The Wall Street Journal

March 31, 2003

PAGE ONE
GENERICS
 Pharmacy-Benefits Managers Are Sued Over 'Secret Dealings'3
03/19/03
 
 Bush to Ask for Money to Speed Approval of Generic Drugs4
01/23/03
 
 Generic Drug Makers Expected to Post Solid Quarterly Results5
01/20/03
 


Pharmacy-Benefit Firms
Profit on Generic Drugs

Managers Take Markups
And Still Offer 'Discounts'

By BARBARA MARTINEZ
Staff Reporter of THE WALL STREET JOURNAL

Pharmacy-benefit managers, the companies behind the cards most Americans use to fill prescriptions, promise to cut costs for employers and health plans. But they have found a way to squeeze impressive profits in an unlikely place: generic drugs.

Express Scripts Inc., one of the four big players that dominate this middleman business, made a $170 profit last summer on a single 90-pill prescription for the generic version of Prozac, according to billing documents. The antidepressant was purchased by a retiree from Terex Corp., a Westport, Conn., construction-equipment manufacturer.

In another instance, Express Scripts pocketed up to $18 on smaller 60-pill prescriptions for generic Prozac, or fluoxetine, bought last September by beneficiaries of Primary Health Inc. in Boise, Idaho. The state of Arkansas found last year that another major company in the business, AdvancePCS, had made profit margins averaging 22% for processing generic prescriptions for public employees.

Pharmacy-benefit managers, or PBMs, say their mass buying power allows them to obtain discount prices for employers and health plans. PBMs also steer doctors to less expensive generics. Express Scripts says it goes so far as to take losses on "a significant number" of brand-name prescriptions. "There is no other part of the supply chain that is trying to make drugs more affordable," says Barrett Toan, the company's chief executive.

But even in a rocky economy, Express Scripts and its rivals are enjoying robust financial results. Ranked third in its industry based on the 50 million people it covers, St. Louis-based Express Scripts reported that its net income grew 63% last year, to $202.8 million. The company, in business since 1986, has said it expects its earnings per share to grow by up to 25% this year. AdvancePCS, the nation's largest publicly traded PBM, has said its earnings grew 44% for the nine-month period that ended Dec. 31, compared with the year-earlier period.

Growth in prescription volume accounts for a lot of the industry's prosperity. But there is another engine propelling PBM success: the surprising leeway these companies have discovered to collect fat margins on some generic prescriptions.

Competing fiercely to sell look-alike products, generic manufacturers have little leverage on price. That means that even after huge markups, generics can seem inexpensive to clients.

GENERIC PROFITS

How generic drugs yield big profits

Example: A 30-day prescription of generic Prozac

Patient's co-payment to pharmacy: $5.00

Pharmacy-benefit manager's payment to pharmacy: $2.50

What the manufacturer charges pharmacy for the prescription: $1.50

Pharmacy's profit: $6.00
(Patient's co-payment plus PBM's payment minus manufacturer's price)

PBM bill to patient's employer: $13.00

PBM's profit: $10.50
(PBM bill to employer minus payment to pharmacy)

Overall drug costs continue to rise relentlessly, by more than 15% a year nationwide. As employers search for any relief available -- especially by shifting to generic drugs -- just how much PBMs make from generic prescriptions is an important question for employers and patients. Express Scripts says that close to half of the 300 million prescriptions it processes annually are for generics, and the proportion is growing.

In the complicated and at times counterintuitive world of drug pricing, many employers and health plans say they don't know what margins their PBM is collecting. Terex is a case in point. Beginning in the late 1990s, Express Scripts provided pharmacy benefits for about 100 Terex retirees. When one retired Terex employee ordered a 90-pill prescription for a generic version of the ulcer medication Zantac last July, Express Scripts paid the pharmacy $15, billing documents show. The bill to Terex was $215, meaning a $200 profit for the PBM.

Terex didn't have a clue about the markup. "You're kidding me," says Kevin Barr, the company's vice president of human resources, when told of this and other transactions. "If that's happening, that's pretty infuriating." (The Wall Street Journal reviewed pharmacy billing statements generally not available to client companies.)

Express Scripts says that focusing on its profits from generics is unfair, since such gains are balanced out by losses on some brand-name prescription medicines. Overall, the PBM says it saves clients huge sums.

Express Scripts says it "fully discloses" to clients such as Terex that it may keep the difference between what the client pays and what the pharmacist receives. The huge margins on the Terex transactions "resulted from an out-of-date contract that no longer applies to any of our clients," the company said in a written statement. The PBM adds: "Only a tiny number of contracts representing just one-tenth of 1% of our members were still affected by this situation in 2002." Terex didn't sign a new contract with Express Scripts when the old one expired in December 2002.

One reason that some employers and health plans may assume they are saving more than they really are on generics is PBMs' focus on "average wholesale prices," or AWPs. These prices for drugs are collected and published by industry trade magazines and data bases. PBMs often market themselves based on large discounts from AWPs that they offer clients -- sometimes as much as 60%.

'Ain't What's Paid'

But it's an open secret in the industry that AWPs often are severely inflated, says Robert Garis, a pharmacy professor at Creighton University in Omaha, Neb., who is studying pricing by PBMs. Some industry veterans joke that AWP ought to stand for "Ain't What's Paid." This is especially true in the generic market, where manufacturers routinely undercut the published AWPs.

The resulting discrepancies mean that discounts from AWPs often aren't as favorable as they sound. The typical AWP for fluoxetine is now about $2.66 a pill. With a 60% discount, that comes down to about $1.06 a pill. But pharmacies can buy the antidepressant for about five cents a pill. Allowing for a standard markup, a PBM may pay a pharmacist about 30 cents a pill for fluoxetine -- still much less than the $1.06 a pill the PBM is collecting from the health plan.

HEALTH NEWS
For more health coverage, visit the Online Journal's Health Industry Edition1 at wsj.com/Health, and receive daily Health e-mails2.

Express Scripts says that currently its clients pay less than 60 cents a pill for fluoxetine. But even if its clients pay only 50 cents, in many cases Express Scripts would still be making a 100% profit margin. That's because it pays stores only 25 cents per pill or less, according to pharmacy price lists.

In October, Express Scripts put out a press release saying that by using fluoxetine, instead of Prozac, which is made by Eli Lilly & Co., its clients save an average of $53.82 per prescription. Yet for some clients, there would be even more room for savings if PBMs took less hefty profits.

Primary Health, the Boise health plan, employs Express Scripts to provide drug benefits for its 13,000 members. Informed that the PBM has made profits of up to $18 on 60-pill fluoxetine prescriptions, Primary Health's chief executive, Elwood Kleaver, says he is surprised his company has paid such large margins for the nation's most commonly prescribed generic drug. "I'm upset about it," Mr. Kleaver says. "But I don't know that there's anything I can do about it."

Referring to the Primary Health example, "and the overall subject of your article," Express Scripts says that "any general numerical range can be inaccurately presented out of context." Generic drugs typically cost 80% less than comparable brands, the PBM says. That means that "when it comes to generics, our interests are fully aligned with those of our clients, members and retailers."

Traditionally, PBMs received only modest administrative fees for arranging prescriptions at cost. But they increasingly are reducing those fees and trying to take advantage of the "spread" between pharmacy prices and what corporate and government clients pay. Express Scripts says most of its contracts now include spread pricing.

Patients themselves are not immediately affected by PBM margins, since most people simply make a flat $5 or $10 co-payment to the druggist. But employer and health-plan costs eventually trickle down, affecting premiums, benefit levels and co-payments.

All told, Express Scripts says that its average net income per prescription -- including both branded and generic drugs -- is only 46 cents. Comparable figures at the other three major PBMs range from about 25 cents to $2.

Together, AdvancePCS, Express Scripts, Merck & Co.'s Medco unit and Caremark RX Inc. form the PBM oligopoly. They say they control the drug benefits of 210 million people in the U.S., or 70% of the nation's population.

Like Credit-Card Providers

Over the past decade, nearly every major U.S. employer has handed over the management of drug benefits to one of the four major PBMs. Like credit-card providers, PBMs made themselves essential by creating electronic networks that automated purchasing and billing. But many clients don't monitor their PBMs closely. Those that do so discover that PBMs refuse to reveal what they pay druggists. The PBMs call this information "proprietary and confidential."

The state of Arkansas hired AdvancePCS in 2000 to provide benefits to 135,000 state employees. The contract called for AdvancePCS to pass through pharmacy prices without any markup and receive administrative fees of 24 cents per claim, as well as a share of certain drug-manufacturer rebates. Instead, an auditing arm of the Arkansas legislature found last year that AdvancePCS, which provides benefits for 75 million people nationwide, was charging the state more for many prescriptions.

The audit agency found, for example, that in January 2002, AdvancePCS charged the state $18.39 for a generic prescription of the pain killer propoxy, having paid the pharmacy only $13.32, keeping $5.07 for a 38% profit. The audit report concluded that AdvancePCS overcharged the state a total of $479,000 on generic drugs over a four-month period.

AdvancePCS told auditors, according to the report, that a computer-programming error caused the overcharging. The company, which has paid back the disputed amount, says, it and Arkansas "are pleased with our relationship and the results that our partnership has generated for the client." Sharon Dickerson, the state's employee-benefits chief, says that overall, AdvancePCS helped Arkansas save about $4 million in 2002.

Some employers and health-plan administrators concede they don't have a handle on PBM profits. "The whole system is so convoluted and complicated," says Therese Hanna, Mississippi's insurance administrator, who oversees $70 million in drug spending for state employees and their relatives. She says she doesn't know what profits the state's PBM, AdvancePCS, makes on prescriptions. Asked for comment, AdvancePCS says in a written reply: "Our clients' competitive bidding process drives the rates and savings they can achieve through retail network discounts. We hold ourselves accountable to our clients for achieving these savings."

Large spreads often aren't available with branded drugs because there is less competition and therefore less undercutting of AWP. With manufacturers -- and, in turn pharmacies -- setting actual prices closer to AWP, there is less of a potential margin for PBMs.

Even on those relatively rare occasions when a client audit forces a PBM to pay back some of the margin it has collected on generic prescriptions, there can be plenty of profit left over.

According to an audit made public last September, Express Scripts overcharged the New York state employees' prescription-drug plan, which covers 1.1 million people. The company charged New York AWP minus 14% for certain generic drugs, rather than the amount New York had contracted for: AWP minus 39%. The difference, involving some 37,000 claims over a 15-month period, resulted in New York making excess payments of about $613,000, according to a September 2002 letter from the state to Express Scripts.

In a written statement, the company attributed the overcharge to "human error, occasioned by a no-longer-used claims-adjudication system." The error affected only claims from out-of-state pharmacies that amounted to "less than 0.1%" of New York's total, the company said. On the "vast majority" of the state's claims, Express Scripts said it took no spread at all. The company said it repaid the overcharge and "took steps to ensure the error did not happen again."

But even at the promised discount of AWP minus 39%, Express Scripts probably makes out just fine. The company typically pays pharmacies much less than that. In the case of atenolol, a widely used blood-pressure medication, Express Scripts pays pharmacies the equivalent of about AWP minus 91%, according to pharmacy price lists. Asked about this comparison, the company says atenolol prescriptions weren't part of the New York audit.

Write to Barbara Martinez at barbara.martinez@wsj.com6

URL for this article:
http://online.wsj.com/article/0,,SB104906009326501200,00.html

Hyperlinks in this Article:
(1) http://wsj.com/health
(2) http://online.wsj.com/user-cgi-bin/searchUser.pl?action=emailalert
(3) http://online.wsj.com/article/0,,SB104802976818451100,00.html
(4) http://online.wsj.com/article/0,,SB1043372693741014024,00.html
(5) http://online.wsj.com/article/0,,SB1043103109201419264,00.html
(6) mailto:barbara.martinez@wsj.com

Updated March 31, 2003





Copyright 2003 Dow Jones & Company, Inc. All Rights Reserved

Printing, distribution, and use of this material is governed by your Subscription agreement and Copyright laws.

For information about subscribing go to http://www.wsj.com