Why are prescriptions so expensive?
Part 1: The origins of the prescription drug plans and PBMs
Every day we see independent local pharmacies close their doors. The consolidation of pharmacies, and watching the big chains reduce their hours as well as close stores.
There is not one factor that can be as identified as THE cause of the demise of the independent pharmacy, but a culmination of many factors. The high cost of prescriptions has gotten out of control and has been rising since the late 1960s and the emergence of the PBM(Pharmacy Benefit Manager). I can tell you that the pharmacy, the independent pharmacy does not benefit from those high prices unlike what many might think. That does not hold true for specific large chains, that also own the PBM!!!
I own and operate a small independent pharmacy servicing nursing homes, and I will share with you, one of many factors that have contributed to the rising high prices of prescription medications. Over the next few articles, three parts in total, I will explain how we got to this place and unfortunately uncover that patient care was never a core part of the equation.
If you talk to pharmacists who have opened their own pharmacy, you will not hear that the primary reason to have their own pharmacy was “based on money” or that it was a “super lucrative” business model. Most pharmacists who have traveled down that career path will tell you they love taking care of their patients, and the ability to be their own boss and make a decent living. Some have done better than others. The sad truth is the ability to turn a profit has nothing to do with how well you take care of your patients.
In fact, if you take too good care of your patients you might actually lose money.
I started working as a technician for a chain called “Drug Fair” and the head of the company could be found during the holidays helping to pack bags at the check out. The profits were made on everything but the prescriptions. If you ever noticed, the Prescription Counter was usually in the back of the store. Why? It was so you would walk THRU the store and see all the products “you needed” to buy. It was like a “Woolworth” with a pharmacy. I am talking about the mid-’70s. The simple business model of success or profit is revenue minus expense equals profit. Pharmacy is no different- except Revenue from prescriptions is determined by outside parties, i.e., PBM, and the $$ they pay the pharmacy has nothing to do with what it costs the pharmacy to purchase the drug. If you lose money with a specific insurance contract, too bad. If you are a retail pharmacy you can tell the customer the problem and they can go to another pharmacy if you do not fill it. If you are a pharmacy that provides medications to a patient in a nursing home, you have to dispense the medication and lose money. The patient cannot get out of bed and go to another pharmacy, and you signed a contract to provide all prescriptions, not just prescriptions that you can make money on. You can always see if an alternative is available but if nothing is available you lose.
One HMO plan representative told my biller, “You should get a different wholesaler to get a better price”. ARE YOU KIDDING ME?
The pharmacy contracts with a drug wholesaler, and today must agree that they are the primary wholesaler and you will guarantee over 90% of your purchasing to comply with the contract.
FYI- Wholesaler’s pricing contract would look like this:
Cost minus a %, but guess what, you don’t know the real cost, but you have to play along, and hope you are getting a decent deal. (Knowing full well you are probably not getting the best deal.) How absurd is this? You are teased with getting rebates if you meet goals set by the wholesaler, a % of the purchases from the wholesaler’s preferred drug list. So now you are managing your costs by trying to buy the preferred drug. What is again not known to most is when you try to order the best-priced drug to buy, often they have “zero in stock” and then you are forced to buy a much more expensive product. Another concern is the drug with the best price to purchase might not be a drug that the insurance company recognizes as preferred. You do not know this until you process an order and adjudicate the claim. Is this done on purpose? Again you are at their mercy, they will determine your success.
In every business except most areas of healthcare, you can price your product and charge for your services, in a usual and customary manner. Not in pharmacy and especially not in the LTC (Long Term Care) nursing home provider pharmacy niche..
I am at the mercy of the insurance contracts, and the PBMs (Pharmacy Benefit Managers) as they dictate what they will pay, and that will determine whether I make or lose money on a prescription. I am also excluded from certain contracts because they say they do not need any more pharmacy contracts. So if I have the contract of the nursing home and patients have those particular commercial insurance plans, I cannot bill and therefore unable to provide my services to that home. That is discrimination and no recourse for me, nobody cares but the patient who cannot get their prescription from my pharmacy.
How can that be? Look at the insurance industry and the PBMs and who is in control. The history of the PBM must be revealed to detail the chain of events that got us to this current state of affairs.
PBMs evolved in the late 1960s and started with “claim administration” duties, and data standardization. Originally most people paid for their prescriptions in cash. The process was to save your receipts and if you had insurance you would submit them to the insurance company for partial reimbursement. When the first plastic prescription drug identity cards were created such as PCS- (Prescription Card Services) in the 70s the process changed. The PBM’s expertise in managing the large amount of “claim submission” was the beginning of their data mining enterprise.
In the 70’s when more employees were receiving insurance prescription benefits through the workplace, the process allowed the employee to pay a co-pay if the pharmacy was in the network. In network- the employer contracted with an insurance plan and part of the coverage including prescription coverage. An agreement, the contract with “pharmacy” established the fees and charges. Example- Prescription Plan A- Pharmacy agrees to an established price by the insurance and PBMs. An established price based on a generic or brand name drug and a specific co-pay from the patient.
The narrative from the PBMs was the pharmacy got paid quickly and the patient did not have to file a paper claim.( Quick payment was not equal to getting paid cash at the time of sale and as of today some plans take over 6 weeks for the pharmacy to receive payment.) The pharmacy should really be named the Pharmacy Bank. The PBMs use our drugs and use our money without having to pay any interest on that money.
By the 1980’s the PBM established a large pharmacy network and a mail service component was often offered. All under the pretense of “efficient administration” of claim processing.
This was the beginning of the end for the pharmacy as we knew it. As insurance plans grew, the PBMs recognized that they had a huge opportunity as a data miner. This data would provide a path that would generate revenue from the manufacturers.
In 1987, real-time, online claim processing was born. Now there was a direct communication, bi-directional communication that was now able to capture clinical information with each claim. The PBM’S now had and were in control of a huge database of valuable healthcare information. Not surprising that it was at this time that the very competitive manufacturer rebate programs were created. (The state Medicaid assistance programs also worked a formulary system and if the manufacturer did not give a rebate back to the state the product was not covered under the state program. If you were on Medicaid and the drug was not on the formulary you would have to pay out of pocket for that prescribed product.)
So the PBM is the creator of the formulary system and what drugs are placed on the formulary. They negotiate with the drug manufacturer agrees and to put their drug on the “preferred formulary list” for a fee, the rebate of $$. PBMs recognized that they had the advantage, leverage, and a ton of data that the drug companies wanted. So the formulary, the tier system, the non-formulary drug lists and the ability to manage the amount of money that the insurance companies would pay for the formulary drugs was exploding.
In data collected by the Pharmaceutical Care Management Association (PCMA), the organization representing “managed care pharmacy, pharmacy benefits management companies, and their healthcare partners in pharmaceutical care,”1999, the PBM were said to manage about 1.8 billion prescriptions annually, 70 percent of all prescription orders dispensed for ambulatory care patients.
PBM employs more than 9,000 pharmacists.
Over two-thirds of prescriptions are covered by pharmacy benefits.
The top ten PBM’s in 1997 were as follows:
1. PCS Health Systems, 2.Merck-Medco Managed Care, 3. Express Scripts/Value RX, 4. Diversified Pharmaceutical Services 21.0, 5.WellPoint Pharmaceutical Services, 6.Integrated Pharmaceutical Services,7. Advance Paradigm 13.0, 8.Medimpact Healthcare Systems 12.0, 9. Caremark, Inc 10.0 and 10.Eckerd Health Services 9.0.1
The 1990s saw the PBM’s grow and their story to the public was they were focusing on the Health of the Patient. There was very little scrutiny of how the PBM’s were operating and in a book published in 1998 by Sheila Schulman and Louis Lasagna:
“Among other things, questions have arisen about the ability of PBM's to conduct their business independently, particularly with respect to the selection of drugs for formulary inclusion and with respect to communications between PBM's and their managed care or corporate clients…. All of these new organizational structures (between PBMs and drug companies, pharmacy chains, and institutional providers) have generated questions about the roles and interests of the various parties…. Still, another set of concerns relates to the increasing centralization of the drug selection process. The pharmacy and therapeutics committees of large PBMs select the drugs for formulary inclusion. In so doing, they are effectively determining the drugs to be taken by tens of millions of patients in the U.S. What appears to be the distancing of the physician from the final drug selection process raises questions about the impact of PBM on the nature and quality of direct patient care.”2
During 1996-1999, there were many community pharmacies, hundreds, that went out of business. The chain drug stores were popping up all over, using “loss leaders” products that they sold to get you into the store, extended hours, and a wider variety of consumables to offer than the corner drug store. The PBMs saw that the chains offered them a huge advantage, a volume of lives to manage. The contracts for the independents were offered but usually at low rates, not sustainable. An example of a rate offer was: Average Wholesale price minus 12-15% plus a $2.00- $2.50 dispensing fee) Note- Dispensing fee determined by the PBM- the cost of the packaging, the time to prepare the medication, any consultation required with the physician to clarify or discuss drug interaction and the consultation with the patient was priced at $2.00? You could take it or leave it- in addition, it was to the PBM’s advantage to limit the number of pharmacies allowed to participate in a contract so as to assume greater discounts through that restriction. There were legislative barriers in 31 states’ “any-willing-provider” laws that prohibited PBMs from a restrictive enrollment process.
Where were the pharmacist and the doctor in this process of determining the best drug of choice for their patients? Another important milestone, in 1995, during this time, was that Drug Manufacturers were able to advertise directly to the consumer. This increased the drug manufacturers’ revenues exponentially. Prior to this, the manufacturers directed marketing to physicians. The manufacturers increased their advertising spend direct-to-consumers from $166 million in 1993 to $4.2 billion in 2005. The practice of medicine and the practice of pharmacy was forever changed by the PBM’s and not to the benefit of the patients, but to the bottom line, the profits for the industry.
Issue Brief, No. 749Robin J. Strongin, Analyst/Writer.Washington (DC): National Health Policy Forum; 1999 Oct 27.