More than half of the nation's employers use a third-party pharmacy benefit manager to process and pay their prescription drug plans, and nearly two-thirds say in a Buck Consultants survey that pricing is of high importance. But, the actual impact PBMs have on pricing depends on who you ask. Some consultants who work with employers on implementing the plans raise questions about the transparency PBMs offer to their clients - a charge the PBMs deny. As health spending in the United States continues to rise, savings and transparency from PBMs are becoming even more important.

In the Buck survey, 57% of respondents from 224 organizations representing more than 2.5 million employees in 20 different industries say they use a stand-alone PBM, and 11% are planning to do so.

Prescription drug spend in the U.S. is huge: $307 billion in 2010 - an increase of $135 billion since 2001 - and nearly 12% of all health care spending in the country, according to the Government Accountability Office in a January letter to Sen. Orrin D. Hatch (R-Utah). Sixty-seven percent of companies in the Buck survey report pharmacy costs account for 16% or more of total health care costs.

A PBM is an organization that administers prescription benefit plans and typically contracts with a network of pharmacies, such as CVS or Walgreens, as well as independent pharmacies, to dispense drugs for an agreed-upon discount rate and dispensing fee, says Robert Kalman, principal and national pharmacy practice co-leader at Buck Consultants in Washington. The PBMs also typically have a mail-order pharmacy where they can dispense "maintenance drugs" to treat chronic diseases in a 90-day supply.

PBMs are administrative arms, adds Eric Auger, partner at pharmacy consulting firm Putnam Associates, in Burlington, Mass. "They have the IT systems to link it with them; they manage all the transactions and sell services either in bulk or as different options to clients," he says.


Impact on drug prices

PBMs have various impacts on drug prices, Auger says. It used to be that their value was in scale economy - it was cheaper for multiple plans to contract with PBMs so the PBM could set up the information technology infrastructure, rather than multiple clients doing it themselves. Yet, the actual amount they save employers and consumers varies. A study by the Pharmaceutical Care Management Association, a Washington-based PBM trade group, found that from 2012 to 2021 PBMs will save plan sponsors almost $2 trillion, or about 35%, compared with drug expenditures made without PBMs. Of the $2 trillion, commercial plan sponsors and their members make up $1.3 trillion, while Medicare Part D and its beneficiaries account for $700 billion.

There is no question that PBMs help reduce the cost of prescriptions and the discount that the plan pays is usually the average wholesale price, Kalman says. But it is not as simple as that, he explains. Rather, it is like buying a car. The discount is not really a wholesale price, but is based off a matrix from which the industry provides a discount, Kalman says. "If I went into the drug store for [a brand-name drug], I would get wholesale minus somewhere between 14.5% and 17%, depending upon the pricing negotiated between the employer and the PBM."

Switching to generic drugs also brings about a majority of the cost savings. As a result, the actual discounts vary based on the contract negotiated and the level of generic drugs allowed.

Charles Cote, senior director of public affairs for PCMA, agrees. "PBMs must achieve high levels of generic drug dispensing in order to win and retain clients in the highly competitive marketplace for PBM services," he says. "As PBMs have expanded, generic drugs have grown from approximately 30% of all prescriptions in 1990 to 80% of prescriptions today."

For brand-name drugs, PBMs sometimes contract with drug companies that may offer the PBM money for promoting their particular medication, and in return the PBM would pass some of the discount to the consumer, or pocket it. OptumRx explains that often these rebates are then passed down to the plan, with the PBM making a profit by charging an administrative fee.

This practice has not been without controversy in the past. In 2004, then New York State Attorney General Elliot Spitzer brought a suit against CIGNA and Express Scripts alleging that it had contracted with a CIGNA company to run the pharmacy benefit for the New York state employees' health plan, and that CIGNA subcontracted with Express Scripts, according to a brief from McDermott Will & Emery.

"New York brought claims against both entities based on its allegations that Express Scripts' benefited itself at the state's expense by allegedly failing to pass along to New York rebates it received from pharmaceutical companies, and by promoting patient switches to more expensive drugs," according to the law group.

Express Scripts settled the case in May 2008, which grew to involve 29 states and agreed to "change its business practices and pay $9.3 million to the states and up to $200,000 in reimbursement to patients who incurred expenses related to certain switches between cholesterol-controlling drugs," according to the Pennsylvania Attorney General's office.

Cote says that much of the criticism comes from "those in the marketplace who want to keep the status quo of 'charge what you want.' Obviously, drug stores aren't happy about that and want to return to world before PBMs ... [but] employers hire PBMs, they want PBMs and they hire PBMs to lower their cost."


It depends on the drug

Ann Woloson, executive director of Prescription Policy Choices, a Hallowell, Maine-based nonprofit, nonpartisan educational and public policy organization, says the price impact depends on the drug.

"I would agree that PBMs are helpful in reducing drug prices for brand-name drugs and perhaps some generic drugs," she says. "To the extent that they promote greater usage of brand name when good quality generics are available, they are costing health plans more money."

She points to a recent analysis she did of drug spending for public entities in the state of Maine. Of the top 10 drugs on the list, there were good quality generic drugs available and "even with the PBM discount, they could save a lot more money if they encouraged their members to switch over to a generic equivalent.

"What happens with PBMs is often they will work with the drug manufacturer to get a discount by steering a plan and its members toward a certain brand-name drug," she adds. "Brand-name drugs cost anywhere from 30%-50% higher in terms of co-pays."

She points to heartburn relief drug Nexium as an example. It has a very strong generic equivalent. Those who take Nexium are paying, say, $40 a month in co-pays, when they could be paying around $5-$12 a month for a generic equivalent.

Further complicating the equation is the fact that manufacturers send out coupons to cover co-pays, so while the consumer does not have to pay the full $40 (or whatever their particular co-pay is) for Nexium; the plan still gets billed at the higher amount.


Lacking transparency

As a result, the actual cost the plan pays versus what the PBM pays is not always clear and "there really is minimal transparency in cost unless you know what to look for, what to ask and what you require the PBMs include from a language and definition perspective in their contracts," says Jennifer Kingsley Wilson, CEO of pharmacy consultancy ARMSRx, in Windermere, Fla.

It would be great, she says, if there would be more be transparency, as there is a lot of "ambiguity with the contracts and it should be easier for the payor to interpret what the contract is saying. Today as they are written, they are very confusing unless you are a consultant."

Yet, the PBMs say they are becoming more transparent, in part, because the clients are demanding it. "Nearly every client we deal with ... negotiates for transparency in the contract, audit rights," says John Jones, SVP for pharmacy policy at OptumRx, in Irvine, Calif. "They want to see what rebates are being paid, exactly what's on formulary, exactly what's [in] your network. It's a negotiating process and they ask questions they expect to have answered.

"I'm trying to figure out where the lack of transparency is," he adds. "If they ask us a question and we don't [have an] answer, we don't get the business."

PCMA's Cote agrees. "Employers are in the driver seat and dictate what they want," he says, "and with this competitive industry, [an] employer can choose to go to another PBM if they feel they are not get[ting] a great deal. ... The FTC found because of that competition, costs are being lowered."

Another PBM, CVS Caremark, says that it is focused on "providing our clients with opportunities to improve health outcomes for their members, while also managing costs. We work with our clients to develop plan designs and programs that meet their needs and promote the use of clinically appropriate and cost effective medications for their members."

Further, ExpressScripts says they are transparent in their costs. Their "clients are sophisticated and understand how the contracts work," says spokesman Brian Henry. "I'm not sure why that charge is levied."

However, Maine State Rep. Sharon Anglin Treat (D-District 79) says she believes that PBMs are completely non-transparent. Treat, who represents Central Maine, says the value you get for your money when you enter into a contract with a PBM is unclear.

"You don't know if you are getting the full value of savings," says Treat, who also serves as executive director of the National Legislative Association of Prescription Drug Plans, a bipartisan, independent, nonprofit organization founded by state legislators seeking to reduce drug prices. "The PBM can say, 'I am managing your drug benefit, you are getting this great deal. Instead of paying X, you are paying Y.' But the fact is the PBM may be receiving a greater part of those savings, as doing that deal and that amount is not known to the company hiring them.

"If it were truly transparent, you would pay a per-script fee, they would know exactly what they were paying for what they are getting," she adds. "To us, that is the greatest concern. ... I think it's more a question of PBMs not passing [on] the true substantial benefits as opposed to PBMs driving up the cost."

Treat passed legislation in Maine in 2003 which prohibited PBMs from receiving kickbacks for having certain drugs on formulary lists. In 2006, the Supreme Court refused to hear a case about the constitutionality of the law from the PBM industry, brought by the Pharmaceutical Care Management Association. The law was later repealed in June 2011 when a new Republican majority took office.

The law, according to testimony from Treat to the Maine House, required "PBMs to disclose to health plans any conflicts of interest, side payments from drug companies, and details about drug switching programs."

A similar law in the District of Columbia requires the PBM to act as a fiduciary and requires transparency and pass-through of rebates and other payments and savings. According to Prescription Policy Choices, Maryland passed a series of PBM reforms in 2008 and Iowa, South Dakota and Vermont also have PBM laws that seek to address transparency.

Cote says the legislation comes without merit and that PBMs are hired to save money, so an employer wouldn't hire one unless they did that. "[The] track record of success and the use of PBM tools is something employers want," he says.


Expiring patents

Recently, patents on blockbuster brand-name drugs, such as cholesterol medication Lipitor, which was the most widely prescribed drug in the world, have started to expire, allowing for generics to be marketed and sold in the United States. According to the National Association of Chain Drug Stores, the average brand-name prescription price is almost four times that of a generic.

Nearly two-thirds of the total value of brand-name drug patents will expire between 2012 and 2015, according to IMS Health. "Collectively, the impact of patients shifting to lower-cost generics in major therapy areas such as cholesterol regulators, antipsychotics and anti-ulcerants will reduce total drug spending by about $80 billion to $100 billion worldwide through 2014," the Falls Church, Va., provider of in-depth analytics on health care says.

According to the Congressional Budget Office, the average retail price of a generic drug is 75% lower than that of a brand-name drug and accounts for nearly 78% of all drugs dispensed in retail settings, including independent, chain, and mail-order pharmacies, as well as long-term care facilities, according to the GAO. Further, the rate at which generic drugs were substituted for brand-name drugs when a generic equivalent was available was 93%.

Sometimes, drug companies pay generic manufacturers to keep the generic off the market. A January Federal Trade Commission report found that such "pay-for-delay" agreements are estimated to cost American consumers $3.5 billion per year.

Yet, Federal programs and private health insurance plans have implemented strategies to help encourage the use of generic drugs for PBM members. According to GAO, those strategies include:

* Tiered co-payments where generic drugs have a lower co-payment than brand-name drugs;

* Step-therapy where consumers are required to try the most cost-effective drug in a therapeutic class first, usually a generic;

* Offering free samples of generic medications; and

* Education efforts to describe the benefits of using generic drugs, which may be targeted at both physicians and consumers.

Since the generic version of Lipitor came out in November 2011, those on the drug "can receive the same drug for far less cost, and that really helps both the individual member and the employer sponsor because the cost of the drug has been lowered," Kalman says.

As more drugs come off patent, "we are seeing higher generic utilization, which is saving members as well as employers dollars in terms of their drug spend," he adds.

That provides a time for brokers and consultant to shine. "We look at the overall impact on negotiating improving pricing and generally we are talking somewhere in the range of a conservative 5%-10% savings. ... When you have a drug spend that is, in one year, $10 million, 10% is $1 million," Kalman says.

"The interesting thing is the savings are immediate," he adds. "... With medical plans, there is a 90-day lag before claims are adjusted. A prescription plan's claims are adjusted in real-time electronically, so the improved pricing is realized immediately after the pricing goes into effect."

A study for American Health & Drug Benefits magazine by Andrea L. Kjos, assistant professor at Drake University in Des Moines, Iowa, looked at eight major health plans in Minnesota and found that if 100% of health plan members switched to generics versus recommended drugs, one unnamed plan with 36,924 members alone would save $6.5 million annually across all treatments.

Woloson, of Prescription Policy Choices, sees generics as a way to reduce health care spending. "Every business, public or private, is looking for ways to reduce cost, especially in health care," she says. "And I'm not one to say everybody should switch to generics, but when the generic is proved to be just as effective, even as a consumer, that's what I would choose, to save money in my own pocket and help reduce overall cost."

The PBMs know that generics often reduce costs for clients, and that they have to offer them to stay competitive. "When we look at our clients and what they need and want, they certainly don't want to pay more just to get a discount," says OptumRx's Jones. "If the generic drug is best for the patient, they don't need the branded. We want to give them every incentive," such as lower co-pays, to switch.


Industry consolidation

In recent years, there has been considerable consolidation in the PBM industry. It started with CVS and Caremark in 2007 and Express Scripts and MedCo in 2007, and then SXC acquired Catalyst this year. Kalman believes there will be even more consolidation in the future. That consolidation, he says, helps employers who are working with a PBM-knowledgeable adviser, because that adviser can play the PBMs off of one another for larger discounts. "There is intense competition among PBMs for employer business," he says. "So to grow, a PBM either needs to acquire another PBM or take business away from another PBM. What has happened is virtually everything as far as pricing is concerned is negotiable."

The negotiations, of course, depend on the size of the group. "If my client has 40,000 lives it's going to be a more aggressive negotiation with a PBM than a group that has 2,000 lives," Kalman says. "But [there is] still room for negotiations even with smaller size groups, such as 2,000 lives. So the very important point is that consolidation has resulted in a buyer's market for employers, which gives the employer with a skilled consultant opportunity to negotiate optimal terms with the PBM."

Putnam Associates' Auger agrees that with consolidation PBMs want to grow their buying power and reduce competition in the market for services. "By consolidating, they are increasing their buying power so they are putting more lives under their umbrella, and that gives them more clout for obtaining rebates or better contracts with drug companies," he says.

PBMs argue that their consolidation helps them, and helps create competition. "Scale matters because any one plan sponsor can't get the attention of a drug [distributor]," says Tim Wentworth, SVP and president, sales and account management at St. Louis-based Express Scripts. "We can take our scale and create competition for many of these products, both brand and generic. ... It starts with getting the right drug in the employee's hand - which is often generic, and helping our clients ... move the maximum amount of appropriate care into those generics."

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