Recent news of high-profile companies moving employers to private insurance exchanges has pressured the share prices of publicly traded pharmacy benefit managers. It may be an overreaction as a chorus of stock analysts suggests but there's a reason investors are a bit spooked.

The shift to private exchanges predicted to accelerate sharply beyond 2014 threatens to dislodge the PBM's traditional relationship with employers by shifting the choice of insurance coverage from the employers to the employees.

In the exchange model, instead of contracting with a health plan and sometimes a separate PBM to provide group insurance, the employer gives each employee a set amount of money to spend in the exchange. The employee chooses among several carriers for the plan that best fits their needs, and if taking an option that exceeds the employers defined contribution, then pays more out of pocket for the richer plan. Large employers, which cannot use the public exchanges until 2017, are being enticed into private exchanges by the prospect of achieving more predictability than the traditional group plan. The exchange operator handles all the administration, relieving the employer of the burden. Competition among plans is supposed to keep a lid on costs.

Whether or not the PBMs will get the raw or sweet end of the deal really depends on the type of exchange that gains traction and the PBMs relationship with managed care organizations.
A key consideration is whether the exchange plans are fully insured or self-insured. In a fully insured structure, the pharmacy benefits are typically bundled with the medical policy, or carved into the contract with the managed care company.

Mercer and Towers Watson & Co. two of the large consultant firms marketing private exchanges offer both options, allowing PBMs to potentially retain their carve-out contracts with employers to provide a separate drug benefit. Mercer is offering companies who carved out today to stay that way. So far what we're seeing is that they are. Not exclusively, not 100 percent, but that's what they're tending to do, says Eric Grossman, Mercer's Exchange Business Leader.

Aon Hewitt another large consultant only offers the fully insured model, requiring employers that self-insured their benefits to convert to an insured relationship. This shifts control to the managed care organization, displacing the PBM that had the carve-out contract with the employer. If the PBM has a relationship with the carriers that are chosen, then the market share is maintained or could grow if the carrier is successful in attracting more customers.

This kind of system favors the internal PBMs of health plans (like UnitedHealthcare's OptumRx) or PBMs that have strong relationships with health plans, particularly Express Scripts and Prime Therapeutics, which corner the Blue Cross and Blue Shield market.

The potential to shuffle the decks of the PBM industry is fairly significant. Surveys from both the National Business Group on Health and Aon Hewitt project that nearly a third of large companies will consider a private exchange in the next three to five years, with the NBGH survey citing only 1 percent would be sending active employees to private exchanges in 2014.

Aon Hewitt estimates in 2014 alone that more than 600,000 U.S. employees and their families will be covered through its Corporate Health Exchange. When the consulting firm recently announced that 18 companies had signed on to its exchange including Walgreens, Sears Holdings and Darden Restaurants the price of Catamaran stock dropped sharply before rebounding the next day, reflecting investors concern that Catamaran will lose the PBM contract for Walgreens employees. (Walgreens declined to elaborate on its exchange relationship with the PBM only to say it has set up a solution through each of the carriers that allows it to retain the same pharmacy benefit design).

The trend has taken hold more substantially in the retiree sector. More employers have been shifting retirees from group insurance to Medicare exchanges that connect retirees aged 65 and older with individual Medicare Advantage policies or Medicare Supplement policies with a stand-alone Part D prescription drug plan. With MA, the drug benefit is bundled with the medical.

The uptake among large employers for this option is 10 percent in 2013, and 40 percent are considering it for the future, according to the NBGH. Towers Watson has gained traction with its private Medicare exchange since it acquired Extend Health in 2012. This exchange counts more than 250 employers, including IBM and Time Warner.

Although churn from private exchanges could translate into disruption for PBMs in terms of market share and changing payer relationships, it's not all gloom and doom for PBMs at least in the short term.

The trend is accelerating, but in 2014 plenty of employers will be hanging tight to see how reform shakes out. Wall Street stock analysts even see potential for margin improvement as health plans will rely on PBM partners to more aggressively control utilization and steer to generics to hold down costs.

-The bottom line is that PBMs will continue to be the back-end of health plans in both the public and private exchanges, says Tony Perkins, head of investor relations for Catamaran.

Follow Chris Lewis on Twitter @ChrisLewisHLI


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