Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

The great captive specialty pharmacy crackdown of 2015 is on. Pharmacy benefit managers and big insurers are on the hunt for sketchy specialty and mail-order pharmacies, and they're squashing them.

It started with Valeant’s very ex-best friend Philidor, the pharmacy accused of existing pretty much entirely to boost Valeant sales by gaming the health insurance system. CVS Health cut ties with Philidor first, followed by everyone else. By getting caught so spectacularly, Philidor ruined things for everyone else in its business. Express Scripts followed up by dropping the hammer on Linden Care, accusing the specialty pharmacy of mostly distributing drugs from Horizon Pharma. At least eight pharmacies have been cut off recently, and PBMs and insurers are still looking for more. They're even tweaking audit algorithms to better track them down.  

One side argues that this is a righteous clampdown on the latest way drugmakers have found to squeeze life out of old and marginal drugs. The other side argues that this is a blatantly anticompetitive move by giant companies with glaring conflicts of interest, and that pharmacy benefit managers (PBMs) are trying to deny patients free choice and the best standard of care, to boot. 

Specialty woes
Source: Bloomberg

The rather large wrinkle here is that the companies taking on the watchdog role for specialty and mail order pharmacies... own specialty and mail order pharmacies. Big ones. 

Pembroke Consulting, which follows the pharmaceutical supply chain, estimates that the largest and second-largest PBMs, Express Scripts and CVS Health, own the largest and second-largest specialty pharmacies, with 19 percent and 26 percent of the market respectively in 2014. With its purchase of Catamaran earlier this year, insurer UnitedHealth's Optum business controls an additional 5 percent of the market.

Horizon’s CEO was quick to highlight this in responding to the slap from Express Scripts last week. "This competitive role, in our view, creates a clear conflict of interest, as Express Scripts stands as both a pharmacy's overseer and competitor,” Timothy Walbert said in a statement. He went on to accuse Express Scripts of "profiteering" and "anti-competitive behavior."

Similarly, recent legal complaints by pharmacies Irmat and Linden accuse Optum and Express Scripts of using their market power to drive business to their own pharmacies. And it's impossible to ignore what behemoths these PBMs are compared to the micro-pharmacies they're driving out of business. Express Scripts in particular has become seriously massive through acquisition, and unafraid to throw its weight around.

The Making of a Giant
Source: Bloomberg

So who's right? There's a huge range of behavior at play here. Most specialty pharmacies have almost nothing in common with Philidor, which always stretched the definition of a specialty pharmacy. It was almost but not quite owned by Valeant (which owned an option to buy Philidor for $0), and functioned almost as a direct seller for it. Other situations will rarely be as clear-cut. PBMs should crack down on really blatant abuse when they see it, when prescriptions are altered, or when ownership is hazy. 

But most so-called captive pharmacies are trickier to pin down. They aren't as blatant as Philidor, and firms are still trying to figure out how to define and catch them. An Express Scripts executive told Reuters it only recently became aware of that these secretive pharmacy relationships were so prevalent until just this past year.

There's nothing illegal about drug makers using specialty pharmacies, or favoring one heavily. The problem is when those relationships aren't disclosed. The examples so far, like Horizon using Linden to help hike prices on a combination of over-the-counter Pepcid and Motrin from about $60 to $1,600, appear to be highly profit-motivated in a way that feels distasteful.. It seems to have been an effective revenue boost for the drug makers: By offering to do paperwork, reimburse patients' out-of-pocket costs, and fight with insurers for doctors and patients, specialty pharmacies kept a bunch of sales from going to generic drugs.

That's definitely bad for the benefit managers and insurers who help pick up the costs for patients, and looks expensive for the health care system as a whole. But it's not clear when a firm crosses a line that mandates a PBM guillotine. About 40 percent of Linden's claims to Express Scripts were for Horizon drugs, which might serve as a guide for what might catch that company's attention.

And PBMs aren't exactly (or even nearly) white knights, cracking down on miscreants purely in the interest of the consumer. Their use of owned pharmacies is profit-motivated, too. They just happen to profit when drug costs are driven low, instead of when they're raised artificially high. Lucky for them, that is more politically palatable these days. And there is little reason for people to take expensive branded drugs when generic alternatives are available.

Payers restrict health-care access in lots of other ways that are arguably more troubling -- like only approving Gilead's expensive Hepatatis cure for people with late-stage liver failure. Some find that just as offensive as what Valeant does and argue for just as much scrutiny.

It's hard to find anyone who's fond of their PBM or insurance company. But, for once, payers actually seem to be on the right side of public sentiment. They should press their advantage, weeding out such pharmacies and squeezing drug prices lower, as long as they can.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Max Nisen in New York at

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