Employers Seek Disclosure of Drug Costs, Rebates

September 20, 2005
Pressure is mounting on pharmacy benefit managers to reveal what they pay for drugs and to pass on the rebates that they receive to employers.

Last month, the HR Policy Association’s Pharmaceutical Purchasing Coalition, a group of 52 large employers who collectively spent $3.7 billion on drugs in 2003, established a new transparent pricing platform. The coalition includes such employers as Caterpillar, Starbucks and IBM.

In May, the coalition commissioned Hewitt Associates to issue a request for proposals for pharmacy benefit managers. In order to be certified by the coalition, pharmacy benefit managers had to agree to seven requirements. These included charging employers the same amount that the pharmacy benefit managers pay for drugs, disclosing acquisition costs and passing on to employers the rebates and discounts that the pharmacy benefit managers receive from the drug manufacturers.

The employers in the coalition are bound by contracts with their current pharmacy benefit managers. But once these contracts are up for renewal, the idea is that the employers will discuss discontinuing business with vendors if they do not meet the requirements, says Marisa Milton, a spokeswoman for the HR Policy Association. Out of the 27 who started the bidding process, only three completed it: Aetna Pharmacy Management, MedImpact Healthcare Systems and Walgreens Initiatives.

This is going to cause many employers--including those that aren’t in the coalition--to ask their pharmacy benefit managers why they didn’t agree to the conditions, says Mike Deskin, president of the Pharmacy Benefits Management Institute, a research organization in Tempe, Arizona. Also, he adds, the threat of the 52 coalition members refusing to do business with those companies that don’t follow the requirements may weigh on the pharmacy benefit managers that did not get certified. It remains to be seen whether the employers will follow through with this threat, he says.

Phil Blando, a spokesman for the Pharmaceutical Care Management Association, says setting standards for contracts is not necessarily in the best interest of employers because each company has its own unique needs. “We are adamantly opposed to locking in place a one-size-fits-all approach to disclosure,” he says.

Under the coalition’s purchasing model, pharmacy benefit managers would receive administration fees from employers instead of relying on revenues from the drug manufacturers. One of the biggest sticking points for many of the managers that dropped out of the bidding was disclosing the acquisition costs, particularly for mail-order drugs, says Matthew Gibbs, head of pharmacy consulting services at

Hewitt. Most notably, the three largest pharmacy benefit managers--Medco Health Solutions, Caremark Rx and Express Scripts--all initially competed in the request for proposals but did not make the final cut.

In the mail-order business, pharmacy benefit managers often own the prescription-filling facilities. That means the acquisition costs include overhead expenses such as staffing and leasing of space. Larger pharmacy benefit managers, which often get bigger discounts because of their size, are concerned that if they disclose these costs to employers, the drug makers won’t continue to give them as big a discount.

“They are concerned that if they disclose that they are getting a bigger discount than another pharmacy benefit manager, the drug manufacturers won’t give them as big a discount anymore,” says Paul Wernick, a consultant at Watson Wyatt Worldwide.

“The assumption there is that acquisition costs are going to be the same from pharmacy benefit manager to pharmacy benefit manager, but transparency can cost more,” says David Joyner, executive vice president of sales and account management at Caremark, which declined to disclose acquisition costs for its mail-order business.

Aetna had similar concerns initially but was more comfortable once it learned that the pharmacy benefit managers would recoup the costs through an administration fee, says Eric Elliott, president of Aetna Pharmacy Management. For Aetna, getting certified by the coalition was a business imperative,

Elliott says. “This would have had a major impact if we didn’t make the cut,” he says. “A lot of people would have been scratching their heads saying, ‘Wait, isn’t this what Aetna always said that they were doing anyway?’ ”  

Jessica Marquez