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Pharmacy Benefit Administrators Drive Up Health Costs

The most trusted professionals in America are pharmacists, according to national polls over the past 20 years. So why has Congress not asked them for input on health care reform? In fact, pharmacists can help eliminate huge costs with three easy steps.[IMGCAP(1)] 1. Cut Out MiddlemenIt is not enough to point out that health care costs increase every year.Congress should identify what percentage of the increases result from outdated models that need to be reformed. Consider pharmacy benefit administrators, which were a good idea during the expansion of managed care in the 1980s. Insurers retained PBAs when they recognized that the volume of prescription drug claims in their programs would grow rapidly. The PBAs charged a reasonable fee to process the claims and even helped insurers identify the most affordable medications.Two developments turned this once-good idea into the most wasteful part of the drug delivery system. First, PBAs used their unique positions in the 1990s to exert leverage over drug manufacturers and retailers and expanded to become pharmacy benefit managers. They charged manufacturers for the right to list their drugs on an insurer¹s formulary and dictated prices that insurers would pay pharmacies to dispense them. They then paid pharmacies less for drugs than the actual cost pharmacies paid to acquire them, and pocketed the difference. PBM contracts prevented customers from seeing the manufacturer rebates, pharmacy payments or even drug prices.Second, the PBMs used Congress in 2006 to expand their new model on a massive scale. In return for campaign contributions and a promise of big savings, Congress made PBMs the centerpiece of the new Medicare drug program. As a result, PBMs now take a cut of virtually every prescription paid for by taxpayers.What does this mean for taxpayers? They are getting ripped off. A PBM owned by UnitedHealthcare recently made this clear when it shared industry data with labor unions in New York. According to the company, PBMs keep $7 to $9 in profit on average for every brand prescription filled and $22 to $28 for every generic prescription filled. This compares to the average retail pharmacy fee of $1 to $2 to fill a prescription. Keep in mind that PBMs never handle the prescriptions or even take possession of the medications. Also keep in mind that the details on these transactions are never shared with customers ‹ even if the customer is the U.S. government.How big is the problem? Before Congress created the Medicare drug program, the government paid for 24 percent of all U.S. drug purchases.Today, the government pays for 36 percent, or 1.3 billion prescriptions, and PBMs are in the middle of every sale.2. Make Expenditures TransparentHidden transaction fees are the biggest obstacle to reducing costs.Private employers have already figured this out. Nearly 60 large employers that collectively spend $4.9 billion for prescription drugs have recently either dropped their PBMs or forced them to disclose their drug acquisition costs. The University of Michigan started the trend in 2005 and reported that it saved $2.5 million annually when it dropped its PBM in favor of direct purchases. According to the university, ³Most of the savings come from eliminating fees from the university¹s former pharmacy benefit manager and using the claims data of the 80,000 people it provides insurance for ‹ data the PBMs do not share with their clients ‹ to help school officials negotiate better drug prices.² Companies such as Caterpillar are leading the trend away from the PBM model. According to a report in, Caterpillar¹s pharmacy benefit manager, Todd Bisping, ³found that there was a great deal of waste inherent in a system that uses PBMs as middlemen.² When a Congressional committee held hearings in June to determine how much the government was paying PBMs to manage federal employee health plans, the inspector general of the Office of Personnel Management told the committee the PBMs structured their contracts with the government to make audits ³almost insurmountable.² The committee concluded that ³the drug pricing program is structured to hide information from the consumer and auditors, and the United States Congress.² The committee also concluded that the ³federal employee plans pay substantially more for drugs than other agency programs,² and that ³Costco and offer better prices for drugs … in spite of the fact that the federal program has the buying power of 8 million members.² Of course, the PBM industry issued a media statement after the hearing to say greater transparency by PBMs will ³raise costs for both taxpayers and consumers.² What other health care provider argues that price transparency and open competition will increase prices?3. Protect Consumer ChoiceFinally, Congress should put consumer choice at the center of strategies to lower costs. In the case of prescription drugs, this will result in billions of dollars in immediate savings. Why? Because consumers with a choice almost always fill their prescriptions at local pharmacies, and because pharmacies are best at helping consumers opt for lower-cost generic drugs.A recent report on nationwide generic utilization indicates that community pharmacies used generics to fill 67 percent of all prescriptions in the past 12 months, compared to 49.6 percent by PBMs. Why does this matter? Because taxpayers and consumers save $4.4 billion for every 1 percent increase in national generic utilization. Under this calculation, total U.S. prescription drug costs could be reduced by up to $75 billion every year, simply by making sure consumers are not locked into the PBM model, which pushes expensive brands that provide them with larger rebates.To test the theory, take a look at North Carolina. The state recently enacted a plan that does not use a PBM in its state-benefit programs. Under the plan, generic utilization has already increased, and the state projects annual utilization to reach nearly 75 percent in the first year.Under current models, PBMs have monopoly control over the consumers covered in their plans. They use their control to steer patients away from local pharmacies into pharmacies or mail-delivery programs the PBMs own. The practice is so lucrative that CVS bought Caremark, one of the largest PBMs, to steer patients into CVS stores. Patients who refuse lose their coverage.As a result, CVS now fills one of every seven prescriptions in the U.S.Enforcement of current laws would undo much of what is wrong with the PBM model. For example, patient privacy laws prevent PBMs from using patient data from pharmacies to market new services to them. Despite the law, this is exactly how CVS is growing its business. In addition, the Federal Trade Commission should take an interest in the secret underpayments by PBMs to pharmacies that compete with them, even while Medicare and other government programs force the pharmacies to obtain their reimbursements from the PBMs.In other cases, changes to existing laws will undo abuses and restore traditional PBA models. For example, physicians that steer patients to treatment centers they own face big legal trouble. Is there any reason not to apply the same standard to every other care provider?Members of Congress should spend more time with pharmacists who provide care and less with lobbyists who want to protect expensive delivery models.Here is another bit of information that might help: The most recent survey that placed pharmacists at the top of the most trusted professions in America placed HMO administrators at the bottom. Guess which profession includes PBMs?Mike James is vice president of government affairs, Association of Community Pharmacists.

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