The evolving PBM market – trends to watch

Contributor : Shruti Desai: Lead Analyst

Publish date: 23 Mar, 2018

Amidst mergers, alliances and increased scrutiny, PBMs face a season of change

With 2017 receding into the rearview mirror, the road ahead for PBMs will have more than its share of twists and turns as the industry segment comes to terms with shifting alliances, potential mergers and the potential for new competitors entering the race. Looking ahead to the remainder of 2018 and beyond, here are key trends that bear watching.

Vertical integration and consolidation: Especially among the largest players in the PBM space (CVS, Express Scripts and OptumRx), look for an accelerated push toward vertical integration.

Some of the large PBMs have always functioned as much more integrated firms than others. For example, OptumRx is integrated with its parent company UnitedHealth, while CVS owns more than 9,700 retail store and has over thousand MinuteClinics across the country. More recently,

CVS has made a bid to buy Aetna, one of the nation’s largest insurers. If the deal is completed (and given the failure of healthcare industry mega-mergers in 2017, that’s no guarantee), the combined company could set the pace for programs to promote wellness, manage chronic conditions and hone strategies that tie outcomes to reimbursements.

A mid-sized PBM company, Prime Therapeutics, is owned by 14 Blue Cross and Blue Shield Plan. Prime and its Blue plans frequently collaborate on programs to boost drug adherence and cost management strategies. In a more unconventional move, Prime partnered with Walgreens to jointly launch a new specialty pharmacy company, AllianceRx. The new entity promises to offer specialty pharmacy as well as mail services offerings under one roof and began operations in March 2018.

In February 2018, Rite Aid, parent of EnvisionRx, announced it had signed a deal to be acquired by national grocery chain Albertsons. The deal will expand Rite Aid’s convenient care RediClinics into large Albertsons locations and Albertsons officials noted in a release announcing the deal that EnvisionRx will figure prominently in the combined company’s growth plans.

In October 2017, Anthem announced that it will launch IngenioRx, its own PBM, in 2020 in partnership with CVS Health. This move marks the end of Anthem’s contract with Express Scripts (the contract expires in 2019) and the pending entry of a new competitor into the market.

It is noteworthy that most of the large insurers such as Aetna, Cigna and Humana have been moving pharmacy benefit management in-house and relying on PBMs for channel management. For PBMs, that poses a challenge: To remain relevant and grow, the need for demonstrable value is increasing and leveraging contracted lives into better rebates or prices from manufacturers won’t be enough if payers determine they can do the same internally.

Transparency and other regulations: A long-standing criticism of the PBM industry is lack of transparency in rebate agreements and pricing. Given that such arrangements are often at the core of the PBM value proposition, legislative and rule-making action related to price transparency and rebating will continue to drive the PBM industry to explore new models to deliver value to clients.

More than 30 states have either passed or are considering bills related to price transparency. Three states (Nevada, Maryland, and Vermont) have already passed price transparency bills, 10 states (New York, Pennsylvania, Maryland, Ohio, Nevada, Oregon, Maine, Vermont, New Jersey and Rhode Island) are considering price-control related programs, 18 states (including Puerto Rico) are debating decisions pertaining to drug transparency, and three are in the process of banning drug coupon programs (California, New Jersey and New Hampshire).

Drug price transparency laws, unlike price control regulations, are not intended to directly lower drug costs; they aim to pressure drug makers and PBMs by making the public aware of drug-related profit margins.

Value-based or outcomes-based contracting: Tying reimbursement to drug performance will continue to gain momentum as the industry shifts from fee-for-service to value-based care in a bid to curb costs (both medical and pharmacy). The number of these contracts is on the rise and for PBMs, they appear to be focusing on therapy areas with multiple drugs with very little clinical differentiation.

VBCs can be beneficial to pharma companies as they can secure a preferred position on the PBM's standard formulary if they can prove their claim of clinical efficacy. However, there is a risk of decreased revenue if the drug fails to meet claimed outcomes and the PBMs can negotiate for significant discounts in such a scenario.

Personalized care: As a result of increased scrutiny from healthcare regulators and commoditization of core PBM services, several companies have evolved from handling pharmacy benefits alone to providing disease specific programs to various patient groups. Some large PBMs have gone a step further and have implemented patient-centered programs that individualize and monitor drug utilization and ensure that the right drug is given to the right patient at the right time.

Through its Transform Value program CVS has introduced innovative strategies such as indication-based pricing (reimbursement on the specific use of a drug rather than the same reimbursement across all indications); cost-cap based contracting (sets a cost threshold based on expected utilization of a particular drug) as well as outcomes based contracting (reimbursements based on predetermined outcomes for specific conditions). CVS/caremark is implementing the Transform Value program in the oncology, obesity, and respiratory therapy areas. Through these programs CVS aims to provide personalized support to patients via multiple touch points (pharmacies and MinuteClinics) and also tout the advantage of using advanced analytics to identify unique improvement opportunities for enrolled members.

Express Scripts introduced its patient-centric solution SafeGuardRx in late-2015. The program combines drug utilization management and innovative reimbursement solutions to bring down out-of-pocket expenses for patients within targeted therapy areas: oncology, inflammatory, diabetes. In June 2017, Express Scripts expanded the SafeGuardRx program to include pulmonary conditions and multiple sclerosis categories. Both the programs started in January 2018 and will follow personalized care models that address disease specific adherence and utilization barriers.

Formulary exclusion: The list continues to expand. PBMs continue to use formulary exclusions as an effective tool to gain additional negotiating leverage against manufacturers. Analysis of formulary exclusion lists of two key PBMs, CVS and Express scripts suggests that the companies have significantly broadened their exclusion lists and this is unlikely to change in the near term.

For 2018, CVS is excluding 17 drugs in 10 drug classes from its standard control formulary but is adding 17 drugs that were previously excluded. Combined with previous exclusions, the total number of excluded drugs is 154. Express Scripts is excluding 64 new drugs and taken together with prior year exclusions, the total number of excluded drugs in 2018 is 159.

Given the billions in projected savings big PBMs are expecting to achieve through exclusions (an estimated $2.5 billion for Express Scripts and $4.4 billion for CVS/caremark), it’s not unlikely other PBMs and payers will take a similar approach to formulary decisions.

For more on PBM trends, follow Shruti Desai sdesai@teamdrg.com

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