Employer groups and insurance organizations that offer a prescription drug benefit have turned to pharmaceutical benefits managers in an effort to control spiraling annual expenditures for outpatient prescription drugs, which in the last 10 years have increased from $21.4 billion to approximately $50 billion [5, 6]. Pharmaceutical benefits managers currently supply pharmaceutical benefits to an estimated 100 to 115 million persons in the United States [7-9]. The largest companies—PCS Health Systems, Medco Containment Services, Diversified Pharmaceutical Services (DPS), Caremark, Diagnostek, and ValueRx—are believed to manage benefits for more than 80% of these enrollees Table 1 [10]. The number of persons participating in pharmaceutical benefits manager programs increased approximately 50% between July 1993 and July 1994 [11]. Approximately 90% of health maintenance organizations and 57% of physician practice organizations currently provide managed pharmacy benefits, sometimes through an externally hired pharmaceutical benefits manager [12]. If managed care continues to grow, the use of pharmaceutical benefits managers may continue to increase [13]; some analysts expect that these organizations will control nearly three quarters of the U.S. pharmaceutical market in 5 years [14].

As these programs have grown, their role has expanded from administrating pharmaceutical benefits to sharing responsibility for the care of patients with specific diseases. The structure of the industry has also changed. Until 1993, most pharmaceutical benefits managers were independent advocates for patients and employers and were beyond the scope of pharmaceutical manufacturers. Since 1993, several of the largest pharmaceutical benefits managers have been purchased by pharmaceutical manufacturers; these purchases raise new questions about these programs.

We review the development and functioning of pharmaceutical benefits managers and their evolving role in the health care marketplace. We obtained data by reviewing the literature, interviewing clinical pharmacy directors or similar personnel at nine of the largest pharmaceutical benefits managers, and interviewing benefits managers at eight large, randomly selected employers.

Background

Pharmaceutical benefits managers offer comprehensive drug benefit packages to managed care organizations, employer groups, and other payers by providing generic substitution programs and brand-name products that are substantially discounted compared with those sold by retail pharmacies. These companies manage or "carve out" the provision of prescription drugs independent of other medical services, acting as intermediaries among pharmaceutical companies, third-party payers, and pharmacies. The companies also contract with selected pharmacies to manage the distribution of prescription drugs to patients.

Formularies

All pharmaceutical benefits managers offer a formulary program to enrollees. In an "open formulary," pharmaceutical benefits managers encourage the use of selected drugs but provide full reimbursement for nonformulary drugs. In a "closed formulary," the companies usually allow patients access to nonformulary drugs only after they pay a financial penalty, often a higher copayment or the price difference between a formulary product and its related nonformulary product. The formulary determines the benefits package that each health plan or payer receives.

To develop their formulary programs, pharmaceutical benefits managers have established pharmaceutical and therapeutics committees, composed of internal and external clinical pharmacists and consulting physicians. Only products approved by the Food and Drug Administration are considered. Other certification criteria are developed from published and unpublished information on the costs and effects of products. Pharmaceutical benefits managers rarely do original research on the clinical effectiveness of products before considering the products for inclusion in a formulary. One pharmaceutical benefits manager reported that, because so many therapeutically equivalent drugs are available, cost and community practice often act as the determining factors in formulary decisions (Table 2).

Health maintenance organizations and employers may choose from among various formulary programs. Employers generally accept the formularies without modification. When working with health maintenance organization clients, pharmaceutical benefits managers can serve in a variety of capacities. Health maintenance organizations may adopt prespecified formulary programs, or pharmaceutical benefits managers may customize a formulary devised primarily by the employees of the health maintenance organization or can attend pharmacy and therapeutics committee meetings with varying degrees of involvement. Pharmacists working for pharmaceutical benefits managers who attend these meetings can adopt a passive role by providing supplemental information or can have a more active role by providing clinical and financial data on drugs and offering recommendations on formulary content. The medical literature suggests that physicians tend to comply with these preferred drug lists [15-17].

Physician and Pharmacist Interventions

While providing discounted drug prices for consumers, pharmaceutical benefits managers use a range of financial incentive programs for pharmacists and physicians. Intervention mechanisms can include mandatory generic substitution policies or incentives to use less expensive therapeutic alternatives for specific indications (therapeutic substitution). Pharmacists are frequently paid to use both formulary and generic products. Other financial incentives for pharmacists to encourage the use of formulary products include additional dispensing fees that are based on the generic prescription rate or, more commonly, awarded to pharmacists for each generic prescription [17, 18]. One pharmaceutical benefits manager fixed a maximum allowable cost that corresponded to the generic price, forcing the pharmacy to accept a financial loss whenever it dispensed a more expensive, brand-name product.

When physicians are confronted with pharmacist recommendations through the mail or by telephone, it is unclear whether they are told that pharmaceutical benefits managers offer financial incentives to pharmacists. State district attorneys, the Department of Health and Human Services, and the Food and Drug Administration have begun to investigate pharmacist incentives provided by drug manufacturers [18-20]. One pharmaceutical benefits manager has entered into a consent decree with 17 state attorneys general, which requires that these affiliations be disclosed when a physician is contacted [21].

All pharmaceutical benefits managers use a range of interventions aimed at physicians. "Educational newsletters" are the standard channel of communication through which these organizations inform providers about drugs and disease management strategies. Several pharmaceutical benefits managers report that they distribute physician report cards to payers. These report cards compare physicians' pharmaceutical costs and formulary and generic prescription rates with those of other specialists in the provider's field.

Drug Utilization Review

Drug utilization review is a prospective or retrospective program that analyzes patterns of pharmaceutical use and is intended to prevent inappropriate prescribing [22]. To further encourage cost-effective prescribing, pharmaceutical benefits managers use this review to inform payers and physicians about the types and volume of drugs prescribed and the prescribing patterns of individual physicians. The literature on the success of drug utilization review remains underdeveloped. Programs instituted in private firms have shown that pharmaceutical costs decrease with the use of drug utilization review [23], and Kaiser Permanente [24] reports that its health maintenance organization drug program improves patient compliance with therapeutic recommendations.

Critics report that the assessment of the potential effectiveness of drug utilization review has been hampered by biased and poorly targeted trials, incomplete data, and limited technologic ability to gather clinical information on patients [22]. Pharmacists in a hospital setting expressed only moderate satisfaction with the ability of drug utilization review to change physician prescribing behavior [25].

Disease Management

As the role of pharmaceutical benefits managers continues to develop, these organizations are evolving from suppliers of pharmaceutical products into partners with health maintenance organizations in the delivery of health care services. Managed care organizations have adopted a strategy of "disease management," defined as a comprehensive program for improving the care delivered to defined groups of patients. Asthma and diabetes treatment programs have developed unique patient and physician education strategies that emphasize comanagement and cost-effective therapies [24-27]. Some programs include financial risk-sharing agreements between the pharmaceutical benefits managers and health maintenance organizations, whereby payments for treatment are based on the health outcomes of the population served [28]. Disease management programs under risk-sharing agreements transform pharmaceutical benefits managers into providers of care for patients enrolled in these programs [29].

Selection and Oversight of Pharmaceutical Benefits Managers

Employers usually select pharmaceutical benefits managers in the hope of reducing company benefit expenditures. They evaluate pharmaceutical benefits managers on the basis of price, market stature, breadth of pharmacy networks, and customer service. One company chose its pharmaceutical benefits manager when representatives of the manager approached the company's benefits department and outlined its extensive physician and patient communication network (Table 3).

The employers that we contacted were unaware of the specific selection criteria used by pharmaceutical benefits managers to create formularies. Three employers we contacted understood the process as simply a combination of clinical and cost considerations, and one reported having been assured that all of the drugs considered met quality standards. Employers' knowledge of incentive structures varied greatly. Two of the employers vehemently opposed the provision of financial incentives to physicians and pharmacists for following pharmaceutical benefits manager formulary recommendations, even though such incentives are common practices. One employer applauded direct communication between the physician and the pharmaceutical benefits manager, whereas others expressed indifference.

Only one company that we contacted included an employee satisfaction agreement in its contract with a pharmaceutical benefits manager. This agreement requires the organization to pay a fine to the employer if it does not achieve a certain score on employee satisfaction surveys. None of the other companies that we contacted reported that they monitored the effects of pharmaceutical benefits managers on employees' overall health.

Limitations of the Current Model

Pharmaceutical benefits managers offer the potential to improve pharmaceutical use in the United States by improving therapeutic practices and reducing pharmaceutical costs. However, these organizations cannot track the effect of their interventions on overall health outcomes. Most pharmaceutical benefits managers still cannot link patients' medical claims data to prescription drug information. Increases in the costs of over-the-counter drugs, physician visits, and hospitalizations and in other untracked expenditures may offset the reduced prescription charges that pharmaceutical benefits managers offer [5, 6, 30-32]. Although some studies show that restrictive drug lists result in cost savings [33, 34], others suggest that reducing pharmaceutical use through formularies may result in more prescriptions of other drug classes, increased total pharmaceutical costs, longer hospital stays, and questionable effects on overall health care expenditures [5, 6, 22, 30-32].

Many researchers worry that restricting drugs through formularies results in the reduction of medically necessary drug prescriptions [34], needless exposure to drug side effects [35-37], and irrational substitutions, particularly in noninstitutional settings [6, 30, 38-40]. The content of physician information available from pharmaceutical benefits managers, coupled with physician profiling, could dissuade a physician from appropriately prescribing nonformulary products [41-48]. Finally, the traditional clinical wisdom that physicians should know only a few drugs in any class very well [49] may be offset by frequent changes in formularies that are driven by price competition.

Mergers of Pharmaceutical Benefits Managers

Pharmaceutical benefits managers have traditionally been viewed as adversaries by pharmaceutical manufacturers because of the leverage of their concentrated purchasing power. In 1993, Merck & Co. determined that vertical integration through the purchase of Medco could preserve its threatened market share and profits and give itself access to patient-level outcomes data [50-54]. The move led to an unprecedented series of similar mergers. Within less than a year, the largest pharmaceutical benefits managers had been purchased by or formally allied with pharmaceutical manufacturers. Eli Lilly has acquired PCS Health Systems, DPS has been acquired by SmithKline Beecham, Caremark has entered into agreements with Pfizer and Bristol Myers-Squibb, and ValueRx has allied with Pfizer.

The mergers have created the potential for conflicts of interest in the development and administration of pharmaceutical benefits programs [42], and they raise doubts about the motives of the drug manufacturers making these acquisitions [7]. Several public statements by pharmaceutical manufacturers suggest that they will use the purchases of the pharmaceutical benefits managers to boost sales of their products. For example, the chairman of Lilly, addressing his company's purchase of PCS, stated that "This [purchase] will help sell even more Prozac" [55]. After the Medco acquisition, Merck's volume for its own therapeutic products increased 10% in the second quarter of 1994 and 15% in the third quarter [56, 57]. Some analysts question whether pharmaceutical companies will actually publish information from pharmaceutical benefits manager databases that points to the superiority of another manufacturer's products [58].

Pharmaceutical benefits managers that did not ally with pharmaceutical manufacturers anticipated conflicts of interest in the operations of manufacturer-owned pharmaceutical benefits managers and worried about the potential ability of these manufacturer-owned organizations to underbid their competitors. Because of these merger activities, pharmaceutical benefits managers have been investigated by the Food and Drug Administration, the Federal Trade Commission [18, 59, 60], and the Inspector General of the U.S. Department of Health and Human Services [42]. Eli Lilly has signed a consent decree with the Federal Trade Commission, which guarantees that its subsidiary, PCS, will offer an open formulary along with other formulary options. In addition, Eli Lilly will appoint a pharmacy and therapeutics committee in which the majority of members hold no affiliation with PCS or Lilly and will give no preference to Lilly products. The consent decree also ensures that Lilly will provide the financial discounts and rebates demanded of other manufacturers and includes several provisions that preclude monopolistic market control and unfair price competition by the company [61].

A report by the General Accounting Office, released in November 1995, has heightened worries about the effect of these mergers. The report reveals that since the negotiations for the Merck-Medco merger began, Medco's formularies substantially increased their representation of Merck drugs. The General Accounting Office also found that Medco removed some competitors' products that competed with those of its parent pharmaceutical company. The preliminary findings of the General Accounting Office leave room for further investigation into the potentially anticompetitive practices of manufacturer-owned pharmaceutical benefits managers [10].

At the time of our survey, which was conducted from February 1995 through April 1995, manufacturer-owned pharmaceutical benefits managers could not describe any formal mechanism by which they had implemented the requirements of the Eli Lilly consent decree. The General Accounting Office report found that manufacturer-owned pharmaceutical benefits managers had procedures in place to prevent the transfer of confidential price information from pharmaceutical benefits managers to their parent manufacturers but also that the adequacy of these measures has been questioned [10].

In our informal survey, employers indicated widespread concern about mergers between pharmaceutical benefits managers and drug manufacturers. Indeed, one company had eliminated a pharmaceutical benefits manager from consideration for hire because of an alliance between a manufacturer and the manager. Although most of the companies surveyed had not taken action to minimize potential conflicts of interest or to ensure unbiased service, one employer had requested data from a pharmaceutical benefits manager to confirm that the parent company's drugs were not over-represented in the formulary.

Discussion

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Pharmaceutical benefits managers have the potential to deliver cost savings to patients, employers, and managed care organizations and to provide patients, physicians, and employers with valuable clinical oversight to prevent the accidental and deliberate misuse of prescription drugs. They also offer the potential to accumulate useful data for health outcomes research [14, 62]. However, their inability to track the long-term outcomes and costs of disease poses complexities that researchers and the organizations are still striving to overcome. Until comprehensive, integrated analyses are possible, these organizations will lack the ability to definitively show the effect of their programs.

In the short term, employers can make specific demands of pharmaceutical benefits managers to obtain better data on the effect of pharmaceutical benefit programs. Managers can 1) maintain a formulary development process that is open to review; 2) establish a system of external physician review to aid employers in their understanding of pharmaceutical benefits manager formularies and policies; 3) regularly use a request-for-proposal process that seeks information on formulary criteria and clinical provisions; 4) maintain some stability in the formulary so that physicians can learn to use formulary drugs more effectively; 5) more closely track drug-drug interaction rates, adverse reaction rates, and patient compliance with prescribed drug use; 6) monitor the effects of physician "education" and profiling on prescription behavior and patient outcomes; 7) include such data in quarterly reports to employers; and 8) establish a system that instructs pharmacists to inquire about patients' health status whenever prescriptions are refilled.

Structural change consumes an ever-increasing amount of time in the health care system. Organizations that exist to facilitate the delivery of health care services must be accountable for meeting this responsibility [61]. Pharmaceutical benefits managers have the potential to improve the practice of medicine through more effective use of prescription drugs. However, there are multiple junctures in the complex pharmaceutical benefits manager process at which patient care might be adversely affected. The implementation of policies to monitor the quality of pharmaceutical benefits managers will provide incentives to improve services and ensure prudent development of these programs.

Dr. Abernethy: Division of Clinical Pharmacology, Georgetown University Medical Center, Med-Dent Building NE 403, 3900 Reservoir Road, NW, Washington, DC 20007.

Dr. Sulmasy: Center for Clinical Bioethics, Georgetown University Medical Center, Building D Room 238, 4000 Reservoir Road, NW, Washington, DC 20007.