Who are the bad guys driving up the cost of health care? The list may be lengthy, but certain nominees are the prescription benefit managers. At least, that might be your conclusion after hearing the sorry tale of the acting president of StrongSquare, Ron Davis.

Prescription benefit managers are companies that act as administrators of drug programs. They process and pay drug claims for health plans and self-insured groups and can serve as intermediaries between drug wholesalers or pharmaceutical companies and health plan providers. Because PBMs are large buyers, they can save employers or health plans money by negotiating discounts on drug purchases which they then pass along. The industry has frequently been sued by those claiming that the companies have not passed on the negotiated savings and have instead illegally kept those gains for themselves.

Mr. Davis and his partners claim that the PBMs have put them out of business. They say that StrongSquare’s only crime was to try to save money for consumers by giving them previously unavailable information about the cheapest way to obtain the treatment recommended by their doctors. The PBMs, according to Mr. Davis, do not want the curtain pulled back on the real cost of medicine.

The StrongSquare team has spent the past year trying to sell their software to the medical community. Through the Strong-Square platform, a patient could find out about generic alternatives to prescriptions written by a doctor, would be informed about side effects and interactions with other drugs, and would, above all else, find out comparative price information on various drugs for all retail chains, mail order, and discount pharmacies.

According to Mr. Davis, the technology, which the company was trying to sell on a private label basis to health care outfits, was proven and affordable. In an e-mail, Mr. Davis said: “We knew that 25% of our users were pricing a brand drug that had a generic alternative. We knew that we ‘redirected’ 54% of these users to a generic with an average savings of $58.93 per prescription. Results: $80,000 per month savings for a 100,000 member health plan (with 10% of their members accessing this data.) It saves their members $30,000 a month in reduced co-pays. How could this fail?”

Good question.

“The premise was simple. … The technology had been deployed for three years and could verifiably show cost savings to members of health plans … and to uninsured or self-insured consumers by pointing them to the least cost medications from the least cost providers.”

Mr. Davis’s initial optimism first ran aground last spring when he attended a gathering of senior people in the pharmaceutical benefit industry in New York. Asked to address the group, he launched into his pitch, linking increased information for the consumer to cost savings. He says he was met with “a dozen stares from ‘industry experts’ that probably thought I was a lunatic. One person responded “we don’t want informed consumers – it would mean we would lose control.” One person actually said to him “Ron, you don’t get it. This is a big shell game and the last thing any of us want are consumers looking under the shells to see where the money is.” Discouraged but not defeated, Mr. Davis took his pitch to health plan providers, who paid lip service to the attraction of offering consumers more informed choices, but who were unwilling in every case to upset their relationship with their PBMs.

Who are these PBMs and how are they so powerful? They are companies like Medco Health Solutions (MHS$87), ExpressScripts (ESRX $55), Omnicare (OCR $33), and CVS Caremark (CVS $38) that, along with one or two others, account for an estimated two-thirds of all prescriptions processed every day in America. One report suggests that PBMs manage drug benefits for 57% of the American population. No wonder they are powerful.

Like every aspect of health care, the role of the PBM is complicated. The head of the Schneider Institutes of Health Policy at Brandeis University, Stanley Wallack, said. “The fundamental question about the PBMs is — whose side are they on? The less their income depends on the drug companies, the more they are managing better prices,” he said.

Mr. Wallack says the PBMs got their start by processing claims — a tedious chore that the insurance companies were not prepared to undertake. The PBMs initially were paid a service fee, but then they realized there was more money to be made by negotiating discounts with the drug companies and contractually holding onto some of those savings. Things got out of hand when the combined purchasing power of the PBMs reached a point that they could wrest large discounts from pharmaceutical manufacturers and health plans were not set up to audit the process.

These days, according to Mr. Wallack and others, the health plans and self-insured employers hire consultants to gain a window on the process, which is significantly more transparent that it was a decade ago.

Another consultant to the pharmaceutical industry, who spoke to us off the record, says this about the PBMs: “They are extremely powerful — like the broker-dealers before 1975. There’s not a lot of accountability. CEOs don’t spend time on this kind of cost monitoring — they’re more concerned about the revenue line. Though prescription costs are steadily growing, they’re only a small part of the overall benefits package.”

Some expect that the price-driven entry of Wal-Mart and other large discount stores into the prescription medication business may finally force open the window on drug prices. Yesterday’s market saw the drug chains, and the PBMs, get knocked silly in an otherwise strong market by an unusual earnings shortfall reported by Walgreen’s (WAG $41), stemming from declining prices on generic drugs. Consumers may be at last climbing into the driver’s seat.