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Mail-order medicine

Pharmacy benefit managers say mail-order prescriptions save patients and their employers money. But some clients and others question just how cozy PBMs are with the drug companies.

By SARA FRITZ, Times Washington Bureau Chief
© St. Petersburg Times
published September 15, 2002

WASHINGTON -- Americans frustrated in their dealings with HMOs and PPOs are getting to know another three-letter acronym for an organization that controls their access to health care: PBM.

That stands for pharmacy benefit manager, a company that buys drugs from pharmaceutical manufacturers, then fills the prescriptions of insured patients.

There are four major PBMs in the United States -- Medco Health Solutions, AdvancePCS, Express Scripts and Caremark -- that together serve 200-million people. They are hired by insurance companies and self-insured employers with the promise they will provide savings through massive buying power, convenience and close monitoring of patient prescriptions to prevent adverse drug interactions.

Already an important link in the health delivery system, PBMs are anticipating a big windfall if, as expected, Congress eventually gives them a central role in delivering a prescription drug benefit for Medicare beneficiaries. Virtually every Medicare bill proposed in Congress this year would have relied on PBMs.

"PBMs are part of the solution to Medicare," says LaVarne Burton, president of the Pharmaceutical Care Management Association, which represents PBMs in Washington. "Only PBMs have the necessary systems and experience to expand Medicare to include prescription drugs."

Yet many experts in the health care field are skeptical that PBMs can deliver on their promise to limit future increases in prescription drug spending. Critics say PBMs are more loyal to drug manufacturers than to plan beneficiaries, intent on encouraging patients to take more prescription drugs and guilty of using creative accounting to mask their sizable profits.

* * *

PBMs are also under siege in the courts. Numerous lawsuits have been filed charging them with violating their legal duty to serve only the interests of the plan beneficiaries enrolled in their drug programs. And the Justice Department is looking into allegations of fraud by at least two major PBMs.

"PBMs have a record of gross violations of contracts, fraud and exceeding costs," says Sen. Robert Torricelli, D-N.J., who represents a state where many drug manufacturers are headquartered. "Pretty soon, all major PBMs will be answering fraud charges."

Bait and switch?

When Gina Gruer went to her drug store in Suffern, N.Y., in June, 1995, with a prescription for Pravachol, a drug that lowers cholesterol, she discovered her PBM had a different medicine in mind for her.

Manufactured by Bristol-Myers Squibb Co., Pravachol sells for less than $2 per tablet. But Medco, the pharmacy benefit manager used by Gruer's insurer, switched her to Mevacor, a medicine manufacturered by Medco's parent corporation, Merck. Retail customers normally pay about $2.25 a pill for Mevacor.

Gruer's subsequent lawsuit, pending in federal court in New York, says the plaintiff "believes Medco's drug switch was not solely in her interests, but rather in the interests of Medco and Merck."

Lawsuits like Gruer's have been filed elsewhere by employers and health plan beneficiaries who say that PBMs are violating their duty under federal law to operate only on behalf of their plan members. Medco executives deny they are violating any law.

Yet Medco and other PBMs acknowledge they sometimes switch customers from a medicine prescribed by their doctor to an equivalent drug on their preferred list, a technique called "therapeutic interchange." They say they do it because they are getting a better deal from the manufacturer of the preferred drug.

Medco is the only PBM owned by a drugmaker. Merck had planned to spin it off this year but has postponed the offering.

The role of PBMs has grown since many of these companies were founded about a quarter-century ago to assist insurance companies and large, self-insured employers with the administration of drug benefits. At first, PBMs were paid small fees just to handle the paperwork.

But as the enrollment in drug benefit plans increased, PBMs found they could use their purchasing power to gain substantial savings from the drug manufacturers, usually in the form of rebates. The products of companies that pay rebates are put on the PBM's list of preferred medicines, known as a formulary.

PBMs keep meticulous computerized records of the prescribing habits of every physician whose patients are in their programs. When physicians prescribe drugs from a nonpreferred manufacturer, the PBMs fire off faxes to the doctors' offices, telling them they made a mistake.

In the near future, according to industry experts, a red warning box will flash on a physician's computer screen whenever an off-formulary prescription is entered. The red box will disappear once an approved drug is prescribed.

Most physicians comply with these electronic instructions because they fear their patients would be forced to pay full price or an outsized copayment for a drug that isn't on the formulary. But they are not happy about it. The American Medical Association has passed a resolution opposing the practice, noting that drugs in the same therapeutic class are not all the same.

A search for savings

Despite complaints from patients and doctors, health insurers and big self-insured employers rely increasingly on PBMs to manage their drug benefits because they see it as cost-effective.

"They bring large-scale purchasing power, negotiate deals with the drug manufacturers and encourage people to use mail order, and that keeps the costs down," said Bruce Taylor, employee benefits manager for Verizon, the phone company that is one of the biggest employers in the Tampa Bay area.

Like HMOs, PBMs are being accused of denying patients what they want or need in the quest to save money. But while PBMs say they can help customers control costs, the savings they achieve are relatively modest. At a time when the nation's drug spending is increasing at a rate of about 18 percent a year, Medco says it can hold a customer's increase to "several points below the national average."

Even with the help of Medco, Verizon's expenditures on prescription drugs for its employees are increasing by $100-million a year, fueled largely by unlimited use of popular brand name drugs such as Merck's Fosamax, which helps postmenopausal women avoid bone fractures, and AstraZeneca's Prilosec for gastric distress.

Critics say the savings achieved by PBMs are limited primarily because they keep a portion of the drug manufacturers' rebates for themselves and because the groups actually promote prescription drug usage.

"Drug utilization is the PBM's friend," said Kevin DeStefino, pharmacy benefit expert for Watson Wyatt, an economic consulting company. "That's how they make more money."

Advance PCS, which had $115.7-million in net income last year, told an investor conference in January that most of its profit comes from services to pharmaceutical companies. Just six years ago, 100 percent came from employers and health plans.

And in a filing with the Securities and Exchange Commission, Medco acknowledged it would not have been profitable in 1999, 2000 or 2001 without rebates from the pharmaceutical companies, primarily from Merck. Medco said it received $439.4-million in rebates from Merck in 2001.

These rebates usually average about 15 percent off the published wholesale price, at least some of which is passed along to the insurance company or the employer in the form of lower drug costs. But the PBMs do not share other revenues they receive from the drug manufacturers. These include substantial bonuses for helping the manufacturer achieve a certain market share, as well as a small fee the manufacturers pay for each customer transaction.

Much of the controversy around PBMs is being stirred up by local drug store owners, who complain that they are being driven out of business by the growth of PBMs. By offering discounts to customers who use mail order, the PBMs discourage people from going to the corner pharmacy to fill their prescriptions. Lobbying by pharmacists recently persuaded Georgia to become the first state in the nation to regulate PBMs.

Just as complaints from druggists multiply, so do the legal battles involving PBMs. In Philadelphia, assistant U.S. attorney James Sheehanis investigating whether Medco and AdvancePCS accepted illegal kickbacks from drug manufacturers and violated patient privacy. His court filings say he suspects fraud because the companies are involved in "solicitation and receipt of rebates and secret payments" from drug companies.

AdvancePCS is headed by David Halbert, a friend of President Bush and a former executive of Enron. The company says Sheehan's investigation has no merit.

Torricelli is one of a handful of lawmakers in Washington who have begun to question how PBMs operate. His interest in highlighting the issue may not be purely a matter of public policy: Torricelli is being challenged in the November election by a PBM owner, Douglas Forrester of BeneCard Services Inc.

The New Jersey senator notes that every piece of legislation to create a Medicare prescription drug benefit currently being considered by Congress would rely on PBMs to administer the benefit. PBMs should not be entrusted with that responsibility, he argues.

Secrecy prevails

Craig Fuller, executive director of the National Association of Chain Drug Stores and a leading critic of PBMs, say they do not want people to know how they operate. "It's hard to get your hands on what they are saying they are," Fuller said

Even companies that hire PBMs say it is difficult, if not impossible, for them to learn the wholesale prices the PBMs pay for drugs from manufacturers or how much of a profit the PBMs are making on their account. Verizon's quarterly reports from Merck list savings achieved in each category of drugs, according to Taylor, but there is no accounting for each drug.

"Prescription drug prices are very complicated," Taylor said. "The PBMs use the complications to their advantage."

Although PBMs claim to pass most of their manufacturer rebates along to their customers, there is no way of knowing how much money changes hands between these companies. "I am not naive enough to think there are not secondary rebates that I don't know about," Taylor said.

Medco's bookkeeping also came under scrutiny in June when the company disclosed that it counts patients' copayments as part of its revenue, even though those co-pays are returned to the pharmacies that fill prescriptions. The result: Wall Street investors may have been given an inflated impression of Merck's revenues.

Verizon's Taylor predicted that many people are going to become disenchanted with PBMs unless these companies are more forthcoming about how they operate. "We've strongly suggested they learn from the HMO experience by starting to fix the problem and get ahead of it," he said.

Executives of the PBMs are "very much aware that we're coming into focus here," said Burton of the industry's trade group. She said they intend to respond by demonstrating to Congress and the American people that they offer "tremendous value."

-- Sara Fritz can be reached at or (202) 463-0576.

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