Club meds: could drug-buying clubs cure high prescription costs?

Entrepreneur, Nov, 2004 by Julie Monahan

FED UP WITH THE HIGH cost of prescription drugs, a group of 50 employers from the Fortune 500 are banding together to negotiate a better deal with pharmaceutical companies. While any effort that chips away at medication costs wins support among most employers, if one company pays less, another will pay more.

"The classic image is of a water balloon," says Eric Parmenter, practice leader for compensation and benefit consulting at Grant Thornton LLP, a Chicago accounting and consulting firm. "When you squeeze in one place, the water goes to another part of the balloon."

The plan to buy direct aims to bypass the use of pharmacy benefit management companies (PBMs), intermediaries hired by employers to negotiate discounted drug prices on their behalf. Some companies say this method hides the true cost of pharmaceuticals and makes it hard to determine the level of discount that's negotiated. Drug companies also extend rebates on certain drugs, which increases the PBM's profit while encouraging use of the most expensive medications vs. cheaper alternatives.

Whether this drug-buying club will save money remains to be seen. These clubs seem to boost negotiating power and access to lower prices, says Parmenter, but management fees and the need to spread the savings among members may deliver lower savings. So far, there's little proof that buying clubs do any better than an individual business going it alone. Still, some leverage is better than none. While entrepreneurs will never have the clout of a billion-dollar enterprise, legislative proposals are afoot that hold hope for boosting their bargaining power.

Businesses can also take action. Steve Millard, executive director of the Council of Smaller Enterprises, the small-business division of the Greater Cleveland Partnership, suggests limiting the types of drugs covered by an employee health plan, requiring co-pays and the use of generics, and encouraging employees to use mail order pharmacies, which offer lower prices than retail. "The thing to remember," says Millard, "is that there's always strength in numbers, and plenty of organizations--from chambers of commerce to professional trade organizations--can help find the best deal."