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PBMs Seem Poised to Manage Medicare Drug Benefit, With Cautions

Kate Traynor

Despite last week's decision by a federal judge to halt the Medicare-Endorsed Prescription Drug Card Assistance Initiative, there still seems to be an opportunity for pharmacy benefit managers (PBMs) to be involved in managing the drug therapy of Medicare beneficiaries.

PBMs figured prominently in last October's Congressional Budget Office (CBO) report on designing a prescription drug benefit for Medicare beneficiaries. The report noted that, since 1999, most proposals to add an outpatient drug benefit to Medicare would rely on PBMs or similar entities to administer the benefit. CBO pointed out that reliance on PBMs "is common in the private sector."

A report (PDF) released last month by the General Accounting Office (GAO) likewise seems to pave the way for increased PBM involvement in managing federal drug benefits. In the report, GAO reached the not-so-surprising conclusion that PBMs spend less than cash-paying customers for prescription drugs purchased at community pharmacies. On average, PBMs that managed federal employees' pharmacy benefits in three metropolitan areas paid community pharmacies 18 to 47 percent less than did cash-paying customers for 18 different medications.

This savings was more pronounced—27 to 53 percent on average—when the medications were purchased through mail order rather than at the pharmacy. GAO also found that PBMs paid less than state Medicaid programs for drugs purchased at community pharmacies.

The GAO report found that conventional managed-care strategies, such as prior authorization and drug-use review, are used by PBMs to hold down drug costs. According to the report, savings generated by an individual intervention strategy ranged from less than 1 percent to 9 percent, although GAO noted that PBMs did not have savings estimates for all of their intervention strategies.

The GAO report also touched on some of  the more controversial methods used by PBMs to generate discounts—methods that may receive increased scrutiny as proposals for a Medicare outpatient drug benefit move forward.

In some cases, cost-containment strategies could put PBMs at odds with federal antikickback laws, a possibility described in a draft compliance guideline (PDF) issued last October by the Health and Human Services Department's Office of Inspector General (OIG).


Manufacturers may award to PBMs rebates that are based on the quantity of specific drugs dispensed to plan beneficiaries. Rebates are more commonly offered for brand-name drugs than for generic products and could encourage PBMs to promote the dispensing of higher-cost branded drugs instead of generic products.

Some rebate amounts are tied to the share of the market captured by a specific product. OIG indicated in its draft compliance guideline that such rebates could constitute illegal kickbacks.

The National Association of Chain Drug Stores has faulted the GAO report for failing to investigate the structure of rebate arrangements and the division of rebate dollars among PBMs and other components of the health care system. OIG's draft guidance noted that rebates and other discount arrangements involving federal health programs must be properly disclosed and documented to avoid violating antikickback laws.


The use of formularies by PBMs can reduce drug costs by excluding or limiting easy access to expensive therapies. Various groups have voiced the concern that restrictive formularies can deprive patients of access to needed drugs. GAO concluded that the PBM formularies it examined were comparable to the Department of Veterans Affairs outpatient drug formulary and not overly restrictive.

GAO also noted that formularies and rebates are interrelated, because PBMs may receive rebates from drug manufacturers whose products are included in the formulary. According to the report, such rebates may be tied to the market share that the PBM helps a manufacturer achieve. This practice could violate the antikickback provisions described by OIG.

Therapeutic interchange

Switching patients from more-expensive nonformulary drugs to less-costly formulary drugs within the same therapeutic class saved PBMs up to 4.5 percent on total drug spending, GAO found from asking the companies. But OIG noted that PBMs' receipt of cash incentives from manufacturers for changing patients' therapy from a competitor's product are "suspect under the anti-kickback statute." OIG likewise cautioned PBMs and other members of the health care industry against accepting drug-company payments for contacting patients to encourage them to switch therapies.