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

January 12, 2018

By Dean Celia

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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