Managed Care - March 2008 - (Page 11) MEDICATION MANAGEMENT PBMs’ Rebate Income Threatened By Lawsuits and Move to Generics A recent court settlement may affect the way the PBM industry makes profits, but could it also lead to higher drug costs? By Martin Sipkoff recent $38.5 million settlement with 28 state attorneys general by CVS Caremark will cost the large PBM more than cash. Coupled with previous settlements in the industry, it will enhance a current trend toward pricing transparency and affect the role drug rebates play in PBM profitability, but could lead to higher overall drug costs. “The settlement money is a drop in the bucket to these people,” says Jesse C. Vivian, RPh, a professor in the department of pharmacy practice at Wayne State University in Detroit who has studied the case. “The rules associated with the case could, however, make a difference in how these people do business.” PBMs function as intermediaries between manufacturers and payers. Their purpose is to control costs. But a continuing issue for much of the health care industry is how the PBMs make a profit, and whether those profits are reasonable. That’s important because the three largest administer more than 80 percent of insured retail prescriptions and more than 90 percent of insured mail prescriptions, according to the Federal Trade Commission. It behooves PBMs to push consumers to purchase the drugs that offer the biggest rebates — and that is exactly what has been happening. If a PBM buys a drug in bulk from a manufacturer, it receives a rebate for that drug. The rebates, in aggregate, come to billions of dollars a year. According to the Pharmacy Benefit Management Institute, the average actual rebate amount per retail brand-name drug prescription is $2.57; for mail order, it’s $10.59. Some — but far from all — of that goes to a PBM’s client. How much is retained by PBMs is an ongoing controversy. A Manufacturers, of course, don’t care who profits from rebates as long as their drug is pushed. “Their entire purpose is to move market share,” says Adam Fein, PhD, an economist and president of Pembroke Consulting, who specializes in pharmaceutical distribution. “If they can’t do that through rebates, manufacturers have no incentive to pay them.” Court settlement The settlement will affect the profit Caremark makes from rebates. A settlement by Medco with the federal government about two years ago, which curtailed that company’s drug switching practices for five years, also limited the profitability of rebates. So the way PBMs are compensated has been changing. According to one study, rebate retention accounted for about half their profits in 2004. Now that figure is about 20 percent, according to Fein. But what that means to overall drug costs is unclear. In the January/February issue of Health Affairs, an article by the staff of the Centers for Medicare & Medicaid Services office of the actuary, titled “National Health Spending in 2006: A Year of Change for Prescription Drugs,” concluded that “prescription drug spending growth accelerated in 2006 to 8.5 percent, partly as a result of Medicare Part D’s impact. Most of the other major health care services and public payers experienced slower growth in 2006 than in prior years.” (Although the rate of growth slowed for virtually everything but drugs, health care spending overall did increase by 6.7 percent to $2.1 trillion, or $7,026 per person.) The CMS actuaries found that “lower overall rebates” contributed to the growth in drug spending for two reasons. First, drug coverage for people who are dually eligible for Medicaid and Medicare was transferred from Medicaid to Medicare in 2006 as a result of Part D. Under Rebates serve an important function in the distribution channel, says Adam Fein, PhD, president of Pembroke Consulting, but “greater PBM transparency may be overrated.” Contributing Editor Martin Sipkoff is a long-time health care journalist. MARCH 2008 / MANAGED CARE 11
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