Posted At Forbes.com

BY : Ashlea Ebeling

The middlemen companies that manage prescription drug benefits for big companies, states and pension plans in the United States have fought hard to keep what they really pay manufacturers for drugs a secret. And they've successfully fended off state efforts to regulate them and force more transparency--until now.

Last month, a unanimous three-judge panel of the U.S. Court of Appeals for the First Circuit dealt the pharmacy benefit managers (PBM) a big blow when it upheld a sweeping Maine disclosure law designed to curb questionable business practices such as managers' pocketing drugmaker rebates, without letting customers know the details of the rebate deal.

There are 60 PBMs that administer nearly all private drug plans, and an increasingly large share of public drug plans too. The big players are the stand-alone companies, Caremark Rx (nyse: CMX - news - people ), Express Scripts (nasdaq: ESRX - news - people ), Medco Health Solutions (nyse: MHS - news - people ), and divisions of large commercial insurers including Cigna (nyse: CI - news - people ), Pacificare Health Systems (nyse: PHS - news - people ) and Wellpoint (nyse: WLP - news - people ).

There is no question that PBMs do some good. They negotiate reduced prices for drugs for their customers. As an individual consumer, you're better off if your company has a PBM that provides you with drugs for some set co-pay than if you had to pay the full out-of-pocket cost of a drug yourself, say in a new Health Savings Account plan. But is your company--the PBM customer--getting a good deal?

When they first started up, PBMs charged an administrative fee for their negotiating efforts. But along the way, they found it more lucrative to get rebates from drugmakers and pass only some of the cost savings on to their customers. This is when customers started complaining that they didn't have enough information to evaluate their PBMs.

The Maine law, passed in 2003, requires that PBMs disclose and pass through to their customers their drug company rebates. The PBMs' lobbying association, the Washington, D.C.-based Pharmaceutical Care Management Association (PCMA), sued to stop the law from going into effect. It tried challenging it on five grounds (federal preemption, Due Process, First Amendment, Commerce Clause, Takings Clause). But the trial court said the law was valid, and the First Circuit agreed.

"The new law puts a lot more power in the hands of the PBM customer," says Sharon Treat, executive director of the National Legislative Association on Prescription Drugs Office in Hallowell, Maine, a nonprofit working to pass such laws. (She sponsored the Maine bill while serving as a Democratic senator in the state legislature).

The PCMA has asked for a rehearing before the full First Circuit, and says it may appeal to the U.S. Supreme Court. The PCMA contends that the disclosure regulations would increase, not decrease, drug prices for consumers. It cites U.S. Federal Trade Commission opinions that the rules would have the unintended consequence of limiting competition. (The PBMs say they would lose their bargaining power with drugmakers). It also cites a PricewaterhouseCoopers study that estimates that the Maine law would raise drug prices by 10% over ten years. The Attorney General of Maine counters that the new law will lead to lower drug prices.

The PCMA is fighting a similar Washington, D.C., law in court and arguments in that case are scheduled for January. (North Dakota and South Dakota have similar but weaker laws in effect that the PCMA didn't fight in court.)

The association's lobbying muscle has helped stop legislative efforts to regulate PBMs in a dozen states, including Illinois and North Carolina and California, where Governor Arnold Schwarzenegger vetoed a law he said would be anticompetitive. The PCMA's president, Mark Merritt, calls the legislative efforts misguided. "Essentially they want to create a one-size-fits-all disclosure policy that every single customer has to enter into with PBMs, but the customers want flexibility," he says.

Yet Treat predicts that, based on the First Circuit decision, PBM disclosure legislation "is going to have some legs around the country in the new year." She says she knows of at least 15 states with new or renewed efforts to pass similar legislation.

Against this backdrop, individual PBMs are fighting allegations in court about questionable business practices, including a case filed by New York Attorney General Eliot Spitzer against Express Scripts charging it with hiding rebates that belonged to the state's health program. Express Scripts denies any wrongdoing.

While the legislative efforts and court battles continue, PBMs are already changing the way they do business, says Treat. Savvy customers are starting to negotiate for more transparency upfront, in some cases demanding that the PBMs pass on 100% of drugmakers' rebates.