An Investor’s Perspective on Shifting PBM Landscape

Recently at the PBMI 2018 Annual Meeting, George Hill, managing director at RBC Capital Markets, recapped some recent marketplace changes and gave his outlook on how the PBM landscape is trending.

His presentation, “Wall Street’s Outlook on the PBM Industry,” began with an overview of where PBMs currently fit in to the health care supply chain. 

“PBMs are the only economic counterbalance to branded drug manufacturers and retail pharmacies,” Mr Hill said during his presentation. 

He explained that PBMs command rebates from manufactures through formularies, tiering, and drug exclusions. PBMs also demand discounts from pharmacies, optimize costs through brand/generic interchangeability, and mange costs of specialty pharmacy products. 

He emphasized that the mission of the PBM is to reduce the cost of drugs as much as possible, especially in the case of generic drug switching.

“PBMs make more money when they fill a lower cost prescription,” Mr Hill said.

He also noted that the PBM and payer relationship is an essential one for cost-savings purposes. 

“It’s not a question of whether a plan sponsor could pay less, but to which companies are they paying the money,” he said. “Sponsors pay less to the PBMs than they would pay retail pharmacies and branded drug manufacturers without PBMs”

The Evolution of the PBM

Mr Hill highlighted how PBMs have evolved over recent years, and how they could evolve in the wake of major consolidation within the industry. 

According to his presentation, PBMs have transitioned from claims processing firms to entities that work with payers to design and manage networks, design formularies, manage specialty pharmacy, and focus on managed care and primary care delivery. 

He explained that the trend for PBMs is to become consolidated within large managed care companies or payers. His presentation took place the day before the announcement of Cigna’s purchase of Express Scripts, but this purchase fell in line with the market trends that Mr Hill highlighted. 

Amazon Deal

Mr Hill also cast doubt on the ability for the Amazon, JPMorgan, and Berkshire Hathaway deal to significantly impact the markets. During his presentation, he initially called into question the part of this deal that emphasizes that the company will be “free from profit-making constraints.”

“So, wait—now Amazon, JPMorgan, and Berkshire Hathaway are free from profit-making incentives and constraints?” Mr Hill said. “So, they want to be…Blue Cross Blue Sheild—is that the goal here?”

Mr Hill downplayed this announcement, noting that the vague wording and emphasis on employee-health in the press release was reminiscent of other similar failed efforts made in the past. 

“My first thought after reading this was, I’d like to point them down the path of all the other employer-sponsored initiatives run by individual employers, that were going to try to control health care costs, that went absolutely nowhere,” he said. 

Mr Hill also emphasized that a deal like this would create numerous conflicts of interest that would ultimately impede the company’s goals.

“This deal is rife with conflicts,” he said. “Can anyone imagine Google, and Microsoft buying health care from Amazon? Can you imagine Goldman Sachs, Morgan Stanley, of Royal Bank of Canada buying health care from JPMorgan? I think not.”

He noted that this deal will ultimately fail when other profit-making drivers ultimately influence the parent-companies to abandon the company’s goals of lowering health care costs.

“The rubber will really hit the road when Unitedhealthcare or CVS… want to steer a multi-hundred million dollar advisory fee away from JPMorgan—all so that JPMorgan can save a couple of grand on its health care.”

Mr Hill concluded that the announcement of this deal was a good thing for investors in the industry, indicating that Amazon may not be as serious of a threat as the media is making it out to be.

“To me this announcement was the big sigh of relief,” he said. “That this was just going to be another employer-sponsored initiative that probably goes nowhere.”