PBM Accounting: Express Scripts Says Retail Rx Copays Are Not Revenue

Express Scripts is urging the Securities & Exchange Commission to avoid setting PBM accounting standards that require companies to count patients' retail pharmacy copayments as revenue.

"The idea to include something I never feel, touch, smell, see is very difficult for me to do, quite frankly. I don't touch copays in the retail, " Express Scripts Chief Financial Officer George Paz told a recent SG Cowen health care conference in Boston.

SEC and PBMs have been discussing ways to provide conformity in reporting revenues. Paz' comments suggest SEC is leaning toward having PBMs count all copays as revenue.

SEC's position is "if there's only one transaction, and that is the prescription drug being sold at the retail pharmacy, it shouldn't matter who actually pays, it's who has economic interest in the transaction," Paz explained.

"I think you have to bifurcate it and say there are actually two transactions," Paz said. "They argue there's one transaction: the member buying the drug. I say there's not; the member's buying a portion of the drug, and the plan sponsor's buying the other portion."

PBM accounting practices came into the spotlight when, as part of Medco's amended IPO prospectus in July, the Merck-owned PBM included copayments collected by pharmacies as revenue (¹ (Also see "Medco IPO Delay: Merck Trades Gross Margin For Cloudy Rebate Calculations" - Pink Sheet, 15 Jul, 2002.), p. 28).

The Express Scripts exec described the difficulties PBMs face when trying to account for copays as revenues.

"It sounds easy right? You've got a $20 copay, what would that be to put it in revenue? But it's a lot tougher than that, because keep in mind that probably 20% of our book of business is coinsurance....Do you still pick up the entire copay?"

"What if it's a 100% copay business?" Paz asked. "A lot of plans want the discounts for their members, but they don't have the financial wherewithal to pay for it. So they get the 25% to 35% discount that all gets passed on to the member at that point of sale, but they have to pay everything. The plan pays none of it on their behalf. Now do I pick up that number in revenue?"

Planning for missed payments would also complicate matters, Paz said. "On occasion somebody doesn't pay me or a member gives me a bad check at my mail order, so I've got to reserve for allowance for doubtful accounts up against that revenue stream. If I don't even know the revenue, how am I going to put up allowance for it?"

"Those are the issues I face as I try to figure out what the SEC wants me to do here."

AdvancePCS CEO David Halbert also noted at the SG Cowen conference that SEC is seeking PBM accounting conformity and said he is in favor of having standards (² (Also see "IG Compliance Guide Will Change PBM Rebate Policies, AdvancePCS Says" - Pink Sheet, 24 Mar, 2003.), p. 13).

Paz has discussed another difficulty in having PBMs account for copays with SEC: the fact that a number of healthcare firms other than PBMs also handle patient copays for medical services.

"It's not just us," Paz said. "I was very clear to the SEC: you've got PPOs, you've got HMOs, you've got warranty companies. You go on for days with all of the different companies that don't count copays in their revenue streams. I think to be fair, if you're going to do it to us, you've got to do it to everybody."

"I think that opened a few eyelids at SEC that they do have a bigger issue here," Paz said. "So I can't really say how this is going to unfold."

Including copays boosted Medco's revenues 10%. Paz also noted that the main impact of such accounting on Express Scripts would be on total revenues: "I guess the worst case scenario is my revenues go up. How much? I have no idea."

Express Scripts includes copays for mail-order prescriptions, which are filled through its own facilities, in its revenues. The company is seeking to double its mail-order penetration over the next few years (see ³ (Also see "Express Scripts Mail-Order Rx Penetration Could Double In 5 Years, Firm Says" - Pink Sheet, 31 Mar, 2003.) ).