In Brief non HIMSS news (as I’m still having a little insomnia from jet-lag, and I took it much easier last night on Bourbon street)….

Most THCB readers know that I’m just a wee bit cynical about the “value” provided by PBMs. Much of the data for that view comes from a Creighton University professor called Robert Garis. Well, he’s back:

“We found that brand-name drugs were slightly less expensive when purchased by mail, but generic drugs were more expensive by mail. When we combine the prices for brand-name and generic prescriptions, any differences virtually disappear,’ said Robert I. Garis, M.B.A., Ph.D., associate professor at the Creighton University School of Pharmacy and Health Professions.

And don’t forget that since 2002 (when the data for this report is from) PBMs have moved towards more generics as the rebates have become less important parts of their business and they’re making way more profits on generics. Medco for example increased total profits in 2005 after having its profits from rebates fall dramatically as it passed them back to customers. Margins on generics more than made up the difference. Now Garis is clearly on the side of the retail pharmacies, but given what we know about the PBM business, especially the stories from University of Michigan, I’m inclined to believe him when he says this:

Given a continued increase in generic-drug use by both mail and retail pharmacies and the practice of high markups on generics by PBM-owned mail outlets, he added, retail pharmacies ultimately may offer the better value. He noted that recent reports show generic drugs account for more than 55 percent of all prescriptions dispensed through both mail and retail channels.“Employers need to ask PBMs more questions about their markups on generics, just as they would when purchasing ink, paper or other supplies,” Garis said. “The truth is that PBMs are racking up record profits through an increased use of generic drugs and an increased use of PBM-owned, mail-order facilities.”

I have purloined this and reprinted almost in full from AISHealth.com’s Government News of the Week.

Caremark Rx, Inc. did not breach its fiduciary duties when negotiating drug prices and managing the formulary for a multi-employer health fund because it was not acting as a fiduciary, a federal appeals court ruled last month. The pharmacy benefit management (PBM) industry hailed the opinion, saying it sets a precedent for other lawsuits and state initiatives that claim PBMs have fiduciary responsibilities. In a Jan. 19 ruling (No. 05-3476), the U.S. Court of Appeals for the Seventh Circuit upheld a lower court ruling that found Caremark was not an Employee Retirement Income Securities Act (ERISA) fiduciary for the Chicago District Council of Carpenters Welfare Fund (Carpenters). The fund had sued Caremark, claiming it breached fiduciary duties under three multiyear contracts to provide Rx benefits to union members.The parties disagree about the nature of Caremark’s obligations under the contracts, according to the ruling. Carpenters portrays Caremark as its fiduciary, responsible for, among other things, negotiating prices with retail pharmacies and drug manufacturers on behalf of Carpenters. Caremark claims only to have agreed to provide the stated benefits at prices determined via "arm’s-length negotiations between Caremark and Carpenters," the ruling says.In fact, each contract provided that Caremark "was not a fiduciary as that term is defined by ERISA, and that Carpenters possessed the sole authority to control and administer the plan," according to the ruling. "Nonetheless, Carpenters alleges that, under the three contracts, Caremark has discretionary authority over the management and administration of Carpenters’ drug benefit plan and also exercises discretion and control over Carpenters’ assets," according to the appeals court. The fund contends this "discretionary authority" gives rise to fiduciary duties under ERISA, the ruling adds.Specifically, the union alleges Caremark has discretion (and therefore fiduciary duties) in four specific areas: (1) negotiations with drug retailers over drug prices; (2) negotiations with drug manufacturers over rebates and other discounts; (3) the management of the formulary program; and (4) the management of the drug switching program. Among other things, Carpenters contends that Caremark breached its fiduciary duties by charging the fund a higher price than Caremark negotiated with retail pharmacies, and by choosing drugs for the formulary that were more expensive so that Caremark could pocket extra rebates it obtained from drug makers, according to the ruling. The district court, however, found nothing in the contracts that required Caremark to pass through cost savings to Carpenters, according to the appeals court.Stephanie Kanwit, special counsel at PBM trade group Pharmaceutical Care Management Association (PCMA), described the appeals court decision as an "important ruling" that will set a precedent for other cases. <SNIP>. At least 20 states rejected PBM fiduciary and/or disclosure bills in the first half of last year, according to PCMA. The latest appeals court ruling makes clear from one of the most economically sophisticated courts in the country that these are matters of contracts, Kanwit contends. "It doesn’t do any good and, in fact, harms the interest of customers like this union to start claiming breach of fiduciary duty. That’s a red herring."Kanwit says PBM customers generally don’t want their PBMs to be fiduciaries. "Customers want the PBM to do what the Carpenters did here, enter into a contract," she says. "You do not want them to be in charge of what this court calls ‘discretion.’ There is no discretion about it. In a contract, here it is, here is the price. It’s spelled out."Others say the ruling on the federal ERISA law will have a limited effect on state efforts to impose PBM fiduciary duties. Some states have adopted or are considering legislation that says fiduciary duties exist between a PBM and any company or health plan that hires a PBM to negotiate rebates and other discounts from a drug company, says Sharon Treat, executive director of the National Legislative Association on Prescription Drug Prices, which has worked with states to develop PBM fiduciary laws."That legislation really isn’t affected by a decision that interprets ERISA, because these laws aren’t intended to interpret ERISA," she says. The legislation, rather, defines the relationship between contracting parties as a "fiduciary relationship under state law," Treat says, adding that states have had the right to regulate contracts since time immemorial. "How courts rule on ERISA is, in some cases, beside the point," she adds.

This may sound like complex legal stuff. And it is. I don’t know whether its reasonable or useful to call a PBM a fiduciary with the obligations that go along with it. But one hopes that, whether or not it is legally obligated to serve its clients’ interests, at least the PBM sincerely believes that its interests and those of its clients are the same. But I’ll leave you to be the judge of whether it really does.

Libratto is a blog written by a senior exec from a PBM, Bob Neaser at Express Scripts. I haven’t exactly been polite about PBMs or more accurately about their customers’ willingness to explore their business models over the years. I’ll be interested in watching this blog and seeing what Bob thinks. He’s been posting a little the last two months and I want to encourage him to make the arguments. He started with a rants about why employees should demand less waste in their health care benefits and I (and probably Eric Novack) would agree. But of course one man’s waste…

Still I’m looking forward to more from Bob, especially with the CVS/Caremark deal apparently changing the PBM model.

You should also look at Adam Fein’s blog Drug Channels. He has lots of interesting things to say about PBMs, pharmacy chains et al—even if he’s a little less cynical than I am!

CVS has noticed that big PBMs are now making all their money on mail-order pharmacy, particularly from dumb clients who can’t be bothered to cross check what the PBM is charging for mail-oder generics with the price they can get at (say) Drugstore.com. So the chain stores “logical” next step is to buy the second biggest mail order pharmacy — Caremark —and get the attached smoke screening benefits management organization thrown in with the deal. The NY Times (surprise surprise) is focused on the wrong end of the deal, thinking that Caremark is a “middleman”. But the key is that all the profitability of PBMs comes from their mail order pharmacies, now that the rebating game is drying up.

And that profit comes from selling generics with huge mark-ups. So when Wal-mart puts CVS’ margins on their retail store cash business under threat, it’s not a stupid defensive move to acquire a big mail order house. On the other hand they’d better hope for better luck than the last time (part of) Caremark — the then PCS— was bought by a drug store. Rite-Aid bought PCS in 1998 for $1.5 billion, and sold it for $1 billion to Advance Paradigm in 2000.

But the Medpartners/Caremark guys, ten years after their disastrous foray into physician management, aren’t dumb. The generic mark-ups are about the last place the PBMs have to run to maintain their incredibly profitable business. And that party will end too, when the employers wake up.

Given what the stock has done since they changed their focus to the small PBM they found that they owned by accident in the late 1990s, it looks to me that they’re sneaking out at the top.

UPDATE: Apparently the top wasnt quite as high as some punters this morning thought it was. Caremark opened at 54 spent most of the day at 51 and then fell when the final offer was revealed at 48 and change.

Earlier this week referring to the WSJ piece on PBMs (which one ex-reporter suggested to me was investigative journalism that pushed on open doors) I mentioned the University of Michigan which did the math and fired its PBMs, and is pocketing the savings. Here’s more from Jeremy Smerd at Workforce Management on how Some Employers Look to Break the PBM Habit. The somewhat indignant Chiara Bell of Clarus Consulting who’s got the PBMs in her sights, makes a noteworthy appearance in her quest to derail the monster.

But I love this quote:

The Pharmaceutical Care Management Association, the industry group representing the estimated 50 PBMs nationwide, says the marketplace has determined that PBMs save money for employers by offering a service outside the core expertise of most.

Well they would say that, wouldn’t they.  But the next quote is gambling on the dumbness of the American employer

"The reason everybody uses a PBM, though no one is required to, is because of the savings," says association president Mark Merritt. "If employers can do it and find a new way to build a better mousetrap, more power to them."

I know no one ever went broke underestimating the intelligence of the public, but that is pushing it! It reminds me of W’s line “Bring it on”. Well they might live to regret it.

I just don’t understand Wall Street. The FirstDatabank/Mckesson story clearly was bad news for pharmacies/ PBMs are essentially big pharmacies and it was bad news for them as even your punk blogger here pointed out on Friday morning. But that was known at the open of the market on Friday and the stock fell heavily on Friday. But why the heck did it fall further today?

MEDCO HEALTH SOLUTIONS

Wasn’t that information already in the market? Apparently not—because a downgrade from an analyst based on that information meant that the stocks fell another 3–5% from Friday’s levels today?  So if you realized that the market was even dumber than the employers who use PBMs, then you too could have gone short on Friday and cleaned up this morning. (Yes of course I didn’t).