March 3, 2017

Neil Weinberg and Robert Langreth

A decade ago, Caterpillar Inc. looked at its employee drug plan and sensed that money was evaporating. The bills for pills had increased inexorably, so the company started to rein in its pharmacy benefit manager, or PBM. The managers are middlemen with murky incentives behind their decisions about which drugs to cover, where they’re sold, and for how much.

In a decade when the average American’s drug spending has spiraled higher, the figure has fallen at the company. By hiring its own doctors and pharmacists, among other changes, Caterpillar has saved tens of millions of dollars a year. “The model is as successful today as it’s ever been,” says Todd Bisping, a global benefits manager at the company.

Caterpillar’s experiment raises tough questions about a market that President Donald Trump recently slammed for “astronomical” prices. Pharmacy benefit managers process prescriptions for insurers and negotiate with manufacturers on one end and pharmacies on the other. The three biggest—Express Scripts Holding, OptumRx (a unit of insurer UnitedHealth Group), and CVS Health—process about 70 percent of the nation’s prescriptions, according to Pembroke Consulting. Drugmakers, who met with the president behind closed doors in January, have been trying to finger the managers as the culprits of the cost increases. “The drug-pricing system is completely broken,” says Linda Cahn, who runs Pharmacy Benefit Consultants in Morristown, N.J. “For the first time, PBMs are in the crosshairs.”

The Health Transformation Alliance, a year-old group of more than 30 companies including IBM Corp. and American Express Co., has promised to bring down costs in part by reducing “redundancies and waste in the supply chain.”