Will PBMs Drive Up or Curb Medicare Drug Costs?

Pharmacy benefit managers seldom are in the public spotlight, working as they do behind the scenes to negotiate drug prices between large purchasers and manufacturers. But these low-profile middlemen will play a pivotal and powerful role in the Medicare drug plan. Suddenly, the practices of PBMs are coming under scrutiny — and raising red flags.

Some analysts believe PBMs have the potential to mitigate runaway drug costs by reining in pharmaceutical prices, while others say they are emblematic of everything that’s wrong with the status quo, ¬namely that market incentives do not serve consumer interests.

In some ways, Medicare Part D is the proving ground for PBMs’ potential to temper health care spending, currently estimated at over 15% of GDP.

The Pharmaceutical Care Management Association, a trade group that represents PBMs, claims that the industry improves cost-effectiveness by aggregating the buying power of thousands of Medicare beneficiaries.

This buying clout enables PBMs to negotiate price discounts from retail pharmacies and wholesalers and to squeeze rebates from manufacturers — reductions that act as a countervailing force to drug price increases.

But some consumer advocates and analysts warn that current market incentives and a lack of transparency create an environment where PBMs are likely to profit from closed-door deals that undermine cost-control measures and limit consumer choice.

Regulation Defeated

In spite of these concerns, Medicare Part D does not require PBMs to disclose conflicts of interest or financial arrangements with drug companies.

After much deliberation, Congress rejected the Cantwell Amendment to the 2003 Medicare Modernization Act, which would have required PBMs to submit detailed reporting to HHS and the Justice Department on such rebate agreements.

The deciding factor for many legislators was a GAO report that estimated that the Cantwell provision would have cost taxpayers $40 billion in administrative costs over 10 years.

AB 1960, introduced during the 2005 legislative session, also would have required PBMs to disclose these rebate deals. But Gov. Arnold Schwarzenegger (R) vetoed the bill, and PCMA has been fighting similar legislation in other states, arguing that public disclosure of confidential contract terms would limit competition and inhibit the industry’s ability to broker deals with suppliers and retailers.


Consumer advocates paint a different picture. “We’re very concerned that there’s no transparency provision,” William Vaughan, a health care analyst with Consumers Union, said. He also cautions that PBMs might have too much influence over formulary selection and pricing.

Under Medicare Part D, drug formularies are determined by committees of professionals known as pharmacy and therapeutics committees. These committees also decide where on the formulary (tier 1, tier 2 or tier 3) each drug should be placed. The law stipulates that at least one practicing physician and one practicing pharmacist must be on each committee.

“In a committee of 20, there would only have to be two people giving disinterested advice. And the law doesn’t say anything about whether those two could have ties to a PBM or a drug company,” Vaughan warns.

But according to CMS, medication “switches” cannot be authorized without the consent of the patient’s physician, and market forces will require PBMs to negotiate the lowest prices possible from manufacturers. Part D sponsors have an incentive to ensure that their PBMs aren’t signing sweetheart rebate deals that drive up their plan premiums because sponsors need to control premium costs to attract enrollees.

From CMS’ point of view, the rebate agreements really are beside the point. As long as PBMs are able to negotiate lower prices for insurers, they have performed their function. “The bottom line is lower prices for drugs are better for consumers and that’s what we’re concerned about,” Peter Ashkenaz, deputy director of media affairs for CMS, said.

Two recent lawsuits in New York and Massachusetts shed light on the inner-workings of the PBM industry and revealed that benefit managers quietly have been making large profits through secret rebate agreements with drug manufacturers.

Rather than these savings being passed on to purchasers and consumers, the money has largely remained in the pockets of PBMs. And these closed-door deals might create an incentive for PBMs to promote some pharmaceuticals over others.

According to the New York attorney general’s lawsuit, the PBM Express Scripts pushed more expensive drugs on state employees to reap larger rebates from drug companies.

Self Dealing?

A second area where PBMs have the potential to reap profits and gain more power in the Medicare Part D marketplace is by self-referring to their own pharmacies.

Many of the nation’s largest PBMs — including¬ Medco Health Solutions, Express Scripts and Caremark Rx ¬– own and operate mail-order pharmacies.

“PBMs could force beneficiaries to do business only through mail order and to have no contact with a pharmacist — we think that’s a bad idea,” Carol Cooke — a spokesperson for the National Community Pharmacy Association, a trade group that represents small, independent pharmacies — said.

NCPA has a vested interest in seeing PBMs’ power curtailed:¬ small pharmacies stand to lose lucrative Medicare customers if beneficiaries are steered towards mail-order operations.


However, Part D does have several provisions in place that might prevent self-dealing.

The 2003 Medicare law includes a statute requiring PBMs to do business with any willing pharmacy, and prescription drug plans must allow Part D enrollees to fill 90-day prescriptions at community pharmacies ¬as long as beneficiaries pay the difference in cost between their local pharmacy and mail order stores.

It remains to be seen if enrollees’ allegiance to their local pharmacy will outweigh the economic imperative to buy the lowest cost drugs.

As with many aspects of the Medicare drug plan, CMS is relying on the industry to self-regulate and on market forces to drive good business practices that benefit consumers.

Whether PBMs will save or sink Part D is still a matter of some debate, ¬and one which is unlikely to be resolved until the Medicare drug plan experiment is well underway.

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