Why payers are gobbling up PBMs
The Justice Department on Monday greenlit the $67 billion acquisition of Express Scripts by Cigna.
With the OK from the Justice Department, Cigna's nearly-final takeover of Express Scripts moves closer to the end of an era when standalone pharmacy benefit managers dominated the industry.
Pending remaining state approvals for that $67 billion pact and the expected clearance of the CVS-Aetna megamerger, the three largest PBMs will all be hitched to health plans. UnitedHealth created its own in 1990 with OptumRx.
The crowded landscape has drastically changed from just a decade ago when PBMs were scooping up competitors and morphed the sector into one dominated by a few behemoths controlling the prescription drug benefit for millions of Americans.
Over time, PBMs went from simply processing prescription claims, largely an administrative function, in the late 1960s to now serving as the gatekeeper to prescriptions through formularies and pharmacy networks. They also play a controversial role in pricing as they negotiate directly with drug manufacturers but reveal little about how those savings are passed onto consumers.
Over the past few years, payers have become increasingly interested in bringing the function in-house, dissolving their relationships with independent PBMs to launch their own, or acquiring others to do so.
"I think it’s a natural evolution of where this industry needs to go," Ana Gupte, an analyst for Leerink Partners, told Healthcare Dive. "At the end of the day, the pharmacy benefit is integral to management of an insured member as a whole person."
A case for savings
By combining both the medical and pharmaceutical benefit under one umbrella, analysts say the combined companies could potentially achieve greater costs savings than may have been possible with separate entities. For example, if a patient is prescribed a particular drug the overall drug spend may increase, but it could result in savings on the medical side if it prevents a costly hospital visit.
"Now you have a better coordination of care when you have both of those under one roof," John Boylan, an analyst with Edward Jones, told Healthcare Dive.
That's particularly important as spending has dramatically increased for specialty drugs that treat complex diseases. Some specialty drugs need to be administered in a healthcare setting, so it may be covered under the medical benefit. But some can be covered under the pharmacy benefit or even both, according to Adam Fein, CEO of Drug Channels Institute.
Specialty drugs represent 40% of overall drug spending for Express Scripts, yet only 1% of their members use a specialty drug, according to the company.
"Total specialty drug spending is split between medical and pharmacy benefits. Patients on specialty drugs also tend to have higher medical expenses, so integrated medical-pharmacy management is crucial," Fein wrote in April.
Plus, if covered by pharmacy but administered in a hospital or doctor office, "PBMs are not able to control that channel because they have no leverage over the provider," Gupte said.
Combined, the companies are better poised to deal with this problem, Boylan said.
Role in drug pricing controversy
At the same time, PBMs have faced increased scrutiny over the years as drug prices continued to soar, raising questions about their effectiveness in reining in costs. The debate surrounding PBMs really caught fire when Mylan Pharmaceuticals CEO Heather Bresch in part blamed PBMs for the rise in price while she faced criticism for raising the list price of EpiPen, a lifesaving antidote for those suffering an allergic reaction.
"Drug pricing is becoming a mainstream national issue," Brian Tanquilut, an analyst with Jefferies, told Healthcare Dive.
But as drugmakers took heat, they pointed fingers at others in the healthcare ecosystem, including hospitals and PBMs.
The Trump administration has been particularly aggressive in taking on the industry, showing an interest in curbing the rebates, as well as overhauling safe harbor protections that shield PBMs from anti-kickback lawsuits.
Tanquilut thinks the increased scrutiny has played a role in fueling these payer-PBM acquisitions.
PBMs decide which drugs they will cover each year for their members and, to get a preferred status, drug manufacturers agree to rebates or discounts. It's unclear how much of that savings actually makes it way back to patients. PBMs also use spread pricing — pocketing the difference between what they charge the pharmacy and what they bill their client.
"The black box model is under scrutiny," Tanquilut said. "It’s better for them to be embedded. You can kind of hide your economics."