AIDSWEEKLY Plus, 3 June 1996
Daniel J. DeNoon, Senior Editor

The recent mergers of the largest pharmaceutical benefits managers (PBMs) with large drug companies "have created the potential for conflicts of interest," a Georgetown University study suggests.

According to some predictions, PBMs will control some 75 percent of the U.S. pharmaceutical market by the year 2000.

PBMs have changed the way physician-prescribed pharmaceuticals are delivered to patients. These organizations now supply drug benefits to about 115 million people in the U.S., noted Kevin A. Schulman and colleagues in the Annals of Internal Medicine ("The Effect of Pharmaceutical Benefits Managers: Is It Being Evaluated?" Ann Int Med, 1996;124(10):906-913).

But the PBMs' adversarial role with the companies that sell brand-name pharmaceuticals has changed.

"Until 1993, most pharmaceutical benefits managers were independent advocates for patients and employers and were beyond the scope of pharmaceutical manufacturers," Schulman et al. wrote. "Since 1993, several of the largest pharmaceutical benefits managers have been purchased by pharmaceutical manufacturers; these purchases raise new questions about these programs."

PBMs were designed not only to provide insurance-claims processing services for drug benefits but also to control the spiraling costs of drug-benefit programs. These costs increased from $21.4 billion to some $50 billion over the past decade.

Cost control takes three forms:

* PBMs negotiate with pharmacies to set prescription prices.

* PBMs often institute mandatory generic substitution programs.

* PBMs negotiate volume purchase agreements with manufacturers.

All of the PBMs develop a formulary, a list of selected non-generic drugs for which they provide full reimbursement.

"The medical literature suggests that physicians tend to comply with these preferred drug lists," Schulman et al. noted.

"Many researchers worry that restricting drugs through formularies results in the reduction of medically necessary drug prescriptions, needless exposure to drug side effects, and irrational substitutions, particularly in noninstitutional settings."

A variety of interventions are employed by PBMs to motivate pharmacists and physicians to comply with formulary programs.

"Pharmacists are frequently paid to use both formulary and generic products," Schulman et al. wrote. "Other financial incentives for pharmacists to encourage the use of formulary products include additional dispensing fees that are based on the generic prescription rate or, more commonly, awarded to pharmacists for each generic prescription."

But when pharmacists recommend prescription substitutions to a physician, the practitioner may be unaware that the pharmacist is being offered financial incentives by a PBM.

Among the various PBM interventions aimed at physicians are "educational newsletters" providing information about drugs and strategies for disease management.

"Several pharmaceutical benefits managers report that they distribute report cards to payers," Schulman et al. wrote. "These report cards compare physicians' pharmaceutical costs and formulary and generic prescription rates with those of other specialists in the provider's field."

The researchers cited several news reports and case histories in suggesting that these practices may adversely impact patient care.

"The content of physician information available from pharmaceutical benefits managers, coupled with physician profiling, could dissuade a physician from appropriately prescribing nonformulary products," they wrote. "The traditional clinical wisdom that physicians should know only a few drugs in any class very well may be offset by frequent changes in formularies that are driven by price competition."

The role of PBMs is rapidly evolving toward active healthcare delivery as health maintenance organizations (HMOs) are increasingly making PBMs their partners in disease- management strategies.

"Some programs include financial risk-sharing agreements between the pharmaceutical benefits managers and health maintenance organizations, whereby payments for treatment are based on the health outcomes of the population served," Schulman et al. noted.

"Disease management programs under risk-sharing agreements transform pharmaceutical benefits managers into providers of care for patients enrolled in these programs."

But the biggest change in PBMs has been their merger with large drug companies. This process began in 1993 with the purchase of Medco Containment Services by Merck & Co.

This led to several other mergers:

* PCS Health Systems (50 million people covered in 1994) is now owned by Eli Lilly.

* Diversified Pharmaceutical Services (14 million people covered in 1994) is now owned by SmithKline Beecham.

* Caremark (13 million people covered in 1994) has signed distribution agreements with Pfizer, Rhone-Poulenc-Rorer, and Bristol Myers-Squibb.

* ValueRx (5 million people covered in 1994) is allied with Pfizer, Sandoz, and Johnson & Johnson.

* As noted above, PCS Health Systems (50 million people covered in 1994) is owned by Eli Lilly.

Together these firms manage benefits for more than 80 percent of PBM enrollees.

Schulman et al. questioned the motives of the drug companies in making these acquisitions. They noted public statements by drug company executives suggesting that their primary motive was to increase sales of their own products.

"For example, the chairman of Lilly, addressing his company's purchase of PCS, stated that 'This [purchase] will help sell even more Prozac,'" Schulman et al. wrote. "After the Medco acquisition, Merck's volume for its own therapeutic products increased 10 percent in the second quarter of 1994 and 15 percent in the third quarter."

Indeed, the researchers noted, PBMs that remained independent of pharmaceutical companies "anticipated a conflict of interest in the operations of manufacturer-owned pharmaceutical benefits managers and worried about the potential ability of these manufacturer-owned organizations to underbid their competitors."

And a November 1995 report by the General Accounting Office showed that Medco formularies increased their representation of Merck drugs - and removed competitors products - since beginning the negotiations that led to the Medco/Merck merger.

One firm, Eli Lilly, has entered into a consent agreement with the Federal Trade Commission. According to the terms of this agreement:

* Lilly agreed that its PBM subsidiary, PCS, will offer an open formulary (full reimbursement for nonformulary drugs) along with other formulary options.

* The majority of appointees to the firm's pharmacy and therapeutics committee will have no affiliation with Lilly or PCS and will not give preference to Lilly products.

* Lilly will provide the financial discounts and rebates demanded of other manufacturers.

* Lilly agreed to other provisions that would prevent monopolistic market control and unfair price competition.

Schulman et al. listed several specific demands employers can make of PBMs in order to better monitor their effects on health care:

* PBM formulary development should be open to review.

* PBMs should establish a system of external physician review.

* PBMs should establish a request-for-proposal process to regularly seek information on formulary criteria and clinical provisions.

* PBMs should maintain as much formulary stability as possible to permit physicians to become familiar with formulary drugs.

* PBMs should closely track rates of drug interactions, adverse reactions, and patient compliance.

* PBMs should monitor the effects of their physician education programs on prescription behavior and patient outcome.

* PBMs should require pharmacists to inquire about patient health status when prescriptions are refilled.

"There are multiple junctures in the complex pharmaceutical benefits manager process at which patient care might be adversely affected," Schulman et al. concluded. "The implementation of policies to monitor the quality of pharmaceutical benefits managers will provide incentives to improve services and ensure prudent development of these programs."

The corresponding author for this study is Kevin A. Schulman, Clinical Economics Research Unit, Georgetown University Medical Center, 2233 Wisconsin Avenue NW, Suite 440, Washington DC 20007.

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