Business: Whom do drug benefit managers help?

Toan estimates that Express Scripts, one of four highly profitable companies that specialize in managing pharmacy benefits for employers and insurers, is saving 50-million Americans about 30 percent on the retail prices of their prescription drugs.

"I don't say we're perfect, but we are getting better and we are providing a real public service," Toan said in an interview. "Our interests are aligned with the patient. . . . We have a social mission, a very important social mission."

So why is Toan suddenly on the defensive?

Despite their success, pharmacy benefit managers, or PBMs, as they are known, have come under attack, accused of putting their own profits and the interests of drug manufacturers ahead of the people they are supposed to be serving.

Express Scripts collects $1.91 before expenses on each prescription it handles, according to its most recent financial statement. Drugstores report they take in less than 60 cents on average on each prescription they fill.

This month, executives of Aetna, a leading health insurer, fired Express Scripts, saying they thought they could save more money by cutting out the middleman and purchasing drugs directly from the manufacturers.

Meanwhile, the state of West Virginia went to court last week alleging that another PBM, Medco Health Solutions, defrauded the state employees' health insurance fund by failing to pass along an estimated $6-million in rebates from drug manufacturers. It is the biggest of many current lawsuits that accuse the PBMs, including Express Scripts, of shortchanging plan beneficiaries.

In light of these developments, Toan, a tall, slender man who resembles actor Donald Sutherland, came to Washington recently to explain to policymakers and opinionmakers how his company operates. He insisted Express Scripts does not push high-priced, brand name drugs simply because the company receives generous rebates from the manufacturers for selling those medicines.

"Our business model is not designed to maximize rebates," he said. "Our model is to get the lowest costs for our clients."

At the same time, Toan acknowledged that adverse news reports are creating a hostile political climate for PBMs. Not only are many states threatening to impose stiff regulations on the companies, he said, but Congress seems determined to enact a Medicare prescription drug benefit that would pay them unrealistically low prices for their services.

"We haven't done a very good job of explaining what we do," Toan said.

So his company is working intensely with other pharmacy benefit managers to develop a coordinated strategy to "counteract the critics who do not appreciate the fact that we're reducing their markups and reducing their margins."

Toan says most of the bad publicity is being generated by retail pharmacies, which fear their business will suffer because the PBMs try to steer customers toward mail order. Both the National Association of Chain Drug Stores and the National Community Pharmacists Association have been at the forefront of political efforts to rein in the benefit managers.

Retailers exaggerate how much PBMs are hurting their business, Toan said.

"We are very good for their business," he said. "I don't think they are being hurt as much as they say."

As Toan explains it, Express Scripts gets its revenue from three sources: compensation from employers and insurers whose drug benefit programs it manages; rebates from drug manufacturers for buying large quantities of brand-name medicines; and fees from the drug companies for special initiatives by PBMs to promote brand-name drugs among doctors. Customer copays belong to the drugstores, except when the customers order by mail directly through Express Scripts.

"We make a little bit of money on generics, we make a little bit of money on mail order, and on low-cost brands, we make a little on the rebates," he said. "This is the way we set up the business to work, and I think it's working pretty good."

No PBM discloses how much money it gets in rebates and other fees from the drug manufacturers, however. Critics say these revenues are kept secret because they would show how much the PBMs rely on the drug manufacturers for their profits.

Toan defended the policy of secrecy. He said clients have a right to audit Express Scripts' finances if they think they are being cheated.

"It's sort of like measuring the speed of an electron," he said. "The minute you measure it, it changes direction. And if we are in a bidding process and we're totally open and everybody knows what the prices are, it will change the prices we can negotiate."

He said the particular pharmacy plans are designed by the employers or insurers, and this prevents Express Scripts from being able to push high-priced brand name products on patients simply to increase their rebate revenues.

Toan said he doubts Aetna will be able to save money by filling its own mail order prescriptions, and he denied reports that other clients are considering such a move against PBMs.

In fact, Express Scripts just signed up a new, lucrative client: the Defense Department.

The one thing that worries Toan most, he said, is the possibility more states will follow the Georgia Legislature, which recently decided to regulate PBN practices in that state. He noted the National Community Pharmacists Association is promoting a model state law to regulate PBMs.

"They will insist that the PBMs be regulated by the state boards of pharmacy, which -- oh, by the way -- just happen to be controlled by independent retailers," he said. "They will require these things to be licensed and pay a fee so that they can go in and regulate our behavior."

John Rector, executive director of the National Community Pharmacists Association, responded that more regulation of PBMs is necessary because the companies, by deciding what medicines a patient will get, "are practicing medicine and pharmacy without a license."

If Congress approves a Medicare prescription benefit, Toan worries about what's known in the insurance industry as "adverse selection."

"The tendency would be for the people who need drugs the most to become part of the program," Toan said. "But the premium would be set for the average individual. So if you get the more expensive people, needless to say you've got a bad situation."

Looking into the future, the Express Scripts executive said he also fears the drug manufacturers have not been sufficiently sensitive to criticism from Americans who cannot afford the high prices of the new blockbuster drugs. Like the PBMs, he says, the manufacturers must recognize their social mission.

"Manufacturers need to realize they are part of the health care delivery system, and no longer a part of the manufacturing sector," Toan said.

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