United States General Accounting Office

GAO Report to the Honorable

Ron Wyden, House of Representatives

November 1995 PHARMACY BENEFIT

MANAGERS

Early Results on

Ventures With Drug

Manufacturers

GAO/HEHS-96-45

GAO United States

General Accounting Office

Washington, D.C. 20548

Health, Education, and

Human Services Division

B-257388 

November 9, 1995

The Honorable Ron Wyden

House of Representatives

Dear Mr. Wyden:

Some of the largest pharmaceutical manufacturers have recently merged

or formed alliances with some of the largest companies that manage

prescription drug benefits for health plans, called pharmacy benefit

managers (PBM). These ventures represent a recent trend in the

pharmaceutical marketplace that involves vertical integration—

manufacturers merging or allying with companies that represent buyers of

the manufacturers’ products. The ventures gained immediate attention

from industry observers not only because of their size but also because of

concerns about their effect on competition in markets for drug

manufacturers’ products and PBMs’ services. Some industry observers

contended that the ventures would reduce competition in both markets

because the PBMs involved would give preference to their manufacturer

partners’ drugs over those sold by competing manufacturers.1

 Such

preference could include collaboration between a manufacturer and PBM

partner to ensure that the manufacturer’s drugs were the most economical

for the PBM’s customers.

Because of these concerns, you requested that we study the mergers and

alliances to determine (1) the role of the PBMs in the health care industry;

(2) the objectives of these ventures; (3) specific concerns about the effect

of these ventures on competition in markets served by drug manufacturers

and PBMs; and (4) the extent, if any, to which the PBMs have given

preference to their manufacturer partners’ drugs.

To address the study’s objectives, we reviewed pertinent literature,

interviewed officials of companies involved in recent mergers and

alliances, and obtained documents from the companies related to these

ventures. (See app. I for additional information on the study’s scope and

methodology.) We also contacted Wall Street analysts, pharmaceutical

economists, health plan sponsors, and pharmaceutical trade associations,

such as the National Association of Chain Drug Stores (NACDS) and the

American Pharmaceutical Association (APhA). Further, we obtained

information from Medco Containment Services, Inc. and Diversified

1

For the purpose of this report, “partner” refers to any manufacturer or PBM involved in a merger or

alliance.

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Pharmaceutical Services, Inc. (DPS) on formularies they managed before

and after their mergers with Merck & Co., Inc. and SmithKline Beecham

Corporation, respectively.

Our work was performed between June 1994 and September 1995 in

accordance with generally accepted government auditing standards.

Results in Brief Drug manufacturers have merged or allied with PBMs because they believe

that the PBMs’ market power will help maintain the manufacturers’ profits

at a time when their drugs face increased competition. The role of PBMs in

health care has evolved from simply administering prescription drug

benefits for health plan sponsors to helping them contain their overall

drug costs. Representing millions of health plan enrollees, PBMs have

developed formularies for many large health plans and have been able to

obtain significant rebates or discounts for their customers from both drug

manufacturers and pharmacies.

To bolster profits, manufacturers are relying on their PBM partners to help

them increase market share for their drugs and develop new programs for

treating specific diseases. To increase market share, manufacturers

anticipate that their partner companies will include their drugs on

formularies—a listing of preferred prescription drugs by therapeutic class

often with cost designations—that the PBMs manage. The manufacturers

will also join their PBM partners in developing cost-effective treatment

programs for specific diseases that affect many of the health plan

enrollees the PBMs cover and eventually sell such programs as products in

the health care marketplace.

Critics of the mergers and alliances have focused on how PBMs may help

their drug manufacturer partners increase market share. Manufacturers

can increase the sales and market share of their drugs by obtaining their

inclusion, as well as a low-cost designation, on their PBM partners’

formularies. A primary concern is that the companies involved in these

ventures will collaborate or act to prohibit other manufacturers from

effectively competing for inclusion or low-cost designation of their drugs

on the PBMs’ formularies. The Federal Trade Commission’s (FTC) review of

the merger between Eli Lilly and Company and PCS Health Systems, Inc.

resulted in a consent agreement between FTC and Lilly that established

safeguards against such behavior.

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Our review of changes in the formularies managed by Medco and DPS

showed differences in the extent to which these PBMs have given

preference to their respective partners’ drugs. Of the eight products that

represent almost all Merck sales of brand-name products to Medco

enrollees, only one was on Medco’s formulary in January 1993. In May

1993, 2 months before reaching their decision to merge and 6 months

before closing their merger, Merck and Medco established an agreement to

add the remaining seven products to Medco’s formulary. After the merger,

from 1994 to 1995, four of these eight drugs faced less competition after

non-Merck products were dropped from Medco’s recommended

formulary. From January 1994, several months before its merger with DPS,

to January 1995, SmithKline Beecham experienced little change in the

number and cost designation of its drugs on DPS’ recommended formulary.

The changes in Medco’s formulary that favor Merck drugs do not

necessarily demonstrate that Medco automatically gave preference to

Merck drugs without considering competitors’ products. Because Medco’s

negotiations with Merck and with other manufacturers are proprietary, we

could not verify how Merck drugs achieved their inclusion and cost

designations on Medco’s formulary. However, the extent to which Medco

gave preference to Merck products supports FTC’s decision to continue

monitoring the Merck/Medco merger and other ventures between drug

manufacturers and PBMs. Such monitoring will help to ensure that the PBMs

maintain competitive processes that allow manufacturers, other than their

partners, to compete for inclusion and low-cost designation for their drugs

on the PBMs’ formularies.

Background PBMs administer the prescription drug part of health insurance plans on

behalf of plan sponsors, such as self-insured employers, insurance

companies, and health maintenance organizations (HMO). In 1989, PBMs

managed prescription drug benefits for about 60 million people. In 1993,

they managed drug benefits for about 100 million, or almost 40 percent of

the U.S. population.2

 Should this rate of growth continue, by the end of

1995 PBMs will provide services for health plans covering about 50 percent

of the population.

While the number of people covered by PBMs has increased significantly,

the market for PBMs’ services continues to involve a small number of firms.

Although there are over 40 PBMs in the United States, some estimates

suggest that the 5 largest manage benefits for over 80 percent of the health

2

Sanford C. Bernstein & Co.

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B-257388 

plan enrollees covered by PBMs.3 They include PCS Health Systems, Medco,

Value Rx, DPS, and Caremark International Inc.’s Prescription Service

Division. All five PBMs were included in our study.

A common technique PBMs use to manage pharmacy care is formulary

development. A formulary is a list of prescription drugs, grouped by

therapeutic class, that are preferred by a health plan sponsor. Drugs are

included on a formulary not only for reasons of medical value but also on

the basis of price.4 PBMs provide physicians and others with printed

formularies that often use dollar sign designations to identify drugs

according to their relative cost within a therapeutic class. For example, “$”

can signify a low-cost product, while “$$$$” can signify a higher-cost

product.5

Both the inclusion of a drug on a formulary and its cost designation can

affect the utilization of a manufacturer’s products. PBMs and the health

plan sponsors they represent encourage physicians to prescribe lower-cost

formulary drugs over both nonformulary drugs and higher-cost formulary

drugs for health plan enrollees. The extent to which the PBMs and their

sponsors are successful in obtaining physician compliance with

formularies can increase the sales and market share within a therapeutic

class of a prescription drug, particularly for products on the formulary

with the lowest cost designations. Because of this potential effect on the

sales and market share of a drug, manufacturers offer PBMs rebates on

drugs that face competition in return for both inclusion on a formulary and

a low-cost designation.

Because of the relationship between formularies and drug sales, FTC has

reviewed the recent mergers on antitrust grounds to determine their

potential impact on competition in the markets involved.6

 Although FTC did

not challenge mergers between Merck and Medco or SmithKline Beecham

and DPS, it did challenge the merger that followed between Lilly and PCS

3

Sanford C. Bernstein & Co.; Deloitte & Touche LLP.

4

“The Changing Environment for U.S. Pharmaceuticals: The Role of Pharmaceutical Companies in a

Systems Approach to Health Care,” Boston Consulting Group (Apr. 1993), p. 18.

5

Jeannie Mandelker, “Formularies: Balancing Cost and Quality,” Business & Health, Special Report

(1995), p. 25.

6

FTC’s role in antitrust enforcement is based on (1) section 5 of the Federal Trade Commission Act,

authorizing the Commission to review the actions of companies that may result in “unfair methods of

competition in or affecting commerce”; and (2) section 11 of the Clayton Act, authorizing the

Commission to enforce compliance with certain provisions of that act, including section 7, which

prohibits acquisitions, the effect of which “may be substantially to lessen competition, or tend to

create a monopoly.”

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B-257388 

Health Systems. FTC entered into a consent agreement with Lilly that

established safeguards against the merger’s potential anticompetitive

effects and also stated that it would continue to monitor the integration of

drug manufacturers and PBMs.

PBMs Contain

Customers’ Drug

Costs

PBMs manage prescription drug coverage on behalf of health plan

sponsors. Their objective is to provide high-quality pharmaceutical care at

the lowest possible cost. PBMs are a relatively new type of firm that

became a major market force only during the late 1980s. Their precursors

were firms that provided prescription claims processing or mail-service

pharmacy on behalf of insurers. While PBMs continue to provide these

services, many provide additional services, such as formulary development

and management, the development of pharmacy networks to serve health

plan enrollees, negotiating drug rebates with manufacturers, generic

substitution, and drug utilization review. Many PBMs are also developing

products called “disease management” programs, which will attempt to

provide the most cost-effective treatments for specific diseases.7

PBMs represent health plans and their enrollees in dealing with other

participants in the prescription drug market. For example, a PBM

negotiates with drug manufacturers to obtain rebates for a plan sponsor.

PBMs also negotiate with retail pharmacies to obtain discounts on

prescription drug prices and dispensing fees for health plan enrollees.8

 In

exchange for such services, a PBM may receive a percentage of

manufacturer rebates or a fee per prescription. Figure 1 shows the typical

network in which a PBM and other participants operate.

7

See pp. 8-11 for additional information on these services.

8

See pp. 7 and 8 for additional information on such discounts.

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Figure 1: The PBM Network

Patient

Pharmacy

Rx

Enrolls

Fee

Rebates

Health Plan

Enrollees

Negotiated Rx

Price Discounts

for Enrollees

% of

Manufacturers

Rebates

Rx

Price

Discount

Employer/

HMO Plan

Pharmaceutical

Manufacturers

PBM

PBMs we studied operate in networks that are structured similarly to the

network shown in figure 1 and use several similar techniques to help

control their customers’ drug costs. These techniques are applied in

providing services related to formularies, pharmacy networks, claims

administration, drug utilization review, and disease management.

PBMs use formularies to help control drug costs by (1) encouraging the use

of formulary drugs through compliance programs that inform physicians

and enrollees about which drugs are on the formularies; (2) limiting the

number of drugs a plan will cover; or (3) developing financial incentives to

encourage the use of formulary products. Although PBMs develop

formularies that they recommend to customers, health plan sponsors may

work with them to develop customized formularies. In developing

formularies, PBMs rely on pharmacy and therapeutic (P&T) committees,

consisting of pharmacists and physicians, to analyze the safety, efficacy,

and substitutability of prescription drugs. PBMs then rely on the

recommendations of the P&T committee to determine the number of drugs

Page 6 GAO/HEHS-96-45 Pharmacy Benefit Managers
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to include on the formulary to give physicians a sufficient number of

treatment options.

Formularies can be open, incentive-based, or closed. Open formularies are

often referred to as “voluntary” because enrollees are not penalized if their

physicians prescribe nonformulary drugs. Thus, under an open formulary,

a health plan sponsor provides coverage for both formulary and

nonformulary drugs.9

 Unlike an open formulary, an incentive-based

formulary provides enrollees financial benefits if their physicians

prescribe formulary drugs. Under this arrangement, the health plan

sponsor still reimburses enrollees for nonformulary drugs but requires

them to make higher co-payments than for formulary drugs. A closed

formulary takes these financial incentives one step further by limiting

coverage to formulary drugs only. Therefore, if an enrollee’s physician

prescribes a nonformulary drug, the enrollee may have to pay the full cost

of that prescription. However, the health plans cover nonformulary

products when physicians determine that they are medically necessary for

their patients.

PBMs we studied reported that the vast majority of formularies they

manage are open. For example, Medco officials told us that of the more

than 2,000 plans Medco represents, only 4 of the plans (comprising just

3 percent of the enrollees covered by Medco) have adopted either an

incentive-based or closed formulary. In another example, DPS officials

determined that of about 90 formularies DPS manages (mainly for HMOs),

about one-third are incentive-based or closed. However, officials of these

PBMs expect that a greater number of health plan sponsors will adopt

incentive-based and closed formularies in the future because of their

potential to help reduce a plan’s drug costs. Incentive-based and closed

formularies increase competition among drug manufacturers with

competing drugs to get their drugs on PBMs’ formularies.

PBMs also contract with networks of pharmacies to obtain discounts per

prescription for the health plan enrollees PBMs represent. For each

prescription, a PBM typically reimburses participating pharmacies

according to a formula based on a drug’s average wholesale price (AWP)

less a percentage, plus a dispensing fee.10 PBMs also encourage pharmacies

to support other cost-reduction techniques, such as substituting a generic

9

According to APhA, during 1994, over 90 percent of formularies managed by PBMs were open.

10Drug manufacturers suggest a list price that wholesalers charge pharmacies. The average of the list

prices, collected for many wholesalers, is called a drug’s AWP. The dispensing fee covers a pharmacy’s

labor and overhead costs, such as pharmacists’ salaries, drug packaging, rent, and utilities.

Page 7 GAO/HEHS-96-45 Pharmacy Benefit Managers
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for a name brand when appropriate.11 Pharmacies accept set levels of

reimbursement and other PBM cost-reduction techniques in order to attract

or retain the potential customer base represented by a PBM’s millions of

enrollees.

In addition, PBMs we studied can reduce their customers’ administrative

costs by using on-line computerization to verify claims and process

payments. This is highly efficient compared with methods that rely on

mailed-in claims. PBMs provide their customers’ enrollees with

magnetically encoded cards that a pharmacist uses to confirm their health

plan membership and to access the PBM screen on the pharmacy’s

computer terminal. This screen lists the drugs on a plan’s formulary, any

requirements for enrollee co-payments, and allows the pharmacist to

request payment on-line from the PBM after dispensing a prescription.

PBMs we studied also conduct retrospective and prospective drug

utilization review (DUR) both to enhance the quality of pharmaceutical care

and to potentially generate savings.12 Under retrospective review, PBMs

study the drug utilization statistics of a customer’s enrollees to identify

any instances in which physicians prescribed potentially inappropriate

medications. If PBMs identify inappropriate patterns of prescribing or

consumption, they will attempt to contact and educate physicians about

more appropriate and potentially cost-effective treatments. Under

prospective review, PBMs use a computer link with network pharmacists to

review each prescription before it is dispensed. Prospective DUR helps

PBMs to identify whether there is a generic or formulary alternative to the

prescribed drug and whether the drug will duplicate an existing

prescription or will adversely interact with other drugs the patient is using.

If a nonrecommended, redundant, or potentially harmful drug is identified,

the pharmacist is notified on the computer screen. PBMs we studied are

working to add physicians to this on-line network to help reduce

prescribing errors by communicating DUR results, as well as patients’

medical histories, as care decisions are being made.

PBMs we studied also plan to help contain spending for chronic conditions,

such as asthma and diabetes, by developing “disease management”

11The involvement of pharmacists in PBM efforts to switch such prescriptions have raised questions

about how independent pharmacists should be. A recent agreement reached between Merck/Medco

and 17 state attorneys general requires that Medco pharmacists disclose their affiliation with Merck in

connection with such activities. Officials of the PBMs studied emphasized that they do not require, or

provide special incentives for, generic drugs manufactured by their partner companies.

12For additional information on the application of DUR, see Prescription Drugs: Automated

Prospective Review Systems Offer Potential Benefits for Medicaid (GAO/AIMD-94-130, Aug. 5, 1994).

Page 8 GAO/HEHS-96-45 Pharmacy Benefit Managers
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programs to manage the care of enrollees with these illnesses. To develop

these programs, PBMs are evaluating various treatment options, or

therapies, discussed in existing medical research to identify those that are

associated with better therapy management as well as low overall

spending. PBMs then intend to educate both health plan enrollees and their

physicians about these more cost-effective treatments and to monitor the

degree of their compliance with related protocols over time. For example,

officials of one PBM explained that when an enrollee enters its program for

diabetes, the PBM notifies the enrollee’s physician and provides both the

enrollee and the physician information on its disease management

protocol. Regarding one such treatment, the PBM seeks to help reduce the

risk of complications and costly additional care by encouraging enrollees

to monitor their glucose levels and to adjust their insulin intake more

frequently than is commonly recommended.13

Manufacturers Seek

to Increase Market

Share and Develop

Disease Management

Programs

The growth of PBMs and other industry developments have forced drug

manufacturers to find ways to prevent profits from declining. At the same

time that more drugs on the market face competition, purchasers have

become more price-focused and organized. In particular, PBMs and other

buyers have been able to use formularies to obtain significant rebates from

manufacturers. Rather than lose market share, manufacturers have

provided discounts on drugs that face competition to obtain inclusion and

low-cost designation on PBMs’ formularies. Furthermore, many

manufacturers believe that, in the future, pharmaceutical care will involve

disease management. Currently, prescription drugs are managed

separately from other components of health care. This approach may

result in higher overall spending for a health plan sponsor than the

management of all aspects of care for plan enrollees with similar illnesses.

In response to a changing environment, large pharmaceutical

manufacturers have vertically integrated into the market for PBM services.

Merck was the first manufacturer to acquire a PBM partner when it

purchased Medco in November 1993. In 1994, SmithKline Beecham

acquired DPS and Lilly acquired PCS. Rather than acquire a PBM, Pfizer, Inc.

contracted to form strategic alliances with two PBMs, Caremark

International14 and Value Rx—plus Value Rx’s parent company, Value

Health, Inc. Table 1 provides information about each merger or alliance.

13See pp. 10 and 11 for additional information related to disease management.

14Caremark’s relationship with Pfizer is a part of Caremark’s Drug Alliance Program, which also

includes Rhone-Poulenc Rorer, Inc., Bristol-Myers Squibb Company, and Lilly.

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(See app. II for additional information on the companies involved in these

ventures.)

Table 1: Companies Involved in Recent

Mergers and Alliances

Date Manufacturer PBM(s)

Covered

lives

(millions)

Price

(billions)

November 1993 Merck Medco 42 $6.6

May 1994 SmithKline

Beecham

DPS

14 2.3

May 1994 Pfizer Value Rx

Caremark

32

13 a

November 1994 Lilly PCS 56 4.0

Note: The number of lives covered by each PBM may be overstated because of double counting

that results from some health plan enrollees being covered by more than one PBM.

aAlliance terms were undisclosed.

The manufacturers believe that merging or allying with a PBM will provide

competitive advantages that will enable them to maintain profits. Among

other things, each venture provides the manufacturer access to the PBM’s

formularies, which can help a manufacturer increase market share while

developing programs to compete in a market for disease management

products. For example, formulary access can help to increase the market

share of a manufacturer’s drug, particularly if it was not on the PBM

partner’s formulary before a merger or alliance. Market share can be

further enhanced if the manufacturer gives the PBM sufficient price

discounts to gain a low-cost designation for its drug on the PBM’s

formularies. According to representatives of several PBMs, their contacts

with physicians to encourage them to prescribe drugs that are on

formularies and have low-cost designations usually result in the

physicians’ compliance. Because of the increase in market share resulting

from formulary inclusion and low-cost designation, manufacturers may

also reduce the sales and marketing costs for a product.

The manufacturers also believe that PBMs will provide them the

cornerstones of disease management programs, namely the abilities to

uncover the most cost-effective treatments for various diseases, such as

asthma and diabetes, and to ensure that patients comply with them.

Specifically, the manufacturers and their PBM partners seek to contain

health plan sponsors’ overall health care costs by establishing programs to

encourage more cost-efficient care for patients with particular illnesses.

The extent to which prescription drugs, particularly those sold by the

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manufacturer partners, will be used in these disease management

programs will depend on their cost-effectiveness as part of overall

treatment.15

However, because the ventures are new, it is too soon to determine

whether each manufacturer has achieved its objective of enhancing profits

by increasing market share and marketing disease management programs.

Among the manufacturers we studied, only Merck has acknowledged an

increase in its share of the drug sales managed by its PBM partner. In

addition, the manufacturers and their PBM partners are in varying stages of

developing disease management products and the success of these

products is not yet known. Medco has six disease management programs

either fully operational or in the pilot stage, including programs for

diabetes and asthma.16 The other PBMs have launched either diabetes or

asthma programs. However, all the PBMs are developing additional

programs to treat these illnesses and others, including depression, ulcers,

and cardiovascular disease.

Concerns About

Reduced Competition

Critics of the recent mergers and alliances believe that the ventures will

reduce competition in markets for pharmaceutical and PBM services. This

concern is based on several contentions. First, competition in the

pharmaceutical market would be reduced as aligned PBMs and their

manufacturer partners collaborate to ensure inclusion and low-cost

designation for the partners’ drugs over competitors’ on the PBMs’

formularies. This preference for a partner’s products would preclude other

manufacturers from effectively competing with its products on the

formularies managed by the PBM partner. Such preference would be

exacerbated as the PBMs move to more restrictive formularies. Second,

competition in the market for PBM services would be substantially lessened

as the aligned PBMs would be able to obtain their partners’ products at

extremely advantageous prices over nonaligned PBMs. This would give

additional market power to the aligned PBMs, which already cover most

health plan enrollees, and make it more difficult for new PBMs to enter the

market or for smaller, existing PBMs to stay competitive.

Several industry analysts contend, however, that it is too soon to

determine the overall effects, either negative or positive, of the ventures

15A number of drug manufacturers are developing their own independent disease management

programs, and not all PBM disease management programs are developed in concert with a

manufacturer.

16Other Medco programs cover chronic obstructive pulmonary disease, allergic rhinitis, smoking

cessation, and hypercholesterolemia.

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on competition in the markets for either pharmaceutical products or PBM

services.17 For example, these analysts contend that it is not possible to

determine in the short term how competitive new or existing PBMs may be

in this market. They believe that the PBM market may become more

competitive as health plan sponsors begin to analyze the effectiveness of

PBMs that represent them. They noted that if the PBMs that are the largest

now do not continue to perform for their customers in controlling drug

costs, the customers can switch to other PBMs.

Industry analysts are more concerned, however, about the influence drug

manufacturers may have on their PBM partners’ formulary decisions. They

believe that any collaboration between aligned companies, or actions

taken by a PBM partner, to ensure competitive advantages for the

manufacturer partner’s drugs over competitors’ could reduce competition

significantly in the manufacturer partner’s market, such as the market for

an individual therapeutic class of drugs. Competitive advantages can be

gained by eliminating opportunities for other manufacturers to compete

for inclusion and low-cost designation for their drugs on the PBM partner’s

formularies.

FTC reviewed the recent mergers to determine their potential impact on the

markets for drug manufacturers and PBMs.18 It issued a complaint against

the Lilly/PCS merger and determined that safeguards were necessary to

ensure that Lilly and PCS maintain a competitive process for determining

which drugs to include on PCS’ formulary and the drugs’ cost designations.

Accordingly, FTC entered into a consent agreement with Lilly, requiring

that (1) PCS maintain an “open” formulary, defined as one that includes any

drug that PCS’ P&T committee deems appropriate; (2) PCS appoint an

independent committee to oversee this formulary, consisting of a majority

of persons outside of either Lilly or PCS; (3) Lilly and PCS establish

safeguards that prevent each from sharing nonpublic information

concerning other drug manufacturers’ and other PBMs’ bids, proposals,

contracts, prices, rebates, discounts, or other terms of their mergers; and

(4) PCS accept all discounts, rebates, or other concessions offered by other

manufacturers and reflect these when determining the ranking of products

on the open formulary.

17Economic analysis can help determine conditions under which vertical integration may restrict or

enhance competition. However, these industry analysts contend that because the ventures are so

recent, the empirical data necessary for such an analysis, including changes in drug prices and health

plan drug costs, are currently limited.

18FTC has the authority to review again mergers that have been consummated. It has made public

statements that it will continue to monitor these markets. (See pp. 13 and 14 for information on these

statements.)

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Manufacturers we studied and their PBM partners told us that they had

established safeguards similar to those accepted by Lilly. Like PCS, the

other PBMs indicated that they offer an open formulary, which the majority

of payers adopt. With one exception, the PBMs also noted that they had

already established independent P&T committees.19 Furthermore, officials

for each PBM said that they had established “fire walls” that prevent the

PBMs from providing their manufacturer partners with confidential price

information, such as bids from other manufacturers.20 Industry observers

agree that these fire walls are the most essential part of the Lilly/PCS

agreement for ensuring a competitive bidding process. Officials from each

PBM also told us that they continue to consider bids from manufacturers

whose drugs compete with drugs sold by their respective partners. Since

the Lilly agreement, Medco has developed written policies that establish

and govern fire walls as well as other safeguards that are intended to

address FTC’s concerns.

Critics of the Lilly/PCS merger have contended that the safeguards

established by FTC in the consent agreement are inadequate to address

their concerns about the venture’s potential anticompetitive effects. For

example, before final approval of the consent agreement, NACDS contended

that the agreement did not address the issue of aligned PBMs having the

option to develop closed formularies that could favor their manufacturer

partners’ drugs and exclude those sold by competitors. Furthermore,

NACDS believed that the fire walls were inadequate to prevent the exchange

of sensitive competitive information between aligned companies,

including market shares for specific drugs. In addition, NACDS expressed

concern that the agreement did not address the merger’s potential effect

on drug prices paid by retail drug stores and consumers.

In addition to approving the Lilly consent agreement, FTC said that it would

continue to monitor several aspects of vertical integration of drug

manufacturers and PBMs. Such monitoring includes whether and to what

extent products of drug manufacturers, especially those not vertically

integrated with PBMs, are prohibited (foreclosed) from formularies

managed by aligned PBMs. The monitoring also includes whether and to

what extent the vertical integration of drug manufacturers and PBMs

results in anticompetitive interaction among integrated companies as well

19Caremark was the exception. Company officials contended that an independent committee was

unnecessary because they consult many sources outside the firm on formulary development and

health plan sponsors ultimately determine which drugs to include on the formulary.

20DPS officials specifically noted that SmithKline Beecham voluntarily adopted such a fire wall in

response to FTC’s review of its acquisition of DPS.

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as any increase in drug prices or reduction in choice of drugs for

consumers.

Determining whether PBMs involved in these ventures maintain fire walls

and refrain from collaborating to give preference to their manufacturer

partners’ drugs requires access to proprietary information. Such

information includes the process used by a PBM to consider which drugs

are to be added to or deleted from a formulary, the reasons for changes,

and whether competitive bids were sought and considered. To obtain such

information requires an extensive right of access, such as that given to FTC.

Formulary Changes

Show Mixed Results

on PBM Preference

for Partners’ Drugs

Absent proprietary information from PBMs related to formulary

development, changes in formularies can be reviewed to determine

whether there are signs of potential problems. For example, if a pattern

developed in which a manufacturer partner’s drugs received the

lowest-cost designations on its PBM partner’s formularies, it would raise

questions from competing manufacturers and others about the process

used by the PBM to make such formulary decisions.

We reviewed formularies managed by Medco and DPS several months

before and after their mergers to determine any changes in the preference

given to their respective manufacturer partner’s products. Two months

before concluding its agreement to merge with Merck, Medco increased its

preference for Merck drugs by adding a number of Merck’s

large-dollar-volume products to its formulary and dropping several drugs

that competed with Merck’s drugs. In contrast, the number of SmithKline

Beecham’s products on DPS’ formulary and their cost designations changed

little.

Merck Gains Access to

Medco Formulary

In January 1993, few Merck products were on Medco’s recommended

formulary. Of the eight Merck products that represent almost all Merck

sales to Medco enrollees, only Proscar was on Medco’s formulary.21

However, according to Medco officials, Merck and Medco established an

agreement to add the remaining seven products to Medco’s formulary

during May 1993, 2 months before reaching their decision to merge and 6

months before closing their merger. Specifically, these products were

Prinivil and Vasotec, two cardiovascular drugs known as ACE inhibitors;22

21According to Medco officials, these eight drugs accounted for about 90 percent of Merck’s

brand-name product sales to Medco enrollees.

22ACE is an acronym for angiotensin-converting enzyme.

Page 14 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

Mevacor and Zocor, two cholesterol-lowering agents; Prinzide and

Vaseretic, two antihypertensive combination drugs; and Pepcid, an

antiulcer drug known as a histamine H2 receptor antagonist. Including

these products increased the number of drugs in their respective

therapeutic classes on the formulary, except for Prinivil and Prinzide,

which replaced their chemical equivalents, Zeneca’s Zestril and Zestoretic.

Table 2 shows changes to Medco’s formulary from 1994 to 1995 that could

benefit the sale of Merck products. For example, between 1994 and 1995

one cardiovascular drug, Monopril, was dropped from the formulary. This

change left Prinivil and Vasotec with fewer competitors on the formulary

and Prinivil with one, rather than two, competitors with the lowest cost

designations. Not only have cardiovascular drugs been Merck’s top-selling

class of drugs in worldwide sales, but Vasotec has been Merck’s number

one sales product. Table 2 also shows that, by 1995, Zocor and Mevacor

faced fewer competitors after three non-Merck products were dropped

from the cholesterol-lowering class. As with the cardiovascular class of

drugs, Merck has dominated worldwide sales in the cholesterol-lowering

class.

Page 15 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

Table 2: Medco Formulary Changes,

1993-1995 Class/product 1993 1994 1995 Manufacturer

ACE inhibitors

Zestril $$ Zeneca

Monopril $$ $$ Bristol-Myers Squibb

Lotensin $$ $$ $$ Ciba

Accupril $$ $$$$ $$$ Parke-Davis

Capoten $$$$ $$$$ $$$$ Bristol-Myers Squibb

Prinivil $$ $$ Merck

Vasotec $$$ $$$ Merck

Antihypertensive combinations

Hydropresa $ $ $ Merck

clonidine $$ $ $ generic

hydralazine/HCTZ $$ $ $ generic

Zestoretic $$ Zeneca

methyldopa/HCTZ $$ $ $ generic

propranolol/HCTZ $$ $ $ generic

Capozide $$$ $$$$ Bristol-Myers Squibb

Prinzide $$ $$ Merck

Lopressor HCT $$ $$ Ciba

Timolide $$ $$ Merck

Vaseretic $$$ $$ Merck

Corzide $$$ $$$$ Bristol-Myers Squibb

Ziac $$ Lederle

Lotensin HCT $$ Ciba

Cholesterol-lowering agents

nicotinic acid $ $ $ generic

clofibrate $ $ generic

Colestid $$ $$$ $$$ Upjohn

Lopida $$$$ $$$ $$ Parke-Davis

Pravachol $$$$ $$$$ Bristol-Myers Squibb

Questran, Questran

Light

$$$$ $$$$ Bristol-Myers Squibb

Lorelco $$$$ $$$$ $$$ Marion Merrell Dow

Zocor $$$$ $$$ Merck

Mevacor $$$$ $$$$ Merck

(continued)

Page 16 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

Class/product 1993 1994 1995 Manufacturer

H2 antagonists

Tagametb $$$ $$$ $$ SmithKline Beecham

Zantac $$$$ $$$$$ $$$$ Glaxo

Pepcid $$$ $$$ Merck

Axid $$$$ $$$ Lilly

Axid (GERD) $$$ $$$ Lilly

Notes: Dollar sign designations are relative indicators within a therapeutic class (that is, $$ in one

class is not the same absolute value as $$ in another class).

Dollar signs in bold indicate a change in dollar status from the prior year.

Generic drugs may be sold by multiple manufacturers.

aGeneric available in 1994.

bGeneric available in 1995.

In contrast to these gains, however, Merck products in the

antihypertensive combinations and H2 antagonist classes were, by 1995,

less competitive on the basis of cost designation. Table 2 shows that since

1994 the number of other manufacturers’ antihypertensive combination

drugs that compete with Prinzide and Vaseretic increased from eight to

nine. Also, most of these products retained the same or a lower cost

ranking than both Merck products. Likewise, because a competing product

(cimetidine, the generic version of Tagamet) achieved a new, lowest cost

designation, Merck’s Pepcid now shares the second to lowest dollar-sign

designation with Lilly’s Axid, rather than the lowest cost ranking among H2

antagonists.

Some industry observers believe that the gains made by Merck in the

cholesterol-lowering and ACE inhibitor classes are indications that Merck

has influenced Medco to prohibit some competing drugs from its

formulary. For example, in a letter to FTC, one law firm commented that

Medco’s formulary excluded Sandoz’s Lescol, a cholesterol-lowering

agent, even though Lescol was sold on the market at a substantially lower

price than other cholesterol-lowering agents and other PBMs have Lescol

on their formularies. Other questions concern why Medco’s 1995 formulary

favors Merck products so much more than DPS’ 1995 formulary. For

instance, while Medco lists only one ACE inhibitor in addition to Merck’s

Prinivil in the lowest cost category, DPS lists three additional products.

Also, DPS included not only Merck’s Mevacor and Zocor in the

Page 17 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

cholesterol-lowering class but also two competitors, Bristol-Myers

Squibbs’ Pravachol and Sandoz’s Lescol.

In response to these concerns, Medco officials told us that Merck’s

products were included on Medco’s formulary through careful and fair P&T

committee and other company deliberations that considered both the

medical value and costs of competing drugs. They added that Medco did

not exclude any drugs from its formulary because they compete with

large-dollar-volume Merck products.

Little Change in DPS

Formularies

Before the SmithKline Beecham/DPS merger in May 1994, DPS’ formulary

contained SmithKline Beecham’s four largest-dollar-volume outpatient

drugs. Distributed among four therapeutic classes, these were Augmentin,

an antibacterial penicillin drug; Tagamet, an H2 antagonist; Relafen, a

nonsteroidal anti-inflammatory drug (NSAID); and Paxil, an antidepressant

referred to as a selective seretonin reuptake inhibitor (SSRI). Tagamet was

in a higher cost category than one competitor, while Paxil shared the same

cost designation with the two others listed in its class. Augmentin and

Relafen not only faced generic competition but also, along with others,

had the highest cost designation among brand-name products in their

respective classes.

Table 3 shows that following the merger, the number and cost designation

of SmithKline Beecham’s large-dollar-volume products on DPS’ formulary

remained largely unchanged. For example, Famvir, an antiviral therapy

introduced during the third quarter of 1994, was added to the formulary for

1995, but Tagamet’s generic equivalent is now available. In addition,

although table 3 shows that Paxil lost one competitor and gained a lower

cost ranking than the remaining product, the table also shows that Relafen

gained both an additional competitor and a higher cost designation.

Furthermore, table 3 shows that Augmentin continued to have the same

number of competitors and the highest cost designation in its class.

Page 18 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

Table 3: DPS Formulary Changes,

1994-1995 Class/product 1994 1995 Manufacturer

Penicillins

penicillin VK $ $ generic

ampicillin $ $ generic

amoxicillin $ $ generic

dicloxacillin $ $ generic

Augmentin $$$$ $$$ SmithKline Beecham

Oral antiviral

amantadine $ $ generic

Zovirax (herpes simplex dosage) $$$ $$$ Burroughs Wellcome

Zovirax (herpes zoster dosage) • Burroughs Wellcome

Videx $$$$ $$$$ Bristol-Myers Squibb

Hivid $$$$$ $$$$$ Roche Labs

Retrovir $$$$$ $$$$$ Burroughs Wellcome

Zerit $$$$$ Bristol-Myers Squibb

Famvir • SmithKline Beecham

SSRIs

Prozac $$$$ $$$$ Lilly

Paxil $$$$ $$$ SmithKline Beecham

Zoloft $$$$ Pfizer

H2 antagonists

Zantac $$$ $$$$ Glaxo

Tagameta $$$$ $$$ SmithKline Beecham

Axid $$$$ $$$$ Lilly

Pepcid $$$$ Merck

NSAIDs (2nd line)

Children’s Advil $ $$ Wyeth-Ayerst

indomethacin $ $ generic

meclofenamate $ $$ generic

naproxen $$ $$ generic

Anaproxa $$ $$$ Syntex

Daypro $$ $$$ Searle

piroxicam $$ $$$$ generic

sulindac $$ $$$ generic

Lodine $$$ $$$$ Wyeth-Ayerst

Relafen $$$ $$$$ SmithKline Beecham

tolmetin $$$ generic

ketoprofen $$$ generic

Oruvail $$$$ Wyeth-Ayerst

(Table notes on next page)

Page 19 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

Notes: Dollar sign designations are relative indicators within a therapeutic class (that is, $$ in one

class is not the same absolute value as $$ in another class).

Dollar signs in bold indicate a change in dollar status from the prior year.

Generic drugs may be sold by multiple manufacturers.

• indicates that a product is substantially more expensive than other products.

aGeneric available in 1995.

Conclusion Our review of changes in Medco and DPS formularies is but one way to

help assess how the independence of PBMs may have changed since their

mergers with manufacturers. PBMs in our study contend that they remain

independent of their manufacturer partners in serving their customers,

particularly in containing their customers’ overall drugs costs. Although

Medco’s preference for Merck products increased substantially 2 months

before their merger agreement, the results of our review of formulary

changes do not necessarily mean that changes in Medco’s, or any other

aligned PBM’s, formularies were the result of anticompetitive behavior on

the part of the PBMs or manufacturers. However, changes in formularies

can serve as an indicator that additional questions may be warranted

about the processes aligned PBMs use in making formulary decisions. Given

FTC’s antitrust role, its access to proprietary information, and its

experience in reviewing recent mergers, our findings support FTC’s

decision to continue monitoring ventures involving drug manufacturers

and PBMs to assure participants in the PBM and prescription drug markets

that these markets remain competitive.

A draft of this report was reviewed by officials of Merck, Medco,

SmithKline Beecham, DPS, Lilly, FTC, and two leading analysts of the

pharmaceutical industry. In general, they agreed with the information

presented in the report. Where appropriate, the report reflects their

technical comments.

Page 20 GAO/HEHS-96-45 Pharmacy Benefit Managers
B-257388 

We will make copies of this report available upon request. The report was

prepared by John C. Hansen, Assistant Director, and analysts Joel

Hamilton and Patricia Barry. Please call Mr. Hansen at (202) 512-7105 if

you or your staff have any questions about this report.

Sincerely yours,

Jonathan Ratner

Associate Director

Health Financing Issues

Page 21 GAO/HEHS-96-45 Pharmacy Benefit Managers
Contents

Letter 1

Appendix I 

Scope and

Methodology

24

Appendix II 

Additional

Information on the

Mergers and Alliances

25

Merck/Medco 25

SmithKline Beecham/DPS 25

Lilly/PCS 26

Pfizer/Value Health 27

Pfizer/Caremark 28

Bibliography 29

Tables Table 1: Companies Involved in Recent Mergers and Alliances 10

Table 2: Medco Formulary Changes, 1993-1995 16

Table 3: DPS Formulary Changes, 1994-1995 19

Figure Figure 1: The PBM Network 6

Abbreviations

ACE angiotensin-converting enzyme

APhA American Pharmaceutical Association

AWP average wholesale price

DPS Diversified Pharmaceutical Services

DUR drug utilization review

FTC Federal Trade Commission

HMO health maintenance organization

NACDS National Association of Chain Drug Stores

NSAID nonsteroidal anti-inflammatory drug

P&T pharmacy and therapeutic (committee)

PBM pharmacy benefit manager

SSRI selective seretonin reuptake inhibitor

Page 22 GAO/HEHS-96-45 Pharmacy Benefit Managers
Page 23 GAO/HEHS-96-45 Pharmacy Benefit Managers
Appendix I 

Scope and Methodology

To address the study’s objectives, we first determined the role of PBMs in

the health care industry. We reviewed pertinent literature and interviewed

officials of companies involved in the ventures. These companies included

Merck & Co., Inc., SmithKline Beecham Corporation, Eli Lilly and

Company, and their respective PBM subsidiaries: Medco Containment

Services, Inc., Diversified Pharmaceutical Services, Inc., and PCS Health

Systems, Inc. We also interviewed officials of Pfizer, Inc. and its allied

partners, Caremark International, Inc. and Value Rx. In addition, we met

with several Wall Street analysts familiar with the PBM market to obtain a

history of its evolution.

Second, to determine the objectives of the ventures, we again interviewed

officials of the companies in our study. We also reviewed internal

documents, press releases, and annual reports provided by these officials

that helped expand on their comments.

Third, to understand specific concerns about the mergers and alliances,

we contacted nonaligned PBMs, health plan sponsors, and pharmaceutical

economists. We also interviewed officials of pharmaceutical trade

associations, such as the National Association of Chain Drug Stores and

the American Pharmaceutical Association. We asked these sources about

changes to the pharmaceutical industry following the mergers and

alliances as well as their views on the conditions established by FTC in its

consent agreement with Lilly. In addition, we reviewed public comments

FTC received regarding Lilly’s acquisition of PCS and asked officials of the

companies in our study whether they had policies or procedures that

would meet the conditions set forth in the consent agreement.

Fourth, to assess the extent to which PBMs may have given preference to

their manufacturer partners’ drugs over competitors’ drugs, we compared

formularies for DPS and Medco before and after the mergers. We compared

formularies that existed several months before each merger to 1995

formularies to determine changes to (1) the drugs listed and (2) the cost

designation of the manufacturer partner’s drugs versus other

manufacturers’ drugs. We reviewed formulary changes for DPS and Medco

because they were the PBMs involved in mergers for the longest period of

time and, therefore, had had the most time to make any formulary

changes.

Our work was performed between June 1994 and September 1995 in

accordance with generally accepted government auditing standards.

Page 24 GAO/HEHS-96-45 Pharmacy Benefit Managers
Appendix II 

Additional Information on the Mergers and

Alliances

The various manufacturer and PBM ventures are similar in that each one

provides a manufacturer access to a PBM’s formularies and aggregate data

concerning its enrollees. This enables the manufacturer to improve its

marketing strategies, enhance market share, and develop disease

management programs. The mergers and alliances are described below.

Merck/Medco On November 18, 1993, Merck & Co., Inc. purchased Medco Containment

Services, Inc. for $6.6 billion. Headquartered in Whitehouse Station, New

Jersey, Merck manufactures human and animal health care products.

During 1993, it had net revenues of $10.5 billion, making it the largest

company in terms of U.S. pharmaceutical sales. Principal products include

Prinivil and Vasotec, two cardiovascular products; Mevacor and Zocor,

two cholesterol-lowering agents; and Pepcid, an antiulcerant.

At the time of its acquisition, Medco, based in Montvale, New Jersey, was

the second largest PBM, covering more than 33 million lives and managing

about 95 million prescriptions or $4 billion in drug expenditures annually.

During 1995, Medco expects to manage benefits for about 40 million

people and remain the second largest PBM.

Immediately after the merger, Medco operated as a subsidiary of Merck

under Medco’s existing senior management. In January 1994, Merck and

Medco formed the Merck-Medco U.S. Managed Care Division, which

initially included a unit that marketed Merck products to managed care

organizations as well as Medco, which marketed PBM services to health

plan sponsors. The Merck managed care product unit was transferred

back to Merck’s Human Health Division in October 1994. The

Merck-Medco Managed Care Division now consists of Medco only and no

longer has any responsibility for managed care product sales. In early

1995, Merck formally adopted a policy under which Medco operates

independently of Merck. Merck markets its pharmaceutical products

through its U.S. Human Health Division.

SmithKline

Beecham/DPS

Following the Merck/Medco merger, SmithKline Beecham Corporation,

the U.S. operating subsidiary of United Kingdom-based SmithKline

Beecham plc, announced on May 3, 1994, that it would acquire Diversified

Pharmaceutical Services, Inc. (DPS) from United HealthCare Corporation

for $2.3 billion in cash. Based in Philadelphia, SmithKline Beecham

manufactures therapeutics for human and veterinary use and was the

seventh largest manufacturer in terms of U.S. pharmaceutical sales for

Page 25 GAO/HEHS-96-45 Pharmacy Benefit Managers
Appendix II 

Additional Information on the Mergers and

Alliances

1993. Its products include Tagamet, an antiulcerant; Relafen, a

nonsteroidal anti-inflammatory drug; Famvir, an oral antiviral; and Paxil,

an antidepressant.

Bloomington, Minnesota-based DPS was founded in 1976 as a wholly

owned subsidiary of United HealthCare Corporation, an operator of HMOs,

preferred provider organizations, and other health care organizations.

During 1993, DPS was the third largest PBM, managing pharmaceutical

benefits for about 14 million people or $2 billion in drug expenditures.

Following its acquisition, DPS continued to operate as an independent

company under its existing senior management.

In addition to acquiring DPS, SmithKline Beecham will maintain, for a

minimum of 6 years, a two-part relationship with United HealthCare that

SmithKline Beecham believes provides advantages over other

manufacturer/PBM partnerships. First, SmithKline Beecham will have

exclusive rights to the medical records of United HealthCare’s 1.6 million

members. When integrated with drug utilization data, such data could

substantially augment studies concerning cost-effective drug treatments

and the development of disease management programs. Second, United

HealthCare plans to continue to use DPS as its PBM for its own managed

care operations, encourage affiliated plans to rely on DPS, and not compete

with DPS in the pharmacy benefit management business.

Lilly/PCS In November 1994, Eli Lilly and Company purchased PCS Health Systems,

Inc. from McKesson Corporation for $4 billion in cash. Located in

Indianapolis, Indiana, Lilly manufactures pharmaceuticals, medical

devices, diagnostic products, and animal health products. In 1993, Lilly

had net revenues of $6.45 billion and the fifth highest level of U.S.

pharmaceutical sales. Its pharmaceutical products include Prozac, an

antidepressant; Axid, an antiulcer agent; and Iletin and Humulin,

antidiabetic agents.

Based in Scottsdale, Arizona, and founded in 1968, PCS Health Systems was

formerly a wholly owned subsidiary of McKesson Corporation, the world’s

largest distributor of pharmaceuticals and related health care products.

Originating as a claims processor, PCS has consistently ranked as the

largest PBM. At the time of its acquisition, it administered pharmaceutical

benefits on behalf of roughly 1,300 customers who accounted for over

50 million lives and as much as $9 billion in drug expenditures.

Page 26 GAO/HEHS-96-45 Pharmacy Benefit Managers
Appendix II 

Additional Information on the Mergers and

Alliances

Under the terms of the agreement, PCS will continue to operate as an

independent company under its existing senior management. Also,

McKesson will continue to have access to certain PCS capabilities and

services, such as its information systems. In addition, Lilly has agreed to

develop a series of strategic alliances with the remaining McKesson

pharmaceutical distribution businesses.

Pfizer/Value Health On May 3, 1994, Pfizer, Inc. announced a strategic relationship with Value

Health, Inc., the parent company of Value Rx. New York-based Pfizer is a

multinational producer and distributor of health care, animal health, food

science, and consumer products. During 1993, it had net sales of

$7.5 billion and ranked eighth among manufacturers in terms of U.S.

pharmaceutical sales. Its health care products include Feldene, an

anti-inflammatory agent; Procardia, a cardiovascular agent; and Zoloft, an

antidepressant.

Value Health is a provider of specialty managed care benefit programs and

health care information services. It comprises six companies, including

Value Health Sciences and Value Rx Pharmacy Program. Value Health

Sciences, located in Santa Monica, California, is a provider of clinical

software and physician review services. Value Rx, a PBM located in

Scottsdale, Arizona, and Bloomfield Hills, Michigan, was the sixth largest

at the time of the announcement, covering about 11 million lives.

Although the financial terms of the various contracts were not announced,

the relationship has three parts. First, in return for rebates, several Pfizer

drugs will be included on Value Rx’s drug formularies. Second, Value

Health Sciences has agreed to develop programs, such as clinical

protocols, physician and patient education materials, and outcomes

analyses, to increase physician and patient use of Pfizer products. Third,

Value Health and Pfizer each contributed $50 million to fund a new

company to establish disease management programs. Value Health has

emphasized that, unlike an acquisition, this contractual relationship does

not affect its operating independence.

In a related event, during May 1995, Value Health announced its

acquisition of Diagnostek, Inc. for $480 million. Headquartered in

Albuquerque, New Mexico, and founded in 1983, Diagnostek is a provider

of diagnostic-imaging centers, PBM services, and pharmacy services to

institutions such as hospitals and nursing homes. Just before the merger,

its PBM business unit covered approximately 16 million lives. Because of

Page 27 GAO/HEHS-96-45 Pharmacy Benefit Managers
Appendix II 

Additional Information on the Mergers and

Alliances

the acquisition, Value Rx will now cover approximately 32 million lives,

making it the largest independent PBM and the third largest overall.

Pfizer/Caremark Pfizer also partnered with Caremark International, Inc. during 1994.

Headquartered in Northbrook, Illinois, and incorporated in 1992, Caremark

International operates in two business segments: patient care and

managed care. The managed care segment includes Caremark’s

Prescription Service Division, a PBM and mail-service pharmacy. In 1994, it

ranked fourth among PBMs, managing benefits on behalf of 1,100

customers who together covered about 13 million lives.

Pfizer’s relationship with Caremark is a part of Caremark’s Drug Alliance

Program. Established in April 1994, this program involves contractual

relationships with four major pharmaceutical manufacturers: Pfizer;

Rhone-Poulenc Rorer, Inc. of Collegeville, Pennsylvania; Bristol-Myers

Squibb Company; and Eli Lilly. Although the amount Caremark received

from each partner was not disclosed, each relationship gives the

manufacturer access to both Caremark’s formulary and the drug utilization

statistics of its covered lives. By partnering with four manufacturers,

Caremark will receive rebates on products in over 85 percent of the

therapeutic classes on its formulary. It also expects to gain advantages in

the development of disease management programs by merging the

research capabilities of each manufacturer.

Page 28 GAO/HEHS-96-45 Pharmacy Benefit Managers
Bibliography

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