A Secret Profit Formula Loved by Drug Middlemen Is at Risk

  • Anthem may dump Express Scripts, claiming overcharges
  • ‘Clear evidence for payers that they are being ripped off’

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Critics have said for years that pharmacy benefit managers’ business practices are so opaque that employers and insurers who hire them can’t know whether the powerful middlemen are saving them money or driving up costs.

News that insurer Anthem Inc. may drop Express Scripts Holding Co. after accusing it of $3 billion annual overcharges shows that view is gaining traction in corner offices.

Express Scripts said this week that Anthem was planning to discontinue its contract after 2019, although Anthem’s chief executive officer said Wednesday no decision was final. Express Scripts revealed that the insurer made up a disproportionate share of its profits: While Anthem represented 16 percent of prescriptions Express Scripts processed last year, it was responsible for 31 percent of its earnings, as measured by a gauge called Ebitda.

The revelations could cause other clients to raise sharp questions about just how much money their PBM is making off them.

“This is just the start of the bleeding,” says antitrust lawyer David Balto, who represents independent specialty pharmacies and consumer groups. For employers and other PBM clients, “the Anthem situation will be a clarion call for them to demand that they are getting the best price for drugs.”

“This is going to provide crystal-clear evidence for payers that they are being ripped off.”

Unique Deal

Critics generalizing from the Anthem situation “clearly do not understand the unique contract we have,” Brian Henry, a spokesman for Express Scripts, said in an email. Unlike its other agreements, Express Scripts paid $4.7 billion dollars to gain the Anthem business. “That is critical to understanding the dynamic of our agreement with Anthem,” he said.

Express Scripts Chief Executive Officer Timothy Wentworth said in a conference call Tuesday that other clients have been “extraordinarily supportive.”

Anthem sued Express Scripts in 2016, claiming that over the life of the contract it would be overcharged about $15 billion, “an obscene profit windfall.” Express Scripts denied overcharging Anthem and countersued.

The precise methods Express Scripts uses to make money from Anthem remain unclear. Like most other PBMs, Express Scripts doesn’t typically break down the sources of its profits. Among other sources, it negotiates discounts with pharmaceutical makers in exchange for favorable placement on covered-drug lists, and it keeps a portion of these rebates, about 10 percent. It also runs its own mail-order pharmacies, both for everyday drugs and expensive specialty medicines.

“Even the largest PBM clients -- like Anthem -- can’t determine whether PBMs’ charges are reasonable,” said Linda Cahn, who runs Pharmacy Benefit Consultants, in Morristown, New Jersey, and has sued PBMs in the past. “PBMs have created an enormous black box, and they use it to gouge clients.”

Words, Words, Words

One reason that clients, including employers, unions, and insurance companies, may not understand what is going on is the complexity of the PBM contracts they sign, consultants and experts say. They are often drafted by the PBM itself and run to dozens of pages. They can contain multiple price guarantees for various types of drugs -- generic, brand, specialty -- as well as a separate list of guarantees for rebates, making it hard to project a contract’s overall costs.

“It’s like trying to go through a corn maze blindfolded," says Tom Borzilleri, a veteran PBM executive whose startup, InteliScript, is seeking to lower drug costs by providing pricing data when prescriptions are written. “The language is so complicated and convoluted, there’s an out and option at every turn that offers up multiple forms of profitability.”

Sunshine State

Anthem isn’t the only client to move against Express Scripts. Florida withheld $10 million after audits indicated the PBM’s performance had been “unsatisfactory” and the state had been overcharged for three years through 2014, according to documents obtained in public-record requests. 

“Both parties came to an agreement that we would not pursue that additional money that we believe is rightly owed to us,” Express Scripts’s Henry said.

PBMs popped up in the late 1960s as payment processors. They now also draft medication menus and negotiate prices behind the scenes with drugstores, health plans, and manufacturers. The three biggest -- Express Scripts, OptumRx (a unit of insurer UnitedHealth Group Inc.), and CVS Health Corp. -- process about 70 percent of the nation’s prescriptions, according to Pembroke Consulting.

In the U.S., $15 of every $100 spent on brand-name drugs goes to middlemen, estimates Ravi Mehrotra, a partner at MTS Health Partners, a New York investment bank. The largest share, about $8, goes to benefit managers. In other developed countries, only $4 out of every $100 goes to middlemen, he says.

Generally, PBMs say that it is a competitive market and customers would switch if they felt they weren’t getting a good deal. Indeed, discounts on some big drug categories, such as those for hepatitis C, have risen sharply in recent years.

“The PBM market will only get more competitive over time; margins will likely erode and growth will stagnate broadly," Eric Coldwell, an analyst at Robert W. Baird & Co., said in a note to clients Tuesday.

Coming Clean

The Anthem revelation will add to that pressure. Drugmakers point to PBMs’ demands for rebates as a cause of spiraling list prices. And in March, Senator Ron Wyden introduced legislation that would force middlemen to disclose secret discounts they receive from manufacturers. The bill would require PBMs to reveal the aggregate rebates for Medicare plans and post the amounts on a government website, according to a statement from the Oregon Democrat’s office.

The industry argues that secrecy saves money by keeping price information from competing drugmakers. A recent analysis commissioned by the Pharmaceutical Care Management Association, a PBM trade group, estimates that Wyden’s legislation would increase federal drug spending by $20 billion over 10 years.

Balto, the antitrust lawyer, isn’t buying it.

“The PBMs play the wizard. Don’t look behind the curtain,” he says. “What they are inventive at is in creating schemes to pad their profits.”

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