Payer Roundtable: Going In-House Are Stand-Alone PBMs in Peril?

Express Scripts is absorbing a significant blow with the loss of Anthem, Inc’s business. Meanwhile, Anthem has found another partner to dance with, and CVS is its name. Who will be the winners and losers when the music stops? 

Anthem Inc’s decision to create its own pharmacy benefit manager (PBM), IngenioRx, means it is kicking Express Scripts to the curb in favor of a partnership with CVS Health. But will other payers follow suit? What does this mean for stand-alone PBMs? And what will organizations need to do to survive and thrive as the landscape shifts rapidly beneath them? 

These were just a few of the questions First Report Managed Care asked a group of experts recently. Our panelists included Melissa Andel, health policy director at Applied Policy; Catherine Cooke, PharmD, research associate professor at the University of Maryland School of Pharmacy; Charles Karnack, PharmD, BCNSP, assistant professor of clinical pharmacy, Duquesne University; David Marcus, director of employee benefits, National Railway Labor Conference; Gary Owens, MD, president of Gary Owens Associates; Arthur Shinn, PharmD, president, Managed Pharmacy Consultants, Lake Worth, FL; Daniel Sontupe, executive vice president and director of market access & payer marketing, The Bloc Value Builders; and F Randy Vogenberg, PhD, RPh, principal, Institute for Integrated Healthcare.

What are the major reasons for taking PBMs in house? 

Mr Marcus: In 2014 and 2015, the FDA generic-approval backlog was significant, making it less attractive to manage pharmacy benefits in-house.  Since then the FDA backlog has decreased significantly. This, along with PBM/wholesaler consolidation, has driven generic deflation. It now makes financial sense to consider managing pharmacy benefits in-house.  

Additionally, payers with integrated, in-house pharmacy benefit management are simply better suited to manage the health of their covered populations.  Combining medical and pharmacy management within the same administrative structure is a more efficient way of delivering health care, as the payer can coordinate care appropriately. Plus, with a wider range of generic drugs available, payers are able to effectively apply drug utilization management rules to drive covered individuals to generics instead of costly brand-name medications. 

Dr Karnack: I think the main reason is the lack of transparency of stand-alone PBMs such as Express Scripts.

Dr Vogenberg: Not only lack of transparency, but there is increasingly a lack of value delivered by stand-alone PBMs, particularly with specialty drugs. And traditional drugs are commoditized, making it more attractive and easier to bring in-house or subcontract. 

Dr Cooke: PBM industry outsiders now have a greater understanding of how PBMs achieve lower drug prices. Their contractual processes are no longer a mystery.  Health plans are not only questioning the value of their PBM, but believe that they can manage their pharmacy benefit better.  

Dr Owens: This is the “buy vs build” argument all over again. In the past, many health plans did their own pharmacy management and contracting, and maintained their own P&T control. Claims payment and network contracting were generally outsourced. Many payers noted the inefficiencies of this approach and moved to using PBMs. However, as PBMs consolidated, the choices and the ability to leverage better deals diminished.  So now the pendulum has swung back and some health plans are considering taking back these functions to gain better control over the pharmacy business line.   

Do you see this potentially spreading widely, or are there limits to those who can do this successfully? 

Mr Marcus: This is absolutely a trend. United Healthcare’s Optum Rx is already here, Anthem is following suit, and CVS Health is acquiring Aetna.  As it stands now, there are only a handful of PBMs capable of handling nationwide markets.  If anything, in 5 to 10 years, there will be even fewer of them.  

Dr Vogenberg: It is more or less a trend, yes. The problem is in the FTC’s position on the extent of vertical or horizontal integration, which affects competition. Regardless, traditional PBMs and health plans will not survive—that is what we are now seeing evolve.

Mr Sontupe: Recall that we also saw this back in the mid-1990s, but health plans found out quickly that their core competency did not spread to pharmaceutical management. So, it is a trend of sorts that has been done for many years in some form. United Healthcare’s in-house PBM, Optum, runs separately. I believe CVS will run Anthem’s PBM in a similar way. 

Dr Owens: Large health plans such as Anthem United Healthcare are best positioned to develop their own PBMs. They have the size, cash, and capabilities.   I doubt this approach is a good one for smaller regional plans. It is just too much work and they have too many other issues to work on.

Dr Shinn: Unless you have just one plan and are covering a single employer, being a PBM is not as all easy as one thinks it might be. Keep in mind that Anthem is not bringing its PBM fully in-house. They are partnering with CVS because they need someone to adjudicate claims. They have so many different groups and plan designs, so they need somebody to be able to maintain that for them. Plus, as big as Anthem is, they’re not as big as CVS. They don’t have the leverage for rebates, particularly for specialty purchasing.

What other benefits do you see in Anthem partnering with CVS?

Dr Karnack: CVS has a national network and public recognition that’s important to patients in the community. It also has the operational experience in retail practice that Anthem lacks, as well as claims processing.   

Dr Owens: Payers who wish to establish their own PBM still need a pharmacy network and a claims system. Those things are much easier to rent/buy than build. I find it interesting that Anthem decided to work with CVS on this, especially since CVS’s plans to acquire Aetna are moving ahead. Anthem could have gone with others to do the same thing.  Who knows what the long-term outcome could be. Perhaps there will be one mega company.

Mr Marcus: It remains to be seen what the pending Aetna/CVS transaction will have on Anthem’s partnership with CVS.  I believe that it is temporary until Anthem fully creates and integrates its own in-house PBM.  The partnership enables Anthem to provide a pharmacy management solution to its customers until the new PBM is up and running.  

Dr Vogenberg: CVS offers site of care optimization that will produce one-time savings. 

Speaking of savings, do you think the potential savings are significant? 

Mr Sontupe: Absolutely. We are in the age of value. The alignment of medical and pharmacy is a value driver. Drugs get a bad rap. They don’t drive costs, hospitalization and other core medical benefits drive costs. The challenge with drugs is that people live longer because of them and, therefore, use more of the more expensive services. However, we can use drug spend to defray other costs. 

Dr Cooke: There’s a real advantage when PBM functions are moved in-house. Health plans have the opportunity to personalize their formulary, especially since they are responsible for the overall care of their members, unlike PBMs that must operate mainly from a silo approach of prescription drug costs.  Studies have shown that when you make formulary decisions based on incomplete information, and inadequate factors such as drug cost, patient outcomes are worse.  

Health plans can take an integrated approach to ensure the use of high-value health care for their specific members. Since all health care is local, plans that take a local approach can use their coverage designs to influence health care practices in ways that are meaningful to their members.   Stand-alone PBMs just don’t have the bandwidth, and without incentives, they continue to function in archaic ways.

Mr Marcus: Consolidated medical and pharmacy management produces efficiencies that simply are not there with a stand-alone PBM. Full control over rates and rebates drive reduced costs, as do market changes, such as generic saturation. 

Dr Karnack: I would think that there are cost savings opportunities, but initially there might not be as many due to setup costs. 

Dr Owens: It’s hard to know without a complete analysis of the cost structure.   I wonder if Anthem, even with its size, can get any better deals than CVS or an Express Scripts for contracts and network discounts. Maybe Anthem already knows it can, which is one of the reasons it decided to cut ties with Express Scripts. 

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Do you think savings will be passed along to patients, kept to maximize shareholder value, or both? 

Dr Karnack: I wish I could say that savings would be passed on to consumers, but I think any savings would most likely go to shareholders in this era of deregulation.

Mr Marcus: As a matter of pure corporate governance, any payer must take shareholder value into consideration, or risk litigation. Thus, we would be naïve to think that payers would pass all cost-savings to consumers. Will consumers see lower drug prices? Sure, but the reduced prices will be driven by synergistic and market forces.  

Dr Shinn: I agree. If you run the program in the most cost-effective way by carving out certain services and handing them over to another group that can do it better, in this case CVS, that should enable you to hold premiums steady or even lower them. If that happens, everyone wins. 

Dr Owens: If there are real savings to be had, some will go to the customer. But most of it will accrue to the corporation and the shareholders as Anthem will now have another potential profit line and an asset. Don’t be surprised if in 5 to 10 years the PBM gets sold off again after the value has been wrung out.  

Dr Vogenberg: I am not sure there will be savings. There may be some efficiencies gained by going in-house, especially related to specialty drug management optimization. Most of this will not get passed on, as much of the so-called gain will come from aggressive contracting or rebates with manufacturers. 

Mr Sontupe: Consumers and shareholders will benefit. The savings generated by the consumer will be in better health value. Taking a drug or receiving a vaccine avoids a bigger issue. But patients have to be compliant. Operationally efficiencies can squeeze costs out of the system, but if patients are not adherent to therapy or ignore the signs of bigger issues, no operational change can impact those costs.

What does the shifting landscape mean for PBMs? 

Ms Andel: I think that PBMs are going to continue to come under scrutiny from other pharmacy supply chain stakeholders as well as policymakers. One major reason is that people don’t seem to understand what value PBMs bring to the table because it is difficult to easily explain their role to the average person. Also, when you look at the basics of the industry, especially how it is highly concentrated between three major players, that looks suspicious, even though the FTC has examined the issue and has not found that there is unreasonable market consolidation. 

I don’t think this is necessarily fair: PBMs contract with large, sophisticated buyers. If those actors didn’t think PBMs added value, then why would they continue to use them? Perhaps the recent moves to bring PBMs in-house indicates that the market dynamic is changing some, but that just means that PBMs will now be challenged to prove to their customers that they do add value that can’t be easily replicated, which could lead to further innovations in care delivery and cost savings in the future.

Mr Marcus: Stand-alone PBMs need to carefully monitor the market and develop strategies to compete with the combined medical/pharmacy management model.  This may include partnering with payers and developing integrated medical management/care coordination systems. We are already seeing this in the marketplace especially among the largest PBMs. 

Mr Sontupe:  I believe that PBMs are positioning themselves for the Amazon invasion. By vertical and horizontal integration, they are defending the mail-service pharmacy space that is the life-blood of the PBM. 

Dr Karnack: Small PBMs may get purchased by larger ones, which will render the small, free-standing PBM a thing of the past.  

Dr Vogenberg: PBMs cannot continue as they have been operating. They will transform or be transformed. For example, look at Diplomat Pharmacy, which has transformed from a specialty pharmacy to a PBM services operation. Others are following suit.

Dr Cooke: PBMs still perform important functions. I recently spoke with a health plan’s pharmacy director who has no desire to move these functions in-house.  There must be large enough rewards to overcome the inertia of remaining with a PBM. 

How does Express Scripts make up for the loss of Anthem? 

Dr Owens: Express Scripts can buy smaller PBMs to make up for the lost revenue and members.  

Mr Marcus: The marketplace is changing rapidly. Express Scripts’ acquisition of the medical benefit management company eviCore is a clear example of this. I’d keep an eye on Amazon as it continues to explore this space and potentially look for a partner/acquisition for fast and full access. 

Dr Owens: The eviCore acquisition makes sense, since specialty pharmacy is now the majority of pharmacy management. PBMs need to be able to manage both pharmacy and medical benefit drugs on equal footing.

Dr Karnack: Express Scripts could buy smaller PBMs and other medical benefit management companies, and eventually become more of an integrated insurance company to employers.

Mr Sontupe: I would not be shocked to see Amazon connect aggressively to Express Scripts. It makes their road in a little less bumpy. 

Dr Shinn: No matter what Express Scripts does, it will be very difficult to make up for that kind of loss. I think it has been tarnished in the marketplace because of losing Anthem. Its 2018 selling season did not go so well, compared to the competition. 

Some have mentioned Amazon. Do you think it will have much of an impact on the PBM business? 

Dr Owens: I think that the only logical way for Amazon to get into this business is to partner with or buy a PBM, which has the infrastructure for large-scale mail-order distribution. It seems easier to buy something like that—along with the licensing and regulatory capability—than to build it anew.   

Mr Sontupe: You can be a pharmacy without being a PBM. However, controlling the business is a big win. I would expect that the quick in for Amazon is to partner with a PBM. 

Mr Marcus: Drug pricing at existing PBMs is opaque at best, and Amazon could change that.  By publicizing actual drug prices in an effort to drive costs down for consumers, existing PBMs may find themselves in a tough spot.  In-house PBMs may be better suited to withstand such disruption as they would likely have already taken steps to minimize drug prices and to apply drug management rules to ensure the most cost-effective and medically appropriate drugs are prescribed.

Dr Vogenberg: With Amazon, it’s a guessing game. I don’t think it is likely that they will get into the drug dispensing business. As far as partnering with a PBM, it really doesn’t fit Amazon’s business model as a disruptor/transformer.

Dr Shinn: Amazon is probably going to get into the cash pay business, which will not have a significant impact on PBMs. I have seen an over 20% increase in my business in high-deductible health plans. These are the people that
Amazon can serve and make money on. Amazon would not have to adjudicate the claim because there is no copay, not eligibility issues, and no formulary. It would be just like any other Amazon transaction. 

What kinds of changes are organizations going to have to make to succeed as the landscape shifts at such a rapid pace? 

Ms Andel: Many of the fundamentals of the prescription drug market are changing. This is putting pressure on plans, PBMs, and pharmacies to deliver value in other ways beyond just switching patients to generics as quickly as possible. Care coordination and drug therapy management are effective, but they are “high touch,” making them a challenge to scale and replicate. The companies that are able to prove value to their customers—whether that is manufacturer to patient/payer, PBM to plan, pharmacy to PBM/patient—are going to be the ones that can survive in this new environment.

Dr Cooke: I agree. The real challenge is whether health plans will design and deliver meaningful coordination and integration to achieve personalized health care, including medical, pharmacy, mental health, and other services that help patients achieve their goals. 

Can you give an example of how this might work in practice? 

Dr Cooke: Sure. In fact, I can show you how it has worked in the past.  Several years ago, while I working for a health plan that was using a PBM, I was reviewing a case where there had been several rounds of denials from the standard PBM processes.  I called the patient to better understand the situation, and it was clear to me that the medication should be covered.  The benefit of reduced medical costs by providing the medication well offset the pharmacy costs.  These decisions can only be made effectively by someone considering the entire care for that member.