Pharmacy Benefit Managers: Too Powerful?

Any week now, the Federal Trade Commission is expected to rule on the proposed merger between Medco Health Services and Express Scripts.


Trouble is, outside of Wall Street and the drug industry, there’s little interest in the deal.

That’s because by its very nature, the arcane world of pharmacy benefit managers isn’t exactly the thing of dinner table conversation.

Yet what they do is.

They’re the middleman between you, your drug store and your insurer.

They control the cost of what you pay for drugs and which drug stores you should use. And based on deals they strike with drug companies, they even try to influence what drugs you take—in some cases refusing to fill the script recommended by your doctor.

I’d go so far as to say they’re the key player in what some might argue is one-step removed from a legal drug cartel.

“Few markets are as concentrated, opaque and complex and subject to rampant anticompetitive and deceptive conduct such as the PBM market,” is the way industry critic David Balto, a former FTC lawyer, put it in testimony before the Department of Labor in 2010 regarding PBM transparency.

The deal, if approved, would shift the industry to a duopoly from oligopoly.

Critics like Balto worry that such a concentration among two of the three biggest PBMs would cause health care costs to go up.

Medco and Express Scripts execs, in a joint conference call announcing the deal, said it wouldn’t — and with $1 billion in “synergies” from the merger would help reduce costs even more.

I say: Since when is less competition ever good for all but investors? Answer — rarely if ever, especially with industry already as quietly powerful as PBMs.

In its early days, PBMs were fee-driven intermediaries and administrators. But over the years they’ve evolved to the point of, in some cases, owning the mail-order drug store you’re encouraged to use. Or as is the case of CVS Caremark , the drug store owns the PBM, which directs you to use its own drug store. (I’m still not sure how that’s not an obvious conflict, but I digress...)

The result has been a rapidly consolidating industry (Medco, for example, has been bought, sold and now possibly merged) with rising profits but relatively thin margins.

Balto, who represents opponents of the Medco-Express Scripts deal, notes that between 2004 and 2008, “the three major PBMs have been the subject of six major federal or multi-district cases over allegations of fraud; misrepresentation to plan sponsors, patients, and providers; unjust enrichment through secret kickback schemes; and failure to meet ethical and safety standards” — resulting in more than $371 million in damages.

But according to a spokesman for the industry lobbying group, the Pharmaceutical Care Management Association: “Simply put, if PBMs didn’t save money and improve access and safety, we wouldn’t be around (i.e., employers wouldn’t hire a PBM).”

Furthermore, the industry’s stresses that with its negotiating power it believes over the next decade, PBMs will save almost $2 trillion in drug costs.

Maybe — or maybe not.

Reality is nobody can really say for sure because the inner-workings of PBMs and the mechanics of the deals they strike with drug companies are simply too complicated.

Or as Walgreen claims to have discovered — too powerful. Walgreen recently decided to end its relationship with Express Scripts rather than agree to contractual terms that it believed were onerous.

The move caused Walgreen’s stock to tumble, as customers whose pharmacy plans are tied to Express Scripts were likely to flee to other drug chains.

Which gets us to the bigger question: Have PBMs become too powerful?

Writing in the Annals of Health Care last year, then University of Chicago law student Mark Maedor (now with the FTC’s health care enforcement division), wrote:

“To patients, it appears they are purchasing medication from a pharmacy — with their doctor’s permission — and are simultaneously or subsequently reimbursed for their expense by their insurance company. In reality, their purchase is the end result of an extensive process of contract negotiation, cost-benefit analysis, corporate haggling, manufacturer rebates, and the artful salesmanship of pharmacy benefit managers. While simplified transactions are ordinarily beneficial to consumers, in the case of prescription drugs they conceal unnecessarily inflated prices.”

He adds: “What is clear is that pharmacy benefit management companies have developed and grown into a business model that pits their profit incentives against the financial needs of their clients and, at times, the health of patients.”

Not sure that's what the doctor meant to order.


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