Federal Diary

Pharmacy benefit managers and the rising drug costs for federal workers

By Joe Davidson
Washington Post Staff Writer
Thursday, January 7, 2010

When Uncle Sam arranges prescription drug coverage for millions of federal employees and their dependents, you'd expect him to have enough muscle to keep those prices low.

So how come the Federal Employees Health Benefits Program pays up to 45 percent more for medicine than other federal programs? One reason is it includes retirees who take more drugs than younger folks.

But that apparently doesn't explain it all. Some lawmakers believe the costs are also inflated because of the role of pharmacy benefit managers. They negotiate drug benefits with more than 200 health insurance carriers that provide services to more than 8 million people covered by the benefits program.

The chairman of a subcommittee of the House Oversight and Government Reform Committee plans to introduce legislation this month that would increase the transparency of the pharmacy benefit managers' operations. The legislation would strengthen the ability of the Office of Personnel Management, which administers the plan, to obtain information about the finances of making drugs available to federal employees.

Called PBMs in the trade, Bruce T. Rogers, chief executive of the National Community Pharmacists Association, has another name for them: "billion-dollar middlemen."

"PBMs have experienced enormous growth, fueled by their ever-increasing share of prescription drug transactions," he wrote in a Federal Times article. "PBMs pay pharmacies one price for dispensing a drug, then charge the plan sponsor much more. In addition, they pocket large portions of discounts or rebates from drug manufacturers before passing the rest on to plan sponsors and patients."

The PBMs have been at the center of a debate over federal employee prescription drug costs that was highlighted in recent months by a congressional hearing and a closed-door forum on Capitol Hill.

Rep. Stephen F. Lynch (D-Mass.), chairman of the subcommittee on federal workforce, Postal Service and the District of Columbia, wasn't available to discuss his proposed legislation, but his statements at the hearing in June made clear his displeasure with the current situation.

"If the FEHBP wants to remain a model for providing health benefits, legislative changes that allow for alternative prescription drug benefit contracting and pricing may be in order," he said.

Information distributed to participants at a forum held in September by the subcommittee said the FEHBP pays from 15 to 45 percent more for drugs than other federal programs.

"I'm not an expert on pharmaceutical pricing, but I have a hunch that the pharmaceutical industry charges what they can to make the largest profits," Lynch said.

"So, do I think that the pharmaceutical industry could afford to charge lower prices for our federal employees? You bet I do."

He's not alone.

Fellow committee member Gerald E. Connolly (D-Va.) said Congress must act "by getting tough on pharmacy benefit managers."

As you might expect, the trade association for the pharmacy benefit managers has a different take.

In a statement Monday, the Pharmaceutical Care Management Association took a good chunk of credit for a national "historic low in drug spending growth," saying it "coincides with the expanding use of cost-saving tools developed by pharmacy benefit managers (PBMs) in private and public programs."

"PBMs have pioneered tools -- including incentivizing the use of generic medications, e-prescribing, and mail-service pharmacies -- that improve savings, access, and safety for consumers and payers. Since the key to access is affordability, payers and policymakers alike should explore broader use of PBMs' cost-saving tools and reject approaches that make prescription drugs more expensive," said Mark Merritt, the association's president.

But OPM Inspector General Patrick E. McFarland doesn't see it that way. Citing rising drug costs for federal workers covered by Blue Cross/Blue Shield, by far the largest employee plan, he told the subcommittee: "These steadily rising costs call into question the effectiveness of the large PBMs which the Blue Cross Blue Shield Association has contracted with in controlling prescription drug costs."

Furthermore, "the cost structures of the PBMs are utterly nontransparent," he added, saying that is the "single most important issue which OPM must resolve" regarding drug prices for federal workers. The lack of transparency "means there is no objective basis to determine whether the terms being offered" to insurance companies represent a good deal or not.

"We find the absence of transparency to be deeply troubling," he said.

That doesn't seem to bother OPM as much.

Nancy H. Kichak, who is in charge of employee services for OPM, said that "whether increasing transparency alone will lead to lower pharmacy costs is unclear."

She also told Lynch at the June hearing that OPM is exploring a broad range of options regarding drug costs. On Wednesday, OPM did not respond to queries about what actions, if any, it has taken.

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