PBMs Need To Be Disrupted, Not Disintermediated

The managed care industry faces regulatory pressure to halt the rising cost of prescription drugs, but real change can be found by disrupting traditional PBMs

Jake Frenz

Unchecked rising drug costs have made the opaque pricing practices of PBMs and drug manufacturers a popular target for greater regulation, and for good reason. Traditional PBMs and Big Pharma realize tremendous profits while employers and consumers have shouldered the burden.

Jake Frenz

Jake Frenz

Americans spent $450 billion at the pharmacy in 2017, and 96% of that spend passed through a PBM. PBMs profit because their actual cost on many drugs is much lower due to rebates – the practice by which drug companies incentivize PBMs to prefer one drug over another.

Lawmakers and other stakeholders—drugmakers especially—have criticized rebates as a secretive way for PBMs to increase their profits and, possibly, distort the formulary because drugs are picked for their rebates, not their cost effectiveness. During a February Senate hearing on drug costs, Pfizer CEO Albert Bourla claimed that “none of the close to $12 billion in rebates Pfizer paid in 2018 found their way to American patients.” HHS Alex Azar has called for the elimination of rebates in Medicare.

Pricing practices such as rebates have boosted PBM profits, while they have invested little in innovation. PBMs keep 9.8% of margin per claim processed, compared to a payments middleman like AMEX, which charges only 2.45%. Further, PBMs only spend 0.4% of earnings on innovation compared with Apple, which reinvests 3.5% to 5% its profit on innovation.

When compared to other industries, traditional PBMs also have low incentive to evolve beyond the status quo, and consolidation is further limiting choice.

New regulations such as government price controls on pharmaceuticals threaten to undermine the impact of effective, transparent managed care in controlling drug costs and improving patient outcomes.

Instead, the traditional PBM model needs to be disrupted with transparency and technology to meet our current challenges.

Three industry shifts must take place:

  • Make PBM pricing transparent. How much should a PBM make on each transaction? Should that amount change based on the drug? The answer(s) should be simple, but, in reality, are virtually impossible to measure. Recently, drug manufacturer Merck announced Zepatier (elbasvir and grazoprevir), a hepatitis C treatment, would have a low rebate—and then watched as it failed to get on formularies. Viekira Pak , a competing combination drug for hepatitis, was marketed with high rebates and was much more successful in getting included in formularies. This is just one example of the unnecessary complexity added when middle managers take an unknown and ever-changing cut in the form of rebates. The real loss is to the patient at the pharmacy.
  • Upgrade inefficient operating models. PBM technology was built in the ’80s and has been cobbled together through M&A over the past 30 years. True operational efficiency has never been realized. The current systems lack real-time data capabilities that are critical to driving patient engagement and outcomes. Employers, hospitals, and providers should demand more from their PBM.
  • Require innovation in product development. PBMs must bring truly creative solutions to address unmet needs in population health management, specialty cost management, and clinical outcomes improvement. PBMs need to align their product offerings with the cost containment that employers need and the predictability and flexibility that employers want.

The public is demanding better health care solutions, including those offered by the traditional PBM model. The likelihood that industry regulation will really solve our problems is uncertain. Genuine innovation and competition will provide an alternative path forward to overcome these challenges.

Jake Frenz is CEO of SmithRx, a technology-first pharmacy benefits manager based in San Francisco.