"The main purchasers of drugs are distributors such as McKesson and Cardinal Health. They buy the drugs from the manufacturers in large quantities, letting them get a discounted price, and supply them to retail pharmacies like Walgreen and CVS Caremark, so that they can fill the prescriptions of their customers at the other end of the chain.
The PBMs' role is to handle the payment side of filling prescriptions. They contract with the pharmacies and insurance companies to negotiate what drugs will be covered by a plan (called the formulary) at what cost. When you give your insurance card to the pharmacist, the pharmacist contacts the PBM to determine the cost of that prescription to you and to your insurance company. If the drug your doctor has prescribed is on the formulary, then it's covered and you pay a certain, lower price. The PBM also handles the payment transfer between the insurance company and the pharmacy. It is paid a fee for all this and oftentimes earns a spread from the negotiated prices between payors and pharmacies."
I believe the above is an excellent explanation of what PBMs do by Jim Mueller in the premium report on ESRX.
Catamaran had done an investor presentation recently where they stated that their primary job is to drive cost savings in healthcare.
We know, that means, providing the prescription to the patients at the lowest possible cost. I would think, eliminating the PBM itself would be the most efficient way to drive this saving. Yes, some PBMs also function as mail order pharmacies. I am not proposing that this function should be eliminated.
I never understood or accepted the notion that we really need a PBM to drive down costs of prescriptions.
Generally in the supply chain, you have manufacturers, wholesalers and retailers. In some instances, we have manufacturers that directly sell to consumers. In other instances, we have retailers that directly source the merchandise from manufacturers eliminating the wholesaler completely. But we usually don’t have a middleman between a retailer and wholesaler responsible for “driving cost savings in healthcare”.
CTRX’s last quarterly revenue was approximately 5B. 6.4% was the gross profit or approximately 314 MM. Similarly, ESRX sold around 23.6B worth of prescriptions, and pocketed a gross profit of 1750MM i.e 7.4% of sales. Just these two companies cost us Americans an additional 2 billion dollars in one quarter. We paid 28B for prescriptiosn that really cost them 26B. I wonder if PBMs didn’t exist, would we really be charged more than 28B for these prescriptions by Walgreens, CVS and Walmart pharmacy, and other small and large pharmacy’s in the country?
Now, I am not proposing that we should have a markup free world. A supply chain will have essential participants, and all of them will charge a markup. That's why we need to have fewest possible middleman.
My guess is, just like consumers seek out lowest price for various consumer items, they would seek out a pharmacy selling these prescriptions for the lowest price. (The trick would be for insurers to put some kind of incentive, or implement a fixed reimbursement rate. For e.g. 20% above the wholesale price or whatever the PBMs currently pay to the McKessons and Carinal Health’s or AmerisourceBergen’s of the world)
I am just of the opinion, that regardless of how insurers figure out a trick to keep the cost of prescriptions low, there has got to be a way that does not involve the PBM. Otherwise, no matter how much saving they drive in, there is always going to be that 6-8% markup.
Discl Long CTRX because I don’t think the world is perfect, and the PBMs are not going anywhere in the near future. However, I do believe the system will become more streamlined during my lifetime. That's why CTRX is not a buy and hold forever stock for me. [more]
I thought this was interesting, so just wanted to share it here, and also, so I can refer to this for myself in the future. [more]
Now the latest news is that some Credit Card issuers will charge you a "inactivity charge" . This means, if you have a credit card that you havent used in years, but still decided to keep it to keep your FICO score high, could cost you. [more]
Responding to very interesting comparison between WMT and AMZN in an attempt to justify why Market is paying 70 times earnings for AMZN [more]
I read the newyork times editorial today to bring myself uptospeed on the healthcare reform bill progress. I learnt that an attempt to introduce a reform has been attempted since 1935. Bill Clinton had also attempted one such reform bill with about a 270,000 words document. [more]