Sunday, June 10, 2012

Rent-Seeking: A Traditional PBM's Pathway to Riches

Rent-seeking is a term economists use to describe an organization's ability to generate above average economic returns without providing any relative incremental value. Wikipedia may explain it a bit better.

Wikipedia Definition

The simplest definition of rent-seeking is to expend resources in order to gain wealth by increasing one's share of currently existing wealth instead of trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce total social wealth. It is important to distinguish between profit-seeking and rent-seeking. 

Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. Rent-seeking generally implies extraction of uncompensated value from others without making any contribution to productivity.

The origin of the term refers to gaining control of land or other pre-existing natural resources. In a modern economy, a more common example of rent-seeking would be political lobbying to obtain government benefits/subsidies or to impose burdensome regulations on competitors in order to increase market share.

Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition. The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks tariff protection, quotas, subsidies, or extension of copyright law.

How does a traditional PBM employ a rent-seeking methodology?

Most recently, the FTC approved the acquisition of Medco by Express Scripts. The net effect of this purchase is not a creation of new wealth, but instead a reduction in social wealth. The FTC approval of this acquisition will ultimately benefit only the government, Express Script and Medco stockholders.

Patients won't pay lower prices or see a real difference in their health care outcomes. Retail pharmacies and PBM competitors certainly won't benefit from this acquisition. History tells us that greed will supersede social responsibility almost 100% of the time. Express Scripts has used the government, with powerful lobbying, to attain near monopolistic privileges.

Some state governments, Texas for example, require PBMs to take on the role of a fiduciary. The problem is that this requirement doesn't extend to private enterprise. I say it's a problem not because the government hasn't interfered, but the opposite. Private enterprise hasn't exercised its right to require a fiduciary role from their PBM. A transparent PBM, acting as a fiduciary, shares the risk and essentially agrees to be 100% transparent in all of its related business dealings.

This transparency includes sharing third party pricing contracts with pharmacies and rebates from manufacturers. It also includes offering real-time access to MAC price lists for retail and captive mail-order pharmacies. As specialty drugs become a larger part of the dispensing mix, it's imperative to be fully aware of pricing arrangements between biotechnology companies as well. Here is an example of a typical fiduciary disclosure in a transparent PBM contract.


“No Name PBM” owes a fiduciary duty to Client and shall discharge that duty in accordance with the provisions set forth herein.

(a) “No Name PBM” shall perform its duties with care, skill, prudence and diligence and in accordance with the standards of conduct applicable to a fiduciary in an enterprise of a like character and with like aims.

(b) “No Name PBM” shall notify Client in writing of any activity, policy or practice of “No Name PBM” that directly or indirectly presents any conflict of interest with the duties imposed by this subsection.

(c) “No Name PBM” shall provide Client all financial and utilization information requested by the Client relating to the provision of benefits to covered individuals through the Client and all financial and utilization information relating to services to Client. “No Name PBM” providing information under this paragraph may designate that material as confidential. Information designated as confidential by “No Name PBM” and provided to Client under this section may not be disclosed by the Client to any person without the consent of “No Name PBM”.

(d) "Covered individual" means a member, participant, enrollee, contract holder or policy holder or beneficiary of a covered entity who is provided health coverage by the covered entity. "Covered individual" includes a dependent or other person provided health coverage through a policy, contract or plan for a covered individual. With regard to the dispensation of a substitute prescription drug for a prescribed drug to a covered individual the following provisions apply.  

(1) If “No Name PBM” makes a substitution in which the substitute drug costs more than the prescribed drug, “No Name PBM” shall disclose to the Client the cost of both drugs and any benefit or payment directly or indirectly accruing to “No Name PBM” as a result of the substitution.

(2) “No Name PBM” shall transfer in full to the Client any benefit or payment received in any form by “No Name PBM” either as a result of a prescription drug substitution under subparagraph (1) or as a result of “No Name PBM” substituting a lower priced generic and therapeutically equivalent drug for a higher priced prescribed drug.

(e) If “No Name PBM” derives any payment or benefit for the dispensation of prescription drugs based on volume of sales for certain prescription drugs or classes or brands of drugs shall pass that payment or benefit on in full to the Client.

(f) “No Name PBM” shall disclose to the Client all financial terms and arrangements for remuneration of any kind that apply between “No Name PBM” and any prescription drug manufacturer or labeler, including, without limitation, formulary management and drug-switch programs, educational support, claims processing and pharmacy network fees that are charged from retail pharmacies and data sales fees. “No Name PBM” disclosing information under this paragraph may designate that material as confidential. Information designated as confidential by “No Name PBM” and disclosed to Client under this paragraph may not be disclosed by the Client to any person without the consent of “No Name PBM”, unless ordered by a court of this State for good cause shown. Prior to making the disclosures required by this paragraph, “No Name PBM” may require the Client to agree in writing to maintain as confidential any proprietary information. That agreement may provide for equitable and legal remedies in the event of a violation of the agreement. That agreement may also include persons or entities with whom the purchaser or prospective purchaser contracts to provide consultation regarding pharmacy services.

(g) In addition to any other remedy provided by law, a Client aggrieved by a violation of this section 3(g) may file an action in superior court for injunctive relief and an award of compensatory and punitive damages. The superior court shall award to the Client who prevails in an action under this section reasonable costs and attorney's fees.  

Do you have such language in your contract? If you are dealing with a traditional PBM chances are you won't get it! Traditional PBMs make money by rent-seeking and not by being fully transparent. And if you think health care reform will fix this I urge you to think twice. The solution is to deal only with PBMs willing to sign on as a fiduciary. This begs the question, "how many checks are you willing to cut for traditional PBM services without knowing exactly what you're getting in return?" 

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