Payments by Managers of Drug Plans Face Scrutiny

By MILT FREUDENHEIM

Published: December 11, 2003

he pharmacy benefit companies that manage drug coverage for most working Americans commonly offer millions of dollars in payments to important customers when contracts with them are signed, according to industry executives and consultants.

The practice is receiving widespread attention after Justice Department officials on Tuesday accused Medco Health Solutions, one of the largest pharmacy benefit managers, of violating kickback laws by paying $87.4 million to Oxford Health Plans.

Both Medco and Oxford, which received the money two years ago, asserted in statements that the payments were legal and appropriate.

But some industry experts said such payments often added to the drug costs that pharmacy benefit managers, or P.B.M.'s, were hired to shrink.

Mark Campbell, chief executive of Innoviant, a pharmacy benefit manager based in Wausau, Wis., that covers 500,000 people, said it was "not uncommon today for a number of P.B.M.'s to offer prospective customers up to $10 per covered person," theoretically to cover transition costs of installing the new contract. He added, however, that Innoviant did not.

For example, $10 per covered life would be $1 million for an employer with 40,000 employees and 60,000 dependents, Mr. Campbell said. "That is excessive," he said, "because $10 per person is not really necessary to cover the costs of a transition."

Kevin Nagle, chief executive of Envision Pharmaceutical Services, a pharmacy benefit manager based in Folsom, Calif., and Aurora, Ohio, agreed, and said his company also did not make this kind of payment. "To me that front-end money is questionable," he said.

Sean Brandle, a pharmacy benefits consultant with the Segal Company consulting firm, said he had seen the upfront offers made by all the big P.B.M.'s he deals with.

"We try to steer customers clear from it," he said.

Some payments are advances against future rebates from drug manufacturers that reward large purchases of certain drugs. Gerry Purcell, a consultant to health plans based in Atlanta, said one example of this was the several million dollars in a package of upfront payments the Texas Employees Retirement System collected from Medco.

Sheila Beckett, executive director of the system, which covers 521,000 state employees, retirees and dependents, said Medco "did advance some portion of the anticipated rebates that we were supposed to earn" in a 1999 contract no longer in effect. She said she did not remember the size of the advance.

Jeffrey Simek, a Medco vice president, said the upfront payments "are not unique to Medco, and they are considered standard across the P.B.M. industry." He added: "The upfront payments are generally associated with transitional expenses, typically associated with the number of covered lives, and some are related to future rebates."

Stephen Littlejohn, a vice president of Express Scripts, another big pharmacy benefit manager, said that "under certain circumstances, Express Scripts sometimes may reimburse a client for actual and reasonable costs, such as the production of new cards and membership materials, incurred in transitioning its plan to Express Scripts from a competitor and in educating members about their pharmacy benefit."

Oxford said in its 2001 annual report that Medco paid it $4.5 million to lighten costs relating to moving Oxford members to Medco and $82.9 million for a five-year commitment to provide data about members' health claims and consulting services.

"It would be crass to call it 'buying business,' " said Patricia Wilson, an independent consultant who advises large companies on drug benefits. "We are warning every customer to watch the follow-up. Are they paying 30 percent or 40 percent more than the price of generic drugs, for example?"

She says she tells clients, "The advance payment is coming out of your hide, one way or the other."

The kickback accusations against Medco were added by the United States attorney in Philadelphia, Patrick L. Meehan, to a broader civil complaint against Medco filed in September. The complaint linked the payments to Medco's contracts with Oxford and Blue Cross and Blue Shield plans to provide drugs to federal employees and people in government-financed health care programs.

The new filing also added Robert J. Blyskal, a former Medco executive vice president, as a defendant. He was accused of "conducting a coverup of intentional destruction of patient prescriptions at Medco Health's Tampa II mail-order pharmacy in 1998.''

James Rohn, a lawyer for Mr. Blyskal, declined to comment.