Pharmacy Predictions: 2019
by Scott Vogel, as published in American Benefits Specialist magazine
Most who have been in the Pharmacy Benefits business for any length of time has learned that change is constant, both real and perceived. Perceived change is driven by marketing lingo and product positioning by organizations claiming new to the market or revolutionary solutions, when in fact, the real measurable solution is still in the proof of concept phase.
Why does this matter? Right now, our industry is undergoing the major restructuring that is purported to bring about great change, more control for plan sponsors, better control over the total healthcare spend, and increased visibility into medical and pharmacy costs. There are several market dynamics that we will examine, which are converging to mold the future of healthcare.
In the years leading up to 2018, consolidation or horizontal integration across pharmacy benefit managers (PBMs) was a major driver of change. The competition was whittled down to a select few jumbo carve-out PBM providers that wield enormous buying power and influence throughout the entire pharmaceutical supply chain. Individually and collectively, they created a paradigm shift in which plan sponsors began abdicating control to the PBM for oversight of the pharmacy program, such as: allowing drugs to be excluded from the formulary; the acceptance of required step therapies/prior authorization; and more frequent formulary changes.
Why were plans willing to tolerate these disruptions? These concessions were driven in large part by the reality that no other effective model existed. Despite claims to the contrary, the majority of today’s PBMs use near-identical methods for controlling drugs spend and reporting value to their clients. Real or perceived, moving forward we will be required to evaluate new solutions based on redesigned criteria.
The recent health plan/PBM acquisitions are based on value propositions that are in stark contract to historical best practices. The vertical integration of CVS Health/Aetna, Cigna/ESI, and UHG/Catamaran (OptumRx) presents a paradigm shift towards medical and pharmacy integration. The perceived value of this integration will challenge the prevailing belief that carving-out pharmacy from the health plan to a specialist will result in lower cost and better member experience. Moving forward, PBM’s historical value proposition will be overshadowed by the promise of managing total cost of care. Additionally, three of the top four specialty pharmacies that in total have roughly 75 percent market share will now be under common ownership with a health plan. It is expected that health plans begin to more effectively leverage the specialty pharmacies distribution, aggressive management strategies, and rebating capabilities under the medical benefit as they seek to tackle total cost of care.
Along with vertical integration will be a transformation in the way PBMs and health plans work with prescribers. Currently, too much of the drug benefit management happens after a patient walks out of the physician’s office. Putting point-of-sales claim adjudication information right at the fingertip of the physician at the point of prescribing will be a game changer, minimizing member disruption, and creating an environment for more effective management of the drug benefit. This consolidation opens the doors to future development, such as providing integrated medical/pharmacy information or even outcomes data directly to the physician at the point of prescribing.
Biosimilar’s Role in Lowering Costs
Biosimilar availability in the marketplace holds great promise for millions of dollars in plan cost savings but have yet to be maximized. As with generic products, significant price decreases will not occur until multiple biosimilars enter the market. Current biosimilars offering a 10-35 percent savings off the innovators list price is not enough to offset rebating strategies. Unfortunately, this prohibits the PBMs from aggressively promoting the biosimilar. In addition, regulatory process, manufacturer patent litigation, and prescriber concern regarding interchangeability has severely hampered the impact biosimilars have made. Over forty biosimilars are approved in Europe, but today there are only three available in the United States – and for available biosimilars, uptake has been terribly slow. To provide an example of the magnitude of this problem, Prozac® lost over 80 percent of its market share within six months of its generic equivalent launch. However, Remicade® remains at roughly 50 percent market share after two years of biosimilar availability.
Drug pricing is being pressured from all angles within the government. In May, the Trump administration published its blueprint to address drug pricing concerns, titled American Patients First, which focused on driving competition, increased negotiation, incentives for lower priced drugs and lowering out of pocket costs. In addition, Alex Azar, Secretary of Health and Human Services, and the commissioner of the FDA, Scott Gottlieb, are making frequent public statements about the need for a change in the current drug pricing ecosystem. In fact, the government has already made significant policy changes such as for the first time allowing step-therapy (including for biosimilars) in Medicare Part B. In addition, the administration is focused on bringing more biosimilars with the FDA’s July 2018 release of the Biosimilar Action Plan, which will shift the dynamic of the U.S. biosimilar market.
Specialty Pharmacy Growth
Specialty growth has been, and without a material change, will continue to be a huge source for PBM profits resulting in one of the most concerning areas of misaligned interests within the PBM model. As one of the highest trending components of healthcare, analysts predict that specialty pharmacy will equal 50 percent of total drug spend by 2020 – yet some plan sponsors are already there. According to the Pharmacy Benefit Management Institute, the average annual cost of a specialty patient was $52,486 in 2015 – higher than the median wage!
While today specialty patients represent only one-to-two percent of the population, there is a huge portion of the population with a rare disease for which no medication is available. It is estimated that 30 million individuals have a rare condition but only five percent of them have a treatment available. This is a clear target for drug manufacturers who are developing new medications that are priced not just in the tens of thousands but in the hundreds of thousands of dollars annually. Specialty management will be one of our most difficult challenges moving forward due to the risk created by the exceptionally high costs of these drugs (especially for small and mid-sized self-funded employers), lack of credible data that integrates medical outcomes and pharmacy claims, lack of visibility and controls over specialty drugs adjudicated through the medical benefit, and limited clinical outcomes data that justifies the price of these high cost drugs.
Rebate Bubble Burst
The list price of a drug that members in high deductible health plans pay has zero correlation with the true net cost of the drug after rebates. That said, both Express Scripts (ESI) and CVS say that they return 95-98 percent of rebates to plan sponsors. While they did not disclose how much of the rebates were shared five years ago, our firm attests to the fact that many more sponsors today receive 100 percent of rebates compared to five years ago.
This has certainly put pressure on PBMs to grow revenues elsewhere – not to mention the immense pressure to make rebates go away all together. To be clear, ESI and CVS reported the “percentage of rebates” they share but specifically did not discuss the “percentage of total manufacturer revenue,” which would be much lower.
Worth noting: there are significant revenue streams that flow from drug manufacturers to PBMs that are contractually defined as anything but rebates. In fact, some PBMs have gone so far as to remove inflation protection rebates from their rebate contracts with manufacturers. By creating a separate contract with manufacturers for the same dollar value but under a different contractual structure, the PBMs can retain more profit.
Plan Sponsor Skepticism Feeds Disruption
Plan sponsors are becoming less trustworthy of the PBM value proposition. Large employers and coalitions are seeking ways to disaggregate the current PBM model by leveraging PBMs technology and scale while stripping out the areas of misalignment. In its most simple form, two examples of this are contracting with a specialty pharmacy that is not owned by the PBM or no longer using the PBM for rebate management and instead contracting directly with the manufacturer or third-party rebate aggregator. The vertical consolidation has not helped this feeling of skepticism.
According to the National Business Group on Health, 56 percent of employers were skeptical the consolidation would lower cost and improve both quality and the customer experience. It’s for some of these same reasons that Amazon has been snooping around the PBM space and is expected to continue to invest in ways to disrupt the current PBM market, whether leveraging its logistical prowess through the wholesaler licenses it owns, developing a direct to consumer solution focusing on transparency and consumerism, or continued acquisitions of strategic solutions such as PillPack – which was announced in June of this year.
While many of the dynamics that are currently contributing to the stormy seas, the pharmacy benefits landscape will continue to evolve and impact the future. We expect a few unique perspectives to emerge in the next 18-24 months:
- Total Cost of Care driven by vertical integration Historically PBMs focused on lowering outpatient prescription drug spend. More recently, PBMs realized they could positively impact medical specialty drug spend. However, this approach is still siloed as it considers only a patient’s drug cost. PBMs have also started to demonstrate the value of their programs through the anticipated impact of reduced medical costs by working more closely with members to manage certain disease states. Moving forward, the total cost of care will be front-and-center of every health plan and PBM sales pitch. The combination of two separate specialist organizations, a health plan, and a PBM, under one singular vision, will create opportunities for data scientists to leverage not just big data but medical/pharmacy integrated data. This integration will seek to understand not only which drug offers the best clinical results but also which drug offers the lowest total cost of care. It is likely that we may see arguments stating that higher cost drug therapies drive lower medical costs. In addition, we will see integrated clinical/patient management strategies where both the health plan and the PBM, for the first time, use the exact same clinical protocols to manage a patient’s health.
- Transparency and consumerism The rebating system will be meaningfully transformed. Eliminating rebates altogether will likely be too significant as it would send a shockwave through the entire supply chain. However, it would not be surprising to see a world where the government redefines the rules of the game as it relates to rebates, thus driving greater transparency into the true net cost of medications and in the process helping to eliminate misaligned interests within the PBM model. With the continued rise of high deductible health plans, this increased transparency will demand a new perspective of consumerism which will include providing consumers integrated data focusing on total cost of care and clinical outcomes. Consumerism may also play a role in how rebates are reimagined by PBMs. Think a world where a manufacturer would reimburse a member or the plan sponsor if the medication does not work. While this may be extreme, PBMs will certainly be challenged to move away from what some call a pay-to-play atmosphere to value-based rebate contracting or even developing rebate strategies that are based on the integrated medical and pharmacy clinical management protocols mentioned earlier.
- Disrupters may gain attention Disruptors are not just new market entrants, but also include existing companies providing a disruptive solution, such as new pricing models or potentially going at risk for costs and outcomes. Amazon, JP Morgan, and Berkshire Hathaway are clearly looking to disrupt the market, however, disruption will also be in the form of continued disaggregation of the entire health benefits administration model. For instance, an integrated health and hospital system or accountable care organizations (ACO) purchasing discrete services from PBMs and health plans/TPAs and supplementing them with in-house services or third-parties. (i.e. development of clinical protocols, formulary management, drug purchasing, member navigation/advocacy).
So, what does this all mean? Perceived change or real change? While we may not know exactly what we are facing, we must be prepared to look at effectiveness, pricing and outcomes through a different lens, one that can focus on price transparency, integrated clinical and financial outcomes, consumerism, and total cost of care. The effects of vertical integration will force plans and their benefits advisors to re-examine how they contract and procure PBM services, weigh the risks vs benefits of maintaining carve-out contracts, and sift through what’s real vs perceived changes in the way pharmacy and medical costs are tracked and managed. Real change is coming and while it may not be as soon as the market will try to convince us, now is the time to be thoughtful and start preparing.
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