PBM Profits Soar Even as Drug Costs Rise

By Devin Stone

A recent MarketWatch analysis demonstrates the substantial boom experienced by the PBM industry. Both Express Scripts and Medco Health Solutions have experienced a five-fold jump in profits over the last decade. Although the news story does not mention the top PBM in the industry, CVS Caremark has reported that its PBM revenue has increased 23.4% in their third financial quarter.

What’s often overlooked is that these PBMs are not fiduciary agents that are financially obligated to act in the best interest of their clients – health plans. The top 3 PBMs are instead publicly traded corporations that answer first to shareholders. Thus, it’s useful to review the many ways in which these PBMs can potentially maximize revenue at the expense of health plans and patients. In addition to the MarketWatch analysis, a recent pair of New York Times stories on rising drug costs makes this particularly timely.

First, these PBMs negotiate with health plans to determine how much they will be paid for managing prescription drug benefits. The more revenue the PBM can bring in from the health plan, the better for the PBM’s shareholders. This can mean increasing premiums for health plan participants, which is exactly what is happening for many enrollees under Medicare Part D.

Secondly, these PBMs negotiate with pharmaceutical manufacturers for rebates, often in return for pushing market share. This means the PBM has an incentive to encourage the use of more costly brand name drugs over less expensive generic alternatives, leading to higher costs to health plans and patients but more lucrative rebates for the PBM. Michigan State Representative Mike Simpson recently authored a great column expressing the shock he experienced at such practices and what the state did about it.

In certain instances a PBM will advertise to physicians to push a certain product if the pharmaceutical manufacturer is willing to pay. Examples include Eli Lilly paying CVS Caremark to promote Cymbalta. The worst case scenario is that the rebates provide an incentive for the PBM to illegally switch the patient onto a new drug in order to maximize revenue from pharmaceutical manufacturers.

Third, these PBMs negotiate contracts with pharmacies to determine how much the dispensing pharmacists will be paid for services rendered. The less the PBM has to pay the pharmacy, the more revenue from the health plan the PBM is able to keep for itself through spread pricing. Since contracts with independent community pharmacies are on a “take it or leave it” basis, many independents have seen their margins squeezed thin. On the other hand, a large chain pharmacy such as a Walgreens is able to negotiate one contract with the PBM for the thousands of pharmacies that it owns. Because of this, large chains such as CVS, Wal-Mart, and Walgreens are often provided contracts with much better payment rates than an independent pharmacy.

Obviously there is an immediate solution to the problem of spread pricing. Simply eliminate the practice so that the pharmacy is paid whatever the health plan is billed, and create transparency so that the patient knows how much they will have to pay at each pharmacy. Such a solution would force the large chains to have to actually compete with independents on cost. Instead, we see situations such as the Hausers’ and the Butzskes’ where they have to pay substantially higher prices at a CVS Caremark than they do at an independent. On a related note, CVS Caremark has announced their retail revenues have increased 17.9% for their third financial quarter.

These are just some of the numerous ways that PBMs are able to pad their wallets at the expense of the health care stakeholders that they were initially intended to serve. There is nothing wrong with profit, but given the history of PBM abuse and the current initiatives on the table that will provide a greater number of patients covered under prescription drug programs administered by PBMs, transparency is necessary. The health care reform bill winding its way through Congress contains provisions championed by NCPA that, while modest, are an important step in this direction. More on that is available here and here.

3 Responses to “PBM Profits Soar Even as Drug Costs Rise”

  1. 1 Cassie January 6, 2010 at 4:03 am

    How serious are these conversations in Congress? I feel as if I haven’t heard much national news about this very topic. I think PBM regulation is a crucial part of decreasing health care costs and needs to be seriously addressed.

    Also, where is NCPA at with the conversation with the FTC about the CVS/Caremark issue? Thanks so much for the information and updates!

  2. 2 Editor’s note January 6, 2010 at 7:54 pm

    Reuters briefly covered PBM transparency last month (http://www.reuters.com/article/idUKTRE5BK3XA20091222) but you are correct in that most national news coverage has focused on other aspects of health reform.

    Regarding the Federal Trade Commission’s investigation of CVS Caremark, we posted an update here (https://ncpanet.wordpress.com/2009/12/16/new-cases-illustrate-cvs-caremark-driving-up-costs-for-patients-health-plans/). The investigation appears to be ongoing, but there’s no definitive word or outcome at this point.

    • 3 Cassie January 8, 2010 at 4:33 pm

      What can we do as individuals (aside from emailing and calling our Congress members) and as NCPA to get the message about the practices of PBMs out in the public eye? Even when I was at the health care debate at the NCPA annual in New Orleans, this topic was not brought up, and it was pretty frustrating.

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