Medicare is trying to curb an opaque industry practice that inflates what some older and disabled people pay for medicines under the federal insurance program’s prescription-drug plan.
Medicare Part D, introduced in 2006 to extend drug coverage to beneficiaries, is provided through private health-insurance companies. Many insurers in turn contract with so-called pharmacy-benefit managers to administer their plans. Among other functions, these PBMs negotiate lower drug prices with pharmacies. But some companies, under a practice allowed by Medicare, then charge a higher price to health insurers and, ultimately, the government.
This approach is called “lock-in pricing” because the insurers pay the PBMs a set amount for the drugs, even if that differs from what the drugs really cost at the pharmacy. Lock-in-pricing can boost costs for Medicare beneficiaries because they pay a percentage of their drug costs. Also, the practice can more quickly drive consumers into the notorious gap in coverage known as the doughnut hole, where they generally must begin paying the full cost of their medicines. The doughnut hole kicks in when total drug expenditures by the beneficiary and the plan reach $2,510. Medicare drug plans start paying again once total expenditures reach $5,726.
Lock-in pricing “has a detrimental effect on the beneficiary because it pushes him into the coverage gap faster,” says Abby Block, director of the arm of the government’s Centers for Medicare and Medicaid Services (CMS) that runs the drug benefit. Under a current Medicare proposal, PBMs would be allowed to continue claiming the higher prices for reimbursement. But beneficiaries’ own drug costs would be calculated without the extra amounts included.
Pharmacy-benefit managers — including Express Scripts Inc., Medco Health Solutions Inc., and units of CVS Caremark Corp. and UnitedHealth Group Inc. — carry out their functions behind the scenes, including developing lists of covered drugs, maintaining networks of participating pharmacies and paying the pharmacies when beneficiaries buy drugs.
CMS figures that 19% of the hundreds of Medicare drug plans are using lock-in pricing this year, affecting 14% of the 25.8 million enrollees in the Medicare drug program. Other plans use what is known as pass-through pricing, in which PBMs charge insurers the same prices they pay the pharmacies.
CUTTING COSTS
Ways to control costs in a Medicare drug plan:
• Compare drug costs in different plans using the Prescription Drug Plan Finder at medicare.gov/mpdpf.
• Track your drug expenses and progress toward the ‘doughnut hole’ using your explanation of benefits.
• When possible, use generics, which tend to cost less than branded medicines.
Patients who take lots of drugs are most affected by lock-in pricing. For example, one female patient who last year regularly took six generics and two branded drugs had average monthly costs of about $256, according to the patient’s explanation of benefits. At that rate, the patient was on track to reach the doughnut hole in October. But without the PBM’s higher charge based on lock-in pricing, the patient would have paid $215 a month on average for the same drugs — and she wouldn’t have hit the doughnut hole until December, according to an analysis of data provided by the patient’s pharmacist.
The price spreads tend to be much greater for generics than for branded drugs. That’s because generics are much cheaper for pharmacies to acquire, making it easier for PBMs to negotiate down the prices they pay and less noticeable to patients and insurers when the extra costs are included.
PBMs that administer lock-in pricing plans argue that the method is common in the private insurance market and should be available for Medicare as well. Some PBMs say the extra money they make under the pricing method provides funds to encourage more consumers to use lower-cost generic drugs. Express Scripts, for instance, says it analyzes beneficiaries’ drug-purchasing habits and sends patients letters to explain how changes in their purchasing habits could lower their costs. And some companies, including UnitedHealth and CVS Caremark, which operate both as PBMs and insurers, have warned that if those extra amounts aren’t included in drugs’ costs, insurance plans that would be affected by any change may have to increase premiums, the monthly price that seniors pay for the plans.
To be sure, a large majority of older people are satisfied with their Medicare drug-benefit plan and say they are paying less for drugs than they were before the benefit existed, when seniors relied on a hodgepodge of private and public drug benefits, or made do without coverage. In a Wall Street Journal Online/Harris Interactive survey over the Internet of 571 U.S. adults age 65 or older, published in December, some 75% of respondents said their plan had saved them money and 83% said their plan was easy to use. Some 12% said they had to pay the full price for medicines because they had hit the doughnut hole.
The Kaiser Family Foundation projected this spring that the average premium for most Medicare Part D plans would rise nearly 17% to $31.99 a month in 2008 from $27.39 a month last year. That follows an average premium increase of 5.6% in 2007 from a year earlier.
The difference between what PBMs pay pharmacies and what they are reimbursed by insurers under lock-in pricing is generally a secret. Medicare itself doesn’t have this information and therefore doesn’t estimate the total cost of the practice.
For consumers it may be possible to determine the size of the price differences under lock-in pricing by looking at the full cost of your drug listed on your explanation of benefits, and asking your pharmacy how much it was paid. But many pharmacists are prohibited from disclosing pricing information under terms of their contracts with PBMs.
“It is absolutely unacceptable for any government benefit program to be based on questionable [numbers] or numbers that aren’t transparent or easily understood by a beneficiary,” says Michael Burgess, director of the New York State Office for the Aging, who says he was unaware of the issue until recently.
An analysis of explanation-of-benefits documents from consumers and payment data from pharmacies shows that the size of the price differences varies widely from as low as just a few dollars to well over $100. In one case, a patient filled a prescription for a 90-day supply, or 270 pills, of the generic antinausea medication prochlorperazine. The difference between what the PBM, Express Scripts, paid the pharmacy and the price that showed up on the patient’s explanation of benefits was $146.53.
Express Scripts spokesman Steve Littlejohn said it is “extremely rare” for price differences to get above $100, and it occurred in this case because the patient purchased the drug at a quantity greater than is typically prescribed. Broadly, Mr. Littlejohn said that PBM pricing on generics “is very competitive, and is generally far better than [uninsured] cash-paying customers obtain on their own.” He added that the differences on costs of branded drugs are much slimmer and that overall the company’s per-prescription profit margin is a “single digit” percentage.
Medicare has been battling lock-in pricing almost since the inception of the drug-benefit program. But efforts to curtail or stop the practice have faced numerous delays, amid intense lobbying on the subject.
“We thought we had a clear policy” barring lock-in pricing when the drug benefit was created, says Ms. Block of CMS. “We learned that there were different ways of interpreting a policy statement,” she adds.
Under Medicare’s current proposal, PBMs wouldn’t be able to hide the extra costs of drugs. Instead, they would have to declare the extra amounts as “administrative” costs that an insurance plan pays the PBM. Patients’ own drug costs would be calculated without the extra amount included, thereby easing the burden on consumers.
Although the proposal wouldn’t prohibit lock-in pricing, health-cost experts say the transparency and accounting that would be needed to include the extra costs as a separate “administrative” item could effectively curb the practice. CMS hopes to finalize its proposed regulation late this summer to go into effect in 2010.
The PBM trade group, the Pharmaceutical Care Management Association, opposes the CMS proposal because it says insurers should be able to choose what type of pricing they want. The drug benefit “program is working,” says Mark Merritt, the group’s chief executive. “Unless it can be decisively shown that one model offers more end savings for consumers or is decisively able to manage drug [costs] better for the program, we think there ought to be flexibility and choices.”
A spokeswoman for CVS Caremark, which administers Medicare drug plans as a PBM and also sponsors plans through its SilverScript Insurance Co. subsidiary, says lock-in pricing is used in its SilverScript plans and is also common in other Medicare plans for which CVS Caremark serves as the PBM. UnitedHealth says it uses lock-in pricing on United Rx Basic and United Rx Value Medicare plans.
Not all major PBMs use lock-in pricing in Medicare, including Medco Health and Humana Inc., an insurer that acts as its own PBM for its Medicare plans. Humana spokesman Tom Noland says pass-through pricing, the alternative to lock-in pricing, gives patients “the full benefit of our negotiated discounted rates with network pharmacies and also promotes transparency of pricing.”
In the meantime, Medicare drug-benefit participants buying drugs should consider checking low-price sellers of generic medications, such as Costco Wholesale Corp. and Wal-Mart Stores Inc., to see if their retail prices are lower than those in the insurance plan.
That is what Len Steinberg of Scottsdale, Ariz., did, and he found that Costco’s retail price for his generic nasal spray was about half of the drug’s total cost under his plan.
Mr. Steinberg, a 73-year-old retired employee-benefits consultant, says he now pays cash for certain cheap generics at Sam’s Club and Costco, rather than using his drug coverage. That allows him to avoid the doughnut hole and continue receiving coverage for his more expensive branded medications, he says.
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