PBM evolution and vertical integration will have significant implications for pharma - what are the threats and opportunities?

The below post is an excerpt from our white paper Beyond the PBM: A New Order for Healthcare Delivery.

The U.S. healthcare delivery model is undergoing dramatic changes – especially the evolution of the PBM sector (most recently CVS - Aetna and Optum - DaVita deals.)

These changes have significant implications for pharma companies. Under the current model, pharma typically charges prices high enough to sustain rebate concessions to PBMs for product access. The problem for pharma is that these discounts are not being passed along the supply chain, be it to the health plan, the employer, or ultimately the patient, resulting in increased public outcry about drug pricing and patient cost burden. Of course, manufacturers end up paying twice, by also tackling affordability at the patient level. And so margins continue to erode.

While the new vertical models could answer the call for a more transparent pricing landscape – arguably both an opportunity and a challenge – the big threat is surely the greater negotiating power that these integrated entities will be able to wield. Pharma needs to make stronger, more measurable, and increasingly complex value arguments.


What are the opportunities for pharma?

Value-based contracting

PBMs traditionally have not been receptive to value-based contracting. But the integration of PBM and health plans, with a greater focus on total cost of care and visibility of data, should make integrated PBMs more receptive to engaging in value-based contracts with pharma. That said, PBMs may still need to overcome implementational barriers such as outcomes data-gathering and analysis.

Convergence of pharmacy and medical benefits

Having medical and pharmacy side by side might be a good thing for pharma. If you believe there is leverage in the cost of medicine – that it’s a lot cheaper than ER visits and hospitalizations – having truly connected businesses where you see the medical and pharmacy costs in one place, allows you to assess if you are lowering the total cost of care. This means that PBMs will be able to realize gains from nuanced outcomes and endpoints, previously difficult to measure and pay for in a world where prescription and medical benefits were managed in silos – and increasingly important in areas such as specialty and oncology. This makes it more important to tell a value story that extends beyond traditional, Rx-centric outcomes.

Potential for a better pricing model

As PBMs are increasingly built into larger vertical structures, and the rebate and “spread” become less essential to their function, it’s possible that the pharma pricing model can start to move away from rebates and towards a more transparent and patient-friendly approach, focusing on front-end affordability. This will have implications on optimal pharma contracting strategies, which may vary as PBM and payer models evolve to change where dollars can best be spent to ensure access and outcomes. Account managers and brand teams must understand the nuances of PBM models more than ever.

Diverse offerings of PBMs

The big PBMs are getting bigger, while the smaller PBMs are becoming more specialized. While pharma may be experiencing a loss of control, particularly regarding drug exclusion lists and the increased bargaining power of integrated entities, they may still achieve access by aligning with PBMs’ varied offerings and objectives. Even the bigger ones, Caremark and ESI, for example, tend to take opposite stances on which drugs and companies they are going to cover. These dynamics may require that pharma contracting strategies evolve to drive cost effective access, requiring deep understanding of PBM model dynamics.


What are the threats for pharma?

Up against greater bargaining power

It stands to reason that a combined organization controlling even more patient lives will have greater negotiating power with regard to rebates and discounts.

Limited access for specialty products

A lot of the newer, high-cost, specialty products fall under the medical benefit, and health plans have been concerned about managing these costs. The potential for integrated PBMs to manage the medical benefit with the same level of utilization applied to the pharmacy benefit, might limit access to some of these specialty products.

Pressure to justify drug prices

Although this is a potential opportunity, it could also be construed as a threat, pressuring manufacturers to justify their high prices. While the large, integrated entities will create transparency, there are also a handful of smaller, standalone PBMs, such as Navitus and MedImpact, that are putting transparency at the center of their value propositions.

Generics utilization

With a greater focus on total healthcare costs, vertically integrated entities could drive use of generic drugs, particularly in the case of CVS-Aetna, where an expanding retail clinic environment might greatly favor generics dispensation.

Drug exclusion lists

The relatively recent phenomenon of drug exclusion lists could pose an even greater threat to pharma, should PBMs gain greater authorization control within the new vertically integrated models. While Caremark showed a somewhat softened stance with its latest list, ESI continued its aggressive approach, excluding 64 drugs this year.

Patient steerage fallout

As payer, PBM, and provider integration accelerates, the resulting collective organizations have greater control over where patients receive care, and may more actively steer patients toward preferred providers or pharmacies, which could threaten pharma from an access perspective. While this may result in a simple consolidation of control, the changes in where control truly lies may be rapid and difficult to measure in transition. 


Download the full report to learn more about healthcare delivery evolution and implications for pharma, payer, providers, and patients.


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