Drug Middlemen Are Facing Pressure Over Rising Prices
By MILT FREUDENHEIM

      Paul O. Boisvert for The New York Times
      Peter E. Shumlin, chairman of the Northeast Legislative Association on
Prescription Drug Prices.

s employers, consumers and government officials grow increasingly frustrated
by upwardly spiraling drug costs, pressure is building against a handful of
powerful companies that have prospered for years as middlemen between drug
manufacturers and those who pay for medicines.

The companies, called pharmacy benefit managers, administer drug plans for
some 200 million Americans and play a critical role in determining which
drugs people take for different ailments.

But increasingly, large corporations and major public employers say pharmacy
benefit managers have not done enough to stem the rapid growth in national
spending on prescription drugs, which nearly tripled in the last eight years
from $50 billion in 1993 to $150 billion last year.

Consumers and employers have filed lawsuits against several pharmacy benefit
managers, claiming that they inflate drug costs for some customers and
violate their duty to act in the best interest of customers. And pharmacists
in a dozen states are pressing for laws that would tighten regulatory
oversight of pharmacy benefit managers.

Officials at Merck-Medco Managed Care, a unit of Merck (news/quote) Inc. and
the largest pharmacy benefit manager, said drug costs increased at a slower
rate for its clients than the national average. Executives of several other
big drug plan managers said that they had to provide savings for their
customers or they would lose the business to rivals. "We don't switch to a
higher-priced product," said Barrett Toan, chairman of Express Scripts.

David D. Halbert, chairman of AdvancePCS (news/quote), said, "We are held
accountable through the competitive bidding process."

But critics say the pharmacy benefit management companies negotiate deals
with drug makers that benefit themselves and the drug companies more than
anyone else.

Some say the drug plan managers actually contribute to rising medical costs
because they strike deals that then lead them to induce patients to use more
expensive medications.

For example, after Merck-Medco Care was sued by several employers and
consumers who said the company was not serving customer interests, lawyers
and consultants for the company said in court documents and interviews last
year that Merck- Medco and other pharmacy benefit managers sometimes ended up
promoting the most expensive drug in a class because Merck and other drug
makers paid them the most to do that.

Pharmacy benefit managers often receive payments or rebates from drug makers
to include their drugs on lists of preferred medicines. The benefit managers
then structure the lists so that consumers pay less for those drugs than for
other brand name drugs in the same class. Consumers are often happy to
request those drugs from doctors because their own payments are smaller. But
the employers covering the rest of the cost of the drug may have to pay more
to treat a given ailment.

Drug plan managers say they allow clients to audit the rebates they receive,
and they say they pass on at least some of the payments. But they rarely
disclose the full terms and amounts of the payments they receive, and some
critics have questioned whether the companies are cooperating with drug
manufacturers to maximize their own profits rather than serving the
cost-saving interests of their customers - corporations, government
employers, union welfare plans, health maintenance organizations and other
purchasers of health care.

Some of the drug plan managers' biggest customers are now demanding a more
complete accounting. General Motors (news/quote), which spends more than $1
billion each year on drug benefits, is second-guessing its pharmacy benefit
manager, Merck- Medco, and closely monitoring drug purchases. The company's
direct spending for drugs rose $143 million in 2000 and the increase will
probably exceed $180 million this year, a G.M. spokesman said. "I monitor
every drug in the top 100," said Cynthia Kirman, director of pharmacy at G.M.

Verizon Communications (news/quote) is encouraging Merck-Medco, its pharmacy
benefit manager, to pay less attention to making deals with drug
manufacturers and to focus more on getting the right drug to the right
patient.

Prodded by customers like Verizon and General Motors, Merck- Medco contacted
physicians and patients to urge them to switch to fluoxetine, the generic
version of Prozac, after it became available last year.

Jim Astuto, a regional manager in charge of employee health care at Verizon,
said he did not count on rebates passed on by a pharmacy benefit manager to
lower his company's $500 million in annual drug costs. "We declared the
rebate strategy dead a couple of years ago," he said.

Officials of at least 20 states are going further, working on plans to stop
using drug plan managers altogether or manage central elements of their own
drug plans themselves for state employees and Medicaid members.

In a study last summer for a group of legislators from eight Northeastern
states - New York, Connecticut, Pennsylvania, Maine, Rhode Island,
Massachusetts, Hampshire and Vermont - Health Management Associates
(news/quote), a consulting firm, projected potential savings of $1.8 billion
a year on drugs for Medicaid patients if the states created their own joint
pharmacy benefit manager, or P.B.M.

"The P.B.M. model has failed," said Peter E. Shumlin, president of the
Vermont Senate and chairman of the Northeast Legislative Association on
Prescription Drug Prices. "The P.B.M.'s often negotiate secret kickbacks that
don't benefit the purchaser."