PBMs are driving up generic utilization

August 8, 2005

A clear sign that generics are now part of the mainstream of the healthcare industry is that they are now the drugs of choice of most pharmacy benefit managers. It's a strategy that is paying off well for the PBMs. "It's a clear win-win situation," said Steve Littlejohn, VP of communications for the PBM giant Express Scripts. Its 54% generic utilization rate is the highest in the industry, he said. "Our customers want us to use generics. Studies show that for every 1% increase in generic utilization, there's a 1% drop in drug-cost trends."

A clear sign that generics are now part of the mainstream of the healthcare industry is that they are now the drugs of choice of most pharmacy benefit managers. It's a strategy that is paying off well for the PBMs. "It's a clear win-win situation," said Steve Littlejohn, VP of communications for the PBM giant Express Scripts. Its 54% generic utilization rate is the highest in the industry, he said. "Our customers want us to use generics. Studies show that for every 1% increase in generic utilization, there's a 1% drop in drug-cost trends."

The nation's largest PBM is Medco Health Solutions. The first quarter of 2005 saw a drop in Medco's revenue: $8.74 billion for Q1 2005 compared with $8.91 billion for Q1 2004. The company attributed the drop in part to an increased generic dispensing rate. But that was the good and the bad news: The revenue drop was coupled with a 27% increase in income, from $103.6 million in Q1 2004 to $131.2 million in Q1 2005.

In addition, Medco created what the company calls an Internet-based "Generic Medications Resource Center." The site features a comprehensive and searchable database of brand-name drugs and their generic equivalents. It allows consumers to look up their brand-name medications to see if a generic is available. The site also provides registered Medco plan members with plan-specific cost-comparison information on generic medications, allowing them to see the actual price difference between generics and higher-priced brand-name drugs. (The address is http://www.medco.com/genericsinfo/.)

Aggressive tactics Express Scripts reported a similar income jump as a result of its generic utilization rate. Its income rose 28%, from $70 million in Q1 2004 to $85.3 million in Q1 of this year. Its revenues also rose, from $3.63 billion in Q1 2004 to $3.83 billion in Q1 2005. All that good news for Express Scripts-largely related to increased generic utilization rates, according to company executives-was capped off with a two-for-one stock split in June. "The split reflects the execution of a business model built around the alignment of interests with our clients and members," said George Paz, Express Scripts president and CEO. "The increased utilization of generics translates into lower costs for our clients and improves profitability."

Express Scripts has been just as aggressive as Medco, if not in fact more proactive. One example is the Express Scripts Zero Dollar Copay program: Clients who switch from using a higher-cost branded drug to a lower-cost generic for certain therapy classes can have their prescription copayment waived by their plan sponsor for six months.