We haven’t heard much about the plans that will end up being the Medicare Part D quasi-PBMs. These are known in CMS-speak as the Participating Prescription Drug Plans [PDP], and they’re going to be selling plans/enrolling seniors and then administering their benefits similarly to the way that PBMs do it for the private sector now. The first enrollment date is November 15th. I looked diligently in this CMS document advising the plans but I couldn’t tell when the applications to qualify had to be in by, but suffice it to say that they are well under way and CMS will presumably soon be announcing which plan is up in which area when.

On the other hand if (as we can assume they will) the current PBMs get into this game, they may have to think twice about continuing some of their business practices. Caremark, for example, is facing even more whistleblower suits about reselling returned stock. Supposing that the Federal government is now the end customer, I suspect some clean up needs to go on across the PBM industry which has sailed very close to the legal wind in recent years and has several state AG suits in process to show for it.

UPDATE: Promoted from the comments, (thanks Matt!) Forbes ran an article last month that I missed on how and why the scams will increase as Medicare Part D takes shape. It’s really worth reading the whole thing. As my old boss Ian Morisson use to say, a claim is an agreement made between a doctor and a patient to defraud an insurer!

Writing in The Street Melissa David says that a 6 year-long investigation of Caremark receiving overpayments for Texas Medicaid is about to result in indictments.  Caremark stock reacted poorly to the rumors.

Of course indictments and charges are nothing new in the PBM industry, and will only become more common when Medicare Part D is introduced next year.  Why?  Well the whole industry runs on secrets, and no-one really understands what’s going on, despite the attempt to develop "transparent PBMs".

From the "why does this keep happening?" file, it looks like the PBM sector is continuing to remain very profitable. Today it’s the turn of Express Scripts to announce that  its earnings were up 13 percent. It also revised up expectations for next year.  The stock rallied about 7%.

THCB continues to be baffled at how the PBMs and other health plans are getting away with this.  After all this is a group that has had no success in saving its clients’ money on drugs in the last 10 years, and a recent survey showed that fully one-quarter of employers believe that PBMs are responsible for increasing their drug costs.  But with the Medicare drug benefit giving the PBMs increased visibility and access to a whole new market of customers, it would be a brave short seller to look for the top to the stock here.

I’m not a great believer in the effectiveness of PBMs to hold down drug prices. My evidence is that since PBMs have become important drug prices and the share of health spent on them have gone through the roof. Of course, no one can prove that they wouldn’t have gone higher without PBMs in the picture. But in the middle of this rather fun hatchet job on Caremark from Melissa David at The Street.com there’s this great stat she’s dug up:

The companies claim to save their clients large sums of money by using their bulk purchasing power to negotiate deep discounts from drug manufacturers. But a growing crowd of industry critics, pointing to the rocketing cost of prescription drugs, have voiced their doubts. They believe the PBMs are unfairly keeping much of the savings for themselves. Indeed, a recent survey by Hewitt Associates showed that only 53% of employers believe that PBMs lower prescription drug costs — and that nearly one-quarter believe the PBMs raise the costs instead.

So 25% of their customers think that PBMs do the exact opposite of what they say they do. And don’t forget that next year the taxpayer (i.e. us) becomes their biggest customer.

Meanwhile the NY Times reports on a new initiative where 30 big employers who use Medco have bullied the PBM into letting them monitor the inner workings of its deals with its suppliers. Presumably the members of the "RxCollaborative" are not as happy as they might be about how they’ve been treated so far.

NY A-G Eliot Spitzer continues his swath through the boardrooms of America. He’s piling in on the recent investigations and he comes right out and accuses Express Scripts of fraud.

The suit alleges the company inflated the cost of generic drugs at the expense of New York state’s largest employee health plan, the Empire Plan. It charges the company cheated the state on payments from drug companies that Express Scripts received when negotiating on behalf of New York. Spitzer, who has been probing the company for a year, said the abuses occurred over a five-year period and cost the state $100 million. Also named as defendants were two subsidiaries of Cigna Corp.

“They are using their role as an intermediary to line their own pockets,” he told reporters on a conference call. “They were simply committing fraud, and it cuts to the core of the integrity of the company.” Spitzer said abusive practices are not limited to Express Scripts but are rampant throughout the sector. Pharmacy benefits managers, or PBMs, are brokers that act as middlemen, buying drugs for employers and health plans.

That’s not exactly soft speaking, and it doesn’t augur well for PBMs if they have to administer a Medicare program in 2006 that is being run by a Democratic HHS, with possibly a Justice department overseen by an Attorney-General called Spitzer.

Let me tell you my tale of woe over Krispy Kreme, a stock with a big hole in the middle that I was shorting off and on for the past year. I closed out all positions and went on holiday to Turkey and the stock plummeted 30%. And in another from the coulda, woulda, shoulda file — I’ve been more than a little cynical about PBMs in this blog, including as recently as yesterday. I’ve also been looking at ESRX as it traded up into the mid-70s over the past week or so as a potential short sale. Well Thursday 20 state AGs beat me to it and started investigations of Express Scripts — I assume they’d used some of those state bonds they’ve been issuing to go short first. 20 states versus Medco case) being the customers in question. If you haven’t noticed that means all three big PBMs are being sued/investigated for this practice at the same time, which makes me slightly cynical when the PCMA calls its industry "transparent". The stock which was at one point down down about $10 to the low 60s ended down $6.49 at $65 and change.

The allegations are the familiar ones of getting rebates and not passing them on to customers or switching drugs on customers, with presumably the state employees (as in the

After years of saying that PBMs need to do something else to maintain their value proposition, and repeating that concept last week, I realize that I’ve got it all wrong.  You see, as this press release from the newly active PCMA (the PBMs trade assoc) shows, they have saved tons of money for Rx customers already. That’s because of the huge competition in the business–funnily enough confirmed just as number 2 and 3 in the business merge–leaving 3 giants and a ton of minnows. Of course, you have to actually read deep into the press release before you discover that PBMs have saved their customers a massive percentage compared to those who have to pay retail cash prices for drugs.

In other words they are saving tons compared to those completely powerless consumers who are getting gouged by the drug companies and aren’t going to Canada. That’s not exactly a tough bar to squeeze under. How about actually reducing drug costs for their members? Impossible? HMOs (love ’em or hate ’em) actually did reduce premiums for their members for a few years in the 1990s. But the PBMs have never come close to getting real price reductions for their clients. The best they can claim is that they’ve successfully designed plans which force people into using few drugs–they’re not using the same drugs at lower prices.

Oh, and by the way the studies claim that unregulated PBMs are better for transparency in the market than presumably, just for instance, PBMs regulated into disclosing what discounts they are getting and passing on to their customers:

"In general, vigorous competition in the marketplace for PBMs is more likely to arrive at an optimal level of transparency than regulation of those terms. Just as competitive forces encourage PBMs to offer their best price and service combination to health plan sponsors to gain access to subscribers, competition should also encourage disclosure of the information health plan sponsors require to decide with which PBM to contract."

Exactly who are they trying to kid? No one knows exactly who’s getting what in share of rebates from PharmaCos to PBMs.  Certainly not their employer clients or their members, and generally not their health plan clients.  Yet competition among PBMs has been apparently going  for at least 15 years. When is this transparency going to happen, then?   

Of course when you look at

the source for the majority of this press release it’s the entirely unbiased and unpolitically motivated Justice Department, which happens to be run by this theocratic fascist fair-minded public servant.

You may not know this (I admit I didn’t) but there’s a trade association for PBMs called the Pharmaceutical Care Management Association which yesterday was one of the first to come out and laud the Administration’s call for improving the Nation’s Health Care Information Infrastructure. That reminded me of something old and something much more recent about PBMs. I’ve written pretty widely about PBMs in THCB, with the much shorter version being that despite the fact that they have totally failed in their stated mission to keep the lid on drug prices, and for that matter haven’t really done much to advance care management (or "health improvement"), they have made a business out of being decent claims processors and by inserting themselves firmly in the financial dealings between their clients and their "partners" in the pharma world. filed Monday against Caremark:

  No wonder that the biggest PBM, Medco, is starting its first ever PR campaign. There’s no question in my mind that PBMs need to find what we consultants call a new value proposition–but then I’ve been thinking that for a while. What that new value prop is and whether they can get away with doing what they’ve been doing for a while longer while they figure it out is of course up in the air.

It’s interesting that the PBMs are now loudly backing the new health IT initiative (more on that from THCB tomorrow when I hear back from my spies in DC) as the data processing part of their business was indeed launched by the last major change to Medicare. That was the ill-fated Medicare Catastrophic Act which was passed in 1988 and repealed in 1989. One thing that its passage caused was the installation of what ended up being NDC and PCS’ pharma claims and editing transaction systems. So now when you go to the drug store, your claims and co-pay information is right there for the pharmacy tech to read off to you–no, you didn’t notice that happening in the doctor’s office! So it looks like PBMs have decided that the new Medicare "Modernization" Act with its somehow associated IT initiative will do something equally good for its business in the future.

They’d better hope so. Whatever the future holds, their present continues to come under increasing attack. THCB has mentioned before the attempt by large employers to go around the PBMs in negotiating rebates, and several of the bigger PBMs have been settling with trial lawyers and their customers over the extremely opaque nature of their rebate mechanisms. I thought that the plaintiff’s attorney put it rather well in a further lawsuit

The lawsuit says that Caremark keeps discounts from drug makers and pharmacies instead of sharing them with members of the Morrell benefit plan. It says Caremark secretly negotiates rebates for drugs and keeps that money. It also says that the company provides plan members with expensive drugs, instead of cheaper alternatives, to get rebates.

A while back Medco lost the FEBHP contract to Caremark. Now TheStreet.com reports that Medco is laying off some 7% of its workforce. And its stock has started to rally somewhat on the news.

THCB readers will know that I’ve never really understood what value PBMs add in the chain. It appears that with the announcement that 50 big employers are starting their own buying group, others share that view.