Pharmacy Benefit Managers Lose Luster As Rx Cost Cutters

February 11, 2003 ( - These days, pharmacy benefit managers (PBM) may be as much a part of the problem of spiraling health costs as they are a part of the solution.

With prescription drug spending now the fastest-growing sector of US medical outlays, critics say PBMs have lost their traditional luster as cost-cutters and now earn a large portion of their money from drug companies that pay them to promote certain medications, a Philadelphia Inquirer report said.

The legality of drug-company payments to PBMs and other PBM industry practices will be decided in court. The US Attorney’s Office in Philadelphia has been investigating PBMs’ business practices since 1998. The probe focuses on the cost and health effects of rebates on patients, “and the broader cost effect on [employer health] plans,” according to Assistant US Attorney James Sheehan, who is leading the investigation, the Inquirer reported.

PBMs Claims They’re Within the Law

One of the PBMs being investigated, AdvancePCS Inc., of Irving, Texas, wrote in a US Securities and Exchange Commission (SEC) filing last year that Sheehan’s case centered on whether rebates and other drug-company payments to PBMs, or payments that PBMs make to retail pharmacies or others, “may violate the anti-kickback laws or other federal laws.”

The SEC document says Advance believes its practices comply with federal laws and regulations. After initially challenging investigators’ requests for documents and employee interviews, company officials are now cooperating with the probe.

Officials of Medco Health, of Franklin Lakes, New Jersey, another focus of the investigation, wrote in similar SEC filings last year that they also believed they were complying with federal laws. But “different interpretations and enforcement of these laws could require us to make significant changes to our operations,” the company wrote.

In numerous lawsuits across the country, health plan representatives want PBMs to repay millions of dollars in rebates and other financial incentives that they claim should have been passed on to their health plans. Some of the lawsuits accuse PBMs of steering clients to higher-priced drugs for their own profit and of failing to act in their plans’ best financial interests.

Without admitting any wrongdoing, Medco and plaintiffs in five other lawsuits have agreed to a settlement that, among other things, calls for Medco to pay $42.5 million. A sixth plaintiff, represented by New Orleans lawyer Russ Herman, rejected the offer as inadequate. In court, Herman said analysts he hired to review Medco financial documents concluded that Medco withheld $2.85 billion in rebates from clients from 1995 to 1999.

In response to clients’ concerns about rebates, many PBMs, including Medco, now share a portion of the rebates with their clients, said LaVarne Burton, president of the Pharmaceutical Care Management Association, a trade group that represents the PBM industry.

More than 100 PBMs operate in the United States, but the industry is dominated by four: AdvancePCS (75 million people covered), Medco (65 million), Express Scripts Inc., of St. Louis (40 million), and Caremark Rx Inc., of Birmingham, Alabama. (20 million).