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Pharmacy Benefit Managers Fading as Generic Drug Use Grows

Many PBMs have agreed to pass along rebates on brand-name drugs to customers. Yet such gains are too little too late, according to some health care benefits experts.

September 22, 2006
Related Topics: Health and Wellness, Compensation
Pharmacy benefit managers, hired by employers to manage prescription drug purchasing, have long been criticized for not passing on to clients the rebates they receive from drug manufacturers.

    After all, PBMs are in business because they save their clients money.

    Recently, many PBMs have agreed to pass along rebates on brand-name drugs to customers. Yet such gains are too little too late, according to some health care benefits experts.

    "I think those who have been caught up in the rebate game are very shortsighted," says Keith Bruhnsen, assistant director of staff benefits at the University of Michigan. Bruhnsen led the university’s effort to do away with PBMs and manage its drug spending.

    "If your drug trend is growing 14 or 15 percent a year, it doesn’t matter how much in rebates they are going to give you," Bruhnsen says.

    The profit paradigm of the industry has changed, he says.

    Drug consumption is moving away from brand-name drugs—the source of rebates—and toward generics. From 2005 to 2009, some of the most widely used brand-name drugs, from Allegra to Zocor, have become or will become available as generics. Companies are enticing employees to use the cheaper generic drugs by making co-pays for brand names more expensive.

    The use of generic drugs is at an all-time high, according to second-quarter earnings reports from the three largest PBMs—Express Scripts, Medco and Caremark Rx. All reported increased revenue compared with a year ago.

    "They figured it out," says Edward Kaplan, a consultant with the Segal Co. "They can make more money with generics than they can with rebates."

    Instead of pocketing rebates off brand-name drugs, PBM revenue comes from the difference, or spread, between the price an employer pays for a drug and the price a PBM pays for it. Such spreads are lucrative. Medco paid $90 in 2001 to fill 114 prescriptions for a generic version of Valium, for which it charged $1,028, according to court records reported in May by The Wall Street Journal.

    The cost PBMs pay to acquire a drug is usually much less than what they charge employers for it, but those numbers are rarely disclosed. Instead, PBMs use the average wholesale price—an industry agreed-upon figure used as a reference point when PBMs negotiate contracts with employers. PBMs use discounts off the average wholesale price to entice and keep customers.

    While these discounts may give employers the impression they are saving money, they mask the markup employers are really paying, Kaplan says.

    "The true acquisition cost is 60 percent to 90 percent below the average wholesale price," Kaplan says. "So you can do the math: Even if you discount by 70 percent, they still make 20 percent."

    As part of their effort to make pharmacy costs more transparent, the HR Policy Association created a coalition several years ago to find the wholesale acquisition costs and actual price PBMs pay for drugs. While these prices are often set by the industry, they are intended to be a better representation of how much a markup employers are paying PBMs for drugs, says spokeswoman Marisa Milton.

    Mark Merritt, president and CEO of the Pharmaceutical Care Management Association PBM industry group, says such transparency is available to companies that want it, but "it may cost more."

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