If they didn’t siphon so much money out of the health care system while doing so little for patients in return, you’d almost have to admire pharmacy benefit managers (PBMs) for their creativity. It seems every time a profit-padding door is closed, they open a window.

Consider their share of manufacturer rebates one slowly closing door.  Health plan sponsors (employers, et. al) contract with PBMs to run their drug benefit. Some employers erroneously believe they receive 100% of the rebates paid by drug makers. Instead, PBMs often retain large portions of these payments before passing on the rest to the plan.

PBMs can become so consumed with maximizing their share of rebate dollars, that they actually steer patients away from lower-cost generics toward rebate-eligible brand-name drugs.  While it’s still a widespread practice today, it is less common after being exposed through litigation and through other means.

With drug-switching on the decline, PBMs still enjoy substantial, though undisclosed, revenues from manufacturer rebates. Though that cash cow is also gradually getting thinner for several reasons:

1)    Fewer opportunities to play games.   Brand drugs represent about 35% of all prescription drugs dispensed, down from just fewer than 50% five years ago. 

2)    A concerted effort by consumer groups, the National Community Pharmacists Association and others has raised the awareness of the games being played with brand rebates.

3)    Some employers (but by no means all) are savvier; asking tougher questions about rebates and more aggressive in making sure the plan sponsor gets a bigger share of them.

So, if that’s the door that’s closing, where’s the open window? Drug sleight-of-hand known in the industry as “repackaging.” Here’s how it works.

The average wholesale price (AWP) for medication is akin to a new car’s sticker price. Nobody pays it, but in this case it is the basis for the prices pharmacies pay for drugs and are reimbursed for dispensing them. Community pharmacies typically receive take-it-or-leave-it contracts from PBMs setting their reimbursement on formulas based on the manufacturer’s AWP (AWP minus 20%, etc.).

PBMs are under no such restriction when it comes to paying themselves. In Monopoly-money fashion, they use their standing as both drug benefit auditor and mail order pharmacy to ignore the manufacturer’s AWP and set whatever, higher AWP they want!

That allows them to hoodwink employers into thinking they’re getting a deal on mail order drugs and a better discount off of AWP, when in fact the AWP for the drug, and possibly its overall cost to the employer, is higher than it would be at a community pharmacy. It’s just one of the ways mail order “savings” can be illusory for plan sponsors and, ultimately, patients.

Consider the following example:

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The patient wants to fill a prescription of Lipitor 20mg #30

Option #1


Patient goes to a community pharmacy:


The pharmacist orders Lipitor 20mg #30 from their wholesaler, which comes with an AWP of $147.04

Option #2

Patient sent to a mail order pharmacy:

The mail order pharmacist orders Lipitor 20mg #30 from a wholesaler, which comes with an AWP of $147.04

The pharmacy is paid AWP – 14% plus dispensing fee, which is calculated as

$147.04 – $20.59+ $2 = $128.45

The PBM/mail order pharmacy can start “repackaging” drugs, in doing so they can create a new package size with a much higher AWP.  For example purposes, a new package size might be #60 with an AWP of $408.60.

The community pharmacist then counsels the patient on how to use the drug appropriately, possible interactions with other drugs, and the importance of adherence.

The mail order pharmacy then sends the patient Lipitor 20mg #30 with an AWP of $204.30. At AWP – 22% the PBM pays itself:

 $204.30 – $44.95 = $159.35.

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The combination of PBM Caremark with CVS has brought the practice into the retail pharmacy environment as well. The company has its own manufacturer national drug code (NDC) number it uses when it repacks drugs.  Since CVS Caremark is paying itself for both mail order and retail prescriptions, this can be very lucrative.


Of course, this leads to higher employer costs but the smoke and mirrors make the employer think they are getting a good deal and that the cost increase is just because the manufacturers keep raising the prices.


What little risk there is of exposing this practice in detail is mitigated by the contractual roadblocks PBMs set up to prevent employers and other plan sponsors from looking behind the curtain.


This is yet another reason why health plan sponsors need greater transparency from pharmacy benefit managers. Provisions in health care reform offer a good start and should be retained in the final legislation.