navigating the pharmacy benefits marketplace · california’s health care delivery and financing...

Navigating thePharmacy BenefitsMarketplace

January 2003

chcf

January 2003

Navigating the Pharmacy BenefitsMarketplace

Prepared for CALIFORNIA HEALTHCARE FOUNDATION

by Mercer Human Resource Consulting

chcf

Acknowledgments

Mercer Human Resource Consulting helps clients understand,develop, implement and quantify the effectiveness of their humanresource programs and policies. Our goal is to help employerscreate measurable business results through their people.

Mercer Human Resource Consulting is a leading globalconsulting firm with more than 13,000 employees in some 140 cities and 40 countries. Mercer consultants work withclients to address a broad array of their most important humanresource issues, both domestically and globally. This report wasdeveloped by consultants in Mercer’s Health Care & GroupBenefits Consulting Practice. Employers and other plansponsors look to Mercer as the world’s leader in the design,funding and delivery of group benefit plans, in general, andpharmacy benefits, in particular.

About the Foundation

The California HealthCare Foundation, based in Oakland, is an independent philanthropy committed to improvingCalifornia’s health care delivery and financing systems. Formedin 1996, our goal is to ensure that all Californians have accessto affordable, quality health care. CHCF’s work focuses oninforming health policy decisions, advancing efficient businesspractices, improving the quality and efficiency of care delivery,and promoting informed health care and coverage decisions.CHCF commissions research and analysis, publishes anddisseminates information, convenes stakeholders, and fundsdevelopment of programs and models aimed at improving thehealth care delivery and financing systems.

Additional copies of this report and other publications can beobtained by calling the California HealthCare Foundation’spublications line at 1-888-430-CHCF (2423) or visiting usonline at www.chcf.org.

ISBN 1-932064-19-2Copyright © 2003 California HealthCare Foundation

Contents

4 Executive Summary

9 I. Scope of This Report

Research Materials and Methods

11 II. Who Pays for Prescription Drugs?

Variations in Pharmaceutical Pricing

Pricing for Public Programs

Pricing for Private Plan Sponsors —Employers and Health Plans

17 III. Pricing for Private Insurers: The Flow of Money

20 IV. Pharmaceutical Manufacturers

How Manufacturers and Wholesalers Determine Prices

22 V. Wholesalers

24 VI. Pharmacies

Retail Pharmacies

Mail-Order Pharmacies

Other Pharmacies

30 VII. Pharmacy Benefit Administrators

Pharmacy Benefit Managers

Health Plans

Third-Party Administrators

34 VIII. How Employer Plan Sponsors Can Contain Costs

To Carve in or Carve Out

Risk Sharing

Cost Sharing

Benefit Design

Collective Purchasing

38 IX. An Evolving Marketplace

39 Glossary

40 Endnotes

4 | CALIFORNIA HEALTHCARE FOUNDATION

WITH PHARMACEUTICAL PRICES CONTINUING TOclimb, cost containment will likely remain a priority for spon-sors of medical plans containing pharmacy benefits. Thisreport is intended to help plan sponsors navigate the complexand often confusing financial arrangements that determine the ultimate cost of pharmacy benefits to employers andconsumers. The report explores the multitude of forces thatinfluence pricing — from legislation and market dynamics tothe flow of money and interactions among pharmaceuticalmanufacturers, pharmacies, pharmacy benefit administrators,employers, and consumers.

Who Pays for Prescription Drugs?

There are considerable variations in pricing among the majorpurchasers of pharmaceuticals, not only between public andprivate purchasers, but also among private purchasers.

Public purchasers for prescription drugs provide a variety ofprograms for low-income and elderly patients; veterans; mem-bers of armed forces; and federal, state, and local governmentemployees. While public outpatient prescription drug expendi-tures constitute only about 2 percent of total U.S. healthexpenditures,1 the federal government exerts far more influenceon pricing than do either the private sector large purchasers orindividuals. In general, public programs experience the greatestlevel of savings off the original list price for prescription drugsbecause they possess tremendous concentrated purchasingpower, and because legislation mandates that pharmaceuticalmanufacturers offer their lowest prices to public programs. Forexample, if a pharmaceutical manufacturer discounts a price toa particular managed care organization, then the manufactureris legally obligated to offer that “best price” or a lower one tothe entire Medicaid system nationwide.

Private purchasers include health plans and pharmacy benefitmanagers purchasing on behalf of employers. While privatespending accounts for the largest proportion of total U.S.pharmaceutical expenditures, large private purchasers enjoy less of the concentrated purchasing power and none of thefavorable legislation of public programs. Consequently theyhave less clout than public purchasers.

Executive Summary

Consumers purchase drugs from pharmacies atretail drugstores or by mail. Consumers whohave insurance coverage and those who are eligi-ble for government programs (such as Medicaid)typically pay less than consumers who do nothave such coverage.

The act of filling a prescription represents theend point of a complex, multistage transactionchain that determines the ultimate cost ofpharmacy benefit programs to employer plansponsors and consumers. This report tracks thefinancial arrangements and relationships amongthe key players involved in purchasingprescription drugs.

Manufacturers and Wholesalers

Manufacturers establish a wholesale acquisitioncost (WAC) as a baseline for sales to wholesalers.The price wholesalers pay to manufacturers forany given product can fluctuate with the quantitypurchased. For instance, the manufacturer mayquote a wholesaler a price close to WAC, but thisprice does not take into account volume dis-counts that occur in actual sales to wholesalers.

Wholesale prices are also related to publicprogram prices. Using records supplied bymanufacturers of their sales to wholesalers, theCenters for Medicare and Medicaid Services(CMS, formerly HCFA) calculate the averagemanufacturer’s price (AMP) on a quarterly basisfor all drugs. AMP is the benchmark used indetermining the Medicaid “best price,” but it isnot made available to private payers, making itdifficult for private payers to assess the differencesbetween AMP and WAC.

Pharmacies

Of the money spent for prescription drugs, 64percent is channeled through retail pharmacies(chains, independent pharmacies, and pharmacieswithin food stores); 24 percent through medicalfacilities (hospitals, nursing homes, clinics, homehealth care, and federal facilities); and 12 percentthrough mail-order sales.2

Retail PharmaciesThe four largest drugstore chains account for morethan 60 percent of the retail pharmacy marketshare today, compared to less than 25 percent in1996.3 Some large national or regional retailchains (including pharmacy, supermarket, andmass merchandiser chains) purchase drugs in largeenough volumes so that they can bypass thewholesaler and buy directly from the manufac-turer. Manufacturers offer these pharmacies bothup-front discounts for purchasing their productsand “back-end” discounts (formulary rebates) for selling specific volumes of certain drugs orachieving a certain share of a specified market.

Smaller retail entities, such as independent retailpharmacies and regional retail chains, purchasedirectly from wholesalers or join group purchasingorganizations (GPOs) in order to leverage theircombined purchasing power and negotiatediscount pricing from wholesalers or evenmanufacturers. Some of these groups furtherreduce their costs through direct rebate dealsoffered by manufacturers.

To obtain reimbursement from private payers, andto have access to a greater number of customers,retail pharmacies contract with pharmacy benefitadministrators, including pharmacy benefit mana-gers (PBMs) and health plans, to join a pharmacynetwork — a group of independent pharmaciesand pharmacy chains where members of a benefitplan have to go to get their prescriptions filled,usually for a lower cost per prescription. To beincluded in such a payer’s network, retailpharmacies are required to offer a guaranteed

Navigating the Pharmacy Benefits Marketplace | 5

reimbursement formula for prescription drugspurchased through the benefit plan. This formulaspecifies how the pharmacy will calculate the costof the drug and the dispensing fee.

Mail-Order PharmaciesMail-order pharmacies, most of which are ownedand operated by PBMs, are popular with employerplan sponsors, 87 percent of whom offered mailservice in 2001.4 Mail-order pharmacies can bemore cost-effective than retail pharmacies, yieldinggreater discounts and lower dispensing fees. Byconsolidating purchasing from consumers acrossthe country, mail-order facilities can buy pharma-ceuticals in bulk and can economically dispenselarge quantities through automated processes.Also, mail-order pharmacists usually have a greateropportunity than retail pharmacists to focus onutilization management efforts and interchangetherapeutically equivalent products, which cansignificantly reduce the cost of prescriptions.

Mail-order dispensing also has the advantage of having a higher rate of correctly filled prescriptions than retail dispensing, because mail-order pharmacies have largely automatedthe prescription filling process, which has led to greater accuracy.

Pharmacy Benefit Administrators

To administer their prescription drug benefitsprogram, employer plan sponsors usuallycontract the services of an outside organizationsuch as a PBM, health plan, or third-partyadministrator (TPA).

Pharmacy Benefit ManagersPBMs are independent specialty administrators;they focus on administering pharmacy benefits,and managing the purchasing, dispensing, andreimbursing of prescription drugs. About 45percent of the U.S. population has pharmacycoverage provided directly by a PBM.5 Depending

on its size and other factors, a PBM may performsome or all of the following functions:

■ Purchase and dispense medications. MajorPBMs purchase pharmaceuticals for their mail-order pharmacies and dispense medica-tions directly to consumers. They negotiateboth purchasing agreements and rebatecontracts with manufacturers for the productsthey dispense.

■ Pay claims.

■ Act as a financial intermediary betweenpharmacies and the plan sponsor, negotiatingwith retail pharmacies to contract reimburse-ment levels for prescriptions filled by planmembers. They often create and maintainpharmacy networks.

■ Manage prescribing choices. PBMs caninfluence which drugs are ultimately dispensedat retail and mail order. They do this bydeveloping formulary management, health and disease management, therapeutic inter-change, and other education programs thatinform physicians and consumers aboutpreferred drugs.

■ Create and maintain pharmacy networks.

PBMs use their relatively large customer base andability to influence physician prescribing patternsand consumer preferences as a negotiating toolwith manufacturers to secure formulary rebates.The U.S. Department of Health and HumanServices estimates that PBMs receive direct rebatesfrom manufacturers ranging from 2 to 35 percentof brand-name drug sales prices and pass onabout 70 to 90 percent of these direct rebates toinsurers or self-insured employers.6

Health PlansHealth plans employ varying strategies to managepharmacy benefits. They include:

■ Outsourcing claims payments.

■ Outsourcing elements of pharmacy benefitmanagement.


■ Outsourcing pharmacy benefit managementcompletely to an outside PBM.

■ Owning and operating a PBM. Certain largehealth care plans with national or regionalscope employ this strategy. Health plan PBMs typically provide service to the healthplan exclusively.

■ Operating pharmacies within their outpatientclinics. Some organizations with a high degreeof care management, such as group-modelmanaged care organizations (MCOs) likeKaiser Permanente, offer this service.

Most health plans have some clinical/formularymanagement programs that can influenceproduct preference in the treatment of aparticular medical condition. HMOs exertconsiderable control through both providereducation and plan design, including the use of formularies. In 1999, about 97 percent ofHMOs relied on some type of formulary.7

In MCOs (including HMOs) formularycompliance is generally high — approximately 90 percent of members’ prescriptions are filledwith formulary drugs8 because (1) participatingphysicians agree to enforce the MCO’s utilizationmanagement programs; (2) the plan generallydoes not cover brand medications when genericequivalents are available; and (3) the plan generallydoes not cover off-formulary brand medications.These high formulary compliance rates spurmanufacturers to offer rebate incentives in orderto successfully negotiate a place for their productson the MCO’s formulary.

Third-Party AdministratorsThird-party administrators engage in primarilyadministrative functions; they process pharmacyclaims, but have no influence over what the retailpharmacy charges, or what is dispensed. Plansponsors rarely use TPAs to process pharmaceu-tical claims without PBM support. It implies thiscould be a more expensive way to offer pharmacybenefits to employees.

How Plan Sponsors

Can Manage Costs

While employers have little control over some of the factors that determine how much thepharmacy benefit ultimately costs, some factorscan be influenced. Employers can use theirinfluence to their best advantage by carefullyevaluating the following key decisions.

Will the benefit be administered by a healthplan or will it be managed separately by aPBM? A health plan offers the potential for anintegrated health care approach, although thelevel of integrated care varies significantly amonghealth plans. While health plans can and do offera range of PBM-related services, PBMs are morelikely to offer discounts and guarantees on rebatepayments, provide a wider range of formularyoptions, and allow the plan sponsor greaterability to customize the program.

Will the employer purchase an insuredpharmacy benefit, or assume financial risk and self-insure? While an insured benefittransfers the risk for the pharmacy benefit fromthe employer to the PBM, self-insuring providesmore opportunity to offer input on how thebenefit is structured and more often allows forthe possibility of rebates from manufacturers. For small plan sponsors, self-insuring may posetoo great a financial risk.

What portion of the cost of prescription drugswill the employer absorb? This will vary byemployer, but can be controlled by the design ofthe benefit plan — including how the employee’sshare of the drug cost is structured (such as flatdollar co-pay, tiered pricing, coinsurance); theformulary (which drugs are covered); and theactual plan design in place (for example, two-tierversus three-tier). Employers can choose to absorbanywhere from the full cost of prescription drugsto none of the cost.


How much influence will the employer plansponsors have over which drugs are covered in the benefit? Manufacturers’ discounts andrebates are available to plan sponsors willing toallow their PBM or other pharmacy benefitadministrator to educate physicians and consu-mers about preferred drugs. This is accomplishedthrough plan design and formulary management.

Will the employer engage in collectivepurchasing? An employer can realize the bene-fits of collective purchasing by (1) consolidatingits benefit plans with a single provider so that the sum total represents a larger group, and (2) joining together with other employers ingroup purchasing coalitions to collectivelynegotiate for even better financial as well asservice arrangements.



THE COST OF PROVIDING PHARMACY BENEFITShas risen significantly during the last decade, surpassing the costincreases experienced by employers for any other category ofmedical services.

Newer drugs are often more expensive than the ones theyreplace, and the utilization of drugs is growing dramatically.Multiple drugs are more often used to treat single conditions,and there is a burgeoning emphasis on using pharmaceuticalsin preventive care and chronic disease management. As thegrowing elderly population and the emergence of new drugs to treat previously untreatable conditions continue to drive upthe cost of pharmacy benefits, cost containment will likelyremain a priority for prescription drug plan sponsors.

In providing pharmacy benefits, an employer’s primarychallenge is to secure the best pricing for the most appropriatemix of drugs and services for its employee population. Giventhe varied interests of the stakeholders and the sometimescomplex turns and twists that characterize the flow of moneyand interactions through the pharmaceutical marketplace, thisis no easy task.

I. Scope of This Report

0%

5%

10%

15%

20%MedicalRx

2001200019991998

11.5

6.27.3

8.1

11.2

15.2

17.516.8

Figure 1. Pharmacy Benefit Cost Increases Continue to

Outpace Overall Medical Trend Rates

Source: Mercer/Foster Higgins National Survey of Employer-Sponsored Health Plans 1998-2001

This report attempts to demystify the pricingprocess by describing the following variables:

■ How pricing strategies vary in different sectorsof the pharmaceutical marketplace;

■ What principles are at work in determiningpricing for various purchasers;

■ What direct and indirect forces influence theultimate cost of the pharmacy benefit to theemployer and consumer; and

■ What roles and complex relationships existamong the major players in the pharmaceuticaldistribution chain.

Employers can use this information to negotiatethe most appropriate and cost-effective pharma-ceutical services and products.

Research Materials and Methods

Information for this report was gathered fromboth primary and secondary sources.

Primary information came largely from anextensive database of financial arrangementsnegotiated by Mercer on behalf of employer plansponsor clients with PBMs and health plans.Additional data were derived from Mercer’s workwith pharmaceutical manufacturers to define the value proposition of pharmaceutical therapyversus the cost of the prescription drug.

Secondary sources include published articles andstudies about the flow of money in the pharma-ceutical market from a variety of viewpoints.Some of these analyze or observe trends in theprescription drug industry (for example, Standard& Poor’s, PhRMA publications, and KaiserFamily Foundation’s “Prescription Drug Trends”).Others reflect a strong constituent position (forexample, Human Resource Executive).

To ensure that the report reflected broad-basedviewpoints from all pharmaceutical marketsegments, we asked a spectrum of stakeholders to review it and made revisions based on theircomments. Reviewers included representativesfrom brand-name and generic pharmaceuticalcompanies, retail and mail-order pharmacies,PBMs, and California-based health plans, as well as industry experts.



WITHIN THE PHARMACEUTICAL MARKETPLACE, Anumber of purchasers are involved in the complex flow ofmoney and interactions that ultimately determine prescriptiondrug prices. Each of these purchasers represents or serves aparticular population or group of consumers. At the most basiclevel, prescription drug expenditures are funded by eitherprivate or public sources. Of the total U.S. expenditures of$99.6 billion on outpatient prescription drugs in 2000, approxi-mately 78 percent was privately funded and 22 percent waspublicly funded.9

Variations in Pharmaceutical Pricing

There are considerable variations in pharmaceutical pricing, notonly between private and public purchasers, but also amongthe various private purchasers. These pricing differentials resultfrom the interacting influences of government regulation,marketplace dynamics, and purchasing decisions.

Public PurchasersPublic funding for prescription drugs covers consumersparticipating in federal, state, and local public programs. The federal government funds multiple programs includingthe Department of Veterans Affairs, Department of Defense(DOD), the Coast Guard, and Medicaid (Medi-Cal inCalifornia). State and local governments sponsor programs that supplement or expand the federal programs for low-income or elderly persons.

Federal and some state legislation mandates that pharma-ceutical manufacturers offer their lowest prices to publicprograms. The net cost for public programs is determined by a combination of legislatively mandated discounts and rebates.These legislatively mandated prices can impact the pricescharged to private purchasers.

Private PurchasersA large proportion of prescription drug spending is made bywhat might be termed “private purchasers,” or pharmacybenefit plan sponsors. These benefit plan sponsors, who payfor part or all of the cost of prescription drugs for their coveredbeneficiaries, include employers and health plans. Most of

Public programs’ legislatively

mandated prices influence the

prices that manufacturers

charge private purchasers.

II. Who Pays for Prescription Drugs?

these plan sponsors purchase prescription drugsthrough pharmacy benefit administrators (eitherhealth plans or pharmacy benefit managementcompanies (PBMs)) who negotiate discountswith retail pharmacies and rebates from drugmanufacturers. The vast majority of suchpurchases tend to be outpatient drugs.

While spending by private plan sponsorsaccounts for a larger proportion of total U.S.pharmaceutical expenditures than publicspending, these plan sponsors, lacking thefavorable legislation of public programs, tend to have less clout than public purchasers.

Consumers Who Make Out-of-Pocket PaymentsThere are primarily two types of consumer: those who have some type of pharmacy benefitcoverage and pay a portion of the cost of a drug(copayment, coinsurance, deductible), and thosewho have no coverage and pay the entire cost of the prescription drug at the retail pharmacy.Sometimes referred to as “cash-paying consumers,”many of these individuals without insurancecoverage are seniors who are eligible for Medicare.Data collected on this type of consumer typically

include both those with no prescription drugcoverage and those who are covered by traditionalindemnity plans and must pay the full amount atthe pharmacy and later be reimbursed. Althoughthere are limited data on prescription drugexpenditures by cash-paying consumers, recentestimates suggest these consumers account forapproximately 21 percent of private prescriptiondrug expenditures at retail pharmacies (excludingmail order).10

Cash-paying consumers have limited, if any,ability to negotiate for better pricing. They maycomparison shop among a number of retailpharmacies and Internet pharmacy sites or joindiscount card programs, but still tend to pay the highest net prices of any purchasers for theirprescriptions.

Figure 2 illustrates the magnitude of cost differ-entials among the different classes of prescriptiondrug purchasers. In general, public programsexperience the greatest level of savings off theoriginal list price, although the cost to Medicaidis somewhat higher than for other publicprograms. MCOs, hospitals, PBMs, and otherinsurers pay a higher manufacturer price forprescription drugs than do the public programs.


$0 $10 $20 $30 $40 $50 $60

Net Purchase Price

Initial Price from Manufacturer

List Price (AWP)

50505050

24 34 37 52

24 40 40 40

Federal Supply ScheduleMedicaidInsurer/PBMCash Customer

Figure 2. Cost Differentials among Different Classes of Prescription Drug Purchasers

Source: Estimates based on Report to the President: Prescription Drug Coverage, Spending, Utilization, and Prices. Department of Health and Human Services, April 2000.

A closer look at how drug prices are determinedfor each of these purchasing groups will enableemployer plan sponsors to understand some ofthe dynamics of pharmaceutical pricing and theextent to which employer plan sponsors andprivate insurers indirectly influence pricing forprivate purchasers.

Pricing for Public Programs

As previously noted, public (government)outpatient prescription drug expendituresconstitute a relatively small proportion of totalU.S. health care expenditures. There are twoprimary reasons that the government exerts far more influence on pricing than do otherprescription drug purchasers:

1. Legislation regulates the amount paid forprescriptions under public programs.

2. Public purchasers can realize greatereconomies of scale because of the size of the populations they include.

Unlike many other countries around the world, theUnited States does not impose price controls onpharmaceutical products. Manufacturers are freeto price their products as they see fit, seeminglyconstrained only by the demand for each particularproduct. However, legislation mandates discountlevels for prescription drugs in order for them tobe covered under the public programs.

The following is a brief overview of the publicprograms that fund prescription drugs. For amore detailed analysis, see von Oehsen’s“Pharmaceutical Discounts Under Federal Law: State Program Opportunities.”11

MedicaidOf all the public programs, Medicaid may havethe most significant impact on prescription drugpricing. This program, jointly financed throughfederal and state funds, is designed to aid certainlow-income people, and covers more than 36million individuals.

Pharmaceutical pricing for the Medicaid drugrebate program is primarily regulated through theOmnibus Budget Reconciliation Act (OBRA) of1990. OBRA 1990 is administered by the Centersfor Medicare and Medicaid Services (CMS,formerly HCFA) an agency within the federalDepartment of Health and Human Services(HHS). OBRA 1990 specifies that pharmaceu-tical manufacturers whose products are listed onthe Medicaid formulary must give state Medicaidprograms the lesser of:

■ The “best price” offered to any purchasingentity, including wholesalers, retailers,nonprofit entities, or governmental entitieswithin the states (but excluding specific federal agencies), OR

■ The average manufacturer price (AMP)charged to wholesalers with a 15.1 percentdiscount for brand drugs or an 11 percentdiscount for generic drugs.


In the years after the Medicaid

best-price regulation took effect,

discounts beyond the specified

15.1 percent to any entity, public

or private, became less generous

and less common.


Section 340B

Enacted in 1992, Section 340B of the PublicHealth Service Act requires pharmaceuticalmanufacturers to provide reduced priceoutpatient drugs to eligible federally fundedgrantees, including federally qualified healthcenters, safety net hospitals, and clinics. Thestatute sets the maximum price that cannot be exceeded for certain outpatient and over-the-counter drugs, called the ceiling price. The ceiling price must be at least as low as the price that state Medicaid programs pay(lower prices may be negotiated). According to recent information available from the Officeof Pharmacy Affairs, there are more than 8,600 eligible covered facilities participating in the 340B program.*

Section 603 and the Federal

Supply Schedule

The federal supply schedule (FSS) is a list ofprices that assists federal departments,agencies, and institutions in purchasing specificproducts and services. Individual agencies cantake advantage of public programs’ combinedpurchasing power to extract greater discountsfrom various suppliers, including pharmaceuticalmanufacturers. The VA is in charge of collectivepharmaceutical purchasing; it negotiates,awards, administers, and maintains contractsunder two VA federal supply schedule programsfor pharmaceuticals.† The VA negotiates witheach manufacturer for its "most favored custo-mer" price, which is a discount equal to orgreater than what that manufacturer currentlyoffers a comparable customer.

Section 603 of the Veterans Health Care Act of1992 makes participation in FSS a requirementfor manufacturers who wish to participate inthe Medicaid program. Other rules require anymanufacturer wishing to contract with the VAto disclose discounts and pricing informationfor other customers. This allows the VA toanalyze and compare pricing and to targetparticular drugs for negotiation.

FSS prices are typically more deeply discountedthan even Medicaid best prices because manu-facturers and wholesalers can offer prices forthe FSS list without considering the Medicaidbest price. This creates a critical advantage forthe VA in its negotiations with pharmaceuticalmanufacturers.

Section 603 and the “Big Four”

Section 603 also mandates minimum drugdiscounts for the “big four” federal agenciesthat procure pharmaceuticals: VA, DOD,portions of HHS, and the Coast Guard. Eventhough these agencies benefit from FFSpricing, Section 603 sets a minimum discountto protect these purchasers from large fluctua-tions that can occur in prices on the FSSschedule. This price cap is set at 24 percentless than AMP to nonfederal purchasers (alsoknown as non-FAMP, the nonfederal averagemanufacturer’s price is the weighted averageof the prices paid by all wholesalers and thelower prices paid by manufacturers’ largestpurchasers). These prices reflect manufacturers’discounts and rebates, but exclude thediscounted prices paid by the VA and otherfederal agencies, and rebates paid to stateMedicaid programs. The manufacturer faces a penalty if the non-FAMP rises faster thaninflation (as measured by the consumer priceindex). As with the federal supply schedule,pharmaceutical manufacturers must agree tothese price caps for the “big four” in order to be a supplier to Medicaid programs.‡

* Health Resources and Services Administration, Office ofPharmacy Affairs (http://www.hrsa.gov/odpp)

† “How the Medicaid Rebate on Prescription Drugs AffectsPricing in the Pharmacy Industry,” Congressional BudgetOffice Papers, January 1996.

‡ The Federal Supply Service(http://www.fss.gsa.gov/aboutUs.cfm)

Regulations Governing Pharmaceutical Pricing for Non-Medicaid Public Programs

OBRA 1990 legally obligates participatingpharmaceutical manufacturers to give the Medicaidprogram the best price available in the privatemarketplace. In other words, if a pharmaceuticalcompany discounts a price to a particular MCOor other insurer, it is mandated to offer that priceor lower to all Medicaid programs nationwide.

The price paid by a state Medicaid program isnot determined at the time the prescription isfilled. The final cost of the prescription drug is determined retroactively on a quarterly basis.Manufacturers are legally required to supplyCMS with records of the prices charged to whole-salers, and using these records, CMS computesthe average manufacturer price (AMP) for alldrugs. The state Medicaid programs pay thepharmaceutical manufacturer for the cost of themedication, taking into account both the up-front discounts offered by the manufacturers and rebates “owed” on the basis of the volume of medications sold to Medicaid participants.These rebates help bring the costs down to thelevel specified by OBRA 1990.

The final price that Medicaid pays the manufac-turer remains confidential. Information aboutAMP is not publicly available, so a private plansponsor cannot determine how its pricingcompares to best price.

Forty-nine states and the District of Columbiacover drugs under the Medicaid program andapproximately 520 pharmaceutical companiesparticipate in this program.12 The Medicaid

program’s immense purchasing power creates acompelling incentive for participating manufac-turers to conform to the best price regulations;otherwise they will be barred from all Medicaidprograms — that is, their products will not belisted on, or covered by, the Medicaid formulariesnationwide.

While specific information on AMP is notavailable, reports from the Congressional BudgetOffice have shown that in the years after theMedicaid best price regulation took effect, discountsbeyond the specified 15.1 percent to any entity,public or private, became less generous and lesscommon.13 Discounts to private purchasers thatwere on average the equivalent of 36 percent offAMP in 1991 diminished to 19 percent in 1994.14

The reduction is understandable from the manu-facturers’ point of view: If discounts in excess of 15.1 percent are given to any commercialpurchasers, a commensurate discount must begiven to Medicaid purchasers.

After OBRA 1990, when non-Medicaid discountsbecame less generous, pharmaceutical costs wentup for other government purchasers as well asprivate purchasers. A cascade of legislation ensued.The resulting regulations specified that in order fora pharmaceutical manufacturer to participate inMedicaid programs, the manufacturer must agreeto the legislatively mandated price specified for theother governmental programs, which are generallyat least as low as the Medicaid best price.


If a pharmaceutical company

discounts a price to a particular

insurer, it has to offer that price or

a lower one to the entire Medicaid

system nationwide.

Pricing for Private Plan Sponsors:

Employers and Health Plans

The purchasing experience is more complex for private plan sponsors than for governmententities. The price paid by public programs islegislatively mandated and directly negotiatedwith the manufacturer, whereas the price paid by the private plan sponsor is a combination of discounts, fees, and rebates negotiated withintermediaries (such as PBMs and health plans).Moreover, private plan sponsors typically do nothave the same access to pricing information asgovernment purchasers. Later sections of thisreport explain the intertwined relationships and transactions that ultimately determine theemployer’s net cost for pharmaceuticals.


Private plan sponsors typically

do not have the same access

to pricing information as

government purchasers.


A PRESCRIPTION DRUG GETS FROM THEpharmaceutical manufacturer to the privately insuredindividual via a multifaceted distribution and pricing systemand a range of stakeholders. The complex relationships amongkey players in this multistage transaction chain directly andindirectly determine the ultimate cost of the prescription drugto employers and consumers.

The distribution of products through the pharmaceutical chainto the consumer is generally carried out by manufacturers,wholesale distributors, and pharmacies. The key players in thepharmaceutical marketplace can be seen in Figure 3.

Securing the best pricing for

the right goods and services

can be a daunting task for the

employer in a pharmaceutical

marketplace where the price

determination process is less

transparent than that for

other employee benefits.

III. Pricing for Private Insurers:The Flow of Money

Figure 3. Pharmaceutical Product Flow

Source: Market share estimates based on data from IMS Health, 2001.

While the flow of products through the pharma-ceutical chain is relatively straightforward, theflow of money involves a wider range of playersand complex financial relationships (see Figure 4).

Because of the number of players involved in theflow of money, the price paid to the pharmaceu-tical manufacturer for a given drug is rarely thesame as the price paid by the consumer. In 2001,the average estimated retail prescription cost of


Figure 4. Pharmaceutical Money Flow: Carve In

a drug to the consumer was $50.17. Of thisamount, the manufacturer received $37.93; thewholesaler received $1.67; and the retail phar-macy received $10.57. In other words, for every

prescription dollar sale at a retail pharmacy, 76 percent went to the manufacturer, 3 percentwent to the wholesaler, and 21 percent went tothe pharmacy.15


Figure 5. Pharmaceutical Money Flow: PBM Carve Out


PHARMACEUTICAL MANUFACTURERS HAVE BEENunder increasing scrutiny as the cost of prescriptions drugscontinues to rise and consume a greater share of the U.S.health care dollar. In 2000, according to IMS, U.S. prescriptiondrug sales (based on wholesale prices) totaled $145 billion, anincrease of 15 percent from the previous year.16 The pharmaceu-tical industry points to demographic changes in the populationand the rapid introduction of life-extending medications andprocedures as the primary reasons for this increase. Increasedutilization accounts for approximately 9 percent; price increasesfor 4 percent; and new medicines for 2 percent of the rise inprescription drug costs.17

Pharmaceutical manufacturers fulfill various roles, including(1) research and development of new drug therapies, (2)manufacturing products, and (3) marketing to inform themedical community and consumers. Not all pharmaceuticalmanufacturers assume all these roles. A number of lesser-known companies do not develop new therapies, but insteadmanufacture generic compounds — drugs that are no longerprotected by patents. After a drug’s patent has expired, genericversions of the same compound can be introduced into themarket to compete with the original branded version.

The pharmaceutical industry maintains that developmentcosts are the key drivers of escalating prices for patentedprescription drugs. The Tufts Center for the Study of DrugDevelopment estimates that the average cost of developing anew drug is $802 million.18 Another Tufts study reports thatthe time from initial drug creation to market approval hasincreased from around eight years in the 1960s to approxi-mately 14.2 years in the 1990s.19 Added to the high cost andincreasing amount of time required to bring a drug to marketis the fact that only a relatively small number of drugs everattain commercial success.

Manufacturers’ primary customers are wholesalers, retailpharmacy chains, mail-order pharmacies, hospital chains, andsome health plans. Occasionally an employer with an on-sitepharmacy will purchase drugs directly from the manufacturer,but the typical employer plan sponsor does not. Wholesalersare manufacturers’ largest group of purchasers, and wholesaleprices depend partially on volume purchased.

In 2000, U.S. prescription

drug sales totaled $145

billion, an increase of

15 percent from the

previous year.

IV. Pharmaceutical Manufacturers

Manufacturers offer up-front discounts topharmacies for purchasing their products, andrebates (back-end discounts) to wholesalers andPBMs that sell specific volumes of certain drugsor achieve a target market. Purchasers who areable to more closely manage the pharmacy benefitor influence the market share of a specific drugare likely to receive greater formulary rebates thanthose who do not.

How Manufacturers and

Wholesalers Determine Prices

Manufacturers and wholesalers use several pricingstandards to arrive at their pricing arrangements.To develop introductory drug prices within theUnited States, manufacturers use “employedfinancial modeling,” which takes into accountresearch and development costs, launch andmarketing costs, competitor prices, and estimatesof consumer and physician demand. Once anintroductory price has been set, the manufacturerestablishes a wholesale acquisition cost (WAC),which it uses as a baseline for sales to wholesalers.

In addition, the manufacturer establishes thebenchmark price known as the average wholesaleprice (AWP), which is published in recognizedsources such as FirstData Bank and its supple-ments or other nationally recognized pricingsources. Until recently, there has been nostandardized definition of AWP. A commonlyaccepted one is the manufacturer’s suggested

retail price; that is, the price that manufacturersrecommend that wholesalers use to resell a drugto retail pharmacies.20

To complicate matters, wholesale prices areindirectly related to public program prices; that is, WAC is loosely related to the averagemanufacturer’s price, the benchmark used todetermine the Medicaid “best price.” AMP is the average price paid by wholesalers for a drug,as calculated quarterly by CMS with recordssupplied by manufacturers of their transactionswith wholesalers. While this information is thebenchmark used in determining the price togovernmental purchasers, it is not made availableto private payers. This makes it difficult forprivate payers to assess the differences betweenAMP, AWP, and WAC.


Purchasers who are able to manage

the pharmacy benefit more closely

or influence the market share of a

specific drug are likely to receive

greater formulary rebates than

those who do not.


LIKE MOST OTHER TYPES OF WHOLESALERS,pharmaceutical wholesalers purchase goods from manufacturersand then resell them to other businesses. Wholesalers, whosemain customers are retail and mail-order pharmacies, buypharmaceuticals in bulk, sort them by customer needs, anddisperse them in usable quantities, selling them at a profit. They offer their customers either a full line of pharmaceuticalproducts or a narrow, more specialized line, such as oncologydrugs or biotech products. Some wholesalers sell to a widevariety of customers; others distribute pharmaceutical productsto a narrower customer base, such as physician offices ordiagnostic labs.

Pharmaceutical wholesalers have undergone significantconsolidation during the past 25 years, with the number offirms declining from approximately 200 in 1975 to fewer than 50 by 2000.21 The top five wholesalers now account formore than 90 percent of the entire wholesale drug market.22

While wholesalers have experienced lower operation marginsover the past several years, larger wholesalers are in a betterposition to negotiate prices with manufacturers.

The top five wholesalers now

account for approximately

90 percent of the entire

wholesale drug market.

V. Wholesalers

Others

Bindley Western Drug Co.

AmeriSource Corp.

Bergen Brunswig Drug Co. Cardinal

Health, Inc.

McKesson HBOC, Inc.6%

33%

9%

21%

11%

20%

Figure 6. Wholesalers’ Market Share, 2000

Source: Profile of the Prescription Drug Wholesaling Industry, Eastern Research Group, Inc., 2001

Although some of the largest drugstore chainsfind it more advantageous to assume the role ofwholesaler for their own retail operations than tooutsource that role, wholesalers continue to playan important role in the pharmaceutical distribu-tion chain. Their ability to buy drugs in largequantities creates efficiency in the marketplacethat is reflected in the discounted pricing theyreceive. Wholesalers alleviate the need for manu-facturers to negotiate and distribute products tonumerous pharmacies, and they pass along thesavings of economy of scale to pharmacies bysupplying smaller purchasers with products at alower price than they would pay manufacturers.

While wholesalers do not generally interactdirectly with employer plan sponsors, one majorwholesaler, AmeriSourceBergen (formerlyBergen-Brunswig), has recently offered PBM-type services to employers. Whether or not thisdirect wholesaler-to-employer connection willprovide additional savings to employer plansponsors remains to be seen.



ALL PHARMACIES — INCLUDING RETAIL CHAINS,food stores, mass merchandisers such as Target and Wal-Mart,independently owned pharmacies, and mail-order facilities —play a pivotal role in the distribution chain. They fill prescrip-tions for consumers and serve as a link between prescriptiondrug benefit administrators and manufacturers/wholesalers.Among their key functions, pharmacies:

■ Maintain adequate stock to provide products on an as-needed basis to consumers in a convenient way,

■ Provide meaningful information to consumers to ensure safe and effective use of prescription drugs, and

■ Facilitate billing and payment for consumers participating in group benefit plans.

As Figure 7 shows, the majority of dollars spent for prescriptiondrugs flow through retail pharmacies. In 2000, 64 percent ofsales were channeled through retail pharmacies (chains, indepen-dent pharmacies, and food stores with pharmacies), 12 percentthrough mail-order sales, and 24 percent through medicalfacilities (hospitals, nursing homes, clinics, home health care,and a number of federal facilities).23

VI. Pharmacies

Prisons, Universities,etc. (0.5%)

HMOs (1%)Home Healthcare (1%)

Federal Facilities (1.5%)

Long Term Care (3%)

MassMerchandisers

Clinics

Food Stores

Non-Federal Hospitals

Mail Service

Independent

Chain30%

10% 17%

9%

8%

7%

12%

Figure 7. U.S. Prescription Market Share by

Distribution Channel

Source: IMS Health, Retail and Provider Perspective™, 2002

Retail Pharmacies

For many Americans, the local retail drugstoreremains the primary distribution channel forprescription drugs, although other channels suchas mail order are growing in popularity.24 Accord-ing to the National Association of Chain DrugStores, there are approximately 50,000 retailpharmacies in the United States (20,000 areindependent and 30,000 are operated by chains,supermarkets, and the like).25

Retail pharmacy chains have merged to gain buy-ing power from manufacturers and wholesalersand to broaden and strengthen the regionalpresence of their stores. In 2001, the top fourdrugstore chains accounted for 51 percent ofmarket share compared to less than 25 percent in 1996.26

Ironically, one by-product of retail pharmacyconsolidation may be higher costs for employerplan sponsors. As retail chains grow in size andregional and national presence, many are able tocommand higher dispensing fees (fees paid to thepharmacist for filling the prescription) as a condi-tion for continued participation in a PBM’s orMCO’s network. As PBMs and MCOs pass the

cost on to plan sponsors, these higher dispensingfees translate into potentially higher prescriptiondrug benefit costs for employers.

Retail pharmacies obtain prescription drugs frommanufacturers or wholesalers. Some large nationalor regional chains (including pharmacies, foodstores, and mass merchandiser chains) purchasein large enough volumes that they can bypass thewholesaler and buy directly from the manufacturer,negotiating discounts equivalent to those that awholesaler would obtain from a manufacturer.These organizations already have the operationalinfrastructure necessary to bypass wholesalers —such as warehousing facilities, distributionvehicles, and inventory control systems.

Smaller retail stores, such as independent retailpharmacies and smaller retail chains, purchasedirectly from wholesalers or join group purchasingorganizations. As members of a GPO, smallerentities receive the benefits of volume purchasingby leveraging their combined purchasing powerto negotiate discount pricing from wholesalers oreven manufacturers.

Additionally, some retail pharmacies reduce theircosts through rebate deals for selling selecteddrugs or achieving market share targets for selectedmanufacturers’ drugs. These rebates provide anincentive for pharmacists to switch interchangeablemedications in favor of the one that has a rebate.


0%

10%

20%

30%

40%

199819971996

21

30.6 32.2

Figure 8. Market Concentration of Top Four

Retail Chain Pharmacies

Source: Standard & Poor’s Industry Surveys: Supermarkets & Drugstores, Aug. 2, 2001and Prescription Drug Trends, Kaiser Family Foundation, July 2000

One by-product of retail pharmacy

consolidation may be less

competition among the retail

pharmacies and potentially higher

costs for employer plan sponsors.

Although rebate payments to pharmacists aregenerally confined to prescriptions for cash-paying customers, pharmacists sometimes usethis substitution approach to fill prescriptionsfrom PBM and health plan members whoseplans cover all medications.

While mail order may offer the same level ofservice, the opportunity to establish a personalrelationship with a pharmacist is a priority tosome consumers.

Retail pharmacies generally do not have theeconomies of scale that large mail-orderpharmacies have; therefore their costs are higherthan those of mail-order pharmacies. Retailpharmacies can compete by offering a high level of service and convenience to consumers.They may, for example,

■ Stock a large and varied inventory ofpharmaceuticals at convenient locations;

■ Offer an opportunity for face-to-faceconsultations with pharmacists; and

■ Obtain payments from PBMs and other payers.

To be included in a pharmacy benefit admini-strator’s network, retail pharmacies are requiredto offer a guaranteed reimbursement formula for prescription drugs purchased through thebenefit plans.

This reimbursement formula specifies how thepharmacy will calculate the cost of the drug —including the discount — and the dispensing fee.

For a brand-name medication, the drug cost isusually determined by subtracting a negotiatedpercentage from the drug’s AWP. For a genericdrug, reimbursement may be determined in thesame way as for a brand drug, but is more oftenbased on an amount specified as the maximumallowable cost (MAC) per unit (such as tablet orcapsule) dispensed.

MAC PricingTo stabilize the cost variance of different genericproducts of the same compound, pharmacybenefit administrators calculate a maximumallowable cost based upon the listed averagewholesale prices of competing generic drugmanufacturers. The resulting proprietary pricelist varies from PBM to PBM. CMS also issues a MAC list, but only for generic products thathave three or more manufacturers or distributorson the market. Because of this limitation, not all generics have a corresponding CMS MAC.PBMs often utilize this government issued MACas the basis of their MAC list and supplement itwith other generic products.

Mail-Order Pharmacies

Mail-order pharmacies are typically available toconsumers whose plan sponsor includes them inthe benefit. Consumers send their prescriptionsby mail, fax, phone, or Internet to a centrallocation where the prescriptions are filled andmailed back to the consumer. Mail-orderpharmacies are popular with employer plansponsors, 87 percent of whom offered mailservice in 2001.27 While the majority of mail-order facilities are owned and operated by PBMs,a number of retail pharmacy chains also ownmail-order facilities.


Retail pharmacies offer consumers

convenience and the opportunity to

establish a personal relationship

with a pharmacist.

Mail order is best suited for maintenancemedications when treatment is predictable andmedication can be ordered in advance of need.Mail order is not appropriate for consumers with acute conditions, such as an infection thatrequires antibiotics, in which the treatment mustbe started as soon as possible.

Cost SavingsOne of the advantages promoted by mail-orderfacilities is their dispensing accuracy. Becausemail-order pharmacies have largely automatedthe prescription filling process, they typicallyoperate with less than a .01 percent error rate.

Mail-order pharmacies generally offer costsavings over retail pharmacies. By consolidatingpurchasing from consumers across the country,mail-order facilities can buy pharmaceuticals inbulk and dispense them economically throughautomated processes. As high-volume purchasers,these pharmacies can choose the most cost-effective source for products by negotiatingdirectly with manufacturers, or negotiatingvolume discounts with wholesalers.

PBMs that use mail-order pharmacies also have a greater opportunity than retail pharmacists toearn rebates by interchanging therapeuticallyequivalent products. When they are passed alongto employer plan sponsors, rebates can signifi-cantly reduce the cost of prescriptions. HHSestimates that PBMs receive rebates from manu-facturers ranging from 2 to 35 percent of certain

brand-name drug sales prices. PBMs pass onabout 70 to 90 percent of these rebates toinsurers or self-insured employers.28

Mail-order pharmacists can substitute generic orless expensive brand medications for high-costbrand medications more frequently than retailpharmacies because the pharmacist has moretime between when the prescription is receivedand when it is filled to contact the prescribingphysician and request a change. The costdifference between the generic drug and thebrand-name drug can lead to significant savings.

These factors combine to make mail-orderpharmacies potentially more cost-effective thanretail pharmacies. Industry sources with a stakein the mail-order business estimate that plansponsors using a relatively high percentage ofmail order can achieve approximately 10 percentin additional savings over retail.29 However, the cost-effectiveness of mail order relative toretail depends largely on the plan design —for example, the amount of copayments orcoinsurance — to ensure that the members’ costsharing properly reflects the larger prescriptions(for example, 90-days supply) at mail order.


Mail-order pharmacies are popular

with plan sponsors, 87 percent of

whom offered mail service in 2001.

According to some mail-order

providers, plan sponsors using a

relatively high percentage of mail

order can potentially achieve up to

10 percent in additional savings

over retail.

Other Pharmacies

Though not as widespread and accessible as retailand mail-order pharmacies, other pharmacies openunique opportunities for plan sponsors whoseneeds fit within these pharmacies’ special niche.

Internet PharmaciesStand-alone Internet-based “drugstores” were firstdeveloped in the late 1990s to offer consumers theconvenience of ordering prescription drugs online.For the most part, these businesses have failed toattract the number of customers initially antici-pated. Part of the reason may be that PBMs andother providers built their own Internet pharma-cies, making it unnecessary for plan members touse the stand-alone Internet pharmacies.

Also, in response to the Internet pharmacies,retail pharmacies developed their own Internetcapabilities. Some retail chains allow consumersto order refill prescriptions via the Internet andthen either pick them up at a nearby chain storeor have them delivered to the home. Thisincreases the number of options available toconsumers. They may choose to transmit theoriginal signed prescription from their physicianto the pharmacy via traditional means (fax, mail,or bring it to the store), or they may send theinformation through the Internet. The availabilityof these options varies by state.

In general, an Internet pharmacy constitutes adifferent contact interface for mail-orderdistribution. From a cost perspective, theefficiencies of mail-order purchasing applyequally to Internet pharmacies, with the addedadvantage of decreased administrative costsresulting from the efficiency of the Internetinterface. However, Internet pharmacies generallydo not provide the level of service offered at retailpharmacies or through a PBM-operated mail-order pharmacy.

Employer-Sponsored Worksite PharmaciesWhen employees are concentrated almostexclusively in one or more work locations, as inthe case of workers at a large manufacturingplant, employers sometimes find it cost-effectiveto operate a worksite pharmacy exclusively fortheir employees. This allows employers to offerall of the advantages of retail purchasing with theadded convenience of not having to leave thework site, while reducing costs. The employer,who is financially at risk for the operation of thepharmacy, usually hires a managing agency thatspecializes in worksite health facilities (such asclinics or nurse stations) to oversee the operation.


According to one manager of

worksite corporate health programs,

employers who offer worksite

pharmacies can save up to 20

percent on their prescription drug

coverage costs.

An Internet pharmacy constitutes a

different contact interface for mail-

order distribution.

Aside from the convenience to employees, aworksite pharmacy offers the financial advantageof eliminating the middlemen. According toCHD Meridian Healthcare, a developer andmanager of worksite corporate health programs,employers who offer worksite pharmacies cansave up to 20 percent on their prescription drugcoverage costs.30 The managing agent (e.g., CHDMeridian HealthCare) is able to take advantageof volume purchasing from manufacturers andwholesalers by pooling orders from all the facilitiesit operates. Likewise, it is able to obtain rebatesto the extent that its pharmacists are able toinfluence which medications are dispensed.However, these rebates are frequently not sharedwith the employer.

Given the specific circumstances needed to makethe employer-sponsored worksite pharmacyoption viable, this arrangement is not oftenutilized. There are at most 40 worksite pharmaciescurrently in operation in the United States.31

Managed Care Organization On-Site PharmaciesPrimarily located in MCO-owned outpatientfacilities, which house physicians’ offices as wellas some diagnostic facilities, MCO on-sitepharmacies are for the exclusive use of theMCO’s plan members, and are typically staffedby MCO employees. For plan members, thistype of pharmacy offers all of the services of aretail pharmacy plus the unique convenience of being able to fill a prescription at the samefacility as their physician’s office. While thenumber of customers for this type of pharmacy is limited to the participants in the MCO, thisarrangement presents some distinct advantages.

MCOs with on-site pharmacies can negotiatelower prices because, compared to almost anyother pharmacy, they have the ability to influencethe prescribing behavior of physicians throughthe use of their formularies. Moreover, to theextent that managed care organizations directlypurchase and distribute prescription drugs, somedata indicate that MCOs are able to achievelower acquisition costs than other privatelyfunded pharmacies.32


Some MCOs with on-site

pharmacies can negotiate lower

prices because they have greater

ability to influence the prescribing

behavior of in-house physicians.


IN PROVIDING PRESCRIPTION DRUG BENEFITS,employers usually contract for the services of a PBM, healthplan, or third-party administrator to administer the program.Some of these TPAs pay claims and exert some level of controlover dispensing; others only pay claims. Some are willing tobear risk; others are not.

Pharmacy Benefit Managers

PBMs are independent administrators that focus exclusively onpharmacy benefit administration. They manage drug purchasing,dispensing, and reimbursement for prescription drug benefitplans. It is estimated that about 45 percent of the U.S.population has pharmacy coverage directly through a PBM.33

The PBM industry has undergone significant consolidationover the past several years, with clear industry leaders nowemerging. The number of PBMs operating in the UnitedStates has shrunk from more than 100 companies in 1998, to 80 in 1999, to fewer than 60 in 2000.34 According to a first-quarter 2001 market survey, there are approximately 55 distinct PBM companies currently in existence.35 Thisindustry consolidation could affect employer plan sponsors by supplying them with fewer PBMs to choose from butpotentially more competitive financial deals as PBMs competeto capture market share from each other.

A PBM may do the following:

■ Purchase and dispense medications. PBMs purchasepharmaceuticals for their pharmacies — mail-order facilities— and dispense medications directly to consumers. Theynegotiate purchasing agreements and rebate contracts withmanufacturers for the products they dispense.

■ Pay claims.

■ Act as a financial intermediary between pharmacies and theplan sponsor, negotiating with retail pharmacies to contractreimbursement levels for prescriptions filled by plan members.They often create and maintain pharmacy networks.

■ Manage prescribing choices. PBMs have the opportunity toinfluence which drugs are ultimately dispensed at retail andmail order, thereby leveraging their negotiating power.

The number of PBMs

operating in the United States

has shrunk from more than

100 companies in 1998, to

80 in 1999, to fewer than

60 in 2000.

VII. Pharmacy BenefitAdministrators

They do this through formulary management,health and disease management, therapeuticinterchange, and educational programs that can

steer physicians and patients toward preferreddrugs.


The Formulary

PBMs develop a formulary (a list of prescrip-tion drugs that members are encouraged torequest and participating pharmacies areencouraged to dispense) as the foundation of their pharmacy management approach. This list is issued to inform physicians whichmedications are the most cost-effective andclinically efficacious, and therefore preferred, in a particular therapeutic class. When decidingwhether to add or delete particular drugs fromits formulary, a PBM looks at both the clinicaland financial impact.

From a clinical perspective, the PBM’s phar-macy and therapeutics committee evaluatesthe efficacy of the drug and determineswhether or not it should be included in thePBM’s list of formulary drugs.

On the financial side, a PBM negotiates withindividual pharmaceutical manufacturers forrebates or incentive payments for includingtheir drugs in the formulary. The inclusion orexclusion of a drug can significantly impact the manufacturer’s sales volume. Rebates may be based on the sales or market sharetargets for the manufacturer’s drugs soldthrough the PBM.

Manufacturers pay substantial rebates toPBMs for increasing their market share. Somesources estimate PBM rebate revenues to bebetween 5 and 25 percent of brand-name drugspending; other sources estimate the figure ashigh as 35 percent.

Examples of PBM Gross Revenue per Transaction

ADMINISTRATIVE FEES: $0.20–1.00

DRUG SALE TO RETAIL PHARMACY

NETWORK (SPREAD): $0.10–0.35

MAIL ORDER PRESCRIPTION SALES: $50–150

DISEASE MANAGEMENT: $5 PMPM

REBATES (% OF BRAND-NAME

DRUG SPENDING): 5–25%

Source: FAC/Equities, Research Report-Caremark Rx,October 2001

Health and Disease Management Programs

Some PBMs offer clinical programs that maintainwellness; provide case management servicesfor particular conditions, such as asthma anddiabetes; and disseminate educational informa-tion to patients and physicians. Manufacturersoften subsidize development and managementof these programs by the PBM, believing thatthey will help achieve greater product recogni-tion and influence physicians and consumerstoward a preferred therapy.

Pharmacy Claims Data

Pharmaceutical manufacturers often pay PBMs and health plans to supply them withsanitized claims data detailing the volume and types of drugs sold. These data providevaluable information for manufacturers aboutdrug utilization.

Therapeutic Interchange Programs

These programs are employed by PBMs tosubstitute generic or less expensive brandmedications for higher-cost brand drugs whenavailable and appropriate. The ability to makesuch changes is often dependent on the physi-cian’s willingness to modify prescriptions (hasnot indicated "dispense as written"), as well asthe patient’s willingness to change medications.

To o l s t o M a n a g e P r e s c r i b i n g C h o i c e s

For plan sponsors, the PBM’s volume discounts,rebate savings opportunities, and therapeuticinterchanges can yield significant cost savings.

Health Plans

Health plans adopt a range of strategies in admini-stering outpatient pharmacy benefits. A few healthplans reimburse patients for prescriptions on a fee-for-service basis, but health plans rarely use thismethod to process pharmaceutical claims becauseit allows no opportunities to reduce costs or con-trol utilization. More commonly, health plansemploy one of the following strategies:

■ Outsource claims payment to a Third-PartyAdministrator. There may be more efficienciesand greater savings to be gained through out-sourcing if the claims processing is centralizedand performed by an expert in that area.

■ Outsource pharmacy benefit management toan external PBM. With their primary focuson inpatient and outpatient medical care,some health plans prefer to use a specialist foroutpatient pharmaceuticals.

■ Operate their own PBMs. Certain largehealth plans with national or regional scopeown PBMs. These PBMs typically providededicated service to the health plan. Examplesinclude CIGNA, operating Rx Prime;PacifiCare, operating Prescriptions Solutions;and Wellpoint, operating Wellpoint PharmacyManagement. In some cases, these internal

PBMs eventually become a service of the healthplan that can be purchased on a stand-alonebasis. MCOs extend the integration of pharmacyand medical administration to include purchaseand distribution of pharmaceuticals, and evenoperate pharmacies within their outpatientclinics. For some organizations with a highdegree of care management, such as group modelMCOs like Kaiser Permanente, it makes sense to maintain control over pharmacy procurementand utilization. Kaiser procures its own pharma-ceuticals from manufacturers and dispenses tomembers at on-site pharmacies.

Given the range of administrative strategies thathealth plans use, the cost of pharmaceuticalcoverage can vary considerably from plan to plan.For plan sponsors with fewer than 5,000 members,a pharmacy benefit program provided through ahealth plan is likely to provide a better financialarrangement than direct negotiation with a PBMbecause the health plan essentially offers thesmaller plan sponsor a vehicle for aggregatepharmaceutical purchasing.

Health plans such as nationally and regionallybased MCOs tend to negotiate fairly competitivearrangements with pharmacy networks becausethey are able to ensure that a relatively largegroup of members will be using a relativelyconcentrated number of pharmacies. Most healthplans further reduce drug costs through formularymanagement programs that influence medicationpreference in the treatment of a particular medical


For plan sponsors, the PBM’s

volume discounts, rebate savings

opportunities, and therapeutic

interchanges can yield significant

cost savings.

National and regional health

plans obtain perhaps the most

advantageous pricing of any

nongovernmental entity.

condition. In 1999, about 97 percent of MCOsrelied on some type of formulary.36

MCO AdvantageAmong health plans, national and regionalmanaged care organizations obtain perhaps themost advantageous pricing of any nongovern-mental entity not only because of their volume of purchases but, more importantly, becausethese organizations are uniquely positioned tocontrol the prescribing behavior of their staffphysicians and members through the use of their formularies.

For many MCOs, formulary compliance isgenerally high because (1) the plan will not readilypay for more expensive medications when lessexpensive equivalents are available, and (2) parti-cipating physicians agree to enforce the plan’sutilization management programs, allowing theplan to influence the physician’s behavior beforethe prescription is written rather than after thefact. For the most part, physicians are cognizantof the formulary and prescribe accordingly. As aresult, among MCOs with formularies, approxi-mately 90 percent of members’ prescriptions arefilled with formulary drugs.37

A Congressional Budget Office study showedthat for MCOs that directly purchase anddistribute prescription drugs, acquisition costsare, on average, 18 percent below retail pharmacyacquisition costs, whereas hospitals’ acquisitioncosts are only 9 percent below. By comparison,

federal facilities such as VA hospitals achieve acqui-sition costs of 40 percent below retail.38 Amongprivately funded pharmacies, MCOs are able toachieve some of the lowest acquisition costs.

Third-Party Administrators (TPA)

TPAs may process pharmacy claims but are notinvolved with dispensing drugs or controllingutilization. Their approach can vary, with someTPAs subcontracting the pharmacy benefitadministration to a PBM. In other cases, plansponsors require the employee to pay the full cost of the prescription at the pharmacy andsubmit a claim form to the TPA for reimburse-ment. Whatever the approach, the TPA has noinfluence over what the retail pharmacy chargesor what is dispensed.


Among MCOs with formularies,

approximately 90 percent of

members’ prescriptions are filled

with formulary drugs.


EMPLOYER PLAN SPONSORS FACE A NUMBER OFchallenges, not the least of which is balancing cost containmentagainst the pressure to provide adequate pharmacy benefitcoverage for employees and their dependents. How much thepharmacy benefit ultimately costs each employer is the resultof many factors involving numerous parties and a chain offinancial transactions, many of which are played out behindthe scenes. While employers have no control over some ofthese factors (such as government regulations), others are opento their influence (for example, the choice between a healthplan and a PBM). Employers can use this influence to theirbest advantage by carefully evaluating how the following keydecisions will affect the goals of their benefit program.

To Carve in or Carve Out

Will the benefit be administered by ahealth plan or will it be carved out andmanaged by a PBM? A health planoffers the potential for an integratedhealth care approach, combininginformation from both medical andprescription drug data to identify at-riskmembers and implement disease andhealth management programs. In practice, however, there issignificant variation in the level of integrated care offered by health plans.

For smaller plan sponsors, health plans often offer moreaggressive pricing terms leveraged by their ability to purchaselarge quantities. On the other hand, they tend to limit theemployer’s flexibility to modify the benefit, and tend to offer alimited range of formulary options.

PBMs focus solely on the prescription drug benefit; therefore,they can work with employer plan sponsors to develop aneffective combination of appropriate employee access andpharmacy management. Many PBMs have also developedprograms to identify and manage the care of at-risk members.While these programs utilize pharmacy data only, lacking thepotential to integrate clinical and pharmaceutical care, someuse sophisticated methods to effectively use pharmacy data toidentify members with chronic conditions.

VIII. How Employer Plan SponsorsCan Contain Costs

PBMs regularly provide a range of formularyoptions. They are also likely to offer guaranteeson financial and service performance, and aretypically more flexible with plan design andprogram management customization. On theother hand, a PBM’s financial arrangements maybe complex and difficult to understand, andsome PBMs tend to be unwilling to disclose keyinformation about their pharmaceuticalagreements.

Risk Sharing

Will the employerpurchase an insuredpharmacy benefit, orassume financial risk andself-insure? Manyemployers purchase aninsured benefit so as toavoid the greater risk and potentially higher costsof providing prescription drug coverage. However,some employers prefer to self-insure, seeing thisas a way to provide greater input on how thebenefit is structured and provide greaterlikelihood of rebates from pharmacy providers.

For some plan sponsors, especially smalleremployers, limiting financial exposure bypurchasing an insured benefit may be moreadvantageous than choosing unlimited exposurealong with the guarantee of rebates. However, theinsured arrangement often subjects the employerto mandated benefits, premium increases, andspecific plan design, which may make theemployer more reliant on the health plan tocontrol costs.

Self-insuring allows the employer greater flexi-bility in plan design, formulary, and pharmacymanagement, and can be of particular advantageto national employers because it avoids coveragemandates that differ by state. However, self-insuring imposes a greater burden on the sponsorto implement programs to control costs.

Cost Sharing

What portion of the cost of prescription drugswill the employer pay? The proportion theemployer pays will depend on how the benefitplan is structured — that is, the amount of the employee’s share of cost (in copayment,coinsurance, and deductibles); how many andwhich drugs are covered and which are not; andwhether and how the formulary is tiered. MostPBMs and some health plans offer more thanone formulary for plan sponsors to choose from,with some formularies being more restrictivethan others. A restrictive formulary is believed to result in greater cost savings. It may, however,lead to member dissatisfaction over coveragelimitations or higher co-pays for a larger percen-tage of drugs.

Some plan sponsors also introduce variousutilization management strategies that can varythe level of coverage based on clinically relatedrules or prescribing guidelines. Plan sponsors alsouse more narrow retail networks to contain theirportion of costs.

Benefit Design

How much influence will the employer have overwhich drugs consumers use? Manufacturerdiscounts and rebates potentially are available toplan sponsors willing to allow their pharmacyadministrator to steer consumers and physicianstoward one drug rather than a competing drug.This is accomplished through plan design andformulary management decisions.


Plan DesignAn employer can use plan design to influencewhich drugs its employees use. By implementingdifferent cost-sharing structures, employers canhelp move employees from higher- to lower-costdrugs. Examples of plan design include:

■ Two-tier co-pays, which favor purchase of generic over brand medications;

■ Multi-tiered or percent co-pays; and

■ Programs such as prior authorization,mandatory generics, or mail-order andInternet reordering incentives.

Employers moving from open formularies to a two- or three-tier plan design can negotiatehigher rebate payments because manufacturerstypically provide PBMs and health plans withimproved rebates for formulary designs thatinclude incentives for members to utilize drugson preferred lists.

Formulary Management DecisionsFormulary lists can be more or less inclusive, andefforts to achieve compliance can be more or lessintrusive. Plan sponsors receive a greater share of formulary rebate earnings if they allow moreintensive intervention efforts, including therapeuticinterchange programs and targeted communica-tions to patients and physicians. While morerestrictive formulary management can result inincreased rebate earnings from the administrator,

this management strategy can pose difficulties incertain employer situations, as when benefits aredetermined by union negotiation.

Collective Purchasing

Will the employer engage in collective purchasing?Almost every player in the pharmaceutical distri-bution chain seeks the benefits of economies ofscale and enhanced bargaining power offered byaggregate or group purchasing. Wholesalerspurchase in large volume from manufacturers onbehalf of numerous smaller entities. Institutionalpurchasers such as hospitals and independentpharmacies form group purchasing organizations,or GPOs, to obtain advantageous pricing frommanufacturers and wholesalers. National chains(including pharmacies, supermarkets, and massmerchandisers) centralize purchasing on behalf of all stores in the chain. Mail-order facilitiesamass the purchasing volume of plan membersthroughout the country, enabling them to receivediscounted pricing. Some national and regionalMCOs purchase in large volume for their affiliatedpharmacies, clinics, and hospitals. PBMs leveragetheir nationwide presence to negotiate withpharmacies and manufacturers. Finally, publicprograms secure highly favorable pricing by usingboth legislative mandates and their own enormousadvantages in aggregate purchasing and ability tosteer participants toward preferred drugs.

Employer plan sponsors indirectly share in thefinancial advantages of aggregate pharmacypurchasing when discounted prices or rebates are passed on to them. They can also directlyparticipate in group purchasing through benefitplan consolidation and employer coalitions.

Benefit plan consolidation. When feasible,employers can decrease the number of distinctbenefit plans offered to their employees so thateach plan represents a larger group. This consoli-dation often increases bargaining potential.


Plan sponsors receive a greater share

of formulary rebate earnings if they

allow their PBM or health plan to

intervene more intensively with

physicians and consumers.

Employer coalitions. Although both nationaland regional employer health coalitions haveexisted for many years, collective purchasingappears to be more widespread for prescriptiondrug benefit administration services than forother health care benefits. The reason is thatPBMs offer aggressive financial terms tocoalitions or GPOs, such as deeper discounts(particularly at mail order) and more competitiveadministrative fees and rebates. It is possible foran employer plan sponsor to reduce prescriptiondrug benefit costs simply by joining a coalition,without necessarily changing plan design.

Collective purchasing does have its potentialdrawbacks. Collective purchasing can limit aparticipating plan sponsor’s ability to customizeits plan design, and may require compromise toachieve group consensus. Although a single plansponsor may be offered less aggressive financialterms than could be gained through collectivepurchasing, the plan sponsor is able to negotiatedirectly with a PBM to meet individual needsand it retains independent decision making.

For an in-depth look at the number of choices opento plan sponsors and the type of questions theymay want to ask their pharmacy benefit vendorsto ensure they are taking advantage of all factorsavailable to them in the purchase of prescriptiondrug benefits, see Prescription Drug Benefit Plans:A Buyer’s Guide.


It is possible for an employer plan

sponsor to reduce prescription drug

benefit costs simply by joining a

coalition, without necessarily

changing plan design.


PRICING ARRANGEMENTS WITHIN THE PHARMA-ceutical marketplace are constantly evolving and the regulatoryenvironment is continually changing. While the future isuncertain, some forces are likely to continue to driveprescription drug prices higher:

■ Advances in science and technology will continue togenerate new agents (including biotech) that replace olderdrugs; fill voids where no drug treatment previously existed;and generate more preventive drugs.

■ Consumer demand for prescription drugs can be expected togrow as the baby boomers age and need more medical care.

■ Direct-to-consumer advertising and manufacturers’ salesrepresentative activity with physicians will likely continue to create greater demand for certain drugs while increasingmanufacturers’ advertising and promotion costs.

New opportunities are surfacing as plan sponsors and otherpurchasers attempt to cope with these persistent cost increases.For instance, we can expect to see the following:

■ Rapid growth of cost-effective means of dispensing pharma-ceuticals, such as mail-order and Internet pharmacies;

■ Tactics that influence physician and consumer drug choices,such as tiered formularies, more restrictive formularies,generic incentives, and therapeutic interchange programs;

■ More extensive use of alternatives like employer-sponsoredworksite pharmacies, supplemental discount card programs,and defined contribution initiatives;

■ Pressures for more legislation to contain drug costs for someconsumer groups — especially in response to the burgeoningMedicare beneficiary population; and

■ More MCOs and physician groups taking steps to limitdrug representatives’ access to physicians.

In the coming decade, employers with successful pharmacybenefit plans will have a clear understanding of the relation-ships among the key players, keep a vigilant eye on the ever-shifting transactions that determine pharmaceutical pricing,and seize innovative solutions.

IX. An Evolving Marketplace

Average wholesale price (AWP) — A list of bench-mark prices set by averaging across the spectrum of prices charged to pharmacies by wholesalers forboth brand-name and generic drugs. The currentlist price is published in recognized sources,including Medi-Span, FirstData Bank and itssupplements, and Medical Economics’ Red Book.

Collective purchasing group — Also known as grouppurchasing organizations or GPOs, these are groupsof retail entities that join together to leverage theircombined purchasing power to negotiate discountpricing from wholesalers or manufacturers.

Formulary rebates — Remuneration received fromcertain drug manufacturers as a result of inclusionof those manufacturers’ products in the formulary.

Formulary — A list of preferred prescription drugschosen by a pharmacy benefit manager on the basisof quality and cost.

Generic dispensing rate — The percentage of genericdrugs within the total of prescription drugsdispensed under a program in a contract year.

Generic drug — A medication that is the chemicalequivalent of a brand-name drug with an expiredpatent. When a brand-name drug’s patent expires,other pharmaceutical companies can produce thesame active chemical compound and sell the drugunder its generic name, typically at a lower price.

Generic substitution rate — The total number ofprescriptions dispensed under a program in a con-tract year that consists of generic drugs, divided bythe total number of prescriptions dispensed underthe program in the same contract year for which ageneric is available on the market.

Health and disease management programs —Some PBMs offer clinical programs that maintainwellness, provide case management services forparticular conditions, such as asthma and diabetes,and disseminate educational information topatients and physicians. Manufacturers oftensubsidize development and management of theseprograms by the PBM, believing that they willhelp achieve greater product recognition andinfluence physicians and consumers toward apreferred therapy.

Maximum allowable cost (MAC) pricing —MAC prices are a schedule of pricing forgenerically equivalent drugs based upon the listedaverage wholesale prices (AWPs) of competinggeneric drug manufacturers. The federal govern-ment originally introduced the concept of MAC

pricing for generic medications in the Medicaidprogram as a mechanism to lower costs. The CMSissues a MAC price list for generic products thathave three or more manufacturers or distributorson the market. Because of this limitation, not allgenerics have a corresponding CMS MAC price.PBMs often utilize this government issued MAC asthe basis of their MAC list and supplement the listwith other generic products.

Pharmacy benefit managers (PBMs) — Organizationsthat help manage the purchasing, reimbursement,and dispensing of prescription drugs for employerplan sponsors or health plans. PBMs create andmaintain pharmacy networks. They also createformularies that influence physician prescribingpatterns and dispensing. Through formularyguidelines and their large customer base, PBMscan secure substantial manufacturer rebates.

Retrospective Drug Utilization Review (DUR) —Retrospective DUR is a program designed tomeasure and assess utilization, quality, medicalappropriateness, and appropriate selection and cost of prescribed drugs. It involves evaluatingpharmaceutical therapies after the medicationshave been dispensed.

Therapeutic interchange programs — These programsare employed by PBMs to substitute generic or lessexpensive brand medications for higher-cost branddrugs when available and appropriate. The abilityto make such changes is often dependent on thephysician’s willingness to modify prescriptions (hasnot indicated “dispense as written”), as well as thepatient’s willingness to change medications.

Third party administrators (TPAs) — Organizationsthat process pharmacy claims, but have no influenceover what the retail pharmacy charges, nor what isdispensed. Plan sponsors rarely use TPAs to processpharmacy claims without PBM support as it greatlyincreases expense.


Glossary

1. Centers for Medicare and Medicaid Services, Office ofthe Actuary, National Health Statistics Group. “Table3: National Health Expenditures, by Source of Fundsand Type of Expenditure: Calendar Years 1995–2000.”

2. Based on IMS Health. U.S. Mail Order Market, March 2000.

3. Standard & Poor’s Industry Surveys: Supermarkets &Drugstores, August 2, 2001 and Prescription DrugTrends, Kaiser Family Foundation, July 2000.

4. Mercer/Foster Higgins. National Survey of Employer-sponsored Health Plans. 2001.

5. MCO & PBM Strategies for Pharmacy Benefits: RecentResults, Current Practices, Future Plans. Third edition.Atlantic Information Services, Inc., 2001. HMO &PBM Strategies for Pharmacy Benefits: Recent Results,Current Practices, Future Plans. Third edition. AtlanticInformation Services, Inc., 2001.

6. U.S. Department of Health and Human Services.Report to the President: Prescription Drug Coverage,Spending, Utilization, and Prices. April 2000.

7. Aventis Pharmaceuticals. Managed Care Digest Series:HMO-PPO/ Medicare-Medicaid Digest. 2000.

8. Aventis Pharmaceuticals. Managed Care Digest Series:MCO-PPO/ Medicare-Medicaid Digest. 2000.

9. Centers for Medicare and Medicaid Services, Office ofthe Actuary, National Health Statistics Group. “Table3: National Health Expenditures, by Source of Fundsand Type of Expenditure: Calendar Years 1995–2000.”

10. Estimate based on IMS Health data as cited inNovartis Pharmacy Benefit Report, 2000.

11. Von Oeshen, William H., III. “Pharmaceutical DiscountsUnder Federal Law: State Program Opportunities.”Public Health Institute, Pharmaceuticals and IndigentCare Program, May 2001.

12. Centers for Medicare and Medicaid Services, MedicaidDrug Rebate Program, accessed 9/19/02(http://www.hcfa.gov/medicaid/drugs/drughmpg.htm).

13. “How the Medicaid Rebate on Prescription DrugsAffects Pricing in the Pharmacy Industry,” CongressionalBudget Office Papers, January 1996.

14. Ibid.

15. National Association of Chain Drug Stores (NACDS),Industry Statistics, 2000.

16. IMS Health, News Release: “IMS Health Reports 14.9Percent Growth in U.S. Prescription Sales to $145Billion in 2000.” May 31, 2001 (www.imshealth.com).

17. Ibid.

18. Tufts Center for the Study of Drug DevelopmentNews Release 11/30/01, accessed 9/19/02(http://csdd.tufts.edu/newsevents/recentnews.asp?newsid=6).

19. Testimony before the House Committee on Commerce,Subcommittee on Health and the Environment, 105thCon., 1st Session. April 23, 1997. Statement of JosephA. DiMasi, Director of Economic Analysis, Tufts Centerfor the Study of Drug Development, Tufts University,Boston, MA.

20. “Profile of the Prescription Drug Wholesaling Industry.”February 12, 2001. http://www.fda.gov/oc/pdma/report2001/attachmentg/toc.html

21. Lehman Brothers. “Macro Shock: How WholesaleDistribution Industries Are Being Revolutionized.”June 22, 1999 (http://www.nawpubs.org).

22. 2001 Healthcare Distribution Management AssociationIndustry Profile and Healthcare Factbook, p. 9.

23. Based on IMS Health, Retail and Provider Perspective™.2002.

24. IMS Health. “IMS Health Reports 14.9 Percent Growthin U.S. Prescription Sales to $145 Billion in 2000.”News Release, May 31, 2001. www.imshealth.com

25. National Association of Chain Drug Stores, 2000.www.nacds.org

26. Standard & Poor’s Industry Surveys: Supermarkets &Drugstores, August 2, 2001, and Prescription DrugTrends, Kaiser Family Foundation, July 2000.

27. Mercer/Foster Higgins. National Survey of Employer-sponsored Health Plans. 2001

28. Department of Health and Human Services. Report tothe President: Prescription Drug Coverage, Spending,Utilization, and Prices. April 2000.

29. Merck-Medco Managed Care, L.L.C. ManagingPharmacy Benefit Costs, 2000 edition.

30. “On-site Pharmacies Save Money.” Human ResourceExecutive Magazine, March 2001.

31. Personal communication from Stuart Clark at CHDMeridian, December 2001.

32. Congressional Budget Office Study, “How IncreasedCompetition from Generic Drugs Has Affected Pricesand Returns in the Pharmaceutical Industry.” July 1998.

33. HMO & PBM Strategies for Pharmacy Benefits: RecentResults, Current Practices, Future Plans. Third edition.Atlantic Information Services, Inc., 2001.

34. Ibid.

35. Ibid.

36. Aventis Pharmaceuticals. Managed Care Digest Series:HMO&PPO/ Medicare-Medicaid Digest. 2000.

37. Aventis Pharmaceuticals. Managed Care Digest Series:MCO-PPO/ Medicare-Medicaid Digest. 2000.

38. Congressional Budget Office Study, “How IncreasedCompetition from Generic Drugs has Affected Pricesand Returns in the Pharmaceutical Industry.” July 1998.

Endnotes


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