Are Pharmacy Benefit Management Companies Really Evil?

By Andrew Dillard - March 5, 2012 | Tickers: CVS, ESRX, MHS | 0 Comments

Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinions of our bloggers and are not formally edited.

This morning I was reading a colorful article by CNBCs Senior Stock Commentator Herb Greenberg about the problems with the pharmacy benefit management industry. In his article Herb egregiously attacks PBMs such as Express Scripts (NASDAQ: ESRX), Medco (NYSE: MHS) and CVS Caremark (NYSE: CVS) arguing that PBMs are one step removed from a legal drug cartel and the inner-workings of PBMs and the mechanics of the deals they strike with drug companies are simply too complicated. The primary goal of this article I believe is to protest the pending merger between Express Scripts and Medco, because as Mr. Greenberg puts it, Since when is less competition ever good for all but investors? However, the half-hearted attempt at writing a unbiased article has clouded the point Mr. Greenberg is making and unfairly painted PBMs as an evil industry. Mr. Greenberg could not be farther from the truth, and heres why.

In the article, Mr. Greenberg over-simplifies the role that PBMs play in the pharmacy marketplace saying, Theyre the middleman between you, your drug store and your insurer.

This statement implies that PBMs do nothing more than sit in the middle and collect fees for simply processing prescription claims, thus increasing the cost of medicine to pharmacy and patients (a subject that many commentators on a previous article I wrote on Walgreens and Express Scripts feel is valid). The truth of the matter is PBMs save money from the healthcare system. Over the next decade, the Pharmaceutical Care Management Association predicts that PBMs will save over $2 trillion in drug costs from the healthcare system, a point that even Mr. Greenberg was keen to highlight (sort of). Despite these predicted savings, can PBMs really be considered to be too powerful or evil?

At the end of Mr. Greenbergs article he cites a source who proclaims that pharmacy benefit management companies have developed and grown into a business model that pits their profit incentives against the financial needs of their clients and, at times, the health of patients.

Mr. Greenberg is implying is PBMs will stop at nothing to protect their profit even if it is at the expense of their clients or patients. Lets think about this for a minute. Do you really believe that Express Scripts or Medco is purposely keeping drug prices high or not passing savings onto their clients? Even if Medco and Express Scripts are allowed to merge and possess 35% of the prescription claims processing, the competition among the remaining PBMs is great. Clients are constantly looking for ways to save money on their prescription drug programs they provide for their employees. Those clients are extremely sensitive to pricing that is different between the PBMs. For any PBM to keep prices greater than their competition would mean revenue suicide as clients would simply move to another PBM with better rates.

The idea that PBMs have become too powerful is a laughable thought. Companies like Express Scripts, Medco or any of the other PBMs that operate in this industry are providing important and tangible products and services to their clients and ultimately their patients. While there may be many frustrations and concerns over the lack of transparency in the operating environment that PBMs operate in, there is no incentive for any PBM to operate in a malicious or irresponsible manner. The truth is, Pharmacy Benefit Management is a highly complex industry that has multiple facets and is constantly changing. PBMs are providing positive quantitative results for the healthcare system as a whole. While there certainly is room for improvement, PBMs are not the root of all evil.

Andrew Dillard

Andrew Dillard is a member of The Motley Fool Blog Network.

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Are Pharmacy Benefit Management Companies Really Evil?