IT WON'T BE LONG

before congressional Democrats authorize the federal government to negotiate the prices Medicare pays for prescription drugs something the 2003 law creating the Part

D program notoriously prohibited. Uncle Sam will crack some heads at Merck and Pfizer, and Washington will save so much money that it might even close the much-loathed "doughnut hole," a flaw in the law that currently denies coverage to Medicare recipients who have at least $2,400 in prescription costs, but less than $3,850 in total out-of-pocket expenses.

That's the plan. But not so fast.

Even assuming Congress can overcome the Bush administration's rigid opposition to using government heft to benefit consumers, it's not clear that most advocates of lower prices understand how the prescriptions racket really works. Drugmakers don't typically sell directly to insurance companies. And insurers don't decide by themselves which drugs they'll cover. Instead, corporations called pharmacy benefit managers (PBMs) negotiate discounted purchases of drugs and manage the administration of benefits for health plans. And with Part D going back on the table, it's the role of PBMs within Medicare that requires corrective surgery first.

The history of PBMs in 100 words: As HMOs emerged in the early 1990s, they sought to clamp down on drug costs within their networks. So they started restricting their formularies, or lists of prescriptions they would cover. And they began hiring outside companies pharmacy benefit managers to play a two-step supply-chain game. First, the PBMs obtained volume discounts from companies that made the drugs the insurers still did cover. Second, they pressured doctors and pharmacists to herd patients onto those medications. Taking cash from both the drug companies and the insurers, PBMs grew into extremely powerful, profitable middlemen.

By January 2006, the three largest PBMs Medco Health Solutions, Caremark (which has announced a merger with CVS) and Express Scripts (which is also seeking to merge with Caremark) were processing prescription benefits for more than 150 million patients and generating combined revenues of $89 billion. And over the past year, PBMs have been able to extend their business model into the Medicare population. That's because the government doesn't run Part D directly, the way it operates Medicare's hospital, physician and home health care programs. Instead, beneficiaries join private drug plans, which buy pharmaceuticals, dispense them and get reimbursed by Medicare, and those plans are using PBMs to obtain drugs and set formularies.

Now, when a PBM saves a managed-care company or employer money by handling paperwork more efficiently, great. But PBMs make most of their money through practices that should scare the hell out of anyone signing up for a Medicare drug plan.

PBMs routinely manipulate formularies to favor the drug companies that offer them cash. Drugmakers typically give PBMs discounts on specific pharmaceuticals in the form of rebates. PBMs pass part but not all of those payments to insurers in exchange for giving those medications favored slots on the lists of prescription drugs the insurance plans cover. PBMs also bombard doctors with requests to prescribe the approved drugs and pharmacists with requests to switch patients to those medications.

So if you have high cholesterol and your doctor wants to treat you with Vytorin, there's no guarantee that's what you'll get. Vytorin is made by Merck and Schering-Plough; if your health plan is working with a PBM that has struck a deal with Pfizer on anticholesterol drugs instead, your insurance will probably cover Lipitor but not Vytorin. Not all drugs are interchangeable though, and if your doctor insists on Vytorin, he may be forced to fill out extra paperwork to authorize your prescription. Or you may have to fork over a higher copayment or full retail price for the drug you want and in Medicare, if you go off your insurer's formulary, your spending will not count toward the out-of-pocket limit that triggers government coverage beyond the "doughnut hole." Creepiest of all, your insurer's PBM may call your pharmacist or doctor and get your prescription switched before you ever get to the drugstore.

Industry professionals call this process "therapeutic substitution," or "step therapy," an even more hideous euphemism. Anyone on a steady regimen of prescriptions knows the reality of those terms: You ride a carousel of medications and an escalator of bills while your health plan and its PBM fish around for payouts from drug companies. Medco, for example, generates more than $3 billion a year in rebates on brand-name pharmaceuticals and keeps 26% of that cash. Indeed, in its 2005 annual report, the company revealed that without discounts and payments from drugmakers, it would not have been profitable in any year since 2003. But is this really something we want to impose on Medicare beneficiaries? Seniors take more medications and are more likely to have multiple prescriptions than other age groups, so they are especially vulnerable to adverse drug effects. It's also a recipe for confusion: My dad takes nine different kinds of pills a week; the last thing I want is for his oval green gelcaps to be switched to triangular yellow tablets and then, 60 days later, to half-red capsules.

What's worse is that this whole process may not even be saving any money. Sure, PBMs obtain discounts for insurance companies. But it's impossible for health plans to know whether they're really getting a good deal on pharmaceuticals, because the contracts between PBMs and drugmakers are secret. Drug companies don't have to reveal the costs of their products, and PBMs don't have to disclose which firms they are dealing with or how much of their rebates they are keeping. "It's like if you go to Best Buy and find a big-screen TV you like and there's a slip on the shelf that says 'COUPON,' but bears no price," says Robert Garis, professor of pharmacy sciences at Creighton University in Omaha. "So you go up to the register and the clerk says, 'That will be $2,300, and by the way, we gave you a great rebate on this.' And you ask, 'How much was the rebate?' And he says, 'That's proprietary.'"

Recently, PBMs have garnered lawsuits from federal prosecutors, state attorneys general and health plan members. In October, Medco agreed to pay $155 million to settle a case in which the Justice Department charged the PBM had solicited kickbacks from drugmakers, paid kickbacks to health plans and submitted false mail-order prescription claims. And in September 2005, AdvancePCS, which is now a Caremark subsidiary, paid $137 million to close its own federal kickbacks case. But these settlements haven't changed the middlemen firms' essentially self-dealing nature. In the traffic of prescription drugs, PBMs are like toll takers who pay themselves salaries from the fees they collect.

Which brings us back to Medicare. Congressional Democrats are seriously considering a proposal by Sen. Richard Durbin (D-Ill.) to have Medicare establish its own drug plan, which would compete with private plans, theoretically driving prices down. But that would leave intact the anticompetitive arrangements that PBMs have with drugmakers and insurance companies. Congress should also resurrect a 2003 plan by Sen. Maria Cantwell (D-Wash.) to require PBMs that want to participate in federal programs to reveal all contracts they have with pharmaceutical companies and health plans. And it should make clear that drug substitutions for commercial reasons are illegal within federal programs.

Seniors are filling 3.5 million Part D prescriptions a day. A government spending $38 billion a year to pay for that medicine has an obligation to make sure that doctors, pharmacists and patients themselves, not drug-company marketers, HMO accountants and PBMs, have the final say over what they put into their bodies.