In a  3-1 vote to end its investigation, the FTC said its probe “revealed a competitive market for PBM services characterized by numerous, vigorous competitors who are expanding and winning business from traditional market leaders.”

The FTC said it is confident the Medco buyout won’t change those dynamics and it sees little risk of the merged Express Scripts/Medco exercising monopoly power.

Capitalizing on the nation’s health care mania, Express Scripts played all the right cards. “Our merger is exactly what the country needs now,” Express Scripts CEO George Paz said in a statement. “It represents the next chapter of our mission to lower costs, drive out waste in health care and improve patient health.”  Music to the ears of influencers in Washington that made this deal happen.

Now the company has to deal with pending litigation over the transaction.  The community pharmacist association and drugstore trade groups have filed suit. Also, several states have their AG’s bringing action. All of this activity does seem like much ado about nothing after the FTC announcement. We believe that these legal actions are designed to extract some pricing concessions and will not ultimately prevail.

Here’s one vote for George  as industry executive of the year. This is quite the coup! Let’s see how it actually gets put into practice.

Now, a federal lawsuit filed by these trade associations in the U.S. District Court for the Western District of Pennsylvania tries to block what seems to be a fete accompli. This action, joined by the announced actions of several state Attorneys General, shows how serious these opponents of the expected “Expredco” are!  The same rhetoric is being used now as during the FTC review process: that this mega merger will create a huge new middleman that stands between patients and pharmacies and hurt competition.

It is unlikely, however, that after withstanding FTC scrutiny and winning approval, that these 11th-hour legal attempts to block the transaction will have much chance of prevailing.  It could be that these efforts are being attempted to negotiate some concessions in advance of having to actually negotiate beyond the courthouse steps.

The truth is, this “mega middleman” as claimed in lawsuits, really isn’t such an anti-competitive controlling force. As identified in earlier WBC blog posts, the combined entity of ESI and Medco represents approximately 31-32% of Rx’s filled (not the 40% claimed by opponents). Here’s the actual breakdown:

PBM Market Share By Annual Rx Volume

1. Medco                               17.07%
2. ESI                                    15.13%
3. CVS/Caremark                 13.49%
4. Argus                                 11.76%
5. Optum Rx                          7.61%
6. ACS                                   5.77%
7. SXC                                   4.79%
8. MedImpact                      3.93%
9. Magellan                         3.43%
10. Humana                           3.36%
11. Catalyst/Regence          3.29%
12. Aetna                                2.64%
13. Other PBMs                     7.72%

Source:   AIS’s Quarterly Pharmacy Benefit Survey. Reported volume by 56 PBMs as of 4Q2011.

As usual, stay tuned as this story is the gift that keeps on giving!

Our Inside-the-beltway sources have told us that the deal is eminent, contingent on a couple of adjustments.  The main issue is a requirement that the newly formed “Expredco” will shed one of it’s Specialty pharmacy units.  You remember Specialty. Still the fastest growing component (20% trend) in a plan sponsor’s pharmacy drug spend.  Well, the powers that be have to throw the howling wolves (NACDS and NCPA)  a bone, so the sacrificial lamb will be Accredo, Medco’s superb Specialty management company.  Talk about throwing the baby out with the bathwater!  But that seems to be the price they must pay to get the deal done.  Recent press releases showed, for the first time, a softening of position by the community pharmacists, who said they could live with the new environment, as long as they get to participate in filling Specialty scripts.  We’ll see how it plays out.  As usual, stay tuned!

Lots of stories about skepticism of the deal are being floated by those who oppose it in order to try and gin up more lemmings to follow their lead. Lobbyists are working overtime to reach their favorite Congressional contact.  Let’s face it,  lobbyists get paid to put the kabossh on deals their clients don’t like.  Supermarkets and community pharmacists say no!  We knew the deal was headed for approval when the press releases issued this week by various supermarket spokespeople  were “this deal will put an end to our ability to offer $4 generics.”   Ha!   That sounds like a panic statement.

We tend to agree with Fitch’s assessment that the deal will get done. Fitch believes that the broader consumer interests of creating better pricing concessions and thus, help reduce health care costs, will ultimately win the day and enable the FTC to approve the deal. ESI is prepared to divest some business operations (particularly in the Specialty area) if that becomes a condition of approval.

As we’ve stated previously, the  combined companies still only represent around 30% – 35%  of all Rx’s being filled, so it’s far from the mega-monopoly that is being presented by organizations such as the National Association of Chain Drug Stores, the National Community Pharmacists Association and the Food Marketing Institute.  The FTC is expected to announce their decision by the end of February of very early in March.  Stay tuned!

The ESI P.R. machine has been pushing out releases over the last several months touting the benefits to consumers and health plan payors of the new mega PBM represented by this super-sized combo. This position is sharply contrasted by several community pharmacy associations who fear the negotiating club that would be wielded by “Expredco.”

Unlike the AT&T deal for T-Mobile, which received a thumbs down from the FTC,  ESI/Medco, while potent, would still only represent 30% of the prescription drug market.  Expressed (no pun intended) another way, 7 out of 10 Rxs will still be managed by competitors.

The return for investors in a combined organization looks sweet, and ESI is making a strong case that cost savings will be significant.  The question remains whether these savings generated through operational synergies and ability to negotiate with manufacturers gets passed through to plan sponsors or is simply reserved to keep a smile on stockholders faces.  We’ll see.

PBM operations have been one of the best kept secrets in managed care. As a result of litigation over the past few years, many otherwise little-known business practices have come to light.  Stories regarding multiple pricing lists, huge pricing spreads, underreported rebates and non-compliance with contracted discounts have become rampant.  WBC  helps our clients and blog subscribers become better informed as to the PBM business practices that will influence their ability to control prescription drug costs. Our clients know what to look for in a PBM contract and why incorporating contract validation and audit provisions are so important!  We also help them better manage their PBM relationships which will directly reduce their overall drug spend.

The question then becomes “who is managing whom?”  If plan sponsors are the object of PBMs desire, shouldn’t the sponsor be in a position to, if not dictate terms, at least know the rules of engagement?  Unfortunately, too many plan sponsors have been willing to accept the four most damaging words in the PBM lexicon: “It’s standard industry practice.”  By accepting these “standard” practices, plan sponsors have allowed their PBMs to profit, some would argue, unfairly, at the expense of the plan and their members.

The first decision that a plan sponsor should make is to select a PBM business model that is consistent with the sponsors’ own operating philosophy.  There are typically three choices: Traditional; Transparent; and Pass-Through. Traditional is the most elusive.  The PBM will quote a pricing framework, including discounts and dispensing fees, along with shared rebates. Under this choice, little is actually disclosed about cash flows that are generated through the account and the majority of contractual features are left open for the PBM to interpret. The second option, Transparent, is really more opaque than clear. The PBM will declare some level of “disclosure” and will share some of their former windfalls, but they are still not handing over the keys to the kingdom. They may still be bound to achieve their own financial forecasts that are generated based on the financial underwriting assumptions they make when pricing a client account , particularly those PBMs that are publicly traded and have to meet analysts quarterly earnings expectations. The third option, Pass-Through, means that 100% of all sources of revenue generated through the plan sponsors prescription drug purchases,  is passed along to the plan sponsor.

Each of these three choices carries its own advantages and drawbacks. WBC believes that it is the responsibility of the benefit consultant to make sure the plan sponsor is fully informed.  It’s interesting when a PBM will tell the plan sponsor that they will offer all three types of options.  They will also claim that it doesn’t matter to them which offer the client elects, because it’s the same financial outcome to the PBM, based on how they have structured their pricing and administrative fees. This outcome seems philosophically incongruent and demonstrates the financial manipulation at the disposal of the PBM.   In our view, a PBM should offer one over the others.

Visit us again as we cover the additional crucial components for managing your PBM relationship in order to reduce your pharmacy benefit costs.

To say Medco has had a tough year would be an understatement. First came the CALPERS scandal, the fallout of which is still unknown.  There may be much more in this story than has been reported.  Second was the announcement that Medco would lose the Federal Employees business; and finally, a sidebar announcement today that the much rumored United Health deal, would, in fact, not be renewed with Medco.  This seemed to be the third nail in the Medco cross that made the ESI acquisition a reality.

How this impacts prescription drug benefit plan sponsors trying to reduce the costs of prescription drugs remains to be seen.  The bally-hooed party-line will yak about how the new scale of the combined companies will represent purchasing power that generates fabulous pricing, but as we’ve pointed out in this column before, it’s not what the PBM buys, but what they bill!  We’re pretty sure that special deals (if any)  obtained by ESI/Medco in the future will accrue to the benefit of their stockholders, and the pricing spreads that generate a PBM’s earnings will be greater than ever.

Here are some additional thoughts to ponder regarding this marriage made in Wall Street Heaven:

1. What will U.S. anti-trust regulators say?

2.Integration is always an issue in the mega PBM world. Will their platforms work together and what will the account service issues be?

3. How will ESI’s commitment to Buyer Behavior and “consumerology” gel with Medco’s investment in personalized medicine and genomics?

4. Will large Rx plan sponsors feel that they have fewer options with a change in the Big 3, or will they finally give legitimate shots to smaller PBMs that, in the past, have not been invited to the table?

5. How will ESI’s specialty company Curascript blend with Accredo from Medco?

6. Does this deal drive Walgreens back to the negotiation table with ESI?

7.  Pink slips will sure to appear, so relationships that may have driven some client deals may be on the table if a favorite account manager is given their walking papers.

Stay tuned, this should be fun!

Last summer, Walgreens and CVS/Caremark caused sparks with the announcement that Walgreens was leaving the Caremark network. That separation was short-lived, however, as cooler heads prevailed and saw it was a losing proposition for both parties.  Some have opined that the current lover’s quarrel involving Walgreens is just a negotiating ploy and will also work itself out so that the two parties can continue to do business.  The relationship brings a handsome chunk of change Walgreens way to the tune of $5.6 billion in annual Rx’s.  Of course, that may be wishful thinking and this dispute may have some bite to its bark!

To re-cap, Walgreens walked away from negotiating an extended deal with Express Scripts. The bones of contention centered on three stated issues.  According to the Walgreens press release, the issues are:

1.  The desire by Express Scripts to define contract terms, including what a brand drug is and what should be declared a generic (Note to plan sponsors: if it’s this important to ESI and Walgreens, it should be evident that it should be important to you in your PBM contract);

2. The request that Walgreens be notified in advance when Express Scripts decides to transfer a prescription to another network pharmacy; and

3. A reduction in reimbursement rates to a level that Walgreens felt was unacceptable.

The loss of Walgreens retail outlets would be a significant dent in the Express Scripts network, particularly in key markets, such as NY Metro and Chicagoland.  Losing the Duane Reade chain (a Walgreens subsidiary) in NY may prove particularly painful to the Express Scripts block of labor business. Plus, we can’t believe the huge Department of Defence (“DOD”) contract held by ESI would passively allow Walgreens to jump ship without throwing a fit.  They would/should be exerting heavy pressure on their ESI account managers to “fix it.”

So where is the silver lining in this melodrama? Well, it gets plan sponsors to start thinking about the merits of a restricted network, one that we like to call “right-sized.”  We haven’t met the plan sponsor who truly needs the 64,000 store variety. The vast majority would do just fine with a network half that size or smaller.  So the reduction to 55,000 or so really shouldn’t prove a major obstacle for Express Scripts clients. This right-sizing allows the PBM to perform a disruption analysis and present their case to their clients. Does the plan really need a pharmacy on every corner? Will their members have adequate access with the reduced version?  If they discover that a “select” network meets their needs,  then opting for a smaller network with  better discounts may prove more beneficial to the plan.

How this plays out remains to be seen. We believe both sluggers have more to lose than to gain by parting ways. Wall Street seems to agree, yet the Street appears to be siding with ESI.  Their stock is slightly up, while Walgreens is still down  almost 6%  since the announcement.  Stay tuned for some real summer fireworks!

The PBM relationship can be a strange one. Where else does the customer not know what their purchases will cost; where the vendor can change pricing at any time, and at their discretion; and where the customer has to depend on the vendor to tell them how they are doing?  This fox sure knows a good deal when they can get it!

Every two weeks in the U.S., more than $12 billion in pharmacy benefit claims (PBM invoices) are paid by plan sponsors without review! Mistakes due to systems problems, coding errors, complexity of PBM contracts and ever-changing pricing discounts lead to errors that create payment confusion for the plan sponsor.  Without concurrent invoice review, a plan sponsor is probably paying significantly more than they should.

Fortunately, technology is now available that enables the review and analysis of unlimited claims data files in very rapid order. What use to take weeks can now be done in a few hours.  This is particularly meaningful when most PBM contracts require payment submission within 48 hours of receipt.  The platforms are PBM-agnostic, so any PBM’s invoice can be reviewed.  WBC helps plan sponsors with this critical prepayment validation service for prescription claims.  Our clients receive an immediate ROI with the first invoice we review.  The review includes:

• Ingredient costs
• Duplicate claims
• Effective discount rates
• Dispensing fee validation
• Member cost share
• Invalid NDC’s
• Eligibility review
• Med D subsidy
• Regulatory compliance
• Fraud, waste and abuse

A review system should be fully scalable, easily handling large or small claims volumes. Unlike end-of-year contract audits that are difficult to gain recoveries, our monthly monitoring provides cash flow controls and near real-time reporting delivered within hours of obtaining the necessary data feeds.  Discrepancies can be fully documented and deducted from that month’s invoice. Plus, this review is not an audit and should not trigger onerous audit  language found in many PBM contracts.

Adequate financial oversight is not just a compliance afterthought, it’s a necessity!  A comprehensive invoice review will help reduce fiduciary liability by improving regulatory compliance for Sarbanes-Oxley, Medicare Part D, GASB 45 or FAS 106.  Systems should have the ability to maintain a parallel reconciliation process aligned with internal audit and finance reporting calendars.

Plan sponsors need to ask themselves whether the business philosophy deployed in their PBM Services Agreement is serving the needs of their  organization, or of the PBM and their shareholders. The PBM contract is one of the few business agreements that clients enter where they really don’t know what the product will cost; where the  vendor can adjust the price at any time; and where they have to ask the vendor “how are we doing?”

Just about every PBM contract begins with a definitions section and sets the stage for how the plan will operate.  Some of these terms look familiar and the plan sponsor would think, pretty straight forward, but that’s not always the case.  Here are a few key contract terms and definitions to consider:

• AWP. Means Average Wholesale Price for a standard package size of a prescription drug from the most current pricing information provided by First DataBank or such other drug database supplier “as determined by the PBM at any time.”  Of course, the standard package size they mean is 100 units, regardless of the size that is filled, unless it’s a smaller size.  This enables the PBM to create pricing spreads based on different size quantities and to use multiple pricing sources, at their discretion.
• Claim. Means those prescription drug claims processed through the PBM’s on-line claims adjudication system, but what about errors, duplicates and reversals?  Without clarification, the plan sponsor could be billed for everything, and if there is a per click admin. fee being charged, this can really add up. These “false claims” can represent as many as 20% of total claims!
• Brand and Generic Drug.  Sometimes it’s not even mentioned in the contract.  In which case, the PBM is free to classify any prescription as one or the other, and then, reverse themselves, when advantageous.  For example, a single-source generic may be designated as a generic when the PBM calculates their generic fill rate (“GFR”) to meet contract guarantees, yet they may adjudicate the claim as a brand in order to assign a lower discount rate (the brand discount).
• Rebate. Means monies the PBM receives from pharmaceutical manufacturers for formulary access and/or market share increases.  Many contracts, however, also say “excluding any other payments or fees.” What about all the other revenue streams that are payable by a pharma manufacturer?  In addition to base and market share rebates, these should include sales target incentives, prompt-pay discounts, data selling fees, administrative fees and rebates on specialty drugs.

There are many more definitions and contract provisions to consider when negotiating a PBM services agreement. The plan sponsor is well-served to include contractual language requirements as part of the RFP response, where vendors understand and accept the terms and conditions being requested.  That way, they can underwrite their pricing offer to reflect client requirements and should agree to be bound to the terms defined.  The client gains the advantage of using the leverage inherent in the RFP procurement process.