of the rebate, a company that approves an employees' use of such a drug could well find that "five months later, a generic comes out," says Bruhnsen. A few months of rebates, he explains, wouldn't make up for the expense of a brand-name drug that an employee might take for many years.

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