NCPA Executive Update

NCPA Executive Update delivers insights on legislative, regulatory, policy, and industry developments from NCPA CEO B. Douglas Hoey, Pharmacist, MBA, to NCPA members and pharmacy leaders every Friday.

How Much $ Should a PBM Make on an Rx? | NCPA Executive Update | May 5, 2017

by NCPA | May 05, 2017

Dear Colleague,

Doug Hoey

A lot of time and effort is spent trying to figure out the cost for a pharmacy to dispense a prescription, but what about how much money a PBM should make on a prescription?

Both questions are especially relevant now. The state of Washington seemed to disregard an appropriate cost to dispense a prescription when setting its ultra-low Medicaid reimbursement—which is why NCPA, NACDS, and the Washington State Pharmacy Association have filed a lawsuit against the state. For PBMs, the question is relevant in light of Express Scripts Inc. (ESI) saying last week that it expects to lose Anthem after their 10-year contract expires at the end of 2019.

Anthem is ESI’s largest customer, accounting for about one-sixth of its annual revenue or $17 billion. You may remember that Anthem sued ESI in March 2016, alleging that the largest U.S. PBM had overcharged it for prescription drugs and seeking $15 billion in damages.

“Regardless of whether Anthem has a legitimate legal claim,” The Wall Street Journal observed last week, “there is no doubt that the contract was extraordinarily lucrative for Express Scripts as measured by unit profitability. That metric, reported as earnings before interest, taxes, depreciation, and amortization (EBITDA) per prescription filled, was $8.39 from the Anthem business in the first quarter. Express Scripts booked just $3.25 per prescription filled from other customers.”

How many of you out there would love to have a pre-tax net of $8.39 per Rx?

That $8.39 figure is interesting because it is similar to the number we came to during an internal analysis of ESI’s 10-K. Our estimates showed approximately $6.15 per “unadjusted” prescription by taking ESI’s 2016 reported EBITDA and dividing it by an estimated total number of unadjusted prescriptions. ESI (and other PBMs) “adjust” their prescription claims by counting 90-day prescriptions as three prescriptions. ESI processed 1.4 billion “adjusted” prescriptions, but was the actual middleman for just over an estimated 1.17 billion unadjusted prescriptions.

To be clear, the $6.15 figure already accounts for whatever rebate ESI passes along to plan sponsors and the hefty salaries of ESI’s executives. The retail pharmacy’s inventory that PBMs count as their own which misleadingly bloats their revenue and masks their plump profit percentage margins (read more in this exceptional Bloomberg story) is also accounted for in the $6.15.

As a point of reference, while the NCPA Digest, sponsored by Cardinal Health, doesn’t use EBITDA to measure pharmacy’s pre-tax earnings, the figure that most closely resembles it has independent community pharmacies earning on average less than $2 per prescription. For that $2, the pharmacy carries the inventory (not the PBM—see above Bloomberg story link), dispenses the product, counsels the patient, offers the convenience of being there for the patient whenever they are needed, and involuntarily serves as the PBM’s insurance coordinator.

Getting back to my original question, “What should PBMs be paid for what they do?” That answer can be debated, but I say whatever they should be paid it should be less than what the pharmacy receives! In the meantime, Anthem, an $85 billion corporation, says it didn’t have clarity on what it was being charged and is going the lawsuit route to see how badly it was being taken advantage of.

If ever there was a case for complete PBM transparency, this is it. Seniors, taxpayers, and pharmacists need complete PBM transparency to see if the amount that PBMs contribute to higher drug prices is appropriate or misplaced. Only then can a judgment be made on what PBMs should be paid.

Doug Hoey

P.S. The info from the NCPA Digest is vitally important. The financial survey that supports the Digest is available now and we need pharmacy owners/managers to fill it out. Those who fill out the full survey receive a free analysis of how their pharmacy compares to other pharmacies.