PBM practices on trial in Ohio

The retired teachers of Ohio are suing its Pharmaceutical Benefit Manager (PBM) Medco, alleging Medco overcharged for prescription drugs. Today's Wall St. Journal (Ohio Teachers' Suit vs. Medco Offers a Peek at PBM Practices) describes the allegations regarding generics.Each side is framing the issues its way:

• The teachers point to a "350% markup" on generics that drove up costs by millions of dollars
• Medco says it made only a 1% margin on the contract as a whole and saved the teachers millions

They could both be right. In Medco's defense, the cost of handling a generic or brand drug is the same. For example, if Medco charges $10 to process a prescription and the drug is a $3 generic, it's a 333% markup. The $10 processing fee on a $100 branded drug is a 10% markup. It's worth it to pay high percentage markups to get generic drugs.

In the teachers' defense, it's quite likely that Medco made strong profits on generics by not ratcheting down prices as fast as its own costs were dropping. Generic drugs typically drop quickly in price as more players produce the same drug. In addition, we don't know what overheads Medco is including in its 1% margin calculation --the real profit margin could be higher under different accounting.