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Like most employers, the University of Michigan has been stung by soaring drug prices. But unlike most employers, the university was able to do something about it.

Convinced that something needed to be done to rein in the stiff, double-digit price hikes that hit their budget with each passing year, the university called on a staff full of medical experts and a group of outside consultants to create a working group that could come up with a solution. In the end, says Keith Bruhnsen, who was hired on to the university's benefits division specifically to focus on drug costs, Michigan found that some of the biggest culprits for higher drug prices were the pharmacy benefit managers (PBMs) who had been brought in to help manage costs.

Instead of dividing drug administration among the five different health plans and pharmacy benefit managers engaged to work with each, the university acted to centralize drug administration under one vendor. The remaining PBM, AdvancePCS — later bought by Nashville-based Caremark — was ordered to turn the work of the pharmaceutical and therapeutics committee over to the university's experts; a panel of pharmacists and physicians who were charged to determine which drugs needed to be covered for the 80,000 lives covered by the university and which could be safely excluded.

The process got underway in 2002. And the university is now in the final stages of making one last reform — dropping Caremark and turning to one of the smaller PBMs that is willing to cede complete control over the drug formulary to the university.

One of the university's first big reforms was getting a handle on the rebates drug manufacturers paid to PBMs for getting their pharmaceuticals on the preferred drug list, says Bruhnsen. Unlike most employers, Michigan now has a set arrangement in which the rebates are split between the university and the PBM. Those rebates are audited and carefully controlled.

But the PBM has still been able to extract other administrative fees from the drug companies that the university doesn't know about. Those fees can come from "selling your data and other fees that we do not know how much they are," says Bruhnsen. "We have no ability to negotiate those fees."

Says Bruhnsen: "The lack of transparency is troublesome. That can be millions of dollars that they can be making."

Fees could be paid directly to the PBM for getting drugs listed on a preferred drug list, says Bruhnsen. Dawn Parsons, a clinical pharmacist at the university, says that Michigan shut off one revenue stream, stopping the PBM from collecting fees for a therapeutic exchange program. In that case, drug companies pay sponsorship fees to a PBM to fax physicians who are prescribing non-preferred drugs instructions to switch the prescription to one of the drug company's sponsored products. And they would do that even though the sponsored product was often more expensive than the drug originally prescribed.

Manufacturers also once sponsored promotional materials that representatives for the PBM would take to physicians with supposed report cards on pharmaceuticals. "Caremark can't send representatives to physicians and present these materials," adds Parsons, "because they're sponsored. They're glossy and slick and they're advertising."

PBMs "undermine your efforts to control costs, and that's a real problem," says Bruhnsen. "Those are the kinds of activities going on behind the scenes that are really problematic."

And expensive for employers. By steering workers to the expensive, branded drugs that drug companies are promoting — and paying fees to gain PBMs' help in their campaigns — the university was forced to absorb millions of dollars in unnecessary costs.

Take ACE inhibitors, says Bruhnsen. The PBMs had rebates tied to the promotion of branded ACE inhibitors even though generics are considered just as good. And while generic ACE inhibitors would sell for a few pennies, branded ACE inhibitors could cost dollars.

Under the new arrangement being unveiled this summer, the university will pay the PBM a set fee and handle all outside negotiations with drug companies by itself.

Michigan's efforts have been paying off.

"When we started in 2003," says Bruhnsen, "we were dispensing 43 percent generic. We're now at 53 percent. And that's a savings of half a million dollars per percentage point each year. And you're keeping those members on that product for the rest of their therapy."

That trend has helped rein in drug costs to some extent. The university's 12 percent to 14 percent annual price hikes have slimmed down to 9 percent to 10 percent. And the university is convinced that it can make even more progress with generics and cutting the invisible fat out of the PBM's take.

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