Healthy Skepticism Library item: 437

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Publication type: news

Freudenheim .
Big Employers Join Forces in Effort to Negotiate Lower Drug Prices
The New York Times 2004 May 12

Full text:

Hoping to slow the rising cost of providing health coverage, 50 of the country’s largest employers are creating a buyers’ club to bargain directly with drug makers on behalf of five million active and retired employees and their families.

The move is a major departure from the current industry practice of employers paying middlemen – known as pharmacy benefit management companies – to provide drug coverage for their insured workers. Those prices are supposed to be at discounted rates. But because drug pricing is notoriously opaque, employers cannot be sure they are getting the best possible deal.

By shrinking the role of middlemen, the employers hope to seize control of a system that they say has fueled one of their fastest-growing costs. The 50 employers in the buyers’ group spent roughly $4 billion for prescription drugs last year. Over all, the nation’s employers spend more than $70 billion through pharmacy benefit managers, and their drug bills rose 9.1 percent in 2003, on top of eight years of double-digit increases.

Employers say they typically cannot determine the true costs of drugs, and note that their bills are largely based on discounts from “average wholesale prices’‘ that are quoted by the industry but that no one actually pays.

Consider this example: A 30-day supply of 40-milligram tablets of Lipitor, a cholesterol treatment that is the world’s best-selling drug, costs $112.48 at the “average wholesale price.’‘ For the average employer drug plan it is reduced to $97.51, not counting various rebates from the manufacturer. But at the Drugstore.com Web site, available to anyone, the price is $94.99.

“Large employers have an opportunity here to basically change the model and to get to price transparency in prescription drugs,” said Jane Lohmeier, benefits manager of one of the employers involved in the effort, the FPL Group. The company spent $14 million last year to provide benefits for 33,000 people at Florida Power and Light and its other divisions.

“We require price transparency in everything we do,” Ms. Lohmeier said. “But drugs have been a little bit of a black box.”

Even when prices are lowered, employers’ overall costs keep rising, because manufacturers offer rebates to the pharmacy benefit managers that lead them to encourage higher use of multibillion-dollar products. Although a portion of those rebates are passed along to the employers, the companies suspect that they would be better off negotiating directly for the best prices for the drugs that best suit their employees’ needs. “We pay twice as much for drugs as we did five or six years ago,” said Greg Folley, the benefits and compensation director for another member of the group, Caterpillar, which provides benefits for 66,000 employees and retirees and their dependents in the United States. “We would like to drive the inefficiency associated with the rebate process out of the system.”

The employers are working through the Human Resources Policy Association, a Washington trade group of senior executives for 220 large companies, and through Hewitt Associates, a benefits consulting firm. The group has started discussing drug pricing for next year’s health plans with drug makers and the large pharmacy benefit management companies that currently arrange the discounts and rebates.

The group plans to negotiate on the 50 drugs that its members spend the most on, including Lipitor and another cholesterol treatment, Zocor; Prevacid and Nexium for heartburn; the painkillers Celebrex and Vioxx; Zoloft, Paxil and Effexor for depression; and Allegra, an allergy drug.

They are seeking “a revolutionary change,” said David B. Snow, president and chief executive of Medco Health Solutions, one of the largest pharmacy benefit managers, which has offered to cooperate with the employers’ group.

Medco and other benefit managers would maintain a role even if the employers negotiated their own drug deals: they would continue to manage the employers’ payments for thousands of less expensive drugs, including generics, and would still operate the mechanics of company drug plans.

The benefit manager companies will receive fees to cover their costs and profits on crucial services like determining plan members’ co-payments in stores and directing patients with chronic diseases to mail-order pharmacies.

Still, Mr. Snow said he doubted that the employers could save money by negotiating their own deals for the 50 drugs. “It’s worth trying, but I’m highly skeptical that they can do it,” Mr. Snow said.

Drug companies, he said, trim their prices only when the deals result in larger market share for their products – something he said the employers were unlikely to achieve by making deals outside the larger buying pools controlled by benefit managers like Medco, which represents more than 60 million people.

Another pharmacy benefits management executive, though, said the employers’
group might succeed if it sticks together and shows its resolve. “The cohesiveness of the buying group will matter a lot in terms of their ability to move market share,” said Timothy F. Dickman, president and chief executive of Prime Therapeutics, which manages drug plans for 10 million members of nine Blue Cross and Blue Shield plans. “If you don’t get the price you want, you have to be ready to move your business” to another manufacturer.

A spokesman for the Pharmaceutical Research and Manufacturers of America, a drug industry trade association, said that the group could not comment on the marketing arrangements of its members.But Kenneth Sperling, a health care consultant at Hewitt, said drug makers so far “have reacted positively” to the employers’ initiative. “The pharma companies realize that the current rebate model has a limited future,” he said.

The system is changing as Medicare prepares to begin paying for prescription drugs in 2006 and writes new rules requiring more clarity on pricing, Mr.
Sperling said.

The current system is “all based on sales volume and rebates,’‘ Mr. Sperling said.

“You can’t get to the right solution until you fix the pricing model,” he said. “If the cost is not real, it is not fair to the consumer’‘ who will be making choices and paying a growing share of the costs.

“We have a responsibility to show consumers the real cost of the drug and the real cost of the alternatives so they can make an informed choice with their doctor.”

The buyers’ group is the latest and most far-reaching of several recent efforts to change the way employers pay for drugs. For example, Towers Perrin, a benefits consulting firm, has recruited “numerous companies” by promising to pass through to them 100 percent of rebates and other manufacturers’ payments made to their pharmacy benefit manager, which is Medco, according to Rich Ostuw, a principal at Towers.

“Transparency means you know what the real price is,” Mr. Ostuw said. “The employer needs to understand what the true price is’‘ – both the gross price and the net price without the rebate.

On another tack in the push for transparency, Stephen N. Limbaugh Jr., a federal district judge in St. Louis, recently ordered Express Scripts, one of the largest benefit managers, to open its electronic and other records for inspection by lawyers who are suing the company. Stephen E. Littlejohn, a spokesman for Express Scripts, said the company would not comment on current litigation.

Mr. Folley, at Caterpillar, said that by using prices established directly with the drug makers, “consumers and providers can look to see what is the most cost-effective drug among many that are similar and identical in efficacy.”

“We want to let the consumers and doctors have a good basis for deciding which drug to select,” he said.

But Patricia Wilson, an independent consultant who helps large companies with their drug plans, questioned the effectiveness “of taking the 50 most costly drugs and thinking that you can negotiate a better price.”

Employers, she said, would have more success if they worked more closely – not less – with their pharmacy benefit managers. “The question is, How do I keep pressure on the P.B.M.‘s to get a better price?” she said.

And one benefits management executive, Kevin Nagle, said that negotiating payment rates for stores and mail-order pharmacies is also important in controlling drug costs. Mr. Nagle is president of Envision Pharmaceutical Service, a smaller benefits manager that says it has two million members.
Negotiating contracts with drug companies, he said, is “only one part of the equation.”