The algorithm black box

How it works:

• Imagine a generic drug has an average sticker price of $100, and its cost (including money for the drug maker, wholesaler and pharmacy) is $15.
• The PBM says it will apply an 80% discount on generic drugs, meaning an employer should only pay $20 for the drug. The PBM pockets $5 on normal spread pricing (after subtracting the $15 cost).
• However, using the algorithm, the PBM could define the generic drug as a brand, which only commands a 17% discount.
• Under that scenario, an employer would pay $83, or more than four times what it should for the generic, and the PBM pockets $68 after subtracting the drug's cost.
• Multiply this strategy for millions of generic prescriptions, and the profits add up quickly.

The bottom line: "You, as a customer, will never understand what's in there," one person familiar with the pharmacy benefits industry said about the algorithm.

From the Express Scripts template:

"Brand/Generic Algorithm" or "BGA" means ESI's standard and proprietary brand/generic algorithm, a copy of which may be made available for review by Sponsor or its Auditor upon request. The purposes of the algorithm are to utilize a comprehensive and logical algorithm to determine the brand or generic status of products in the ESI master drug file using a combination of industry standard attributes, to stabilize products "flipping" between brand and generic status as may be the case when a single indicator is used from industry pricing sources, and to reduce Sponsor, Member and provider confusion due to fluctuations in brand/generic status. Sponsor or its Auditor may audit ESI’s application of its BGA to confirm that ESI is making brand and generic drug determinations consistence with such algorithm.

Other parts of the series:

• The pharmacy squeeze
• The windfalls of secrecy
• The drug rebate curtain