2019 Year in Preview

Why vertical will continue to be the favored direction for PBMs, insurers

PBMs and insurers are getting rolled into single entities with clout over the supply chain and benefit design. Any major changes in how they operate may wait as they spend 2019 figuring out how to mesh.

Robert Calandra

The Justice Department’s approval of the $52 billion merger of Cigna and Express Scripts in September followed a month later by its blessing of CVS and Aetna tying the $69 billion knot pretty much signaled the end of the era of the large independent PBM.

Sure, there are still a number of smaller, independent PBMs. But consider UnitedHealth Group and Optum; the Blue Cross Blue Shield plans with their PBM, Prime Therapeutics; and Anthem’s announcement that it was going to develop an in-house PBM. It appears that insurers and PBMs are in the process of getting rolled up into one.

“Let’s get vertical,” tweeted Adam Fein after the CVS/Aetna merger was announced. Fein’s Drug Channels blog is popular among pharma insiders.

And vertical integration is, in fact, the general idea. Getting vertical theoretically will allow the new entities to capitalize on efficiencies in care management, total cost of claims, and other programs while creating an all-in-one health care product that provides more services at less cost. At least that’s the spin.

But before the newly formed entities can truly “get vertical” and realize their goal, there’s a lot of work ahead. Integrating businesses can take years. So what can plan sponsors expect from the newly amalgamated industry in the year ahead?

“It’s going to take a little time for these entities to begin to move beyond pulling together these organizations and actually start to innovate as one intensive unit,” says Ashraf Shehata, partner at KPMG’s Global Healthcare Center of Excellence.

There are a lot of moving parts to manage when blending companies, Shehata says. The first order will be making sure the transition is smooth. Shehata says “the low hanging fruit” will happen in 2019, the harder parts of integrating the businesses could take two years. Only then will the efficiencies and innovations from the mergers be realized.

“So if you look at it you will probably see another year of true integration activity that will take us up to 2020,” he says. “If the innovation work is stalled or less than heavily invested, then we might see innovation not come together until 2023. It is hard to innovate when you are integrating.”

If anything, the mergers have made things more complex for employers and employees, says Wayne Dix, a health care expert at SSA & Company, a management consulting company.

Dix says 2019 will be “a continuation of the current trajectory” for PBMs. But he also expects Congress to pass more legislation like the Patient Right to Know Act and Know the Lowest Price Act that President Trump signed into law in October.

Those bills allow pharmacists to tell patients about lower-cost alternatives, something that most PBM contracts with pharmacists had forbidden. Dix also expects that state legislatures and Congress will pass laws that will alter, curtail, or even end the rebates and the various other deals PBMs make with pharmaceutical companies that have left people grumbling.

“To be perfectly honest, everybody is kind of fed up with the illusion of transparency and this notion that rebates are being passed through to the plan sponsor,” says Dix. The plan sponsors “know they are being lied to and that this is a game. They would love to find a way around these guys. If the formulary is driven by what’s best for PBM and drug company profits and not clinical results, that’s a problem.”

While he is hopeful that legislation will end rebates, Dix isn’t betting that even the so-called “gag law” has enough bite to change the industry. The industry “is ripe for a change,” he says. “You just don’t know what that one thing will be that tips everything over.”