Stateline Story

States Take Closer Look At Drug Discount Brokers

President Bush's new drug discount plan for older Americans would be administered by profit-making companies known as Pharmacy Benefits Managers, or PBMs. But many states have reservations about how much of a price break these firms really provide their customers, and are striking out on their own to negotiate lower drug prices. Moreover, practices of PBMs are being examined by state auditors in West Virginia and a federal investigator in Pennsylvania. Benefit practices are also the basis for class action lawsuits in New York.

Under Bush's plan, Americans 65 or older would purchase a drug discount card from a Medicare-approved PBM that would entitle them to savings of up to 25 percent on their prescriptions. The one-time only cost of the card could not exceed $25.

The firms that would run the program have yet to be selected. But they have to already serve at least one million people, agree to take all comers from Medicare and provide comparative information about their competitors. The top PBMs in the country include AdvancePCS, Merck-Medco and Express Scripts, each of which respectively cover 75 million, 65 million and 45.2 million patients.

These firms and others like them oversee drug benefit programs for dozens of state employees' health plans or for businesses like General Motors.

Thirty-seven states provide some level of drug benefits to state employees through a PBM. The other 13 states offer drug benefits indirectly through a HMO or health insurance company. AdvancePCS and Express-Scripts each claims nine states as clients. Merck-Medco won't reveal how many states it represents on grounds that it's proprietary information, but company spokesman Jeff Simek says it's a significant number.

Despite the huge numbers of people the companies serve, drug industry experts say PBMs are underregulated, potentially opening the doors to problems.

"There's very little oversight of [the firms] and few state insurance commissioners even require them to register as a business. The U.S. Department of Labor has some oversight of the industry, but officials there didn't understand what was going on with business practices until the late 1990's," says Gerry Purcell of Georgia-based Pharmacy Partners, a for-profit firm that advises Fortune 500 companies on how to structure contracts with pharmacy benefits groups.

Purcell, who has consulted with the Labor Department, U.S. Steel and other state groups, says the companies are now beginning to come under scrutiny because the industry is relatively new and because drug prices are now going "through the roof."

"Many lawmakers are very skeptical of traditional PBMs," Vermont Senate President Peter Shumlin says."The biggest problem both Republican and Democratic members have are real concerns that traditional [prescription drug discount groups] have not provided the kinds of services to Americans that they've promised." Shumlin said there is evidence that PBMs sometimes promote a particular company's drug "even though it may not be the cheapest" without the knowledge of their customers and receive rebates that are not fully passed on to beneficiaries.

As part of the Northeast Legislative Association on Prescription Drug Prices, Shumlin and policymakers from eight other states met in Boston last Friday (July 27) to discuss a prescription drug buying pool that would take power from traditional PBMs and put it in state officials' hands.

If the plan moves forward, eight states -- Connecticut, Maine, Massachusetts, New Hampshire, New York, Pennsylvania, Rhode Island and Vermont -- would save a projected $1.8 billion for Medicaid programs.

"The model offers tremendous hope because it modifies private sector programs. What's good for General Motors should be good for our constituents, particularly if we can do it better," Shumlin says.

Merck-Medco, which manages pharmaceutical benefits for 200,000 state employees in West Virginia, faces an audit because of questions about its practices. Tom Susman, who heads the state's Public Employees Insurance Agency, told the Charleston Gazette last month he told the company to stop putting pressure on state employees to get 90-day prescriptions by mail.

Susman told Stateline.org he wants the audit because he believes outside contractors, Merck-Medco included, need more oversight. "We're evaluating the whole drug benefit program because we have never had an independent evaluation," he says.

Regardless of the audit's outcome, Susman says the way the state buys drugs will change. "Whether we take part in a joint purchasing pool or not, we're all going to be smarter customers, we're going to demand a bigger part of rebates and greater discounts," he says.

Merck-Medco, a subsidiary of pharmaceutical giant Merck & Co., Inc., is a defendant in six separate class action lawsuits in New York which allege that Merck-Medco switched patients who had been prescribed competing drugs to Merck products to drive up its parent firm's profits.

Although lawyers have pursued similar cases in the past with little success, these cases captured national attention once David Boies, a super-lawyer tapped by the U.S. Justice Department to argue a landmark antitrust case against the Microsoft Corp., took over the lawsuits from another New York firm.

Merck-Medco's Simek declined comment on the lawsuits. "We'll argue the cases in the appropriate court as required. We invite anybody who has questions about what we do as a company or how we do it to learn more about what we do," he says.

The PBM industry is also facing a probe by Assistant U.S. Attorney Jim Sheehan of Philadelphia. Sheehan is pursuing the probe under a 17-year-old program which directs U.S. Attorneys to stop fraud and abuse in areas that traditionally haven't been regulated.

On the heels of Sheehan's investigation, officials from California, Florida, Illinois, Massachusetts and Texas recently began examining the policies of pharmaceutical firms and PBMs, says Carolyn McElroy, a former director of Maryland's Medicaid Fraud Control Unit.