Lynch: The Wizard Behind The Curtain, Part 1

Thursday, February 7, 2019 | 0

Suddenly, everybody’s out to get pharmacy benefit managers: the Centers for Medicare and Medicaid Services, state legislatures, state Medicaid officials, a boatload of experts and even President Donald Trump, who appears to actually and sincerely believe PBMs have created a rigged system.

The issue, what you and I pay for medicine, is getting a lot of ink and airtime. As well it should. Drug prices in the U.S. are nearly twice as high as other developed nations. How did it come to this, and are PBMs a big part of the problem or are they a modern Horatius at the bridge holding back an invading army of even steeper costs?

The PBM industry was born in the late 1960s when Pharmaceutical Card System Inc. invented the plastic benefit card. By the mid-1970s, PCS was serving as a fiscal intermediary by adjudicating drug claims. In other words, it was a prescription third party administrator (TPA).

By working for insurers and health plans, PCS (later AdvancePCS) and others figured out that they could leverage the buying power of their clients to negotiate lower drug prices. And until around 1992, that’s they did. During that approximately 20-year period, PBMs saved insurers, health plans and consumers money by driving physicians and patients to use lower-cost generic drugs. This was a valuable service for all.

In 1992, however, PBMs began to change their focus. As noted by the Wall Street Journal in August, 2002, from 1992 through 2002, PBMs had “quietly moved” into marketing expensive brand-name drugs. Since then, two major problems have emerged.

First, there is an incestuous relationship between PBMs and pharmacy companies. This occurred over three periods.

From 1968 through 1994, pharmaceutical companies acquired PBMs. For example, in 1994 Eli Lilly bought PCS for $4 billion, and SmithKline Beecham bought Diversified Pharmaceutical Services (from insurer UnitedHealth) for $2.3 billion. But the FTC saw antitrust implications these deals created and ordered the acquisitions to stop and the pharmaceutical firms to divest the PBMs.

So, Eli Lilly sold PCS Health Systems to Rite Aid for $1.5 billion, SmithKline Beecham sold Diversified Pharmaceutical Services to Express Scripts for $700 million, and Merck spun off Medco Health Solutions, the PBM for 68 million Americans at the time.

The third PBM evolutionary period, the one we’re now living in, has seen mergers between PBMs and PBMs with pharmacy chains. In 2000, Advance Paradigm bought PCS for $1 billion and changed the name to AdvancePCS; in 2003 Caremark bought AdvancePCS for $5.6 billion; and in 2007, CVS bought Caremark for $26.5 billion.

Similar long and winding roads have resulted in three PBMs — CVS Caremark, Express Scripts and OptumRX — cornering 78% of the nation’s PBM business, serving 266 million Americans. Revenue for these three firms in 2017 was about $300 billion. And these costs are growing at an accelerated pace. According to the American Academy of Actuaries:

In some years, prescription drug spending growth has far exceeded the growth in other medical spending, while in others it has fallen below other medical spending growth. Over the next decade, however, the Centers for Medicare and Medicaid Services (CMS) projects that spending for retail prescription drugs will be the fastest growth health category and will consistently outpace that of other health spending.

Which brings us to the second big problem. The one everyone’s talking about.

More about that soon.

Tom Lynch is a principal with Lynch Ryan & Associates, a Massachusetts-based employer consulting firm. This column was reprinted with his permission from his Workers' Comp Insider blog.