As the chief pharmacy officer of a major health system, I’ve been aware of the financial shenanigans of pharmacy benefit managers, or PBMs, for some time. These companies are supposed to help control costs for payers and lower out-of-pocket costs for plan members. But as a team of investigative journalists with the Columbus Dispatch are revealing, some pharmacy benefit managers are skimming hundreds of millions of dollars in Ohio alone, boosting drug costs for everyone.

The Dispatch team is shining much-needed light on the inner workings of pharmacy benefit managers. Even I have been surprised at what they have turned up.

Pharmacy benefit managers market themselves as keen negotiators able to squeeze pharmaceutical manufacturers for better deals that save money for insurers, patients, and society. Yet they are turning out to be little more than middlemen, adding scant value but significantly increasing costs. They have no fiduciary responsibility to their customers.

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For years, pharmacy benefit managers have protected themselves with the financial equivalent of Harry Potter’s cloak of invisibility. They closely guard their complicated processes to avoid scrutiny, and require pharmacies to sign confidential agreements that shield them from visibility.

The three largest public pharmacy benefit managers control 73 percent of the market. Abuses often occur when competition is limited, as it is in this three-headed oligopoly.

Pharmacies must be included in these big networks for their financial viability. Pharmacy benefit managers refuse to negotiate their rates with pharmacies for participating in their plans, giving pharmacies no choice but to accept these contracts as written. The alternative is to walk away from being able to fill prescriptions for a huge number of their patients. Due in large part to declines in reimbursement from pharmacy benefit managers, many pharmacies have been forced to die a slow and painful death. In Ohio alone, 164 independent pharmacies have closed in the past three years.

As bad as the lack of transparency and competition in the pharmacy benefit manager sphere is for community pharmacies, patients, consumers, and taxpayers also feel the pain.

Pharmacy benefit managers make their unparalleled high profits in five ways, only one of which is an honest business practice.

Claims processing. This is a valuable service. When you give your insurance card to a pharmacist, the pharmacy benefit manager reads the card and knows if a medication is covered. If it is, the pharmacy is immediately paid. This is a necessary service that is worthy of a small fee — one that translates into big dollars because it is collected over millions of transactions. While a reasonable fee is acceptable, the Columbus Dispatch found that pharmacy benefit management companies recently increased their charges to pharmacies through the Ohio Medicaid program from $0.14 to $0.17 per prescription, a 21.4% increase. This resulted in additional charges of up to $10 million dollars.

Rebate negotiations. Pharmacy benefit managers negotiate rebates with drug companies to have their drugs placed on the PBM’s formulary (the list of prescription drugs covered by a prescription drug plan). If drugs are not on the formulary, the drug company loses business since the drug will either not be covered by the health insurance plan or the patient will have to pay much more out of pocket to get it. In hospitals and health systems, physicians and pharmacists decide which medication in a class to carry based upon safety and cost-effectiveness. In pharmacy benefit managers, actuaries make the decisions based on how big the financial rebate from the drug company to the PBM is. While some of this rebate may be passed on to the insurer, pharmacy benefit managers keep a large — secret and nontransparent — amount for pure profit.

Spread. This is the difference between what a pharmacy benefit manager collects from the payer (such as Medicaid) for medications and the amount it pays the pharmacy that dispenses it. The state of Ohio spent $2.6 billion on prescriptions drugs in Medicaid managed care plans in 2017. The Columbus Dispatch compared actual payment and cost data for 40 pharmacies in Ohio and found an average 12 percent spread on all brand and generic drugs. Ohio Medicaid confirmed a significant spread, although it reported an 8.8 percent spread on that $2.6 billion. That means $223.7 million went to pharmacy benefit managers — just for the Medicaid managed care programs for one state for one year!

Forcing patients to use specific pharmacies. Pharmacy benefit managers sign exclusive agreements with payers so patients are forced to use pharmacies that the pharmacy benefit managers own. This can lead to delays and decreased quality of care.

Direct and indirect remuneration (DIR) fees. After a pharmacy benefit manager pays a pharmacy for filling a prescription, it “claws back” money from the pharmacy by claiming it did not meet certain (again, secret) quality indicators over which the pharmacy has no control. For reference, pharmacy benefit managers clawed back $1.9 million from Cleveland Clinic retail pharmacies in 2017, and have taken $1.4 million so far through May 2018. These fees are assessed months after the prescription is dispensed, pilfering the profit from the pharmacy and diverting it to the pharmacy benefit manager.

Just as days of reckoning came for pharmaceutical companies like Valeant and Turing, which raised the price of generic medications by astronomical amounts, they are now coming for pharmacy benefit managers. In Ohio, lawmakers are demanding answers and the state auditor is opening an investigation into potential Medicaid fraud at worst and deplorable profiteering at best from customers and taxpayers whose best interests pharmacy benefit managers are supposed to have in mind.

The astute investigation by the Columbus Dispatch is just the beginning. Lawmakers in 20 states, including Ohio, Pennsylvania, Iowa, and Kentucky are investigating the practices of pharmacy benefit managers. Ohio is already enacting laws to rein them in.

Lifting the veil of secrecy from the pharmacy benefit manager industry isn’t about spreading profits around — it’s about addressing a real crisis in rising drug costs for American consumers. Policymakers in Columbus, Ohio, Washington, D.C., and elsewhere across the country are hearing a loud-and-clear call for action.

I applaud the media, lawmakers, and others for shining the bright light of scrutiny on these reprehensible practices and urge them to further expose the unprecedented scale of greed and dishonesty in the pharmacy benefit manager industry. I urge state and federal legislators to rein in the egregious practices that result in billions of dollars being taken away from patient care to line the pockets of the big pharmacy benefit manager companies.

Scott Knoer, Pharm.D., is the chief pharmacy officer of the Cleveland Clinic.

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  • Scott , You are my hero !!!! You touched on just about every way the PBM’s are stealing from every american. Especially the independent mom and pop pharmacy! We need to level the playing field.

  • Thank you for such an informative article. I am an NP in rural Alabama and for the past 2 years no one knows what is covered until it is “run”!!! My frustration with insurance and PBM is a daily issue. When the public and the media talk about reducing health care cost that only means reimbursement to health providers: clinics, hospitals and local pharmacies. We are the faces they see to connect to health care. Insurance companies do not even pay us what they say they will. Please understand there is no negotiation, they tell you. You send a bill and get an multi-plan statement asking you to agree to an amount, usually around 30% less than the already discounted rate you agreed to before. This is called an expedited claim. If you will agree to this you are essentially assured you will not have to worry about payment delay or claims review. Sorry to drag on, but I just can’t believe how bad things are and no one is really talking about this in the media. I feel like most of this is legalized extortion!

    • Cathy, I feel your pain. I’ve been an independent pharmacy owner for 38 years.
      I partially blame the Fed’s. CVS the pharmacy chain should have never been able to buy CAREMARK the PBM. Is this NOT a conflict of interest ? Damn straight it is !!!
      Now this CVS/CAREMARK owns mail order houses that they funnel hundreds of
      thousands of Rx’s to, Mandatory mail order. Especially for the expensive specialty drugs ! The CEO’s of these companies should be put in jail for racketeering !
      The PBM’s have been called the MAFIA of the pharma industry !!! Let’s treat them like mafia .

  • Most of the practices described here are more than 15-20 years old – it’s a shame that clients of PBMs (like the state of Ohio) need to constantly stay on top of PBM tactics to make sure they are getting a fair deal. But for a client to not understand the different between a deal with spread (traditional deal) vs a transparent deal, after this practice was exposed many years ago, is concerning. They should either learn how to negotiate a fair deal with a pharmacy vendor, or find the assistance of an experienced consulting firm or broker to assist in future negotiations. Much of the PBM practices outlined in this article are easily avoidable.

  • What are Mr. Scott’s markup’s on cancer drugs? This holier than thou article about a middleman making 8% markup seems sort of funny when hospitals are known to charge insurance plans and employers 300-500% margins on life-saving drugs like chemotherapy. Not many worse things than profiteering off of cancer patients and then throwing stones at glass houses. Maybe the Dispatch or the Plain Dealer should evaluate how Cleveland Clinic was able to afford to build all of those new buildings and become the 2nd largest employer in Ohio. We should call on the Ohio Assembly to fully investigate all of these shenanigans and ask Mr. Scott to be much more transparent!

  • Thank you for this article. It’s awful that this isn’t surprising to me. All I can say is job well done and now maybe the greedy PBM’s will see court time and be exposed by name and never allowed to work in this capacity again!

  • Thank you so much for your effort to expose the PBM’s. I pray that they can be stopped before they force every independent drug store into closing it’s doors.

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