Managed Care Innovator: Jake Frenz
Building a PBM With Technology at its Core
Jake Frenz, founder and CEO of SmithRx, a pharmacy benefit manager (PBM) created in 2016 believes his company’s business model, technology know-how, and data infrastructure significantly differentiates it from more established and familiar PBMs. First Report Managed Care recently sat down with him to discuss his background, the PBM space in general, challenges of managing pharmacy benefits, and what is needed in Washington, DC, and in the private sector to drive meaningful change.
Can you begin by telling our readers about your background working in the health care system and how that informs the approach you use?
A lot of how I operate today has to do with my days in the Marine Corps. I was a logistics officer for a battalion of about 100 infantrymen who I ran operational support for. I did two tours in Iraq. After 5 years in the military, I went into health care. I started at WellPoint, which is now known as Anthem, helping to develop new, innovative health care products. I was cutting my teeth. I didn’t know a whole lot about health care but was very familiar with technology.
Along the way my family experienced challenges getting access to quality care. This deepened my commitment to health care and gave me a personal connection to it. I like big, complex, messy problems, and I was eager to do my part to address the problems.
Can you tell us more about how your military experience informs how you operate today?
I feel really fortunate to have had that experience. I miss the sense of camaraderie, as well as the sense of mission and purpose. When I got out of college, I was 22 years old, and hadn’t led or managed anyone. Then, suddenly, I have a platoon that I am responsible for right out of the gate. It’s a trial by fire in a lot of ways. You learn fast. You have to learn about yourself—how you’re built, what kind of leader you are, what kind of leader you would aspire to be, and how to be effective.
You rose to the rank of Captain, so it appears you took to it and it suited you well.
Yes, I would say so. And what I love about what I do now is that I have been able to put my personal touch on all the cultural aspects, the DNA, and the foundational piece of SmithRx. I have the sense of ownership, purpose, and drive that I did when I was in the military. It’s pretty cool.
I imagine you were able to bring those elements to other organizations where you were employed, but not in the same way you can now with your own company.
Yes. Anthem was a behemoth. I’ve also been a part of start-up companies that were not my own. You are a cog in the wheel, which is very different. Here, it’s faster and more rewarding.
PBMs do not enjoy a particularly good reputation. You are a leader with technology experience. Why a PBM, vs another area of health care?
Why a PBM? After Anthem, I helped start a third-party administrator health plan called CollectiveHealth. A third-party administrator operates a lot like a medical insurance company. We built that from the ground up, based upon technology. Through that experience, I started looking at health care from a different context. The inefficiencies, how it is broken, how we can do better, and how we can be a lot more innovative. I started to see technology as the core element.
One of the biggest problems we have in the United States is that our health care model is built on the backs of large insurance companies, and big PBMs, that are now part of those payers. They’re all built on antiquated technology from the 1980s. It is inflexible. It is hard to innovate.
The business models are not aligned. I saw that the pharmacy benefit is one of the more complex parts of the system and I thought that it shouldn’t be.
Here, you have a transactional benefit of a patient who needs to take a drug. They go to a pharmacy to get the prescription filled. Simple enough. And yet it is so difficult to understand how these PBMs operate, how they make money, and the entire ecosystem they operate in. It’s a quagmire.
It sounds very challenging.
As I said previously, I love big, messy problems. Everyone said this would be impossible, so I jumped in head first.
With technology front and center.
Yes, that was our foray into this space—being a technology company. We built the infrastructure from the ground up, on modern rails—in the cloud on a distributed architecture. It gives us the capability to be super innovative, to align the business model, and be much more in tune with the patient.
What are the one or two key differentiators that make your PBM better than the traditional model?
First, we have aligned incentives and interests. Our business model drives the most efficacious and lowest cost treatment to a patient. We only charge a set administrative fee on a per transaction basis, whereas other PBMs take spread and margin from different channels of the supply chain. When you take revenue from the retail pharmacy and drug manufacturers, it creates perverse, misaligned incentives. You end up not doing what’s best for that patient. Our business model is one of the biggest differentiators that we have.
Second is the technology aspect. We measure continuously. We have really well-documented analytics that drive how we engage with patients to drive better outcomes, to improve the quality of care, and to reduce costs. Those two aspects allow us to play a unique role in pharmacy benefits and health care better than anyone else.
Tell me about your typical customer, how you work with them, and how the relationship differs from a traditional PBM?
Our clients are companies that are self-insured who have between 100 and 50,000 employees. We aim to become their partners and gain their trust. We give these companies the levers and controls to make decisions about their health care plans, about their employees and families, in an effort to drive patient-focused care. PBMs typically obfuscate a lot of that data. The end result is that with a nimbler solution like ours, implementation happens more quickly, eligibility files, errors, and other key data can be seen more quickly, and organizations can grow and not have to worry about scalability.
What about the so-called clout/bargaining power the major PBMs claim to possess? Do you have the same or similar capabilities? If not, how do you compete in this regard?
The major PBMs have pushed the retail pharmacies and everyone else into a corner. They have pushed down reimbursement rates and made it very difficult for them to operate and even enforce their contracts. Pharmacists are up in arms about this in fact. That creates a very positive reception to working with SmithRx. We create a partnership with the retail pharmacies, and in return, they have given us exceptional pricing. So, to answer your question directly, SmithRx is highly competitive with our cost structure.
Let’s turn our attention to Washington. Earlier this year, the major PBMs testified on Capitol Hill. In short, they said lack of transparency is not the problem. Do you agree with that?
I disagree. The lack of transparency is part of the problem. What we saw from the PBMs during those hearings was what amounts to a shell game and the blame game. I was hoping the hearings would turn out to be a watershed moment, but that did not happen. With that said, I give the senators a lot of credit. They’re making larger strides now than they have in years. There was a time where the focus was elsewhere. The makers of oxycontin, EpiPen, and others were brought in front of Congress, and rightfully so. But PBMs were never questioned in this way.
Now, finally, both drug manufacturers and PBMs are being held accountable. This is really good progress. They are acknowledging the problem, and it appears to be bipartisan.
Nonetheless, do you see progress from the congressional hearings?
I do. There were certainly soundbite moments, but I think the senators asked really thoughtful questions. Things are moving in the right direction. They’re starting to peel back the layers. I would encourage them to continue to push. The harder they push, the more that is going to be uncovered.
It’s a matter of getting down to the granular economics, the incentive mechanisms in place. We’ve got to figure out where the money’s flowing, and try to figure out how you can drive a more efficient market. Washington needs to think about anti-kickback statutes that it can push on to start creating change. I fully support that. It should be as broad as possible.
Can you give a concrete example of where the unknown inner-workings serve as a detriment?
Sure. You may recall that Merck announced that its hepatitis C treatment, Zepatier, launched with a lower list price and therefore would not carry the same level of rebate offered by predecessors like Sovaldi or Viekira Pak. Meanwhile, a competing medication, Vieira Pak, went on the market with high rebates. Guess which medicine was more successful in getting on formularies? Vieira Pak. This unnecessary and unseen complexity ends up hurting the patient at the pharmacy.
Much attention in the PBM hearings went to spread pricing, where PBMs charge one amount to health plans for a medication, reimburse pharmacies a lower amount, and keep the difference. Some think that the days of spread-pricing appear to be over. Do you agree with that?
No, and I don’t see spread pricing as necessarily nefarious. PBMs make money through spread pricing and rebates. That’s fine as long as it’s disclosed. When you look at the supply chain, you see a wholesale acquisition cost. From there, there is a markup—a reasonable amount of margin, or spread—that serves as the PBM’s source of revenue. That’s fine, as long as it’s transparent and follows guidelines and regulations.
So, are you saying it’s less about the tactic, itself, and more about full disclosure, providing stakeholders a view into what the amount is and how it was arrived at?
Exactly. The problem is that it is a secret number, and it’s based on a target that keeps on moving. Eventually PBMs look at it as an allowance. That’s why we need verifiable evidence that certain costs are being contained. We can come up with that data today, but it is staying hidden and it’s increasing at a rate that far outpaces other cost increases.
Meanwhile, in the executive branch, the Trump administration first proposed requiring rebates go to patients at the point of sale in the pharmacy, rather than be distributed to other stakeholders. Then it reversed course. What do you make of that?
I’m disappointed that [the administration] took the 100% pass-through Medicare rebates off the table. I thought this could have been a very meaningful move that impacted seniors positively in an immediate, direct way. Not only that, I think it should have been extended to the commercial side, as well. It would have caused more layers of the onion to be peeled back as it uncovered the inner-workings of the relationship that exists I between the manufacturers, PBMs, and payers.
Let’s pretend you are running changes in Washington, DC. What would you do next?
Congressional oversight needs to continue. Keep bringing in the key players to answer questions until you start seeing results. Build up bipartisan support and pass meaningful legislation.
Beyond that, I’d like to see the federal government turn over more control to the states. Medicaid is a great example. States are requesting more control over drug benefits. Massachusetts is at the forefront and doing a phenomenal job. Ohio, Mississippi, Tennessee, and North Carolina, are all very progressive states that want more control. Give it to them.
You mentioned previously that the large PBMs’ technology is built on dated platforms. These organizations certainly have the wherewithal to update their systems. Why don’t they?
I think they know what they should do, but it’s really hard. These companies grew out of mergers and acquisitions from the 1980s onward. As they acquired—or themselves were acquired—new platforms, systems, and processes were added and you ended up with this technology monolith. When you have a platform that’s processing hundreds of millions of transactions for tens of millions of patients every year, moving off that to a modern architecture is not easy.
What do PBMs need to do to align with the mandate to offer value-based care and improved outcomes, and to make that happen more quickly?
It has to do with the key elements we’ve already discussed: an aligned business model, technology, and data. Value-based care involves an end to end care spectrum in a continuum where provider and health system are incentivized to drive more efficacious treatment at a lower cost. It makes perfect sense to all of us, but we know that the fee-for-service model puts profits first. So, you end up with misaligned interests. Integrated delivery networks such as Kaiser and Geisinger have made great strides toward offering value-based care. They are great models.
Still, in the end you have to have access to data. You have to be able to take a cohort of people with different demographics and conditions and use that to make informed decisions about their care. Standardize it as much as possible, but also treat patients individually. We are doing our part to help make that happen.