James Alves thought he was getting a good deal. Using his drug-benefits card, he was paying $5 each month at his local CVS pharmacy for a 30-day supply of the generic heart drug furosemide. 

Turns out it was no bargain. The company running Mr. Alves's drug-card program, Harvard Pilgrim Healthcare Inc., had negotiated a price with CVS of a mere 76 cents for the drug. So, when Mr. Alves paid $5 for something that CVS agreed to sell for 76 cents, $4.24 went to Harvard Pilgrim.

More than 200 million Americans now get their prescriptions filled through so-called pharmacy benefit managers like the one Harvard Pilgrim runs, which offer negotiated discounts on drugs. But increasingly, patients in these programs are shelling out more in co-payments for certain medicines than the drug is actually costing their health plans.

SOARING DRUG PRICES   1 Read the full series of Page One stories2 on the embattled pharmaceutical industry.

The practice is most likely to occur with common generics like prescription-strength ibuprofen, the antibiotic amoxicillin, and the popular painkiller acetaminophen with codeine. Co-payments for health plans are creeping higher -- the result of employers' ongoing efforts to control health costs. As a result, more and more of the discounted prices for drugs are likely to fall below the level of the co-payment.

Pharmacy benefit plans generally work by negotiating discounts of between 10% and 20% with tens of thousands of pharmacies -- then pass on some of those savings to clients, like employers who buy the plans for their workers. The consumer pays a small co-payment -- say $5 or $10 -- for a prescription; the employer gets billed by the health plan for the rest.

But plans are getting so aggressive at negotiating discounts with pharmacies that unbeknownst to most consumers, they are sometimes ending up with prices on generic drugs below the standard co-payments. Yet instead of allowing consumers to pay the lower prices, many plans are either pocketing the difference themselves or allowing the pharmacies to keep it.

The phenomenon is the latest irony in the skewed economics of health care. It comes not only amid rising co-payments and even faster-rising retail drug prices, but also amid turmoil in the pharmaceutical industry as a growing number of drugs face generic competitors.

For now, pharmacy benefit plans say the instances when the discounted price is less than the co-pay are rare. But two of the country's three giant PBMs -- Medco Health Solutions, a unit of Merck & Co., and Express Scripts Inc., which together manage the pharmaceutical benefits of more than 100 million people -- routinely let pharmacies charge the full co-payment even if the negotiated discount price is lower. Recently, Walgreen Co., one of the country's largest pharmacy chains, instituted a minimum prescription price of $7.99 or $8.99, no matter what the negotiated discounted price is. Both Walgreen and CVS Corp., another huge drugstore chain, say they need to collect the full co-payment even when the negotiated price is less.

"The co-pay represents fixed costs associated with dispensing the medication," such as paying pharmacists and other overhead, said a CVS spokesman.

It's difficult to estimate how much more consumers spend because of this practice than they would if they simply paid the lower discounted price. One PBM estimates that consumers may pay 7% more in co-payments than they would if they were allowed to pay lower discounted prices.

Substantial Sums

It's also unclear how much the PBMs and pharmacies are netting from the practice, though the sums could be substantial. According to IMS Health, a health-care information company, there were more than 30 million prescriptions in the U.S. last year for the antibiotic amoxicillin, one of the generic drugs for which PBMs often negotiate a price lower than a co-pay.

Keeping the difference between the discounted price and a higher co-payment can be lucrative for individual pharmacies, according to one analysis by a pharmacy-benefits manager. The practice can add nearly 2% to the overall drug spending of a particular plan, according to this PBM's estimate. So a pharmacy that handles $1 million of drug claims for a particular employer could see an additional $20,000 a year. That's not a bad take considering it doesn't require added costs and pharmacy margins are already razor-thin.

While few consumers and employers are aware of the practice, Mr. Alves, a 48-year-old accountant in Massachusetts, found out -- and sued Harvard Pilgrim claiming he was "fraudulently charged" co-pays in excess of his plan's costs. Harvard Pilgrim countered that it sold Mr. Alves's employer a drug plan that listed a flat co-payment amount, not a sliding scale depending on discounts. In June, a federal court judge agreed and dismissed the case. Mr. Alves is appealing.

The issue is one of fairness and complete disclosure, argues Stuart Rossman, director of litigation at the Boston-based National Consumer Law Center, which helped Mr. Alves in his case. "Our feeling is when you pay a co-pay, you assume that it's two people paying," says Mr. Rossman. "If I'm going to put $4 into the health plan's pocket, at least let me know what's happening."

PBMs say that they are struggling to keep drug benefits affordable for clients in the face of skyrocketing pharmaceutical prices. Some say they allow pharmacies to cash in on the difference between the negotiated discount and the co-payment on cheaper drugs in return for discounts on other, more expensive drugs.

For most Americans, paying an extra few bucks here and there for generics is no sweat considering that in most cases, the co-payment -- $5, $15 or even $25 -- costs only a small fraction of the price of some expensive medications. On the whole, PBMs work out pretty well for consumers: The average brand-name drug retails for nearly $70, while the average generic prescription costs almost $20. By contrast, the average American co-payment currently is under $10 for a generic drug and under $20 for a brand-name drug.

Creeping Co-Payments

Nevertheless, co-payments for prescription drugs continue to edge up, now averaging $9 for generics, compared with $8 the previous two years, and $17 for preferred drugs (brand-name drugs with no generic substitutes), up from $15 in 2001. Co-payments for so-called nonpreferred drugs (brand-name drugs with generic substitutes) jumped to $26 this year from $20 in 2001, according to a report by the Kaiser Family Foundation and the Health Research and Educational Trust.

For now, there's not much consumers can do about the problem of co-pays that are higher than the negotiated price. Buying a drug without using your drug card will get you the retail price for the drug, which is bound to be much higher than the discounted price. And drugstores aren't bound to charge the discounted price. They are required only to charge the lower of the retail or the co-payment.

Write to Barbara Martinez at barbara.martinez@wsj.com⁵

Updated September 12, 2002