The War on Drug Costs

Implications: While the Wall Street Journal has done an admirable job exposing many of the ways PBMS have boosted profits at the expense of their customers they have not yet arrived at the flaws which make the current business models of PBMS susceptible to competition.

Analysis:

The WSJ has done a nice job of exposing the underlying reasons for high presciption drug prices as a product of questionable PBM business practices and Why Generic Doesn't Always Mean Cheap continues that trend Health plans have been moving members to generic for years but alas all generics are not created equal and the pricing varys widely widely especially when you compare retail pharmacy costs for generics which recently came of patent with prices being charged by Costco & Sams. Take Zocor for example;

Case in point: Zocor, one of the most commonly prescribed pills in the U.S., which lost patent protection last June. Multitudes of patients have switched to generic versions of the cholesterol-lowering drug, lured by lower insurance co-payments or the promise of a significant price drop for those who pay out-of-pocket.

To be sure, even for the uninsured, generics still typically cost less than their branded counterparts. And at big clubs such as Costco Wholesale and Sam's Club, out-of-pocket prices for generics do generally plummet. Simvastatin costs $6.97 for 30 pills of the 20-milligram dose at a Sam's Club for which the company provided price information.

At Costco Wholesale, whose Web site yesterday listed the common dose of generic Zocor at $11.96, the company says that even at such prices, Costco is making a profit. Charles Burnett, senior vice president of pharmacy at Costco, says the company can acquire the 30-tablet, 20-milligram dose of simvastatin for $2.71. He says the price on costco.com today will fall to $10.66. Patients are allowed to use the pharmacies of clubs such as Costco and Sam's Club, even if they aren't members.

Chain drugstores argue that their business model is different from a company like Costco or Sam's Club. CVS, Rite Aid and Walgreen Co. all say that about two-thirds of their revenues come from prescription drugs.

"We don't sell snow tires," says Mike DeAngelis, a spokesman for CVS/pharmacy. "The core of our business is the pharmacy."

Mr. DeAngelis wouldn't say how much CVS pays for generics but confirmed profit margins on generics are generally bigger than for branded drugs. On all drugs, Mr. DeAngelis says, CVS's prescription-drug profit margins are 2% to 3%. A spokeswoman for Walgreen gave a similar figure, and a spokeswoman for Rite Aid said the company's prescription-drug margins were very thin.

It strikes me that the WSJ would have recognized retail pharmacies are simply doing to consumers what PBMS have been doing to them; marking up a generic by an obscene factor and then citing the paper thin margins on drugs. The difference of course is the employer payors have no idea what the PBM actually reimburses retail pharmacy. And people wonder why CVS bought Caremark?

As I do enrollment meetings for my clients, employees are rapt with attention when you share specific ways to reduce their out of pocket expenses for maintenance drugs.

More employers need to start comparing what shows up on their bi-weekly PBM bill with the costs quoted on Costco and Sam's website for generic maintenance meds. There is absolutely nothing proprietary about generic prescription pricing. Prepare for outrage--the margins are even bigger than snow tires.

CVS raised their bid 3 times for Caremark and Express Scripts upped the ante once. Does anyone truly believe CVS would behave this way to acquire a business with 2-3% margins.

By the way Walgreens owns its own PBM and reported earnings up 25% last quarter. The company cited "brisk sales and a wave of new generic drugs that widened margins"