Congress has entrusted the crown jewel of its Medicare reform plan-the new prescription drug benefit-to a group of shadowy middlemen known as pharmacy benefit managers, giving them a unique opportunity to re-invent themselves as risk-bearing, direct-to-consumer businesses.
PBMs manage the prescription drug benefits for some 200 million people who are covered by a variety of private health plans as well as Medicaid, but until recently they operated under the radar screens of consumers. Four national PBMs-AdvancePCS, Caremark Rx, Express Scripts and Medco Health Solutions-dominate the market, although Caremark and AdvancePCS in September announced plans to merge. PBMs manage about two-thirds of the nation's $200 billion in annual drug spending, according to the Pharmaceutical Care Management Association (PCMA), the industry's trade group, citing Goldman Sachs research. The four largest PBMs pull in revenue of roughly $67 billion annually, according to the same research.
Prescription drugs are the fastest growing segment of U.S. healthcare costs, according to the Congressional Budget Office. Last year, the CBO estimated that Medicare beneficiaries would spend almost $87 billion that year on outpatient prescription drugs, and that number was expected to climb to more than $128 billion by 2005. The reform package, which has allocated $395 billion over 10 years to administer the drug benefit to a large swath of Medicare's 40 million beneficiaries, is counting on PBMs to rein in those skyrocketing costs.
Are they up to the challenge? The industry, of course, thinks so. But others are skeptical, given PBMs' distant relationship with consumers. PBMs earn their keep by negotiating prices with drug manufacturers, earning rebates on large volume orders. They also develop and manage drug formularies that steer patients to the best buys. Phil Blando, vice president of public affairs for the PCMA, points out that in January the General Accounting Office reported that for the federal employees' health benefit plans, PBMs sometimes reduced drug costs by as much as 53%.
On the other hand, critics charge that PBMs fail to pass on a lot of the savings to consumers, in particular by pocketing the rebates. In March, the Prescription Access Litigation (PAL) project and the American Federation of State and County Municipal Employees filed suit against the four major PBMs. The lawsuit, filed in Alameda County, Calif., charged that by cutting inside deals with drug companies, PBMs inflate prescription drug prices (April 14, p. 30). Arguments by the PBMs for a motion to dismiss will be heard in court in early 2004, says Stephen Rosenfeld, senior legal adviser to the PAL project.
By failing to require more transparency from the PBMs, the Medicare reform package failed to reform the drug industry's cozy relationship with PBMs, Rosenfeld says. "PBMs, by creating formularies, have enormous power to determine which drugs are going to be purchased, so there is strong incentive for PBMs and drug manufacturers to reach their own separate deals," he says.
Under the legislation signed into law earlier this month, PBMs now have several opportunities to cash in on Medicare. When the new benefit launches in 2006, they can choose to play their customary back office role for commercial health plans that participate in the new Medicare Advantage plans. They also have a new opportunity to take on some risk themselves as licensed prescription drug plans, administering the drug benefit as stand-alone policies for those seniors who choose to stay in traditional fee-for-service Medicare. As it stands now, according to the CMS, only a little more than 10% of all Medicare beneficiaries-4.6 million seniors-are enrolled in Medicare+Choice plans, the ill-fated precursor to Medicare Advantage.
Until then, PBMs also can participate in the transitional drug discount card program, which for an annual $30 enrollment fee offers Medicare beneficiaries drug discounts ranging from 10% to 25%. As they do now for private insurers, PBMs participating in the drug discount program would put together pharmacy networks and negotiate prices with drug manufacturers.
"It's really a Rubik's Cube situation," says Jorge Lopez, a partner in the health industry group at the law firm Akin, Gump, Strauss, Hauer & Feld in Washington. "There's a lot of fears whether we can really control this benefit and at the (crux) of this issue is whether it can hold the line at $400 billion for 10 years. There's two years until (the drug benefit) comes on line. In the early days, there surely will be many who will want to step up and play as was with Medicare+Choice, but whether they will want to after they have some experience in trying to manage the benefit, (we will) just have to wait and see."