Drug brokers scrutinized

Costs: Pharmacy benefit managers negotiate prices in the $180 billion drug industry. But critics say consumers aren't getting a good deal.

April 07, 2004|By Cyril T. Zaneski | Cyril T. Zaneski,SUN STAFF

Nobody pays sticker price for prescription drugs.

The uninsured - people who can afford it least - pay more than the manufacturer's list price for a bottle of pills.

Nearly everybody else gets a discount. The price break varies widely, depending on negotiations between middlemen and drug manufacturers in a $180 billion marketplace where the secret wheeling and dealing is akin to that in a Turkish bazaar.

"Drugs are like airline seats. They are sold at varying prices set by demand and by what people are willing to pay," said Gary Claxton, director of the Henry J. Kaiser Family Foundation's health care marketplace project. "There is a tremendous range of prices for drugs, based on deals made by private parties."

Middlemen who negotiate with drug manufacturers on behalf of HMOs, insurers and employers are called pharmacy benefit managers, or PBMs. And although these companies process 80 percent of the nation's prescription claims and play major roles in deciding the medication choices for 200 million people, most Americans have never heard of them.

But PBMs' public obscurity may be ending. With spending on prescription drugs soaring, the PBMs are facing scrutiny. Lawmakers, prosecutors and health plan executives question whether the companies really save money for their customers as they claim or are themselves contributing to runaway health care costs. And the industry finds itself fighting in state legislatures and courts against measures that would force it to disclose more about deals with drug companies.

At issue is one of the PBMs' primary tools: the rebate.

Most drug manufacturers pay a rebate to PBMs as part of a deal to list a particular medication on a health plan's preferred drug list, or formulary. Formularies steer a health plan's beneficiaries to one drug over another by offering beneficiaries lower copayments - $10 for the preferred drug, for example, vs. $50 or more for a competitor. The terms of the PBMs' deals with the drug companies are secret - withheld in many cases even from companies that hire PBMs to manage their pharmacy benefit.

Robert Garis, an assistant professor of pharmacy at Creighton University in Omaha, Neb., scrutinized records of 300,000 drug transactions and found that PBMs were failing to pass along all of the drug savings negotiated. Instead they were supplementing their fees by diverting an average of $5 to $10 per prescription into their own pockets. PBMs dispute that finding.

"PBMs provide a valuable service," Garis said in an interview. "However, what they take in may be more than most of us would say is reasonable."

As to the significance of discounts negotiated by PBMs, Garis also expressed skepticism. "It's often hard to say that there are standard prices on prescription drugs," he said. "So a discount off of standard wholesale price is subject to interpretation."

Congressional Republicans and the Bush administration brushed aside such concerns last year when they handed PBMs the central role in managing the prescription drug benefit in the controversial Medicare Modernization Act. The companies begin their work next month as millions of seniors begin choosing Medicare drug discount cards. Twenty-eight companies, most of them PBMs, will offer cards that are expected to give 10 percent to 25 percent discounts on brand-name drugs for beneficiaries.

The discount cards are only a prelude to the Medicare prescription drug benefit that debuts in 2006. The entitlement for 41 million Medicare beneficiaries is expected to be lucrative for PBMs and the pharmaceutical industry. The White House estimates the benefit's price tag at more than $530 billion over a decade.

Mark Merritt, president of the PBMs' trade group, the Pharmaceutical Benefit Managers Association, and one of Washington's top lobbyists, predicts PBMs will be up to managing the cost of the huge entitlement. PBMs' experience negotiating with drug companies and in using formularies and mail-order pharmacies will give taxpayers their money's worth, he said. Citing a Congressional Budget Office evaluation of the Medicare law, he said, the cost of the drug benefit would be $40 billion higher without PBMs.

"This will be the first time people will get a look at what PBMs can really do," Merritt said. "With each succeeding year in Medicare, the government is going to rely more and more heavily on PBMs and cost-saving tools that they use. ... We are eager to show the public we can save them money on prescription drugs."

Spending on drugs has been skyrocketing. Americans spend about 10 cents out of every health care dollar on drugs - twice as much as in 1990. The U.S. Department of Health and Human Services says spending on prescription medication grew more than 15.3 percent in 2002, the latest year for which data were available.

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