General Session: Is the PBM Industry Evolving or Disrupting?

During the keynote presentation at PBMI, Adam Fein, PhD, discussed the current place of PBMs in the market and how he sees this changing in the near future.

He began by recapping how the “big three” PBMs—CVS Caremark, Express Scripts, and OptumRx—dominated the market in 2017, making up around 72% of the market share. He explained that their dominance in the market place tends to drive the market and the public’s perception of PBMs.

“Really, what a lot of people think about when they think about PBMs, are these three companies,” Dr Fein said. “We have a very, very concentrated PBM industry. And these big three companies have kind of leaned in to some very significant changes that are occurring and effecting everyone—and in turn effecting, when we think about it, what does it mean to manage the pharmacy benefit?”

Mega-Trends Impacting PBMS

He went on to explain that the current state of the PBM industry can be contextualized by three major trends, including near peak dispensing rates.

“We are at or close to peak generic dispense rates,” he said. “In the last 15 years we’ve gone from about a 50% generic dispense rate to, in 2017, almost a 90% generic dispense rate. Most of the activity in the system—4.5 billion prescriptions every year—90% of that is a generic drug. We’ve had a great run, but the game is kind of over.”

He then said that this has led to the second large trend affecting the PBM industry, the boom of specialty pharmacy medications.

“The pharmaceutical industry itself has changed dramatically—the industry itself has bifurcated” Dr Fein said. “We have the vast majority of people that can be treated with generic drugs at a very low cost, and then we have another part of the market with very complex hard-to-treat conditions with specialty drugs that are a very small percent of the prescription.” He added that this has ended the era of the primary care blockbuster drug that involved sales reps pitching in primary care offices.

 The third trend highlighted by Dr Fein was the government’s dominance over private payers. 

“The government is crowding out private payers as the source of prescription drug funding,” he said. “Last year, 43% of all prescription drugs were paid for by Medicaid, Medicare, or some other government program. And by 2022 that is projected to be closer to 47% or 48%. So, who the PBM works for is changing too—it’s not just the small employer, it’s increasingly going to be the health plan working for the government or maybe even the government directly.”

In order to highlight how PBMs are adapting to these changes, Dr Fein first explained that drug spending has actually been slowing year-over-year since 2014. He cited data from Express Scripts that showed traditional drug spending has actually decrease since 2016, and while specialty drug spending growth is higher that traditional drugs, the rate at which it is increasing has slow significantly in recent years. 

“What other part of the health care system has seen costs decrease year-over-year? Essentially none,” he said. “Drug spending is not increasing that much, and the public perception doesn’t match this. So, PBM’s can point to this [data] and say ‘look, we did a really good job.’”

Changes to the PBM Business Model

Dr Fein explained that the ways PBMs make money is often veiled in mystery. This included tightly guarded rebate negotiating tactics, retail network spread, mail pharmacy, specialty pharmacy, fees, and “other.”

“How exactly does a PBM make money? And the usually response is ‘we don’t know,’” He said. “But what we do know, and what we can speculate on, is that the ways they make money are going to be changing dramatically.”

One way that this change will occur, according to Dr Fein, is through narrow specialty pharmacy networks. He said that traditionally manufacturers would launch a product in 65,000 pharmacy locations; however, with specialty pharmacy drugs, PBMs will take advantage of limited dispensing pharmacy benefit networks in order to maximize profits.

“We have a benefit design choice,” he explained. “Hey, I’ve got an idea. There is 20 pharmacy available to do this, but what if we narrow that down to one pharmacy, and what if that pharmacy is the pharmacy that we the PBM also own.”

Dr Fein went on to highlight that as a result of these network changes, the bulk of specialty dispensing revenue now belongs to the major PBMs and payers—almost three quarters of the market share. He noted that this trend combined with the trend of major mergers and acquisitions is pushing the market toward a more payer-aligned medical pharmacy future.

He noted that the combination of medical and pharmacy benefits is part of the natural progression of the specialty pharmacy boom. The most expensive drugs are those to treat patients with specialty conditions, and these patients also happen to have the highest medical spending. So, according to Dr Fein, this mass merging of payer/PBM and medical/pharmacy makes sense.

Dr Fein concluded that the future for PBMs will be competitive and challenging due to increased consumer pressure, political pressure, and due to the forces of new, innovative players in the health care space.

“PBMs will face more political and legal scrutiny over their impact on ‘drug prices’ and consumers’ out-of-pocket spending,” he said. “The reality of the US pharmacy supply chain will create deep confusion for regulators, legislators, patients, and plan sponsors. [And then] Amazon may (or may not) change everything.”