Under mounting pressure, new breed of PBM is born

A new type of pharmacy benefit manager has sprung up, preaching transparent pricing. The ideal is to disclose ingredient and dispensing costs, rebates, discounts, and all other financial details to plan sponsors. Rebates, discounts, and other payments flow through to the sponsor. Administrative fees are the PBM's only revenue source.

Driving this development is the establishment of a Pharmaceutical Purchasing Coalition made up of 52 large employers in this country, including Caterpillar, IBM, and others. They've come up with new transparency requirements for PBMs to meet. So far, Aetna Pharmacy Management, MedImpact Healthcare Systems, and Walgreens Health Initiatives have agreed to meet the terms.

Besides these three PBMs, there are other groups that profess to divulge their pricing structure. One example is AmeriPharm, launched in 2003 in Sioux Falls, S.D. As Ron Bertsch, president of AmeriPharm, explained, nothing is free in the PBM world. Plan sponsors can pay per-employee or per-transaction fees or they can pay higher fees in the form of inflated product costs. "If somebody is offering you free service and no dispensing fees, you'd better believe they've got their hand in your wallet," he said.

Innoviant, in Wausau, Wis., is another new entrant that purports to offer its clients pricing disclosure. Formed in 2002, the firm doesn't even call itself a PBM, preferring the term PBA, or pharmacy benefit administrator. Explained Rhonda Grabow, Innoviant VP for strategic planning: "In a traditional PBM, the plan sponsor may lose $1 to $4 per claim from retained rebates or undisclosed MAIC [maximum allowable ingredient cost] prices. We earn less per claim, but we have a stronger client relationship because our incentives are aligned with plan sponsors."

Can PBMs thrive, or even survive, on fee income? Without a doubt, said Teresa Storm, marketing VP for Prime Therapeutics, a PBM based in Egan, Minn. Transparency reduces the PBM's administrative burden by eliminating conflicts of interest.

Conflicts commonly arise over manufacturer funding for research programs, product switches, and utilization studies, Storm explained. Spread pricing, the PBM buying at one price and selling to the plan sponsor at a higher price, raises conflicts. So do rebates, discounts, dispensing fees, and other financial arrangements. "We see transparency as providing a straight and clear financial offer," she said. "No spread pricing, no manufacturer funding for clinical programs or product switches, and full disclosure of all revenue streams."

There are times when disclosure is not in a PBM's direct financial interest. Prime Therapeutics recently rolled out a retail program to match mail-order pricing for 90-day fills for a Wisconsin client. It was a good deal for the client, Storm said, but Prime could have boosted profits by obscuring financial details. "There are times we make decisions that are not in Prime's best revenue interests but are good for the client," she said. "I see the market expecting that kind of action. The industry is moving that way."

That's an easy stance to adopt since Prime is largely owned by Blue Cross Blue Shield and other organizations that are also its clients. It's a tougher sell for publicly owned PBMs whose shareholders expect managers to maximize immediate profits. That's why a deal between Medco Health Systems and professional services provider Towers Perrin raised eyebrows earlier this year. The 30-employer, $800 million Rx Collaborative contract was the largest employer coalition agreement in PBM history until the Pharmaceutical Purchasing Coalition was formed. It also brings greater transparency than a major PBM has ever offered.

Medco spokesman Jeff Simek said Rx Collaborative members are getting full disclosure and quantification of all sources of PBM revenue. In return, members pay a flat transaction fee. Medco is keeping what Simek called its "crown jewels," pricing arrangements with individual drugmakers, under wraps. That could change in future contracts.