Inside the ‘Scorpion Room’ Where Drug Price Secrets Are Guarded

Published by Bloomberg

Susan Hayes can’t forget the trek from the parking lot, across a dusty patch of Arizona desert, to a dingy building without air conditioning and through a door marked “Scorpion Room.”

“Like something out of the Bates Motel,” said Hayes, a fraud investigator for employers, unions and health plans, and a longtime industry critic. In the Scorpion Room, she pored over hundreds of pages of nonpublic contracts between drug companies and a now-defunct pharmacy-benefit manager, a powerful middleman that processes claims and negotiates discounts and rebates.

Office space may be less primitive than it was 15 years ago, but PBMs still often put auditors in secure rooms, limit the number of contracts they can see and restrict and review note-taking, according to people in the industry and contracts reviewed by Bloomberg. It’s an unusual level of control compared with other industries, said David Farber, an Indiana University accounting professor whose research has focused on auditing and its oversight.

“I’ve never heard of circumstances where restrictions like this are imposed,” Farber said. “The audit risk is enormous.”

PBMs occupy a key crossroads of the health system, acting as a nexus among insurers, employers and drug companies. Through a complex web of agreements they help decide what drugs are covered by a patient’s insurance, and how much they’ll cost at the pharmacy counter. The problem, say critics, is that opacity makes it hard for employers to know how much the PBM is paying and profiting on each transaction — an impression reinforced by restrictions on who can audit them and how.

Swelling Costs

Anthem Inc., an insurer, last year said it’s being overcharged $3 billion a year by PBM Express Scripts Holding Co. The PBM has repeatedly denied that, though it said last week that it may lose Anthem’s contract after 2019. Anthem has said no decision has been made.

In Washington, President Donald Trump has repeatedly complained about high drug prices, saying in January that they are “astronomical.” It’s unclear what the administration will do about them. Meanwhile, the bill to repeal and replace Obamacare, which the U.S. House of Representatives plans to vote on Thursday, doesn’t specifically address drug prices.

Express Scripts, CVS Health Corp. and OptumRx (a unit of insurer UnitedHealth Group Inc.) process about 70 percent of the nation’s prescriptions. Contracts vary widely, often tailored to a specific client’s needs, and with a unique set of conditions and restrictions.

PBMs often say that restrictions protect trade secrets. Rebate deals “are proprietary and are a competitive advantage,” said Brian Henry, a spokesman for Express Scripts. Drugmaker agreements “are transparent to the clients,” said Chief Executive Officer Larry Merlo of CVS, which cooperated in almost 1,700 client audits last year.

OptumRx spokesman Andrew Krejci declined to comment about his company’s audit practices or possible restrictions.

Wrangling Rebates

The most carefully guarded secrets of the PBM industry involve tens of billions of dollars in rebates they collect from drug companies. Those payments help drugmakers secure favorable spots on medication menus that PBMs offer to millions of patients. On average, these and other discounts mean manufacturers lop 44 percent off list prices of brand-named drugs, according to Quintiles IMS Holdings Inc. Express Scripts and CVS say they pass along to clients about 90 cents out of every dollar in rebates.

Auditing and accounting experts interviewed by Bloomberg say that while that may be the case, it is often hard to confirm. Any restriction on audits “gives an advantage to the PBM,” said Craig Garthwaite, a health economist at Northwestern University’s Kellogg School of Management. “PBMs have no reason to want to shine a light on it.”

Mark Merritt, chief executive officer of the Pharmaceutical Care Management Association, a PBM trade group, said members are faithful servants of clients, which include employers, unions, and insurers.

“The plan sponsor is in the driver’s seat,” he said. Clients “set the terms of every bit of the contract, including how it is audited.”

Still, the terms often require a rigor associated with intelligence agencies. MedImpact Healthcare Systems Inc., for instance, doesn’t permit auditors “to copy, notate or otherwise capture the terms of any pharmaceutical manufacturer rebate contract” or to reveal them to anyone else, including clients, according to a nondisclosure agreement seen by Bloomberg News.

MedImpact spokeswoman Verona Macdonell declined to comment.

Henry of Express Scripts said auditors of rebate arrangements can take notes, but the notes can’t include actual rates, and auditors can’t remove copies of the contracts. While Express Scripts sometimes redacts portions of contracts irrelevant to a particular client, this “in no way inhibits the auditors’ ability to audit rebates,” he said.

Express Scripts’ rebate contracts can be audited only by a “mutually agreed upon national CPA firm” with a stand-alone audit division and at least $2 million in malpractice insurance, according to a draft contract posted online by Genesee County, Michigan, which hired the company. Any leak “jeopardizes our ability to competitively drive value,” the contract said.

The county and the company each declined to discuss the draft and whether it was adopted.

Hayes, 58, who in 1996 founded Pharmacy Outcomes Specialists in Lake Zurich, Illinois, says she is no longer allowed to audit by some major players in the industry. Express Scripts excluded her for years after she was a witness in litigation against it. She showed “a bias against Express Scripts and the PBM industry in general,” according to a 2012 reinstatement letter from an attorney representing the company. Express Scripts declined to comment on Hayes, but Henry said bans of specific auditors are rare.

Hayes said she was a PBM cheerleader early on, when they charged clients straightforward fees to process claims. As top players started taking money from multiple sources, she said she raised uncomfortable questions. She cited “the lack of transparency, the depth of deception” in 2014 in written testimony to the U.S. Labor Department, which oversees employee benefits.

Others describe similar problems. Auditor Greg Rucinski, whose Milwaukee firm Tricast examines PBMs for large employers, said he’s warned several clients there was little point in auditing drug claims because their contracts so favored PBMs that it would be almost impossible to recover overcharges.

Other Avenues

Rebates are only one way drugmakers pass money to PBMs. Others include fees for care management, administration and inventory procurement. Linda Cahn, a longtime industry critic who runs Pharmacy Benefit Consultants in Morristown, New Jersey, said she once counted almost three dozen such fee categories in a set of contracts.

Employers are starting to push back against the audit restrictions. The Health Transformation Alliance, a group of 39 large companies, including IBM Corp. and American Express Co., recently wrote its own rules to eliminate “artificial limitations,” such as how many drugs can be examined, CEO Robert Andrews said. They permit unlimited rebate audits and “we select the auditor, not them.”

Hayes said PBMs have a useful role, but one they’ve overstepped.

“PBMs perform a great service, and their people are great,” she said. “It’s the fees and rebates they’re not disclosing to clients that I find disturbing.”

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