Thursday, February 25, 2010

Why do pharmacy owners care about PBM transparency?

I have a legitimate, for-real, I’m-not-being-snarky question:

Why do pharmacy owners care so much about PBM transparency?

Seriously. How precisely would pharmacy owners benefit? The issue has become the cause célèbre for independent pharmacists, but I just can’t see how it would directly lead to more money in their pockets. In fact, we already have transparent Pharmacy Benefit Management (PBM) models—and they don’t look too good for independent pharmacies. Be careful what you wish for!

So, here are a few follow-up questions related to yesterday’s blog post and the many negative reader comments from independent pharmacists.

Pay attention: I am not anti-pharmacy. I’m pro-facts and pro-logic. As always, comments welcome.


One reader left me the following comment on yesterday’s post:
"I'm not asking for one more penny, I'm just asking that the savings be passed on to the purchasers of healthcare, not the shareholders/execs of the pbm's."
A noble sentiment, but doesn't anybody else find it odd that independent pharmacists have decided to be the altruistic, self-appointed guardians of large insurance companies, big corporations, and the U.S. Federal government?

And how is it that PBMs can get away with their alleged “gaming”? Does anyone out there actually believe that the executives at insurance companies and for-profit businesses are gullible simpletons? Do these executives not care about money and willingly get ripped off by their vendors? (Sarcasm alert!)

If you want insight into how payers make decisions about PBMs, I recommend you read The PBM Purchasers Guide from URAC. (Free download here; Registration required.) This guide might as well be called “Do Your Homework and Negotiate Hard.” Good advice whether you’re buying a car or hiring a PBM. Sample quote:
“PBMs will provide transparency and disclosure to a level demanded by the competitive market and generally rely on the demands of prospective clients for disclosure in negotiating their contracts. The best proponent of transparency is informed and sophisticated purchasers of PBM services.” (emphasis added)

WIIFM = What’s In It For Me

NCPA was represented at Tuesday’s legislative hearing by Richard Beck, Executive Director of the Texas Pharmacy Business Council. Mr. Beck has been a frequent commenter on this blog. We spoke on the phone a few months ago and had a very nice chat.

I pored over Mr. Beck’s testimony but could not identify a single specific benefit for independent pharmacies from PBM transparency.

Since I’m skeptical of the altruism angle, my next logical assumption is profit-seeking behavior by owners of pharmacy businesses. Perhaps profit margins will get closer to the much higher levels earned from uninsured and underinsured individuals, a.k.a. the hapless “cash-paying consumers.”

Here are the data on pharmacy margins by payer from the latest NCPA Digest. Pharmacies earn margins from the uninsured that are 2X the margins of people with insurance.

Do pharmacy owners believe that PBM profits will magically be transferred into their pockets? Will independent pharmacy margins increase if the rates at which pharmacies are reimbursed by PBMs were disclosed? I don’t see why either situation would occur.

Let’s go one logical step further: Do the fans of transparency believe that pharmacies should disclose all spreads between a pharmacy’s acquisition costs and the rates at which a pharmacy is reimbursed by a payer? Yeah, I thought so.


Go to Peoria, IL, and witness the world of pass-through, fully transparent pharmacy reimbursement—the Caterpillar/Walgreen/Walmart network. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network.

The pharmacy winners here are large, highly efficient, low cost dispensers who don’t mind getting paid at cost-plus levels that would put most independents out of business. Wal-Mart and Walgreens will gain major market share because they are the primary pharmacies in this network. The major PBMs are just as nervous as independents that this model will take off.


My question remains: How would independent pharmacies benefit from “PBM transparency”? Why are they so hell-bent on pushing this issue forward if not for their own self-interest?

I’ll post all responses and let Drug Channels readers make up their own minds.

BTW, I’d be happy to debate this question live in a public forum.


  1. I do not think many people look at things this deeply. WMT and Wallgreens are already in dominating positions. Ind. obviously have to make higher margins to survive because Wallgreens and WMT have other areas of business where they can take loss leaders even if they wanted to in their pharma. area. I think the ind. are just fighting for survival. From a purely economic viewpoint it would be interesting to see what you would advise ind. do if WMT and Wallgreens went to the point of taking loss leaders in pharma. What would you do as an ind. in that situation?

    I love your blog you are a VERY sharp business person.

    Kindest regards,
    Tom Bailey

  2. Adam,

    What up your rear! You've taken this to a new level.

    ".....Let’s go one logical step further: Do the fans of transparency believe that pharmacies should disclose all spreads between a pharmacy’s acquisition costs and the rates at which a pharmacy is reimbursed by a payer? Yeah, I thought so."

    Yep, we've been saying for about three years now that a new reimbursement system is needed for pharmacies. Nobody needs to hide nothin'. Cost of dispensing studies have been done and we all know what it costs to fill a script....and yep, it's volume related of course.

    But who's to say the smaller guys are not needed in certain markets. If the consumer goes to these guys, AND the consumer:
    1. enjoys their service,
    2. pays their copay,
    3. is not forced to go elsewhere...
    ..then what's the problem?

    We're simply looking a way to make about 10 to 12 bucks above our AAC.

    It's no secret that one can't keep their doors open with a 2 buck "dispensing fee".

    You're a smart guy and you have a great flair in entertaining (and educating) many of us, but gosh, you may need a little polishing around the sides.

  3. "we've been saying for about three years now that a new reimbursement system is needed for pharmacies"

    Who is "we"? Link or cite please.


  4. Awesome post today, I suspect things will get lively for you! Way to mix it up:)

  5. Gather a regional group of pharmacy owners - approach a networking company (like Data-Rx) and form your own PBM Network. It's happening already. Wilson Pharmacy - for example - in Johnson City, TN - owner Guy Wilson isn't taking a back seat to any PBM. Wilson IS the PBM and it's working. It may not be easy to get started but it is most certainly possible. If any independent pharmacy in the country thinks they can be truly successful and run their businesses the way they ran them 5, 10, 20 years ago - should call me,....I'd like to buy your pharmacy. There's nothing wrong with independents making as much money as possible as long as you are delivering a better healthcare service than a national player, mail order, or any entity you deem a competitor. The NCPA is still needed by the independents but it’s up to the NCPA members to extract useful advocacy / information to help their businesses.

  6. I've been wondering the same thing. Gutsy post. You are not making many friends at the NCPA!

  7. What really set me off was seeing my own prescription for a generic statin. The pbm billed the goverment employee plan (under my wife) five times what the pharmacy was paid. The pbm has no risk from this self-funded employee plan, yet they have the gall to mark up the price FIVE times. I'm not talking from 2 dollars to 10, it was from 30 to 150. This adds to the cost of the plan, which my wife as an employee contributes to.

    This is not isolated, I see it everyday. With the pipeline of new drugs low and most patents running out in the next year or so, most prescription will be generic. Generics are where the pbms are making these outragous spreads.

    On a brand-name medication I get about a 2% mark-up. Generics prices are set by the pbm, sometimes good, sometimes below cost. I have absolutely no control over generic reimbursement. I can show how a pbm changed the MAC on the same drug on the same day, in order to creat spread pricing. How do I run a business when the pbm can change pricing ANYTIME they wish?

    Would you like to buy a 2.00 loaf of bread on your c-c, and your billed for 10.00? The store gets its 2.00 (minus a transaction fee and small percent) yet the c-c company bills you 10.00. That is a poor example because atleast the c-c company assumes risk for collecting. How long would people stand for that?

    I support transparency because at 2%, It cant get worse. Atleast it would open the discussion for fair reimbursement.

  8. My answer to "Anonymous said" regarding Acquisition plus(AqP).... AQP +$12 is to high, AqP + 8 to 10 gets employers attention and a price that traditional PBMs cannot match, toss in %100 rebates back to employer and you have a local contract for your pharmacy just as PTR described.

    My response to PTR is that your thoughts right on but you need to go one step further and have control of not only the PBM but also the TPA and the PLAN. That is the ApproRx business model and we are licensed in most of the country to sell and administer our pharmacy friendly plans. Creating local networks of pharmacies as you described in your response.
    Jim at

    My answer to Adam as to "why pharmacy owners should care about PBM transparency" is that company HR staffs do not understand the Rx products they are buying, they do not understand the pricing terminology, and most importantly they do not know how to measure if the Rx products they are purchasing actually are creating good health and productivity in their work force or not. This is not how the market normally works, spends millions of dollars and then at the end of the year not even know if the products you purchased performed or not.
    I have yet to present the white paper "Generics New Push for Profits" to CEO, CFO, HR staff, or President of any company and find them to have the skills to understand it.

    Jim Fields
    PS ApproRx starting advocating Acquisition Plus pricing in 2004

    Generics – The New Push For Profit!

  9. You are correct about margins, but how about dollars, very few people pay cash for scripts. Here is data from last week in my pharmacy.


    MEDICAID 228 16427.90 20012.15 3584.25 18

    RETAIL 133 1171.82 3322.50 2150.68 65

    THIRD PTY 1924 98687.88 122174.96 23487.08 19

    OVERALL 20% profit

  10. Re: Generic statin comment

    The plural of anecdote is not data. It's simply mathematically impossible that what you describe happens on a widespread basis.

    In your example, the PBM would have theoretically made a gross margin of 80%, right?

    Well, gross margins at public PBMs are actually in the 4-6% range. Go read the earnings announcements from Express Scripts and Medco from this week.

    And keep mind that these margins reflect a combination of (a) spreads on scripts filled at network pharmacies and (b) presumably higher spreads when the PBM is acting as the dispensing pharmacy and filling the script from a mail pharmacy.

    So, your story is nonsense on a macro level.

    I presume most politicians (and perhaps many pharmacy owners) have not taken the time to look at the actual numbers and draw this obvious, fact-based conclusion.


  11. My take on transparency is that the whole country thinks that all pharmacy arenas are treated the same and we are all making windfall profits. The PBMs are making all the money while the indies are struggling and closing down. If the insurer could see the amounts that the PBMs are charging them vs what they pay us, maybe they will be more amenable to increasing our dispensing fee.
    Drugs are the least expensive form of treatment for many ailments. The PBM industry has inflated these prices and make all of us look money hungry. It's not indies fault. We are not making the lions share of the healthcare dollar. We are not even making our share of the healthcare dollar.

  12. Adam, you do not have a clue. Regarding transparency, who exactly are these "clients" you work for? "Anonymous" example with getting charged $10 for a $2 loaf of bread was spot on? Why should there be any spread on a retail transaction for a PBM?


  14. Hi Adam,

    Another great post. Very provocative. I must raise the question, however, why not altruistic? While the "sarcasm alert" may sound when thinking corporate values, it's easy to picture these comments from an independent community pharmacist with a conscience. I also believe that a reason for desiring PBM transparency is to help support their position that pharmacists are part of the healthcare solution, and not to be pigeon-holed with the media's tarring of "greedy healthcare vendors who gouge the public."

  15. Adam, your gross profit analysis is flawed. In the independent pharmacy analysis that is gross profit on product only. On the 10-k of public PBMs (I'm looking at Medco's) "gross profit" is after all operating costs, including salaries, benefits, facilities, dispensing equipment, etc.) In fact, it includes all costs except SG&A. The two are not comparable. Also, they include in revenue and costs co-pays collected at retail pharmacies AT THE SAME AMOUNTS! So the profit margin on co-pays is ZERO and distorts the profit margins. Why they are allowed to include these amounts on their financials is beyond me, because they don't even handle these dollars and in fact, they have no idea if the retail pharmacy even collected these dollars! It is financial statement fraud, meant to puff up revenues to impress Wall Street.
    So in the interest of full disclosure, Adam, which of the big PBMs do you work for?

  16. Re: Re: generic statin.
    I can only speak for what I see first hand. The spread on this generic statin for this one plan from one pbm: plan paid pbm 48,000 pbm paid pharmacy 7,000. I can prove that. That was one of the big 3, at just my pharmacy for less than an eight month period.

    For the same statin, a different big 3, billed a self insured plan 160.00, pharmacy only received the 30.00 copay. The only reason I saw this was the member brought in a statement from his TPA. He asked why he even has insurance if the middle-man is making 130.00 over what the pharmacy receives.

    If this spread doesn't amount to much, Why are they affraid of transparency? Is cat really getting cost-plus? or does cvs not show rebate after invoice? Its too easy to hide the numbers.

    This is not right vs left...its right vs wrong.

  17. Wow!! the blogs are getting rough today... both towards Adam and from Adam.

    Normally I am on Adams side but regarding the statins nonsense at the macro level, Adam your wrong.

    We own and operate both a PBM and retail pharmacies. So I see both sides of the financial package.

    As a PBM I do not purchase drugs (mail order excluded)we are a service company. A PBM making 4-6% net for what someone else sells is very good, American Express only charges 4% max and MC 1.9%, and that is gross, not net like the PBM numbers you cited.

    And yes it is common for PBMI members to charge 80% or even 500% margins on generics, statins included and that is how PBM wallops American Express on margins. And that is why when a new generic comes out PBM stocks goes up.

    Adam I emailed you a 2004 white called "Generics new push for profits by PBMs" hope you have time to read it.


  18. What's wrong with independent pharmacy looking after their self interest?

  19. Adam,

    Here's at least one citation for the "we've been saying for about three years now that a new reimbursement system is needed for pharmacies." Rupp, MT. “It’s time to overhaul our drug reimbursement system.” Drug Topics. September 2, 2007:52.

    As for why independents care about PBM transparency, one reason is they recognize the prescription drug component of health care is a net zero sum game. Unjustified costs that are added by a middle-man in the distribution chain is money that can't be spent on services to ensure medications are properly used by patients. Starry-eyed idealists that they are, many independents believe that's a worthy goal of health plans and an important responsibility of the pharmacist. Go figure.

  20. One of the reasons we need transparency, can be found in the PBM’s mail order contracts with the plan sponsors.

    The PBM owns the mail order and charges their mail order and pays itself AWP – 27% + $0.00 dispensing fee, using repack drugs. They make the illusion of saving the plan sponsor money when really they are ripping them off.
    Go to any pharmacy and process a claim using Physicians Total Care NDC’s 54868-4070-01 for PLAVIX and then process that claim using the Bristol NDC 54868-4070-01.

    PTC = $ 183.82
    Bristol = $ 172.69

    The difference Dr.Fein is that the independent pharmacy CANNOT buy & process the REPACK DRUG. The PBM’s mail order is charging repacks that’s why they can give those HUGE discount to the plan sponsor.

    That’s why Dr. Fein NCPA is lobbying against another industry, to protect their own.

  21. where does your data come from? The following from medco's earning announcement.

    "The added retail business drove Medco's overall gross margin percentage down to 6.7 percent, from 7.5 percent a year earlier."

  22. medco gm 6.6% Express Scripts gm 9.15%, wow 42% higher, what games do they play?

  23. Ok, now lets look closer at my generic statin prescription. Again this is a self-insured plan that hires a TPA that subcontracts to one of the "Big 3", the TPA/pbm have no risk. My coverage for a 90 day supply is as follows 20% copay with a min 16.00 max 100.00 from retail, mail order (owned by the same pbm) is flat 20.00 copay.

    My statin prescription was 37.50 at the pharmacy, that was my copay and all the pharmacy collected. 37.50 is 20% of 187.50 (what the plan was billed). Also per the pbm's website it said retail was 187.50 with a 37.50 copay and mail order was 170.00 with a 20.00 copayment.

    So actual pharmacy reimbursement was the 37.50, yet the pbm gets to make up the plans retail and the mail order price. Not only does that seem extremely unfair, it should be illegal.

    On the above example it looks like the mail order saves the plan almost 10% and the copayment is 17.50 less to the member.

    Examples like this is why we need transparency.

    Want more? Like the elderly customer with the aarp endorsed discount card? That actually has the pharmacy collect more than the contracted rate in order to send back to the pbm. Yes an aarp endorsed card, when I fill a script, I get a bill from the pbm.....

  24. ALSO, PBMs get paid $68 per patient per month for Medicare D patients. This is paid whether the patient uses any services or not.

  25. Medco:

    ie, As a percentage, profits went up greater than revenues, WHICH MEANS THEIR PROFIT MARGINS WENT UP!!

    Full-Year 2009 Highlights:
    • GAAP diluted EPS increased 22.5 percent to a record $2.61 from $2.13 in 2008

    • Diluted EPS, excluding $0.22 in amortization of intangible assets from the 2003 spin-off, increased 21.5 percent to a record $2.83 from $2.33 in 2008

    • Record total net revenues of $59.8 billion increased 16.7 percent over 2008

    • Specialty pharmacy revenues rose 19.5 percent to a record $9.5 billion

    • Generic dispensing rate increased 3.4 percentage points over 2008 to a full-year record of 67.5 percent

    • Mail-order volume totaled 103.1 million prescriptions, with 2.4 percent growth in generic prescriptions

    • Total adjusted prescriptions increased 12.9 percent to a record 898.8 million

    • Record EBITDA of more than $2.75 billion, yielding $3.06 per adjusted prescription

    • Cash flow from operations increased 114 percent to a record $3.5 billion

    • Cash balance at year-end of more than $2.5 billion

  26. Seems pretty simple... PBM transparency creates a fair marketplace for both buyer and seller of services. Even payers understand a fair payment needs to be had for product and services. But they aren't privy to what a fair cost to provide a service is in this industry and what they get for their dollar. And providers are entitled to know what quality and amount of business they are bidding on (assuming they're given the opportunity to bid at all). In both cases, PBMs intervene (by using loopholes in the law, unfair business tactics i.e. false or misleading information and with the enjoyment of an occasional blind eye from the FTC) to create monopolistic marketplaces that prevent buyer and seller from being able to transact business in a a way the provides the most benefit to the patient. And the patient is really what is at the center of this argument - independent or not. After all, it's their life to manage, not the PBMs'.

  27. Adam, I believe that pharmacist want this "transparency" to help shed some light onto where healthcare dollars are going. I have also seen invoices from PBM's to the "end payor". Is my circumstance, the end payor called me and wanted to know why my price was so high. After I produced my E.O.B. the person was quite surprised. I was paid at 'mac' the employer was charged without 'mac' in the equation. Now that is a "spread".
    Adam, I would like a spot on "mail-order" and maybe
    Why not drug rebates for retail purchases? I know Medicaid agencies use this.
    I question you on who is paying and deciding where you get your service! Now I pay for my employees healthcare coverage, but I feel like they earned that so I do not dictate to them where they "go to the Doctor", etc..
    Now I'm new to blog, so forgive me if you have recently run a spot on these issues.

  28. Ok, I quoted the PBM gross margin numbers without actually checking. Shame on me.

    Here are the data from Express Script's 2009 10-K (PBM segment):

    Revenues = $23.5 B
    (Network revenues=64%; Mail/specialty=35%; Other=1%)

    Gross Profit = $2.4 B
    Gross Margin = 10.1%

    The GM% is a weighted average. If Express Scripts earned average retail pharmacy gross margins (23%) on the 35% of mail/specialty business, then they *mathematically* earned no more than 2.3% on the 64% of retail network revenues.

    If specialty/mail margins were higher than retail (as some above claim), then *by definition* the company earned even less of a spread on network revenues. In fact, if specialty/mail gross margins were any higher than 27.5%, then Express Scripts would have had a negative gross margin on the network portion. Obviously, that's not realistic.

    I'm not defending, just explaining the numbers. Many of the comments above inaccurately describe a PBM's financial statements.


  29. ADAM,

    Chuckle chuckle chuckle. I have to hand to you Adam- you get people to think- maybe? If some of these guys would read their repsonses before sending them to you they might actually say something that might shed some light of all fo this.

    My question again is what are the models of reimbursement in the the

    "Caterpillar/Walgreen/Walmart network."

    I am a pharmacy owner and have always said lets play business like everyone else and eliminate the smoke and mirrors of the current AWP, etc models.

    When you live like "Alice in Wonderland" how do you expect a normal business model to exisit. The current reimbursement models were established back in the early 70's and it was Eckerds who first embraced it. I wish someone would take the time and do a "paper " on this from the 70's through today.

    One more observation - most of your responders probably are secretly saying to themselves- "Why didn't I think of that?" with reagrd to
    how the PBM's have gotten to where they are today.

  30. Thanks for the compliment. I do try to get people to think, although I was not quite prepared for the vitriol today. Ah well, facts are troublesome things.

    The CAT/WMT/WAG model is "cost plus." As I understand the arrangement, reimbursement for prescriptions are based on total landed costs (actual invoice prices into the warehouse) plus an additional (undisclosed) amount to cover overhead and a profit margin. The pharmacies will reportedly base its discounts on the market share gained through the Caterpillar relationship. The more drugs that Caterpillar beneficiaries purchase at Walgreens or Wal-Mart, the cheaper the drugs will be for Caterpillar.

    See CAT Rolls Out Preferred WAG-WMT Pharmacy Network and the links within for more background.


  31. "ah well, facts are troublesome things."

    "As I understand"

    Again, I can prove any of my statin examples from above. You ask why we would want transparency, Why do the pbms not want it? You choose to look at which "facts and figures" support your view and cynically dismiss the rest.

  32. Adam, Graduated as a pharmacist in 1975. Everyone was opening their own independent pharmacy and planned to retire early with their multimillions. Managed Care was born of necessity because we were greedy. PBMs are watched closely by their client plans, government, and especially their network of pharmacies. If a pharmacy sees a PBM caused inequity, they should report it to the payer who is contracted with the PBM. That is pretty good notice of a problem to the party that is aggrieved. Throwing everyone's books open top to bottom is not the answer. That would just drive up prices since negotiating for the best deal would now be everyone else's business.

  33. Your latest blog is awesome.

    Doesn’t the answer to the “Why?” question have to lie in the independents simply trying to do anything they can to stop the ongoing march toward mail order?

  34. Try mail order when you are discharged from the hospital with 10 scripts, want to wait 2 weeks to get them filled? Need that Lovenox today, sorry, in the mail......

  35. Adam,

    As business owners, independents can’t be altruistic, right? After all, the gross margins for non-insured patients at greedy independent pharmacies are 47.5%! Of course, never mind the fact that – excluding $4 loss-leaders – these same gross margins are probably at least 30-40% higher at chain pharmacies. And since independent pharmacists aren’t altruistic, they surely aren’t bothered by the parasitic PBM industry, which is sucking huge sums of money out of an already-broken healthcare system…while adding nothing.

    So, since we’ve established that independent pharmacy owners are driven by greed and profit, why would they care about PBM transparency, which isn't likely to add that much to their bottom line?

    It’s simple: Independent pharmacists hate PBMs. Chain and hospital pharmacists would hate PBMs too if they understood how they work. Even though they truly bring nothing to the table, PBMs have squeezed the profits out of prescriptions and have stolen countless patients through unfair tactics that independent pharmacists want to see exposed. If any industry did this to your consulting profession through such lies and deceit, you’d want the light to shine on their dishonesty as well.

  36. Here's a scenario that maybe Adam will understand:
    Consultants in my newly developed plan for their services will have to contract with a CBM(ConsultantBenefitManager). If they do not, they will potentially lose 98% of their business to the CBM Mail Order Consultant. Individuals with need for a consultant will pay yearly premiums to ABC or XYZ Consultant Insurance Company. ABC & XYZ will contract with CBM for Consultant Services.

    Adam's contract with CBM will be:
    U&C or AWP-10%+0 or MAC whichever is less
    CBM Mail Order contract will be:
    AWP-10% (note there is no MAC for mail order)
    CBM contract with ABC & XYZ will be:
    AWP-10% per unit (no matter the provider)

    End user, Joe Blow, pays $500/year premium to ABC for 12 units of consultation. Adam's U&C for consultation is $1000 per unit. AWP is $500 per unit. CBM MAC is $250 per unit.

    When Joe needs consultation services, he can go to Adam's Independent service and pay $5 copay for 1 unit of service or go to the Mail Order and pay $10 for 3 units of service.

    Adam will be reimbursed only $250 per unit based on the MAC contract ($5 from Joe, $245 from CBM).

    CBM Mail Order will be reimbursed $450/unit based on contract (AWP-10%=$450) $10 of which comes from Joe's copay.

    When CBM bills ABC or XYZ, CBM will collect $450 per unit. Therefore, the CBM "SPREAD" is $200 per unit if Adam provides service. CBM DOES NOTHING BUT PASS THE "CLAIM" TO ABC/XYZ.

    In addition, there will be a "wholesale" consultant distribution company that will rebate providers who can "dispense" 100,000O or more units of consultation. Adam obviously cant do that by himself, so he won't collect the additional rebate money. But the CBM can show that they can and collect $1 rebate for each unit. This will result in at least $100,000 more revenue for CBM.

    So, CBM bills ABC & XYZ full contract price $450/unit plus collects $1 rebate for ALL units provided under contracts. $451 per unit total to CBM. Adam only gets $250 per unit.

    How long will it be before Adam and his independent consultant friends form an association to "right this wrong"?

    But wait, there's more. Joe ordered his 3 unit supply of consultation from CBM Mail Order 2 weeks ago and hasn't received it yet!!! Now he goes to Adam's office to request(no, he DEMANDS) a supply to get him through til the mail order arrives. Adam is obligated to provide Joe since the contract with CBM requires it. But CBM rejects Adam's request for payment because it is too soon. "Why did Mr. Blow run out of his mail order supply?" the CBM "help" desk asks Adam. Mr Blow is becoming impatient and wants his consultation now and "I'm not paying full price for it" he states. Finally, Adam gets approval to provide the short term supply. Mr Blow is upset that he must now pay another copay for something he has already paid for. And "why do I have to pay you $5 for 1 when I can use mail and get 3 for $10.

  37. Express Scipts Financial Analysis.

    1. Pull out the retail co-pays from the revenue and cost side of the ESI P&L. They don't even touch this money, it doesn't belong on the P&L. As I said before, this is financial statement fraud, made to puff up there revenues to impress Wall Street analysts. Even if a PBM has zero real growth, their revenues are going to go up 10% a year due to drug inflation. Clueless Wall Street would say that is a pretty good company, look at their revenue growth.
    In fact, if the PBM industry were honest, there would be NO retail component on their financials. They would be just a middleman, a fiscal agent, as Mastercard is, and their revenue would be their processing fees. ESI's 2009 revenue was $24.7 billion, while Mastercard's was $5.1 billion. If Mastercard did their accounting like the PBM industry, they would be the biggest company on earth!
    Your ESI Gross Profit analysis is flawed, again. The retail gross profit of 23% you use for retail is REVENUE - DRUG COST. The ESI "gross profit" of $2.4 billion is AFTER ALL COSTS, OTHER THAN SELLING GENERAL AND ADMINISTRATIVE! BIG DIFFERENCE! Rather it should be called "net profit" because it is after all dispensing costs, including salaries, benefits, facilities, shipping, etc. THEY ARE NOT COMPARABLE AND YOUR ANALYSIS IS SERIOUSLY FLAWED. Wharton should be ashamed of you, and you should be ashamed of yourself, becasue you are A. Willfully ignorant or B. A paid-off hack of the PBM industry.

    Just answer the question Adam, why should a PBM make a spread for processing a retail Rx?

  38. By the way, it is disingenuous to call yourself a "Dr." just because you have a PhD in finance, unless you are a college professor, especially in a medical setting where there are real doctors.

  39. "Just answer the question Adam, why should a PBM make a spread for processing a retail Rx?"

    I'm not here to defend PBMs or spread pricing. But you need to think about it from the customer's perspective.

    See pages 22-25 of the URAC document cited above in my original post. It has a reasonable summary of the pros and cons of spread pricing **from the plan sponsor's (buyer's) perspective***.

    Regarding spread pricing versus pass-through (transparent) pricing, the URAC guide notes: "The choice of pricing strategies varies by plan sponsor."


  40. Sorry you are offended by my use of the term "Dr."

    I presume you will also be sending an email to NCPA Executive Committee Member Dr. Mark Riley, who has a Pharm.D.


    Just plain ol' Adam

  41. A PharmD is different that a PhD, especially in a medical setting, Doc

  42. I don't recall giving any medical advice on the blog. My Ph.D. is in "Managerial Science and Applied Economics" (not finance), which is why I stick to those topics. The "About Me" section on the top right of every page provides appropriate disclosure, so I really don't understand your issue.


  43. Ok, maybe we need to have transparency to protect from stupidity. Im my statin example, the plan had no idea! They had around 100 million in drug claims and were clueless about spread pricing. This brings up a question that I can't answer, but transparency can: When a self-insured plan hires a TPA, and that TPA subcontracts to a PBM; what is the financial arrangement between them? If the TPA is a fiduciary to the plan, does the pbm carry fiduciary responsibilities to the plan?

  44. Here is a quote from an old article, Note it is from PRMA spokesman.

    "Another problem: How much is involved? Drug manufacturers contacted by Drug Topics declined to discuss rebate percentages. Jeff Trewhitt, spokesman for the Pharmaceutical Research & Manufacturers of America, said rebates are in the 20% to 40% range, depending on volume, buyer, the manufacturer's marketing program, and other factors."

    How much did my statin plan get in rebates from its pbm? 3%....

    I guess it is just too much to ask that everybody gets to see the true figures, It is not like we have expensive healthcare.

  45. "Why should a PBM make a spread for processing a retail Rx?"

    PBMs provide a service to plan sponsors (their "buyers") by assuming a host of responsibilities -- this includes processing retail claims, negotiating and managing contracts with hundreds of chain and independent retail pharmacies, UM, audits, etc. Employers and other PBM "buyers" hire the PBM because they don't have the time or expertise to do those things.

    So why not just have the buyer pay the PBM a full and fair administrative fee for these services? Because buyers are historically averse to paying fees. Marketplace pressure from the buyers led PBMs to "get creative" about subsidizing their administrative costs -- and the result was a system of indirect revenue streams that allowed the PBM to offer their buyers a full service package for $0.00 administrative fee: the "Traditional Model" for PBM pricing. PBMs that used this approach were successful in selling business to buyers (and only a handful of these buyers were savvy enough to scrutinize the indirect revenue streams down the road through audit or oversight). PBMs would simply say that they were responding to pressure from their buyers to reduce or eliminate admin fees.

    Retailers, meanwhile, play a similar "game" -- artificially keeping dispensing fees low to appear competitive in the marketplace, all the while subsidizing this service with drug spread.

    Note that I'm not defending this pricing model for PBMs or retailers, just explaining it. I don't work for a PBM, nor do I work in retail.

    You can debate all day about the best way to spend pharmacy benefit dollars (mail vs chain vs indies)... but the REAL onus is on the wallet-bearer in this situation. The BUYER of healthcare is the employer plan sponsor (or for public plans, the government). They will dictate the level of transparency that they want through their buying patterns. Kudos to the Anonymous that posted this:

    "If a pharmacy sees a PBM caused inequity, they should report it to the payer who is contracted with the PBM."

    Complaining that PBMs "add no value" is kind of absurd. Would you say that retail pharmacies add no value, since folks could theoretically just buy their drugs directly from pharmaceutical companies through the mail? Obviously retailers provide important services: buying in bulk for savings, inventorying, offering clinical guidance, etc. Just as clearly, PBMs also add a service that buyers are willing to pay for, otherwise they would not survive as a business model.

    The true challenge is to educate the buyers about the advantages of transparency. Some will understand, and will demand this of their PBM vendors. Others will just continue to prefer their zero-dollar admin fees.

  46. I just read your referenced "URAC PBM Purchaser's Guide". The post above could learn a lot from this guide. If a purchaser demands the information from its prospective PBM they will have to give it the information on rebate sharing or give up their opportunity to gain the business. Nothing worse than crying about transparency when a buyer doesn't exercise their purchasing power by insisting on disclosure when negotiating their own PBM agreement. If a purchaser lacks sophistication, read the Guide and use a consultant. I think that asking the government to intervene is the lazy way out and is laced with hazards since the slippery slope ultimately leads to transparency of independent retail purchasing.

  47. Read a confidentiality claus in a pbm pharmacy contract? Why do you think I post Anonymous.

    I tried to explain to one plan and got threats from the pbm. Law protects those with money, not necessarily those that are right.

    Please explain the costs the pbm must cover when a retail pharmacy fills a prescription vs the cost the pharmacy must cover. I'll go back to the credit card example, they electronically process the transaction (like the pbm does with a prescription), but the credit card company actually has risk (they must collect the money). Yes pbms bargin for rebates (transparency please for the true amount) which they pocket a portion of. They do serve a function, but what would happen if TPA's started a "spread" on Doctor visits....AMA would say......

    It is time for true figures...transparency, so we the American People can decide who should get paid for what service.

  48. To the reader of the URAC guide: Thank you! You understand the original purpose of my post.

  49. I ran the pharmacy department of a medium Blues plan in the West. We allowed a small percentage of the rebate to go to the PBM. We had audit rights and did so often when the rebates were paid. I am fully confident that the rebates were appropriately collected and distributed to my health plan. Anyone who does it differently is irresponsible to their plan. The PBM isn't the boogie man but like any other business relationship, must be kept honest by appropriate oversight and auditing. This holds true for all aspects of the PBM--plan relationship (performance, revenue sources, administrative payments, etc.). I also made the PBM pay for the audit costs if the recovery by the plan was over a certain dollar amount. I would not have liked my competition to have access to my rates and costs with the PBM. I worked hard for a good deal and didn't want other plans asking for the same deal I had. Transparency would allow that to happen since there are no secrets once disclosure is made--no matter how many assurances people sign that they will keep it confidential.

  50. Why do pharmacy owners care about PBM transparency?
    It's easier to see what is 'wrong' with someone else's business practices rather than to look in the mirror.

    Pharmacists (and I'm one of them) have been complaining for years about PBM contracts, but they never actually pull out of the PBMs' networks. They continue to accept lower and lower reimbursement and try to make up the difference in volume.

    If transparency is so important to these pharmacists, why do they continue to do business with these non-transparent PBMs?
    Because they make more money participating in the PBM contracts than they would if they dropped out.

    If pharmacists really want to change the pharmacy marketplace, lobbying for PBM transparency isn't the way to go. The indies need to drop out of their current PBM contracts, offer services that patients and their employers are willing to pay for, and then negotiate favorable agreements to provide those services. If no one is willing to pay extra for the pharmacist services, then either we pharmacists haven't done a good enough job marketing ourselves or the market has decided that they don't want what we're selling. Now that's a tough pill to swallow -- so let's keep demonizing the PBMs!

  51. I would agree that a great deal of the burden is with independent pharmacies to change their practices and create value outside of PBMs. If you don't like PBMs, then drop out or get together and form something different.

    I would estimate that 40% of independents are content to do nothing or simply complain in an attempt to slow the rate of change of declining reimbursements. Many are old and ready to retire in the next 10 years. They like being independent and do not trust anyone enough to form a true network (that has real requirements). This is problematic for the other 60% that are willing to evolve the model but have no one to organize them (Trying to undo the CVS/Caremark merger does not count).

    The last problem is that many people are truly shocked when they see how much a pharmacy can earn in profits. Yes, margins have decreased. However, we all know that there is a bell curve distribution of profits per store (plus salary). Those profits plus the opportunity to sell for a huge payday. My point here is that transparency works both ways.

    I want to throw out a shocking figure that the PBMs can easily point to: $4B in profits per year. This is how much independents earn in aggregate (20,000 independents X 200K per year in salary+net profits). This is a rough estimate using NCPA figures off the top of my head. As I add up the profits Medco, Express Scripts, and Caremark earn, I believe the independents still make more money. If you then added in the chains, the pharmacy dispensing game makes way more than PBMs (in aggregate).

  52. PBM spreads on statins, SSRIs and virtually all other high volume generic classes often run over 80% for all generic claims (can be >200%). This is not an observation or an anecdote, no need to diminish this statement with some off hand defense of is the STANDARD

    This comes from one who has reviewed hundreds of utilization files for health plans and employers

    A broker/consultant who is completely on the side of the buyer (no $ from PBMs) can do wonders

  53. Adam,

    Congrats. There are so many comments from this post that I do not have time to read them all. I think it's the first time ever I couldn't finish reading the Drug Channels.

    Looks like you have expanded your readership five fold from this post.

    In all seriousness, I say congratulations.

    Yet, as I tell my boys, it's now your job to figure out a way to educate AND make friends with these folks.

    Take care....and good luck.

  54. Adam-
    Your WIIFM entry interests me - tell me Adam what IS in this for you?

    Here is the basic flaw in your economic reasoning: you consider medications to be a commidity and they are certainly not. Countless studies have shown that therapies which include pharmacist teaching and intervention improve outcomes (before you post one of your "prove it" answers see Asheville Project, 10 City Challenge, etc.). The true cost of medications WILL NOT be solved by "low cost providers".

    As for your altruism argument you apparently are not a health care provider and have not taken an oath. Yes I want to save my business and my profession but I also like to improve my patient's lives. Again Adam, what's in for you?


  55. Steve,

    I notice that you did not answer the question motivating my original post. However, I see you are quite familiar with ad hominem arguments.


  56. I am a Pharmacist and Manager of an Independent Pharmacy. I wish we could get those profit margins from both insurance companies and from private payers. It is true that cash payers do pay a higher percentage over what the PBMs are paying. I don't know why the PBMs have been allowed to keep lowering what they pay. Probably because we keep allowing them because we are afraid that we will lose customers if we don't accept their contract. They won't negotiate any contracts with us small fish of the pharmacy world. We either take the contract they offer or allow walmart/walgreens/cvs to be the only ones in town to accept their insurance. While I'm sure the larger Pharmacies are able to negotiate their contracts because they have more pull due to multiple locations.

  57. Something else that I just realized from reading is that most of the numbers that I'm seeing are the percentage of the cost of the medications. Are we not talking about true profits here? What about the cost of my bottle, label, time, my techs time, my utilities, my lease/building costs, and any other bills that may arise. What about the services that I offer such as FREE delivery. That means I'm paying for a car, insurance, gas, and upkeep of the car out of that money. So if you want to compare numbers then compare true profits after all costs. These are the numbers that the PBMs are releasing.

  58. RxdisclosureOctober 20, 2011

    I honestly don't have time to read all the comments, so to answer your question what's in it for the independents?
    1. "Transparency" has become a buzz word, but for the big 3-4 PBMs they talk transparency, their deeds however are business as usual.
    2. With true transparency, the big 3 PBMs would collapse faster than Enron. Their business model can't support a simple $3 transaction fee/Rx model.
    3. With PBMs, and the spread/rebate games they perpetuate recognized as the true cause of over inflation rate cost increases, employer groups will shun them (as they are now the Medco) for better cost containment options.
    4. Community pharmacies will once again be recognized as the best cost containment tool an employer has. We have no incentive to dispense brands and play the rebate game, and often call the MD to switch to generics. Every time that call is made, the employer realizes a $1000 annual savings.

  59. RxdisclosureOctober 20, 2011

    It is becoming readily apparent that you neither skilled in business or business accounting. I suggest you trade in your PhD for an MBA. Better yet, utilize some of your PBM consultant contacts and get a hold of an employer claims file, then if you can find a pharmacy that would let you in the door, compare what the pharmacy got paid vs. what the employer got billed. You have over plaid your anecdote excuse. It seems you are just another academic who is not willing to get his hand dirty by going out doing some actual field research.