Drug Discount Peddlers

Even contracts stating that "100 percent of rebates" will be returned to the employer provide no guarantee that the PBMs aren't getting paid by drug companies, experts say. That's because "rebates" usually refers solely to payments based on how often employees use certain drugs, notes Matthew Gibbs, national pharmacy practice leader at Hewitt Associates. Gibbs notes that many other payments, including data-aggregation fees, data-sales fees, and other administrative outlays, might still flow from drug companies into PBMs' pockets. Adds Bruhnsen: "There are a lot of rocks they can hide sources of revenue under."

Betting Against the Spread
Another target of scrutiny is how PBMs can unduly profit from price spreads. In a typical arrangement, the manager at the PBM agrees with a corporate client on a guaranteed price that the client will pay for a drug. If the manager can hash out a lower price with the drugstore chain, the PBM pockets the difference.

When it comes to generics, the spread should work to the advantage of both the employer and the PBM. Since pharmaceutical companies earn bigger profits on generics than on brand-name drugs, the PBM has more room to bargain for bigger discounts, thereby cutting costs for its corporate client while earning more revenue for itself. "That's a good incentive," says Joseph Paduda, the principal of Health Strategy Associates, a Madison, Connecticut-based workers' compensation and managed-care consulting firm. "How pharmacy benefit managers get paid saves employers money when they shift to generics."

But sometimes the spread can be gaping. For instance, according to a recent study by Garis and his Creighton colleague Bartholomew Clark, one PBM billed an employer $200 for rantidine, a generic stomach medicine, but shelled out just $15 to the pharmaceutical company, and charged $80 for the generic blood-pressure drug atenolol while paying just $7. Closer scrutiny by the internal benefits manager might have delivered some of that spread to the employer.

At times, PBMs allegedly benefit from using different price lists with different clients. According to Spitzer's as-yet-untried charges against Express Scripts, the company generated "huge profits" by parlaying price differences between spread-based plans and "pass-through" plans. Under the latter arrangement, the PBM charges the employer the same amount that it was charged by the drugstore chain. Rather than profiting from a price spread, the PBM receives a fixed fee from the employer for every prescription it processes.

In the Express Scripts case, Spitzer alleged that ESI paid inflated prices for generic drugs to a number of drugstore chains, then passed through those inflated prices to the Empire health plans and their members. Because of those inflated payments, the attorney general explained, the chains "accepted lower prices from ESI for the same drugs dispensed to members of ESI's 'spread' plans." ESI charged higher prices to the employers with spread-based arrangements and made hay on the difference, according to Spitzer.

Exquisite Detail
To avoid being caught on the wrong end of such a situation, employers are beginning to demand much more clarity from their PBMs about how rebates and spreads are divvied up. Garis, who also advises clients on choosing PBMs, maintains that with each invoice from the PBM, the client company should receive a digital copy of the prescription-drug transaction, including the cost of the drug, the pharmacy's filing fee, and the amount of the employee's co-payment.

Currently, however, CFOs and their benefits teams receive surprisingly little data, according to Garis. Typically they get a statement that says only "pay this amount" or that merely provides information on a broad group of pharmaceuticals — like payouts out for "the bellyache drugs," Nexium, Prevacid, and Protonix. Adds Garis, "The exquisite detail that has to be present [for the] pharmacy benefit to work is noticeably absent."

Getting those details has been hard for individual employers, so many are banding into consultant-run collectives to push for closer audits and clearer pass-through arrangements. In addition to the Health Policy Association, run by Hewitt Associates, the Rx Collaborative also boasts more than 50 members; it is administered by Towers Perrin.

Seeking to push PBM incentives into line with employer goals, the Rx Collaborative pledges that members will seek financial and contractual protections in their drug-benefit agreements, according to a Towers Perrin publication. Among them are price transparency via "full disclosure" of PBM revenue sources; "100 percent pass-through of rebates, discounts, and dispensing fees"; and enough information to audit the PBM.

With all the criticism of pharmacy benefit managers, it's fair to ask whether they're still needed at all. Handling drug benefits in house, however, is not in the cards. "Somebody's got to adjudicate the claims," says Ron Lyon, national pharmacy practice leader with Towers Perrin, adding that PBMs do still provide substantial discounts. The problem, he adds, is that while PBMs still provide considerable value to employers, they're not providing "as much value as they could."

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