With government scrutiny of PBMs heating up, concerns are being raised about oversight of the industry as the Medicare drug benefit takes effect.
During the past two years, PBMs have been hit with a series of lawsuits by states and the federal government alleging kickbacks and other financial misdeeds. As a result, some observers are expressing concerns about the potential for abuse by PBMs when they enter the Medicare program on a wide scale beginning Jan. 1, 2006. In particular, some say, the complicated nature of the benefit and the number of health plans and PBMs that will participate will make it vulnerable to fraud.
"Because this is dispersed through so many private plans, it's going to make it that much harder to police," says Alex Sugerman-Brozan, director of the Prescription Access Litigation Project, a coalition of consumer organizations, based in Boston.
In September, Caremark Rx, the nation's second-largest PBM, paid the Justice Department $137.5 million to settle charges that a PBM it acquired in 2004, Advance PCS, had sought and received kickbacks from drug companies in return for placement of certain drugs on formularies. Neither Caremark nor Advance PCS admitted wrongdoing.
Last year Medco, the largest PBM, agreed to pay $29.3 million to settle complaints in 20 states that it had improperly replaced some drugs from other companies with drugs from Merck & Co. in mail-order prescriptions in order to drive up profits. Medco admitted no wrongdoing but agreed to make changes to policies regarding switching of drugs, including notification to patients and doctors when such switches are made. Merck owned Medco until 2003 but wasn't involved in the settlement. The original allegations were made only against the PBM.
Medco is also under investigation by HHS' inspector general's office on allegations it sought to defraud Medicare and Medicaid by filing false claims regarding drug company rebates. The investigation stems from a whistle-blower lawsuit filed in September 2003 alleging Medco inflated manufacturers' "best prices" when determining rebates given to states under the Medicaid rebate program and paid kickbacks to third parties in return for placement of drugs on formularies. Medco says it has furnished the inspector general with documents it requested but declined further comment. The inspector general's office also declined to comment.
Earlier this month, the Board of the State Teachers Retirement System of Ohio sued Medco alleging it had overcharged retired teachers for prescription drugs, including a 350% markup on generic drugs in 2000. Medco denied the charges, saying it had saved the state millions of dollars and that the company's profit margin on the state program was less than 1%.
Meanwhile, in August, New York sued Express Scripts, the nation's third-largest PBM, for allegedly cheating the state out of $100 million by pocketing rebates from drug companies, inflating the cost of drugs and switching patients to drugs with higher copayments. In an e-mail, a company spokeswoman denies the allegations and says that since 1995, it has saved the state $2 billion.
"During the contract, the state received all rebates for which it contracted, and more rebates than guaranteed; initially deep retail discounts got better; and use of low-cost generic drugs increased," Express Scripts says.
Greg Weishar, president and chief executive officer of PharmaCare Management Services, a PBM, defends the industry saying: "I think our industry stands ... in very high regard because we have the best (monitoring and tracking) systems of any sector in healthcare. And we have the strongest audit procedures of anybody in healthcare."
But according to James Hartert, chief medical officer for Prime Therapeutics, a PBM operating primarily in the Midwest, a lack of transparency and misaligned incentives have plagued the industry. That includes a lack of information about rebates PBMs receive from drug manufacturers; how formularies are designed; details about savings negotiated with pharmacy networks; profits from PBM mail-order services; and about sale of data, such as utilization data, to the drug industry for analysis and marketing purposes.
"We, for example, do not take any money from the pharmaceutical industry for programs to promote or sponsor or fund educational initiatives, a fairly common practice in our industry. We've decided as a company that that potentially puts us in a conflicted situation," he says.