Are PBMs making unfair profits on generics?

April 3, 2006

To some, examining how pharmacy benefit management companies function is like watching sausage being made. No matter how tasty the product, it's not a pretty sight.

To some, examining how pharmacy benefit management companies function is like watching sausage being made. No matter how tasty the product, it's not a pretty sight.

PBMs make profits two ways: on rebates from manufacturers and on "the spread"-the difference between the drug ingredient cost billed to the employer by the PBM and what is paid to dispensing pharmacies. Rebates and spreads vary widely, depending on the drug, the manufacturer, and the PBM-payer contract.

PBM industry representatives sharply disagree with Garis' assessment. They are supported by a series of U.S. Government Accountability Office reports in the past few years and a joint report in 2004 by the Federal Trade Commission and the Department of Justice, concluding that PBMs are highly successful in controlling costs, primarily by encouraging the use of generics. The reports influenced Congressional staff in the design of the new Medicare drug benefit, which is being managed largely by the PBM industry.

The PBM industry is in fact very competitive and successful, and increased generic utilization no doubt contributed to the improved bottom line. PCMA and independent studies have found that the approximately 60 PBMs currently managing pharmaceutical benefits have significantly increased generic utilization. Merritt said such efforts are a reason the trend toward overall prescription drug costs is beginning to slow. On March 1, 2006, Medco-one of three PBM giants, along with Caremark and Express Scripts-reported a record generic utilization rate of better than 52.5% in the last quarter of 2005, up 4.4% from the same period in 2004. Reports by industry leaders show that PBMs are also financially successful. Medco also reported on March 1 that it experienced record net revenues of $10.8 billion in the last quarter of 2005, up 21.2% from the same period in 2004.