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James Flanigan

Medicare Bill a Boost for Drugs' Middlemen

June 29, 2003|James Flanigan

The landmark measure overhauling Medicare, which passed Congress last week, includes a prescription drug benefit that not only will help many of the nation's elderly but promises to provide a shot in the arm to an ever-evolving sector of the nation's economy: the pharmaceutical business.

Although the House and Senate still must reconcile key differences in their respective versions of the legislation, the bill ultimately sent on to President Bush is certain to close the drug-coverage gap that has marred the Medicare system since its creation in 1965.

And that, in turn, should mean big numbers for Big Business. About 16 million Medicare recipients -- 40% of today's total eligible seniors -- will have access to prescription medicines that have been out of financial reach of many.

Estimates vary widely, but analysts say that this will translate into as much as $40 billion a year in additional drug sales, over and above the nearly $100 billion already being spent by Medicare recipients on medication.

The obvious winners in all this are the giant pharmaceutical companies such as Merck & Co., Pfizer Inc., Eli Lilly & Co. and Bristol-Myers Squibb Co. -- all of which stand to profit from "millions more prescriptions being filled," says analyst Bill Fiala, of Edward Jones & Co.

But there are other, lesser-known corporate players that also stand to benefit. In particular, "group buyers" of medicines are poised to increase their importance in a process that must constantly juggle two conflicting aims: doing everything possible to keep people healthy while ensuring that costs are kept under control.

The phrase "group buyers" refers mainly to pharmacy benefit manager companies -- PBMs in the trade -- which purchase drugs at volume discount prices from the major pharmaceutical firms on behalf of corporate health plans, insurance companies and other clients.

One of the aims of the new Medicare legislation, those in the industry say, will be to organize seniors into large purchasing groups -- through preferred provider organizations or other clusters -- so that PBMs can purchase drugs on their behalf.

Viren Mehta, head of a New York firm that specializes in investments in drug and biotech companies, predicts that group buyers of pharmaceuticals soon could boost their "share of lives covered" to three-quarters of all Americans, including Medicare recipients.

Call it the triumph of the middlemen.

"With our discounts, we can save our customers -- and the federal government -- money," says Mac Crawford, chief executive of Caremark Rx Inc., one of the larger such firms at $7 billion in annual sales.

The PBMs have grown quickly, if quietly. In little more than a decade they have come to generate annual revenues totaling about $100 billion. In all, there are about 60 PBM companies, including AdvancePCS Inc., Express Scripts Inc. and industry leader Medco Health Solutions Inc., which Merck is preparing to spin off this year.

It isn't just low pricing that PBMs are trying to bring to the table, either. Many are moving to change the very way in which medicine is distributed.

Specifically, companies such as Caremark achieve their greatest savings when they send patients their drugs through the mail, eliminating the overhead of the corner drugstore. Crawford says that Caremark typically negotiates discounts of 15% to 20% with drug manufacturers. "But we get 40% savings for our clients and seniors when we distribute by mail order," he adds.

Caremark has built four distribution centers, employing 500 pharmacists, from Fort Lauderdale, Fla., to Phoenix, to facilitate its mail order operation. Not surprisingly, this trend threatens traditional retailers such as Longs Drug Stores Corp., Walgreen Co. and Rite Aid Corp.

As their role has expanded, the PBMs have been touched by their share of controversy. Federal prosecutors in Boston and Philadelphia have launched inquiries into discounts involving, among others, Medco and Caremark. The question is whether they are truly squeezing the pharmaceutical industry to get low prices -- or conspiring to fatten profits for all concerned.

The PBMs counter that their rivals from the drugstore chains are stirring up the inquiries.

Yet for all of the hullabaloo, there is little question that PBMs are here to stay. The efficiencies they bring to the marketplace make perfect sense when baby boomers are aging, more drug therapies than ever are being encouraged -- and, now, Medicare will support even more drug prescriptions.

It's all in the great tradition of American medicine. Passage of the original Medicare legislation during the Johnson administration set off a great boom in hospital construction and health-care research.

We'll see the consequences of this new legislation over most of the next decade, as once-homey purveyors of headache powders and cough medicines continue to industrialize.

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James Flanigan can be reached at jim.flanigan@ latimes.com.

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