COVER STORY

FIGHTING MAD

Angry as hell over PBMs, community R.Ph.s are taking off the gloves in their battle with them

Accounting tricks to buff up revenues, falling stock prices, a postponed stock market spin-off, federal fraud investigations, Congressional hearings, angry stockholders, and class action lawsuits.

Enron, you say? WorldCom? Global Crossing? Nope. It's all part of the sudden stretch of rough road for pharmacy benefit managers more accustomed to toiling in a quiet corner of the healthcare world. Now, they suddenly find themselves squinting in the glare of the public spotlight. After reinventing themselves in the 1990s as Rx benefit managers instead of claims processors, PBMs claim to be the folks who save their clients big bucks on their Rx plans. But more clients, consumers, and politicians, increasingly frustrated by spiraling Rx costs, are asking questions and demanding answers.

And community pharmacy is right there pouring gasoline on the fire, eager to make it even hotter for its sworn enemies. Several national pharmacy organizations have vowed to let politicians and the public in on the PBMs' secrets. They want to drive PBMs back into claims processing from whence they came.

"A lot of attention is being drawn toward PBMs," said Bruce Roberts, executive v.p./CEO, National Community Pharmacists Association. "We've finally gotten to the point that it's a critical issue because of the chaos being caused in pharmacy, the leveraging of patients out of our stores to mail order, and I think they've gone overboard with the money they're extracting out of [drug] manufacturers."

Pharmacy fights back

After years of swallowing take-it-or-leave-it contracts, shrinking net profits, mandatory mail order, and thousands of pharmacies going bust, community pharmacy finally launched a counteroffensive against PBMs. The resulting battle is fierce because the stakes are high in the $165 billion retail drug market that is now tantalized by the prospect of a Medicare Rx benefit.

A shot across the PBMs' bow was fired last February when NCPA launched a campaign to help members evaluate third-party contracts, pursue legislation to regulate PBMs, and work to get passage of federal legislation to let pharmacies negotiate contracts. "NCPA is taking the lead in urging its members to fight back against the PBMs," said Roberts. "We do have power. We also have a voice in our state legislatures and on Capitol Hill. We will fight alongside our members to level the playing field."

Not to be outdone by the independents, the chain drugstore industry is also lobbing shells at the PBMs. The National Association of Chain Drug Stores has been working to energize its members to take up the fight by educating politicians and the public about the PBMs. In fact, NACDS has vowed to wage an "all-out war" against any Medicare Rx benefit that puts PBMs at the center of the action.

It's fair to say that community pharmacy has thrown down the gauntlet, agreed Susan de Mars, senior v.p./general counsel for AdvancePCS. She sees last year's PBM-backed RxHub for e- prescribing and Medicare Rx discount card as the flash points. "There's no question that the level of noise has really es-calated," she told Drug Topics. "We think it's about their trying to protect their own economic interests. They've felt increasing pressure on their margins, and they blame us for that."

Pass the ammunition

Merck & Co.'s move to spin off its Merck-Medco PBM let the accounting cat out of the bag. Security & Exchange Commission filings laid bare an accounting device that raised red flags at a time when cooked books have left investors and employees holding an empty purse.

Merck counted co-pays as gross revenue and then subtracted them so that they didn't appear on the bottom line. Merck contends the practice falls within Generally Accepted Accounting Principles. The accounting device inflated Merck's gross revenues by about $13 billion.

The Merck disclosure gave community pharmacy ammunition in its offensive against the PBMs, said John Rector, NCPA senior v.p. of government affairs/general counsel. "It's very timely that Merck-Medco really has outdone itself," he said. "So [Merck-Medco] has moved from criticism about a PBM over to the Enron side of the scale. It reported co-pays to which it has no right whatsoever as revenue. The fact that it was adjusted later isn't relevant to the deceptive release of the information to drive the value of its stock or make other companies be more interested in hiring its PBM."

Not only did Merck get a public relations black eye when the co-pay accounting story broke at the same time the markets were being roiled by the WorldCom debacle, its stock fell. It also had to withdraw the initial public offering of the Medco Health Solutions spin-off until market conditions improve. And then there's the matter of two whistle-blower lawsuits filed in Philadelphia as well as several Merck shareholder class action lawsuits.

Merck's SEC filing revealed something pharmacy suspected all along—that the PBM gives preference to the drugs of its parent company. Under the terms of the spin-off, Medco Health Solutions must meet certain market share levels for Merck products over five years or face a stiff penalty.

"All the things we suspected were going on with these guys now have become very transparent," said NCPA's Roberts. "Just the whole clarity as a result of that spin-off has been very helpful to get people focused on what's actually happening here."

Several PBMs have also been issued subpoenas by the U.S. Attorney's office in Boston related to drug pricing. While the PBMs said they're not the targets of the investigation, their stock prices fell on the news that Uncle Sam wants to talk to them. A U.S. Attorney in Philadelphia is conducting a fraud investigation. Clients and patients are also taking PBMs to court for allegedly ignoring their fiduciary duties. And drug manufacturers are reportedly growing weary of rebates to PBMs at the same time some big employers are pushing PBMs for more generics.

As if PBMs weren't fighting on enough fronts, the General Accounting Office is conducting a study on the role of PBMs undertaken at the request of Sen. Byron Dorgan (D, N.D.). GAO is reviewing the benefits and costs of PBM services and their effect on enrollees and pharmacies. Dorgan plans to reschedule a PBM hearing postponed last month when most PBMs declined to testify.

Another offensive

A new front in the battle will be opened this fall when the Pharmacy Freedom Fund (PFF) plans to file a lawsuit against the PBMs, said Bob Gude, who founded the Texas-based advocacy group. Community pharmacy owners have been contributing to a legal war chest to fund any litigation, which has been endorsed by NCPA. He declined to put a dollar amount on the fund but said that the response has been even better than a decade ago, when PFF filed a discriminatory-pricing lawsuit against the drug industry.

Whether the PBM litigation will be filed as a class action suit has not been decided, Gude said. It may, instead, become a private-action case. "We will do whatever best defends or promotes the interests of our members and contributors," he added.

Raising money to fund the lawsuit is "awfully suspicious because retail pharmacy has made it clear it wants to eliminate PBMs or limit them to a purely administrative role," said LaVarne Burton, president of the Pharmaceutical Care Management Association (PCMA).

March through Georgia

May 22 was a day PBMs would rather forget. That's when Gov. Roy Barnes signed a law making Georgia the first state to empower its pharmacy board to regulate PBMs. The law stipulates that when PBMs engage in activities that constitute the practice of pharmacy, they must be regulated and licensed by the board.

The PBM industry wasn't about to let a law pushed by a state pharmacist association ambush it. If the bill won passage, it would set a bad precedent and give other state associations ideas. The resulting lobbying campaign included a letter from PCMA's Burton, urging Barnes to veto the bill. She argued that PBMs aren't pharmacies and that many of their activities are already regulated at the state and federal level.

The PBM legislation proposed by the Georgia Pharmacy Association was sold strictly as a patient care initiative, said executive v.p. Oren "Buddy" Harden Jr., R.Ph. "PCMA was out in force," he said. "Last year, we got it through the state house unanimously, but the lobbying group was able to stall it in the senate. Then we finally convinced the senate leadership of the necessity for this type of bill because these [PBMs] were not regulated."

Georgia's success won praise from NCPA, which has made the regulation of PBMs a cornerstone of its offensive. Part of that campaign is a model bill to regulate PBMs that has been introduced in eight states this year. "Our model leans more to regulation through the state insurance commissioner," said Rector. "But anything to do with PBMs switching patients or pretending they're pharmacists would be with the pharmacy board. I think next January, we'll see more state legislatures looking at the bill."

The National Association of Insurance Commissioners is also studying PBMs and how they are currently handled at the state level with an eye to developing a new regulatory model.

Talk of regulation is like a red flag to the PBMs, which contend that they're already regulated enough. NCPA's model legis-lation is too vague and gives broad power to retail-pharmacist- controlled pharmacy boards, according to de Mars of AdvancePCS. "It's pretty transparent that [community pharmacists] are just trying to thwart our attempts to get the best deals we can for our customers," she added.

Mother of all battles

The opening salvo in pharmacy's mother of all battles was fired last summer when President Bush hosted PBM executives in the Rose Garden to unveil a Medicare Rx discount card plan hatched in secret. The festivities reportedly included a Presidential hug for David Halbert, AdvancePCS CEO. An early investor in Halbert's Advance Paradigm prior to its merger with PCS, Bush reportedly cashed in nearly $1 million of the PBM's stock prior to his run for the White House.

"The Rose Garden party was not a smart tactical move [by the PBMs], said NCPA's Roberts. "I think that's when people really began to stand up and say, 'Hey, what's the deal here? Who actually speaks for pharmacy?' Before the Rose Garden announcement, PBMs were flying under the radar. The arrogance behind the scenes in the development of that Bush Admin-istration initiative without even including pharmacy raised a lot of eyebrows. "

The Medicare Rx discount card was the idea of the Bush Administration, which contacted AdvancePCS and other PBMs for input, said de Mars. "We never met collectively," she said. "The Administration came up with the idea as an interim provision to give some relief to seniors until they could get a funded benefit in place."

The fighting is so fierce because Medicare is the Holy Grail for community pharmacy and PBMs, said Perry Cohen, Pharm.D., cofounder of The Pharmacy Group consultancy. "Medicare beneficiaries are the last cash customers for pharmacy," he said. "The PBMs have no new markets, no place left to go but Medicare. There's desperation for both groups. It's like the next round of 'Survivor.' They don't want to get voted off the island. They're both in an 'I'll scratch your eyes out' mode."

With the Senate's rejection of four pro-PBM bills, community R.Ph.s and PBM officials agreed that Congress would not get its Medicare act together this term. "We don't see a funded Medicare benefit happening this year," said de Mars. "There's a lot of posturing so both [Democrats and Republicans] can go home and say they tried to do something."

No matter how PBMs may try to spin it, the fact remains that community pharmacy won this round of the Medicare war, said NCPA's Rector. "We beat them," he said. "They lost, and we helped make sure of that. Medicare is dead for this Congress."

Dispatches from the front

Community pharmacy's aggressive stance is causing PBMs problems with the general media and during some debates on Capitol Hill, said de Mars. "It's a challenge because they're out there vigorously attacking us and, we think, promulgating a lot of misrepresentations about us and our industry," she said. "We have to educate people about the value of our services."

Medicare may be dead for now, but PCMA will be back in the fray next year, said Burton. "We believe we will have a Medicare benefit that uses PBMs as the primary means of delivering pharmaceutical services," she added.

Community pharmacy is like David confronting Goliath, so when NCPA took on the PBMs earlier this year, Roberts wasn't sure the giant could be toppled. But unexpected developments, some far removed from pharmacy, have tilted the battlefield at least a little.

"I was a little skeptical that we would be able to effect change," said Roberts. "I come from a retail background and have had to deal with the craziness they're causing in the pharmacy. What's been rewarding to me is to see not just independent pharmacies step up to the plate, the chains are right there with us. I've always firmly believed that pain creates change. We've got enough pain. I really believe that we are going to do it. We will end this craziness."

Carol Ukens

Carol Ukens. FIGHTING MAD.

Drug Topics

2002;16:22.