The PBM industry saw some significant changes in 2019, as some of the largest forces in the market vertically integrated and began implementing disruptive programs that redefined the way pharmacy claims are processed in the U.S. The disruptive strategies spanned from drug acquisition (the way PBMs negotiate discounts with pharma clients) through drug delivery (the way the drugs are made available to patients).
Here are the top 10 macrotrends that significantly reshaped the PBM industry in 2019:
1. Emergence of transparent contracting strategies: As an answer to growing criticism that PBMs take huge profit margins through rebates offered by pharma companies, PBMs have explored radically different contracting strategies to retain market share. Both CVS and Express scripts are moving away from a conventional PBM spread model and are passing on pharmaceutical purchase discounts, price reductions, and rebates back to their health plan clients. CVS Health’s ‘Guaranteed Net Cost’ model ensures clients receive 100 percent rebates, while Express Script’s ‘Pass through’ model passes approximately 95 percent of all pharmaceutical purchase discounts back to its members.
2. Consolidation of the retail pharmacy sector: Over the past few years, the specialty pharmacy sector has consolidated significantly - most of the standalone specialty pharmacies have been taken over by PBMs, payers, or larger retail chains. In 2018, CVS acquired five specialty pharmacies (Apothecary By Design, Central Drugs, EncompassRx, EntrustRx, and SimplicityRx). Such consolidations provide the combined entities more bargaining clout for negotiating drug prices with pharma manufacturers. Given the high costs associated with procuring and managing specialty drugs, we can expect to see more consolidations in the coming years.
3. Limited distribution strategies: The addition of new specialty drugs in the market will increase the specialty drug spend, forcing PBMs to explore limited distribution strategies. Currently, more than 75 percent of specialty drugs are dispensed through a limited distribution model. It is noteworthy that the number of specialty drug approvals has been on a rise – in 2019, the FDA approved 44 innovative drugs. Several others are expected to reach the market in the near future.
4. Innovative payment models for high-cost gene therapies: PBMs and drug manufacturers explored innovative payment models pertaining to exceptionally pricy gene therapies. Staggered-payment plans and pay-for-performance deals appear to be the most commonly explored strategies between pharma and PBMs. For instance, Accredo (a Cigna-Express Scripts–owned specialty pharmacy) inked a five-year payment plan for Novartis’s $2.1M rare disease drug called Zolgensma.
5. Formulary Exclusion: CVS, Express Scripts, and OptumRx continue to exclude several branded drugs from their largest formularies. With more biosimilar versions reaching the market, it is expected that many original biologics could be excluded from PBM formularies. In 2019, Express Scripts excluded 244 drugs, while CVS excluded 167 brands. For 2020, CVS and Express Scripts will exclude an additional 32 brands from their standard formularies. Given the billions in projected savings big PBMs are expecting to achieve through exclusions (an estimated $3.2 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.
6. Emergence of community-based healthcare management model: The mega merger of CVS and Aetna paved the way for a new era of payer-aligned medical-pharmacy, wherein the combined entities brought together PBMs, payers, primary care providers as well as pharmacies under one roof. CVS introduced HealthHUBs, which provide primary-care services to Aetna members and help in managing chronic conditions. CVS has plans to have 1,500 HealthHUBs operating by the end of 2021.
7. Increased focus on social determinants of health: In July 2019, Aetna and CVS Health announced a partnership with UniteUs, a social care coordination platform that connects patients with social needs (such as housing, food, and transportation) to community groups that fulfill these requirements. Scientific research has indicated that social determinants drive more than 80 percent of health outcomes such as mortality, morbidity, healthcare expenditure, and functional limitations. More and more PBMs will begin addressing social determinants as a patient engagement tool in the near future.
8. Laying groundwork for digital health solutions: PBMs began investing on technology platforms to support a new era of digital therapeutic applications. CVS introduced a new service called vendor benefit management (VBM) to help its clients manage third-party vendors that provide such digital health solutions effectively. The PBM has included Big Health’s Sleepio application in this program. Express Scripts released a digital formulary through which the PBM aims to provide 15 digital health programs to its members, starting in January 2020.
9. Rapid Drug Delivery options: CVS contracted with UPS to deliver prescription drugs using drones. Two deliveries have been successfully conducted in Cary, N.C., however it will take the companies some more time to provide drone delivery services in a full-fledged manner. It is noteworthy that Amazon is also planning for rapid delivery option (called Prime Air) wherein drones will deliver drugs within 30 minutes of placing the order. Amazon may contract directly with insurers for delivering prescription drugs bypassing the PBMs.
10. New Entrants: In May 2019, Anthem launched IngenioRx, in partnership with CVS Health, indicated potential increase in competition in the PBM space. Amazon’s entry into the prescription drug market with the Pillpack acquisition is another area to watch for. Amazon’s popularity in easy delivery and reach could create more competition in the market. Amazon also launched a virtual clinic called Amazon Care for its employees and acquired Health Navigator, a start-up which provides technology and services to digital health companies.
Conclusion: A significant external factor that dictates the way PBMs function in the future will be the implementation of national and state-level policies. Although the federal government’s efforts to eliminate rebates that pharma companies pay to PBMs has not been successful, a total of 19 states passed around 22 bills to regulate PBMs and to control rising prescription drug costs. These bills include banning gag clauses, PBM licensure, limits on patients’ cost-sharing, prevention of PBM price spread, and rebate transparency. In addition, more than 100 PBM bills were introduced in state legislatures across the nation in 2019.
As for 2020, some significant challenges as well as opportunities await the PBM players as they tread into the revamped race track. CVS/caremark and Express Scripts will remain atop the PBM industry and will continue to manage a significant number of pharmacy lives in the country. However, given that smaller PBMs are engaging in several strategic partnerships and alliances, there is a strong chance that the enrollment rankings for these large national PBMs could see significant shifts in 2020 and beyond.