April 1995

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Prepared by Lynn Etheredge, Consultant. Sponsored as an activity of theHealth Insurance Refonn Project at George Washington University, withfunding from the Robert Wood Johnson Foundation.

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PHARMACEUTICAL SPENDING AND PBM

Private sector payers are using pharmacy benefitmanagers to help control the rising costs of theirpharmacy insurance benefits. National spendingfor outpatient prescription drugs rose rapidly from$21.4 billion in 1985 to $38.2 billion in 1990 and$48.8 billion in 1993. The payment share by third-party insurers also rose rapidly, from 35% ofoutpatient prescription drug spending in 1980 to57% in 1993. Over 80% of outpatient pharmacyspending is from private funds; Medicaid is thelargest public payer, with about a 15% share ofnational spending.!

The pharmacy benefit management businessis now dominated by three large firms: PCS HealthSystems, Medco Containment Services, and Diver-sified Pharmaceutical Services. According to recentWall Street Journal and New York Times stories,these firms manage drug benefits for an estimated100 million to 115 million persons. They accountfor 70% of prescriptions paid by pharmacy benefitmanagers and one-third of prescriptions paid bythird parties} Within the past year and a half, allthree £inns were purchased by pharmaceuticalcompanies: Merck paid $6.6 billion for Medco,Eli Lilly spent $4 billion for PCS, and SmithKlineBeecham acquired Diversified Pharmaceuticalsfor $2.3 billion.

A second tier of about a dozen firms, led byCaremark, Value Rx, and Express Scripts, eachhandle 1% to 5% of the PBM business. Healthinsurance companies such as Prudential, Aetna,Metropolitan, and CIGNA also provide managedpharmacy services. About 90% of HMOs and 57%of PPOs offer managed pharmacy benefits, eitherdirectly or through contract with a PBM company,3

Pharmacy benefit management (PBM) has be-come one of the most rapidly growing of the newmanaged care technologies. Using purchasingtechniques such as phannacy networks, negotiateddiscounts and rebates, lists of preferred drugs,and online utilization review, PBM enhances theability of employers and health plans to deal withphannaceutical prices, physician prescribing prac-tices, and rising drug expenditures. Leading firmsare also pioneering new methods of disease man-agement. Already, the growth of PBM-basedpurchasing has spurred fundamental reorganiza-tion of the pharmaceutical industry, includingsome $45 billion of acquisitions and mergers inthe past 18 months. But few of the potential bene-fits (or concerns about adverse effects) have yetto be adequately documented.

A summary of information about pharmacybenefit management and its potential impacts onhealth care, this paper covers the following:

.A description of the structure of the PBM indus-try, including the dominant role played by justthree large finns-Medco, PCS, and DiversifiedPharmaceuticals-that have all been acquiredby pharmaceutical companies.

.A description of the major PBM managed caretools; how PBM works; how it changes relationsamong patients, physicians, employers, healthplans, pharmacists, and pharmaceutical manufac-turers; and the economic dynamics and businessstrategies that appear to shape its development.

.An overview of concerns that have called forth"shots across the bow" by the Food and DrugAdministration (FDA), the Federal Trade Com-mission (FTC), and the DffiIS Inspector General.

.Information and speculation about the use of PBMmethods via public sector arrangements, suchas the Blue Cross Blue Shield Federal EmployeesPlan (the nation's largest PBM user); state Medic-aid programs; and options for the Medicare pro-gram's elderly and disabled beneficiaries.

The information has been derived from a varietyof sources and conversations. But the reader shouldbe cautioned that reliable data are scarce and thatthe industry is both diverse and changing rapidly.

IHCFA estimates.

2"Drug Industry Takeovers Mean More Cost-Cutting,Less Research Spending," Wall Street Journal, February1, 1995; "FDA Cautions 3 Drug Makers on Pressure,"New York Times, February 1, 1995; "PCS, Medco TopPharmacy Benefit Managers, Pharmaceutical Representa-tive, November 1994.

3"Where Insurers See Pharmacy Going," Drug Topics,November 22, 1993; "PPOs Show Gradual Rise inPharmacy Programs," Drug Topics, January 9, 1995.

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It is difficult to be sure how many companies arenow involved in managed pharmacy benefits;estimates suggest about 40 PBM specialty firmsand about 100 insurers, HMOs and other managedcare providers, a total of perhaps 150 companies.

~e areas il1 vvtrich ~ey coD1pete are accessstandards (for exaD1ple, D1axiD1UD1 travel tiD1eto a participating phannacy), negotiated phar-macy discounts (for exam.ple, average vvholesaleprice [AWP] minus 10%), and dispensil1g feesto ~ese phannacies. For ~e largest nationalaccounts, PBM COInpanies need to have contractsvvi~ InanY thousands of pharmacies, coveringD1ost U.S. zip codes.

.Product substitution. The PBM coD1panies offergeneric and fonnulary options so a heal~ plancan save directly by usil1g less expensive drugsas its preferred products.4 PBM £inns also nego-tiate rebates from pharmaceutical coD1paniesfor strifting D1arket share to ~eir products;portions of ~ese rebates are passed on to ~eheal~ plan. PBM coD1panies use a variety offinancial arrangements to coD1pensate pharma-cists for contacting physicians about changingprescriptions to ~eir preferred drugs and gener-ics and counsellil1g patients. It is ~ese large-scale atteD1pts to shift prescribingpractices-Merck reports ~at its Medco direct-D1ail pharmacists alone made 2 million calls tophysicians last year-~at are ~e D1ost impor-tant recent developD1ents il1 ~e evolution of

pharmacy management practices.

.Quality and utilization review. PBM proposalsnormally il1clude online prospective screeningfor quality issues, such as drug-drug il1terac-tions, dosage and frequency problems, and avariety of prior approval and o~er utilizationscreens. These checks seek to identify and re-duce overuse and il1appropriate use of pharma-ceuticals.

EVOLUTION OF PBM

The management of pharmacy benefits, as aspecialized purchasing technology, has been evolv-ing along a continuum that is similar to the devel-opment of other aspects of managed care:

.a first phase that emphasizes improvements withina traditional insurance system, including variousforms of coverage and benefit rules (formulariesand generic substitution), co-payments, utiliza-tion control through prior approval and claimsreview, and electronic claims submission;

.a second phase that takes advantage of purchasingpawer to negotiate pharmacy discounts, developpreferred pharmacy networks, obtain manufac-turer rebates from volume purchasing, enlistdispensing pharmacists in efforts to alter pre-scribing patterns, and evolve a variety of newrisk-sharing and incentive arrangements; and

.a third phase that emphasizes disease managementtechnologies, including outcomes reporting andcost-effectiveness studies, identification of bestpractices, development of protocols and clinicalpractice guidelines, and improved preventionstrategies.Although leading PBM companies now have

activities in all of these areas, most of their effortstoday are in the second phase. In developing RFPs,evaluating proposals, and the negotiation/selectionprocess, large employers usually turn to benefitconsulting firms that offer specialized pharmacyconsulting services.

.Claims administration. With over 900/0 of pharma-cies now computerized, most administrativesteps-verifying if a prescription is for a pre-ferred drug, quality screens, prior authorization,patient co-payment calculation, and submissionTHE BASIC PBM PACKAGE

4Generic drugs have chemically identical active ingredi-ents, are available from multiple manufacturers, and arenot patent-protected. A formulary is a list of preferreddrugs in each therapeutic class, selected on the basis ofpatient care and cost considerations, that is intended toinfluence prescribing choices among drugs that havechemically different active ingredients.

The features described below are now a basicpackage for which major employers expect PBMcompanies to compete aggressively, with quanti-fiable measures and performance guarantees:

.Pharmacy network. The PBM £inns offer contractswith a network of preferred pharmacies. Among

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the prescribing physician,s which they most oftendo by phone. PBM firms use a variety of pharma-cist incentives to encourage such phone calls andother mechanisms, such as mailings to physiciansbefore refill dates, as part of product-switchingefforts.

and approval of claims-are normally doneonline as the prescription is filled out. Thissharply reduces paperwork hassles comparedto traditional insurance coverage, where patientshave to submit their own claims. Claims pro-cessing costs are among the most price-competi-tive aspects of PBM competition.

.Mail order pharmacy. Mail-order pharmaciesprovide still greater savings opportunities,particularly for patients with therapies whichinvolve longer-term use of expensive drugs.Such mail order pharmacies also offer PBMcompanies an opportunity to use their ownpharmacists to contact physicians and patientswith regard to product substitutions.

EFFECTS ON PARTICIPANTS

This new system of purchasing prescriptiondrugs affects patients and other participants ina variety of ways.

Patients

The patient usually pays a flat co-pay to thepharmacist and has no other paperwork; thepharmacist's bill is automatically submitted elec-tronically by computer as the sale is made. Mailorder works similarly, except that the prescriptionis mailed to the PBM company and filled by itspharmacists.

Patient choices may be expanded by paymentrules, analogous to the "point of service" option-that is, a health plan will reimburse for a prescrip-tion at the cost of a generic product cost, but apatient may choose a prescribed brand name ifhe or she wishes to pay the price difference. Thereare usually procedures for physicians to requesthealth plan authorization for a nonformularyproduct for one of their patients.

There are apparently no wide-scale, objectivestudies of the extent to which PBM companiesactually shift prescriptions and the extent to whichthese substitutions result in clinical benefit or harmto patients.

Pharmacies

PBM has raised many concerns for pharmacies.Indeed, the nation's pharmacies initiated and areimportant advocates in the push for "any willingprovider" and "freedom of choice" statutes torestrict the ability of health plans to contract withselected providers. Such state laws are reportedto affect pharmacy contracting by HMOs in morethan 15 states. Drug stores can find themselvesunder a great deal of pressure to offer productprice discounts and fixed dispensing fees or facebeing excluded from a preferred network. Esti-mates are that up to 50% of total sales in retaildrug stores are for customers who come in to fill

A patient using the typical arrangement describedabove would go through the following process. Anenrollee receives a pharmacy benefit card from thePBM company. For coverage to be paid, he or shetakes a prescription to a participating pharmacy,which is available within certain travel time ordistance parameters specified in the health plan'scontact The pharmacist's computer shows informa-tion about whether the drug is on the health plan'sformulary, the patient's co-pay responsibilities, andthe patient's past prescriptions.

Whether or not a prescription is dispensed aswritten depends on the health plan's rules aboutgeneric and therapeutic substitution and state laws.If there are generic substitutes available, PBMagreements typically call for pharmacists to dis-pense the (lower-priced) generic product. Pharma-cists can usually make such generic substitutionsat their own discretion, unless a physician explicit-ly notes that a prescription must be "dispensedas written" (DAW). To make therapeutic substitu-tions to preferred (price-discounted/rebated)products on a health plan's formulary, pharmacistsare normally required to obtain the approval of

SSome HMOs obtain written authorization by physiciansfor formularies so that pharmacists may make productsubstitutions without individual physician contacts.

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a prescription but then also pick up other items,for example, razor blades and shampoo. Chaindrug stores may fare better in such negotiationsthan "mom and pop" independent stores. Pharma-cies also have to carry the generics and therapeuticequivalents listed on formularies arranged by PBMfirms, rather than negotiate the best deals forthemselves on substitutable products. To help itsmembers compete, the National Association ofChain Drug Stores started its own PBM organiza-tion (Pharmacy Direct Network) last year. Some1,300 pharmacies in 15 states also joined last yearin lawsuits against 27 pharmaceutical manufactur-ers to counter what they deemed to be unfairpricing practices, such as providing much largerdiscounts to HMOs, mail order pharmacies, andhospitals than to community pharmacies.

Pharmacists

Pharmacists participate in a variety of financialarrangements with PBM companies and drugmanufacturers that can increase their incomes foractivities such as getting a physician to approvea prescription change or counselling a patient onswitching products or how best to use a newproduct. Increasingly, these activities expandpharmacists' marketing function in a way thatsometimes conflicts with their other professionalroles. Pharmacists have two distinct advantagesin carrying out this function: Polls show that theyhave a high degree of patient trust. And a pharma-cist calling to discuss a patient prescription thathe or she is filling is more likely than a pharma-ceutical marketing representative to get the doctoron the phone. For pharmacists, these can be finan-cially attractive features of recent PBM develop-ments.

purchasing environment and greater competitionamong drug companies. Other multi-billion dollarmergers, diversifications, and consolidations thathave occurred just in the last six months include,Sandoz-Gerber ($3.7 billion), Roche-Syntex ($5.3billion), SmithKline & Bayer-Sterling Winthrop($2.9 billion), American Home Products-AmericanCyanamid ($9.7 billion), Ciba Geigy-Chiron ($2.1billion), Glaxo-Wellcome ($14.0 billion), andHoechst-Marion Merrell Dow ($7.2 billion, innegotiation).

Several economic factors join to create a strongbuyers' market for pharmacy products. First,pharmaceutical products increasingly compete ina marketplace with substitutable drugs, includingtherapeutic interchange for patent-protected prod-ucts and generic equivalents for off-patent prod-ucts. The trend is even more in this direction, assome 60 brand-name drugs, with $10 billion ofsales, are reported to be coming off-patent in thenext several years.6 Secondly, the marginal produc-tion costs of most drugs are low; that is, it costsvery little to produce another bottle of pills. Asa result, there is a potential for vigorous pricecutting competition among substitutable products,if purchasers can offer higher volume or shiftmarket share. Third, the marketing and distribu-tion costs of pharmacy products using traditionalsale approaches-individual physician visits bydrug company representatives-have been quitehigh, up to 50% of retail costs.

The formation of the three new super-PBM/manufacturing firms reflects strategies to capitalizeon these economic factors. A key dynamic is theability of large PBM purchasers to shift market shareamong therapeutically substitutable drugs and toleverage steep rebates from a drug's manufacturerin return for the shifted volume. Given the lowmarginal production costs, each dollar shifted toa product goes almost directly to its manufacturer'sbottom line-that is, each dollar represents a dollarincrease not only in sales but also in profits-anddrops the sales and profitability of its competitorby an equal amount. The price competition may

Pharmaceutical Manufacturers

For the manufacturers of pharmaceuticals, thedevelopment of effective purchasing of pharmacybenefits is profoundly altering their industry aI)dtheir individual companies. The acquisition of thethree largest PBM firms within the past year anda half, giving the purchasing pharmaceuticalcompanies' ability to influence prescriptions formore than 100 million persons, has stimulated anumber of preparations for a tougher health plan

6BNA Health Care Policy Report, July 18, 1994.

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be just beginning. PBM companies also offer theirpreferred suppliers reduced marketing and distribu-tion expenses by substituting health plan formularydecisions for marketing to individual physiciansand by using calls by dispensing pharmacists totarget individual physicians who prescribe competi-tor products. Once a physician has shifted to usinga PBM-favored drug over its competitors for onepatient, he or she may be more likely to follow thatprescribing pattern for other patients as well. In lightof such considerations, recent acquisitions andmergers among drug companies reflect a neweconomic imperative to find production, sales, andmarketing economies. There are those who believethat only a handful of broad-based companies willsurvive an increasingly competitive drug market-place.

to this generalization, however, has been the"shoebox effect," that is, the tendency for a phar-macy card system to capture all pharmacy claimswhereas, with traditional pharmacy benefits, anumber of prescriptions that patients paid out-of-pocket were never submitted for payment Indeed,two benefit consulting firm studies of employerexperience have reported that a majority of firmssaw higher initial costs from switching from in-demnity coverage to a pharmacy card system, aswell as higher trend rates.7

THE LEADING EDGE OF PBM PRACnCE

At the leading edge of PBM practice--beyondtoday's basic features-are a number of newservices and arrangements that could stronglyinfluence the next generation of managed care andthe entire health system. It is, of course, too soonto tell how well these concepts will work in prac-tice. Among these next generation products, whichare already pioneered in large employer RFPs,are developments such as disease management,capitation and risk-sharing, and point-of-care orpoint-of-prescribing arrangements.

Disease Management

About 5% of the population uses about 50% ofhealth care spending each year, and about 20% usesabout 80% of health care spending. Among thesehigh-expense populations are important subgroupsof patients with chronic conditions, which usuallyrequire the use of drugs. The hope of disease man-agement initiatives is that new efforts to target suchpatients may produce better health outcomes andlower total health costs. Such initiatives build ona range of information about prevention and bestclinical practices, as well as studies about inappro-priate prescribing and patient compliance. Interven-tions include education of patients to change theirbehavior with respect to diet, exercise, and regularuse of medications, as well as working with theirphysicians. To these efforts, the large PBM compa-nies, allied with research-oriented manufacturers,

Physicians

Some of physicians' traditional responsibilityfor selection of prescription drugs is being takenover by formulary committees of managed careplans, PBM companies, and pharmacists. Giventhe inadequacies of getting unbiased prescriptiondrug information to physicians through visits bydrug company representatives, as is evident instudies on physician prescribing, these shifts maybe desirable. Probably much depends, for thepatient, on the ability of the individual physicianto insist on a prescribed product if it is better forthat patient and for a physician to be advised ofwhat drugs and dosages have been dispensed tohis or her patient. On this topic, as on other ques-tions of how PBM works in practice, there is stilla scarcity of objective, published information.Physicians probably also experience increasedhassles from the large numbers of phone calls frompharmacists seeking approval for a prescriptionchange.

Employers and Health Plans

The major advantages offered by PBM firI1;\Sto employers and health plans are greater econo-mies compared to traditional indemnity insurance.The rapid growth of PBM services would be diffi-cult to explain without significant savings inemployer "per member/per month" (PMPM)expenses for pharmacy benefits. A major caveat

7Studies by Hewitt Associates and Foster Higgins, citedin Medical Benefits, December 15, 1994, and April 30,1993.

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protocols where the use of drug therapy or moreexpensive drugs must be preceded by less expen-sive interventions.

These emerging disease management initiativesin PBM may converge with other leading-edgeefforts to develop a valid clinical basis for man-aged care' s next phase, such as efforts to define"best practices" and to identify "centers of excel-lence." An optimistic view would see all of theseefforts coming together.

Capitation and Risk-Sharing

To compete for employer accounts, PBMcompanies are nowexperi menting with going at-riskfor pharmacy costs of an entire enrolled population.They are also experimenting with guarantees suchas one specifying that/ if their product is chosenfor a formulary/the employer's health expenses willgo down, because the specified drug produces feweradverse reactions requiring hospitalizations thancompeting products or has higher patient compli-ance because of taste, frequency with which it mustbe taken, or side effects.

bring a strong scientific base in understandingdiseases, massive drug use data bases that can helpto identify individuals with target conditions andphysicians who treat them, and deep pockets.

Topping the list for PBM disease managementinitiatives are diabetes, asthma, and ulcers, whichhave been estimated to account for one-quarter ofemployer health care spending.s Leading PBM finns,as well as other managed care companies, are devel-oping business units that identify patients with theseconditions from their prescriptions or medicalrecords, contact them, and offer informational mate-rials and other services. For many health plans, forexample, ulcer drugs are among their top ten drugexpenses. Biomedical research has shown that manyulcers are caused by bacteria that can be eliminatedwith antibiotic therapy. Medical research has alsoshown that treatment of asthma by newer drugtherapies (cortisone-based inhalers) can sharplyreduce asthma-related hospital use and mortality.The American Diabetes Association cites large-scalestudies that suggest 45% to 60% savings might beachieved by better control of diabetes and preven-tion of its complications. Other studies cited by PBMexecutives indicate that half of individuals who needprescription drugs to control hypertension or choles-terol stop taking such medication after one year.9Such efforts may fruitfully expand the scientific basisfor managed care and adjunct interventions orientedtoward prevention and toward working more effec-tively with patients with manageable disease.

Supplementing these efforts is a growing empha-sis by pharmaceutical manufaCturers-partlydriven by employer RFPs to the PBM firms-toproduce cost-effectiveness and outcomes studiesthat show the return from use of their productsin comparison to nonpharmaceutical therapies(such as surgery, diet, and exercise) or competingpharmaceutical products. As yet, there are fewsuch studies and no standard methodologies tosubstantiate claims. Also evolving are step therapy

Point-of-Care (PC) or Point-of-Prescribing(POP) Arrangements

Today, most product-switching interventionsare initiated by a pharmacist at the point that theprescription is to be filled at a drug store or mailorder pharmacy. The next generation ofPBM/health plan collaboration may bypass thesepharmacists and put prescription-ordering com-puter links in physicians' offices. The computerwould automatically identify options preferredby the patient's health plan, do the online qualitychecks, offer information on drug therapies, etc.These initiatives, also being demonstrated in someemployer plans, would aim to affect originalphysician prescribing, shifting today's focus from

prescription switching.

If the PBM companies are successful in thesetechnologies and arrangements, they seem likelyto become even more important in the health caresystem of the future. PBM may have its majorimpact by reducing the 93% of health spending thatis now for nonpharmacy health care. But skep-tics-including some pharmaceutical companies

~. Mandelker, "Managing Chronic Disease," Businessand Health, November 1994.

9Jnterview with P. Roy Vagelos, Harvard Business Review,November /December 1994.

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that have elected to work on disease managementbut not to acquire a PBM company-point out that,if new disease management tedmologies are success-ful, the PBM companies are not necessarily the best-positioned to apply them.

CONCERNS AND ISSUES

Set against these potential benefits and rapidgrowth of managed pharmacy are a number ofquestions about how PBM actually works and itspotential for adverse impacts. There seems to beenough cause for worry that the FDA, the FTC,and the DHHS Inspector General have soundedcautionary notes.

Anticompetitive Practices

One focus of concern is that the "forward integra-tion" of the three large drug manufacturers (Merck,Eli Lilly, and SmithKline Beecham) to control thethree dominant pharmacy-purchasing companies(Medco, PCS, and Diversified Pharmaceuticals) givesthem an unfair marketplace advantage vis-a-visother drug manufacturers. Employers and healthplans expect PBM companies to purchase on theirbehalf and to offer other manufacturers' productsto compete with those of their parent company. Butis it reasonable to assume that the PBM £inns extractthe same concessions from their parent companiesas they do from competitors? Or that they cannotfind creative ways to reduce competitive pressureson their parent companies, while undercutting theprices, volume, and profitability of competing manu-facturers' products? Responding to such concerns,the FTC has recently required Eli Lilly to acceptcertain strictures in connection with its purchaseof PCS and has re-opened its previous approvalof the Merck-Medco and SmithKline Beecham-Diversified Pharmaceuticals acquisitions. Amongthe Eli Lilly requirements are that it must providea "fire wallll to keep the parent company fromgaining proprietary information about the pricingand other bid features submitted by its competitorsand that PCS must offer an independently devel-oped "open formularyll option for customers whodo not want to be tied to Lilly's products.

power are now so great, in terms of being ableto extract discounts and shift business, that theseprovisions will be of little value; that PCS, Medco,and Diversified Pharmaceuticals will capture aneven larger share of the PBM business; and thattheir parent companies will become increasinglydominant in phannaceutical manufacturing. Otherobservers, however, note that the PBM business,even if dominated by a "big three" (like the autoindustry), still appears to be highly competitive.They also note that the ability of PBM firms toswitch prescriptions, which is the key to the com-petitive edge they are believed to possess, willbe limited by potential resistance of physicians,patients, formulary committees and health planadministrators to repeated switching campaigns,particularly attempts at re-switching. Some ana-lysts also argue that, regardless of how many PBMfirms there are and who owns them, the basiccompetition in the drug industry is among phar-maceutical products within a therapeutic class andthat no one company is now close to dominatingacross all therapeutic classes.

Amount of Savings

Industry experts caution that trying to assess truePBM savings for purchasers from the oft-quoteddiscounts or rebates based on average wholesaleprice is quite uncertain. Few purchasers apparentlyactually pay the A WP, and there are various repack-aging and other practices by which reported whole-sale prices can be inflated before a discount is ap-plied. A number of drug price deals thus may becomparable to fare quotes in the deregulated airlineindustry, where an industry analyst on a recentMcNeill-lehrer show reported that over 90% ofairline travel is now at "discount" fares, with anaverage discount off a full price ticket of about 6()O/o.One has to wonder whether the acquired PBM finns,in particular, are focused more on reallocatingphamtacy spending toward their parent companiesor on achieving maximum economies for employers.It is questionable whether discounts being receivedby employers yet match the price rebates obtainedby the Medicaid program or the payment rateswhich phamtaceutical companies still find profitablefor their products in other countries.Nevertheless, there are those who worry that

the advantages of already-assembled purchasing

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Off-Label Use Financial Conflicts of Interest

There are a number of drugs for which muchuse is "off-label," that is, for conditions or typesof patients for which the drug has not been provedsafe and effective. While FDA must approve adrug as safe and effective (for some condition,for some population) before it is allowed on themarket-and this is clearly noted in labelling andproduct information-once a drug has been ap-proved, it may be prescribed by physicians at theirdiscretion. Manufacturers may not, themselves,market their products for such off-label use, butthere are drugs-particularly cancer drugs-forwhich such off-label use is common. Similarly,relatively few drugs have been tested in children,so most drug prescribing by pediatricians is off-label in that it is for a population group for whichit has not been FDA-certified as safe and effective.But the lines on marketing for off-label use beginto blur when a PBM firm owned by a drug com-pany is developing its formularies and may belisting its off-label products as the preferred drugin such instances. FDA Commissioner DavidKessler recently published an article in the NewEngland Journal of Medicine cautioning about suchpractices. 10 Similar concerns may also arise if

pharmacy company-sponsored education founda-tions develop patient management informationand programs that would not be acceptable if theywere direct marketing efforts by a pharmacycompany.

The involvement of phannacists in the effortsto switch prescriptions and change physiciansprescribing is a new, large-scale phenomenon. Ifa pharmacist, who the patient may well think isacting in his or her best interest, is paid by a PBMcompany to switch products, should the pharmacistsbe expected to disclose this arrangement? Whenis a financial payment for such services an illegalkickback, violating Medicaid statutes? Concernsabout practices that may violate federal anti-kick-back laws were recently the subject of a DliliSInspector General advisory letter.

Coordination of Care

The evolution of carved-out PBM benefits raisesquestions of how the pharmacy benefit managerswill coordinate with those who manage the othermore than 90% of health plan spending. Who isaccountable for the health of the enrolled popula-tion and for seeing that the enrollees get optimalhealth care when these responsibilities are split?Coordination issues are likely to become moresalient as the PBM companies move into diseasemanagement.

Outcomes and Cost-Effectiveness

Although PBM fim1S will increasingly use claimsof improved outcomes and cost-effectiveness, thereis little standard methodology to support suchclaims. How can employers, consumers, the FDAor others sort out what is valid from what is not?What are the respective roles for medical groups,employers, managed care plans, patient-orienteddisease groups (such as Alzheimer's, diabetes,asthma, and cancer), leading medical journals,benefit consultants, the federal government, andothers in developing such standards? These ques-tions also arise for other areas of managed care,where there are a variety of initiatives under wayto advance outcomes reporting and other measures.

Impact on R&D and Innovation

Given the economics of the pharmaceuticalindustry, it seems likely that the companies thatdepend on me-too drugs will find their profitmargins and their ability to finance future researchand innovation squeezed. Yet the large, sophisti-cated PBM purchasers may also speed adoptionof true breakthrough products-and thus increasethe returns to successful product development.At this point, it is not clear just what the longer-term effects of stronger pharmacy purchasing willbe on the drug industry's R&D and innovation.

Who Looks After the Patient?

In last place-for emphasis rather than lack ofimportance-is the issue of the welfare of patients.Like other developments in managed care, PBM-

lOOavid Kessler, et al. "Therapeutic Class Wars-DrugPromotion in a Competitive Marketplace," New Englandjournal

of Medicine, November 17, 1994.

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if done well-may improve health status, achieveeconomies, and foster better service. When donepoorly, PBM may have the opposite effects. Somequestions have been raised, for example, aboutissues such as delays or mixups in prescriptiondeliveries by mail-order PBM pharmacies and thesuitability of some therapeutic equivalents forcertain populations, such as the elderly. Clearly,stronger employer purchasing, with critical assistsfrom the benefit consulting industry, has a keyrole in maximizing PBM's benefits. Stronger inputand monitoring by patient disease-oriented groupsmay be of assistance; physician groups, as wellas some sort of accrediting organization for PBM,may also have future roles. Key issues shouldinclude whether PBM companies improve prescrib-ing practices and patient health and the extentto which patient health may be compromised toimprove the bottom line of health plans, PBMfirms, and drug manufacturers that have pur-chased them. To serve all of these purposes, betterreporting on current practices and objective studiesare needed.

model for how pharmacy benefits can be publiclyfinanced but provided in a way which also takesadvantage, for government and enrollees, of theflexibility and competition that is possible fromprivate sector purchasing and administration. Abouthalf of the FEP pharmacy beneficiaries are annu-itants, so the program also offers a test-bed forvarious disease management strategies targeted toolder and disabled populations. For those interestedin questions such as "Could I have a benefit as goodas my congressperson and senators have?/1 thereis a working model for managed phannacy benefits.

Medicaid

State Medicaid programs financed about $7.7billion of outpatient pharmacy spending in 1993,roughly 15% of national expenditures. In the 1989to 1993 period, Medicaid drug expenditures grewby 116%, and per recipient spending rose by 46%!1Although the programs are complex and varied,they rely primarily on "first-generation" managedcare, built around benefit design (formularies andgenerics), discounts and required rebates, drugutilization review (DUR), and numerous rules onmatters such as prescriptions per month, refill andquantity limits, unit dose packaging, and manda-tory substitution. Most states limit pharmacypayments (for example, A WP minus 10% for thedrug, plus a dispensing fee); federal law alsomandates that manufacturers pay rebates to Medic-aid, for example, at least 15% of AMP (averagemanufacturer's price) for single-source drugs, arate which approximates the discounts providedto HMOs and large group purchasers. Variousfederal requirements for utilization review, enactedin the Omnibus Budget Reconciliation Act (OBRA)of 1990, were fully effective as of January 1995.Most states, however, do not yet have onlinepharmacy utilization review and billing, although90% federal matching funds are provided. Twostates (California and Pennsylvania) are reportedto have actively considered PBM solicitations fortheir Medicaid pharmaceutical benefit. Most statesapplying for Section 1115 waiver or other capitated

PBM FOR PUBLIC PROGRAMS

PBM has developed primarily as a private sectorpurchasing tool. It may also have major applicationsfor government program beneficiaries-particularlyamong the high-use Medicaid and Medicare popula-tions. How that might work is a major topic in itsown right, but a quick sketch can at least suggestsome of the possibilities.

Federal Employees Plan

The federal government, which, it may surprisesome to learn, has been a pioneer in making avail-able managed phamtacy benefits for federal workersand their families and annuitants, relies on privateinsurance companies and PBM firms. Indeed, thefederal govefnInent offers the largest employer-based PBM program in the country: the BCBSAFederal Employees Plan (PEP). It includes a nationalplan that provides a pharmacy benefit card, phar-macy network and discounts, as well as a mail orderoption, and other features. The PBM subcontractorsare PCS (pharmacy network) and Medco (mail or-der). The FEP program provides an interesting

llNational Pharmaceutical Council, PhannaceuticalBenefits under State Medical Assistance Programs, Septem-ber 1994.

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Medicare beneficiaries enrolled in an HMO mayobtain managed pharmacy benefits as part of thebenefit, and there are proposals to build on thisapproach to encourage their further shifts toHMOs. (PBM-type coverage may also be availablein the 3 [of 10] NAIC-model medigap policies thatcover prescription drugs or in employer-providedretiree benefits.) It seems unlikely that a stand-alone Medicare drug benefit would be enactedin the near future, unless it were as a quid proquo for program savings. Another way in whichPBM-type advantages could be made availableto elderly and disabled Medicare beneficiarieswould be for the federal government to issue anRFP and competitively select, in each region, oneor more pharmacy discount cards that could bemade available to Medicare beneficiaries. Thesecards-like PEP pharmacy discount cards-wouldentitle the Medicare beneficiaries to at least thesame discounts at participating network pharma-cies as now enjoyed by their congressmen andsenators, as well as having such other PBM-typebenefits as online drug-drug interaction checks,red flags for drugs that geriatric experts believeshould be avoided in the elderly, and access tomail-order pharmacy benefits. The resulting database could be one avenue for evolving disease-management demonstrations for Medicare elderlyand disabled persons, as PBM firms are nowpioneering for the under-65 population. Thisapproach could save money for the elderly andimprove their quality of care with de minimusfederal expense.

systems are reported to be carving out the phar-macy benefits or including in managed care plansgroups that are low-utilizers of pharmacy benefits,such as AFDC recipients, rather than the high-user55! populations.

The potential application of rEM-type technolo-gies for the Medicaid program requires furtherassessment Whether PBM companies could matchthe (net) prices now paid by the Medicaid programis still an unresolved issue, and it is difficult toassess how effective advanced PBM models are,compared to current Medicaid management. Inmany ways, Medicaid pharmacy benefit paymentis still a separate market, with separate contractors,such as ED5 and First Health. If emerging diseasemanagement technologies prove effective, theMedicaid populations might be among those withhigh payoff in improved health from their applica-tion.

Medicare

Finally, the Medicare population could be majorbeneficiaries of effective PBM-type programs. Theelderly account for one-third of prescription druguse, and problems in prescribing for the elderly arewidely acknowledged in the medical literature. 12

For example, adverse drug reactions in this groupoccur at two to three times the rate found in youngadults. A recent study reported in the Journal of theAmerican Medical Association showed that prescrip-tion drugs that, in the consensus of geriatric experts,should be avoided entirely in elderly patients werebeing prescribed for one-quarter of elderly peopleliving in the community, about 6 million individu-alS.13 Elderly persons pay for about 60% of their

pharmacy expenses out-of-pocket!4

1~. Montamat, et al., "Management of Drug Therapy inthe Elderly," New England Journal of Medicine, August 3,1989; J. Guiwitz, "Suboptimal Medication Use in theElderly," JAMA, July 27, 1994; D. Waldo, "Estimatingthe Cost of a Medicare Outpatient Prescription DrugBenefit," HCFA Review, Spring 1994.

13Sharon Willcox, et al., "Inappropriate Drug Prescribingfor the Community-Dwelling Elderly," JAMA, July 27,1994.

14D. Waldo, "Estimating the Cost of a Medicare Outpa-tient Prescription Drug Benefit," Health Care FinancingReview, Spring 1994.

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