Tuesday, March 07, 2017

The New Health Transformation Alliance Deal: Mostly Good for PBMs, but Bad for Express Scripts

Last night, The Wall Street Journal reported that corporate members of the Health Transformation Alliance (HTA) will direct their member's pharmacy benefit management business to the Caremark business of CVS Health and the OptumRx business of UnitedHealth. See Alliance of Companies Unveil First Steps Aimed at Cutting Health-Care Costs.

HTA includes 38 of the country’s largest corporations. (See a list of the 20 founding companies here.) Many HTA members already use Caremark and OptumRx. These PBMs will retain their role in the drug channel, although with presumably lower margins, more uniform contracts, and greater transparency. Express Scripts, however, risks significant customer losses, because a number of HTA members are Express Scripts customers.

The HTA deal reinforces PBMs continued presence and role in the drug channel. By forming a giant buying group, plan sponsors are choosing to evolve their PBM relationships, not bypass the middleman. That's how markets are supposed to work. Read on for my additional observations on this novel arrangement.

PBM 101

A third-party payer chooses the overall prescription drug benefit that it will offer to members or employees. The options could include, among other things, the number of pharmacies available to plan members, which drugs are covered, different levels of cost sharing, and the particular incentives for using certain network pharmacies. The third-party payer does this while making tradeoffs among plan costs, quality, and access. The practice of pharmacy benefit management then implements these choices for the plan sponsors.

The various functions of pharmacy benefit management can be performed by different entities within the drug channel system: an employer, a health plan, the government, and an independent PBM company. In general, employers are most likely to outsource pharmacy benefit management services to independent PBMs, which can provide advice and guidance as pharmacy benefit experts.

Few employers have sophisticated in-house capabilities for analyzing pharmacy benefits, especially when controlled by the human resources/benefit function. Most PBM contracts last for one, two, or three years. Employers can and do switch PBMs if they become dissatisfied with a PBM’s performance or with the beneficiaries’ access to network pharmacies.

For a deep dive into the PBM industry’s economics and PBM-plan sponsor relationships, see Chapter Five of our new 2017 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

HTA TRICK

Participation in the HTA’s new PBM arrangement is voluntary. According to the article: “Each company must still decide whether to participate in the prescription-drug contracts, after comparing the alliance-negotiated deals with their existing prescription arrangements, according to the alliance.” This limits the group’s negotiating effectiveness, because each company can opt out and stick with its existing contract and/or existing PBM.

The group can, however, share knowledge on the most effective benefit designs and PBM contract structures. The arrangement with Caremark and OptumRx presumably reflect the “best practices” of the entire group. According to the article: "The alliance expects at least 20 members to participate, and estimates they will save a combined $600 million over three years compared with their current drug-benefit contracts." So, the new contracts will save each company about $10 million annually.

As I note in Plan Sponsors Like More Transparent PBMs—Yet Not All Choose Transparency, plan sponsors’ satisfaction was strongly correlated with a PBM’s perceived degree of transparency. Larger plan sponsors tend to work with less transparent PBMs. The HTA contract is reportedly more transparent than existing agreements. Plan sponsors got what they wanted through negotiation, rather than through government intervention.

Regardless of contract structure, Express Scripts looks to suffer from this announcement. It is the PBM for many of the HTA member companies. According to a report by David Larsen at investment bank Leerink, at least five Express Scripts customers are HTA members:
  • Dupont 
  • Hartford Financial Services Group 
  • Macy's 
  • Pitney Bowes 
  • Weyerhaeuser 
Express Scripts will need to make a very convincing case to these customers—or cut margins to retain business.

Regardless of the intra-industry customer switching, the HTA announcement demonstrates that employers still want PBMs to operate drug plans and negotiate with pharmaceutical manufacturers and pharmacies. Employers don't want direct relationships that disintermediate PBMs.

It’s a fundamental rule known to channels nerds: You can eliminate the middleman, but not the useful services provided by that middleman.

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