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After a flurry of acquisitions in the prescription benefit management market, PBMs now are rethinking their marketing strategies.

Most PBMs are increasingly directing their marketing efforts toward health maintenance organizations rather than toward employers, as more and more companies move their employees into managed care plans.

Many PBMs also are fine-tuning their data collection to create more worthwhile disease management programs.

The search for new approaches to serve health care buyers does not indicate that PBMs are in trouble, despite Eli Lilly & Co.'s second-quarter $2.4 billion writedown of PCS Health Systems Inc., industry sources say (BI, June 30).

Lilly paid $4 billion for the former McKesson Corp. unit in 1994.

The writedown, which devalued the asset on Lilly's balance sheet to $1.6 billion, was not unexpected by industry experts (BI, June 30).

Lilly's writedown of PCS is indicative of two things, contends Mike Barberi, principal and managed pharmacy practice leader for William M. Mercer Cos. Inc. in New York.

First, Lilly paid too much for PCS, Mr. Barberi said. And second, "Lilly probably had misguided assumptions of how much value PCS would deliver in relation to Lilly's objective in moving market share of its own drugs."

PCS isn't the only PBM gobbled up in the past few years by pharmaceutical manufacturers at what observers say was too high a price.

"Merck paid too much for Medco," said Howard Tarre, a senior consultant with The Kwasha Lipton Group in Fort Lee, N.J. Merck acquired Medco in 1993 for $6.6 billion.

"I think the word on the street now is that (prescription drug) companies taking over PBMs is dumb," Mr. Tarre said.

Joe Schiesl, president of Plymouth, Minn.-based ValueRx Inc., agreed that "when those transactions were completed, there was some concern that the values were inflated."

"Now the market has cooled off," he said, and current PBM pricing is more in line with the companies' values.

For example, in a still pending deal announced earlier this year, Columbia/HCA is paying $1.3 billion for Value Health, ValueRx's parent company. ValueRx's PBM gross revenues for 1996 totaled $1.6 billion (BI, Jan. 20).

The Columbia-ValueRx deal is a veritable bargain compared with the $2.5 billion price MedPartners/Mullikin paid last year for Caremark, which is about half the size of ValueRx with 1996 revenues of just $888 million.

It had been suggested that drug companies were buying PBMs to ensure the manufacturers' drugs are given preferred treatment and not sold at too much of a discount.

"The assumption was that the drug companies would be able to get more business for more drugs," said Craig Stern, president of Pro Pharma Pharmaceutical Consultants Inc. in Northridge, Calif.

But drug companies say they didn't take over PBMs solely to be a conduit for delivering their products to the marketplace.

"We realized our expectations when we purchased Medco," said Wayne Gattinella, senior vp of marketing for Merck-Medco Managed Care L.L.C. in Montvale, N.J.

"Our objective was to get closer to the end user-the patient," he said. "We wanted to make sure the drugs were taken appropriately."

The combination of drug maker and PBM also is enabling Merck-Medco to develop better disease management and patient education programs, according to Mr. Gattinella.

"We still see significant opportunities for disease management," he said.

Because of the time needed to determine a cause-and-effect relationship between treatment and outcomes, many of these programs are still in the incubation stage, Mr. Gattinella explained.

"Providers like ourselves are investing significant dollars in fertilizing those programs," he said.

So far at least one of those programs has produced enough data to show that regular monitoring and administration of insulin can reduce the cost of hospitalization and doctor's office visits for diabetics by an average of $500 per year, according to Mr. Gattinella.

Merck-Medco also is working on disease management programs in several other areas, including hypertension, cholesterol, smoking cessation, women's health and depression.

While disease management has been a buzzword among PBMs in recent years, employers haven't been asking for it, according to Mary Harrison, director of client services in Stamford, Conn., for The MEDSTAT Group, a Minneapolis health care information and consulting firm.

Instead, "they are being inundated with drug companies and PBMs coming to them and saying, 'We have a program and wouldn't you like to get involved?' Savvy employers say 'Let me look to see if I have a problem first,'" she said.

"Many buyers are skeptical of specific disease management programs," agreed Mr. Schiesl of ValueRx.

That's understandable, he said, because "our industry has had a difficult time showing measurable results."

ValueRx hopes to set a new standard for disease management programs through its affiliation with hospital giant Columbia/HCA.

ValueRx is building a repository of data to show the efficacy of prescription drug use in three distinct settings: outpatient, inpatient and long-term care.

Called "knowledge systems," the databases will be used to show how drugs work in various treatment settings, cross-referenced by diagnosis and support services provided, he explained.

"Our strategy is to become the leader in medication management-in every outlet of medical care," he said.

Mr. Barberi compared the growth of disease management programs to that of managed care in general.

"Years ago when managed care was still new, Allied Signal was the first to put managed care in, and other employers sat back and were skeptical. And look what happened. Disease management is the same thing. Conceptually, it is still not completely proven, but the business case for it is being built, and it's getting stronger. We're starting to see companies implement it."

The fact is, benefit managers are going to have to "take a much

stronger role to help PBMs achieve the results they are looking for," Mr. Barberi said.

He suggests benefit managers move toward gradually closing formularies to a specific number of drugs and offer disincentives, like higher copayments, for drugs not on the formulary.

When that occurs, manufacturers will give larger rebates that are eventually passed on to employers, because the chance their drug is not on the formulary increases, he said.

"In order to really cut costs and improve quality, benefit managers cannot just have 50 million drugs (in a formulary). They need to give the PBM the ability to go back to the drug manufacturer to manage the health plan by getting better formulary programs," he said.

In general, prescription drug formularies are becoming more fashionable, experts agree.

Todd Swim, a principal and health actuary at Buck Consultants Inc. in Chicago, said he is seeing increased use of closed formularies-a list of 300 to 400 drugs for which reimbursement is provided to plan participants. Drugs not on the list come with penalties, like higher copayments.

Closed formularies "are becoming more prevalent because they've proven to be a more effective way to control costs," Mr. Swim explained.

The drugs on the list are carefully chosen and are the best drugs in their respective classes, so in most cases, no additional drugs are needed and the patient is cured as quickly as possible.

While the PBM industry's growth in recent years may be compared to that of the managed care industry, its future expansion will likely come from that market, industry observers say.

Employers that in the past had carved out their prescription drug benefits to cut costs are less likely to do so today.

Instead, many employers-like Coors' Brewing Co.-are handing over prescription drug management to the HMOs with which they contract.

"Our HMOs handle prescription drug management," said Elaine Allison, benefits administration supervisor at the company's Golden, Colo., headquarters.

Oxford Health Plan's decision to contract with PCS for pharmacy management is another indication that this trend is starting.

"As the market shifts to HMOs from indemnity plans, the PBMs are directing their marketing toward these customers," said Mr. Schiesl of ValueRx.

In the past, many HMOs attempted to manage drug utilization themselves, "now they're realizing that this requires an increasing commitment of resources," said Mr. Gattinella of Merck-Medco.

But HMOs are feeling competitive pressure, too, and need to cut these costs as close to the bone as possible, he said.

Mr. Gattinella predicts the end result will be a trend toward outsourcing pharmacy management to what he considers the experts-PBMs.

Robert Kazel contributed to this report