Thursday, October 25, 2018

PBM Pricing Overhaul: Express Scripts Prepares for a World Without Rebates—But Employers May Not Change

This week, Express Scripts announced an innovative pharmacy benefit contracting model for members of the National Drug Purchasing Coalition (NDPC), a group of 18 large employers. Click here to read the fully-titled press release.

You should pay close attention to this b.i.g. news. It is structured so that Express Scripts will not profit from the flow of funds from a brand-name manufacturer to a plan sponsor. What’s more, the PBM’s compensation will be fully delinked from drug list prices. Instead, Express Scripts will earn only fixed management fees plus additional at-risk compensation tied to clinical outcomes.

I spoke to Express Scripts and the NDPC’s consultant to clarify how the new model will differ from more conventional structures. As I see it, this PBM compensation approach could be an important step in our industry’s journey toward a world without rebates.

For now, it only applies to a sliver of Express Scripts’ revenues. But if the new pricing model is widely adopted, Express Scripts (Cigna) will be able to escape drug channel disruption unscathed.

The biggest unknown is how employers will behave as they select pharmacy benefits. Will the funds flowing transparently through the PBM be put toward solving the reverse insurance issue the gross-to-net bubble? Will this lower out-of-pocket costs for patients? As they say: Mo money, mo problems.


For context, the chart below summarizes how a plan sponsor has typically compensated its PBM for plan administration and other services.

[Click to Enlarge]

As you can see, plan sponsors use a variety of approaches to compensate a PBM for plan administration and other services. In general, spread pricing models emphasize retail network spread, dispensing profit, and rebate retention. Pass-through models emphasize administrative fees and service revenues. Every contract with a PBM is customized to the requirements of the plan sponsor and could include a mix of methods.

For more background, see Section 5.5. of The 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.


The new arrangement is between Express Scripts and the National Drug Purchasing Coalition (NDPC), a loose affiliation of employers. NDPC is not a legal entity and doesn’t have a website. (Weird, I know.) Its membership includes PepsiCo, ExxonMobil, Chevron Corporation, Sodexo, Yum! Brands, Solvay USA, and 12 unnamed other larger corporations. Each NDPC member has its own separate contract with Express Scripts.

NDPC’s PBM relationship began with Medco in 1996. NDPC worked with Cambridge Advisory Group, an outside consultant to advise on the new Express Scripts contract.

This new compensation approach does seem to meet the tenets set out in the press release: Accountability, Transparency, and Alignment. Here’s what I learned:
  • No retail network spreads. Employers reimburse Express Scripts for prescriptions at the same amount that Express Scripts reimburses network pharmacies. There is no markup on the prescription costs, so Express Scripts does not earn a spread. Current Express Scripts clients have the option to have pharmacy networks without retail spread, although most apparently choose networks with spread.

    We estimate that in the commercial market, a typical PBM’s profits from retail network spreads account for a comparatively small, but growing, part of its overall profitability. (See Exhibit 147 of 2018 pharmacy/PBM report.) These spreads are perceived to be notoriously B-I-G for some pharmacy owners. They believe that plan sponsors do not understand the magnitude of the spreads and that sponsors are therefore underpaying pharmacies.
  • No dispensing spread. Here’s an unusual move: Express Scripts will not earn any dispensing spreads for prescriptions that come from its mail and specialty pharmacies. Instead, Express Scripts will be reimbursed at the acquisition cost of the drug plus a professional dispensing fee. This fee will vary based on the activities that Express Scripts performs and will not be linked to the drug’s price. For instance, a product that requires special handling and temperature control will have a higher fee.

    Today, acquisition cost reimbursement is used primarily in fee-for-service Medicaid. Federal government regulations require fee-for-service state Medicaid programs to adopt acquisition cost pharmacy reimbursement. (See my analysis of the AMP final rule from January 2016.) Commercial payers, however, have not yet adopted acquisition cost benchmarks.
  • 100% pass through of all manufacturer revenues. Express Scripts will pass through 100% of the formulary rebates received from pharmaceutical manufacturers. In addition, any “non-direct revenue” will also be passed completely to the employer. This includes admin fees paid by manufacturers, price protection payments, and any manufacturer money related to prescription claims. This is not unprecedented, per the large employer data shown in Employers Are Extracting More of Their Rebate Dollars from PBMs. However, it is another notable component of this arrangement that delinks Express Scripts’ compensation from list prices.
  • Focus on clinical outcomes. Express Scripts will be compensated unconventionally, in this case based on a management fee plus an at-risk, pay-for-performance component. Express Scripts will guarantee per-member, per-year (PMPM) trend as well as clinical metrics tied to five major disease states. In theory, this should mean that formularies are built on total healthcare costs, rather than being narrowly focused on net pharmacy costs and rebates.

    This structure makes even more sense when we consider the pending Cigna deal. As I note in Cigna-Express Scripts: Vertical Integration and PBMs’ Medical-Pharmacy Future:
  • “The days of managing primary care blockbusters are over. Pharmacy benefit management today concerns the more expensive specialty drugs that treat smaller patient populations. Total specialty drug spending is split almost evenly between medical and pharmacy benefits. Patients on specialty drugs also tend to have higher medical expenses, so integrated medical-pharmacy management is crucial.”
NDPC’s long history with Express Scripts and Medco enabled the unusual level of trust and information sharing required for this innovative arrangement. However, I wonder if Express Scripts would have pursued this arrangement in the absence of the Cigna transaction.


Express Scripts and its peers are starting to disrupt the conventional PBM business model. In this new model, all rebates and other manufacturer monies are flowing back to plan sponsors.

What will happen to this money? Express Scripts told me that the employers in the NDPC “intend to get value to patient at point of sale,” but that the employers will likely retain benefit designs with high deductibles, coinsurance, and accumulators. Naturally, Express Scripts can’t determine how each employer will structure its benefit.

Will the funds be used primarily to offset total plan costs for the employer and premiums for everyone? Or, will the money offset the out-of-pocket costs incurred by the patients whose prescription activity generates the rebates and fees?

These questions highlight the most difficult challenge of shifting to a world without rebates, per my discussion in New Disclosures Show CVS and Express Scripts Can Survive in a World Without Rebates. Are Plan Sponsors Now the Real Barrier to Disruption?.

Perhaps plan sponsors still don't know what we want from them. It's like the more money we come across, the more problems we see.


The Notorious B.I.G. and Puff Daddy provided an NSFW examination of the gross-to-net bubble. Messrs B.I.G. and Daddy may not be to everybody’s liking, but in this case, they do call all the shots. Click here if you can’t see the video.

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