Tuesday, August 22, 2023

A Reality Check on That Blue Shield of California Announcement

Last week, Anna Matthews of The Wall Street Journal scored a market-moving scoop with her story about Blue Shield of California’s decision to ditch CVS Health’s Caremark pharmacy benefit manager (PBM) in favor of five separate vendors. ICYMI: A Big Health Insurer Is Ripping Up the Playbook on Drug Pricing

I commend Blue Shield of California for undertaking a noble experiment to unbundle the PBM business model. But let’s curb our enthusiasm over any purported “disruption.” The model is intriguing, but less novel than advertised—and retains an unexpected reliance on the largest pharmacy benefit managers (PBMs).

Read on for some industry context and my unanswered questions.

Below are my speculations and questions about the Blue Shield of California news. I reached out to Blue Shield for clarification on some items and to confirm a few facts, but did not receive a response in time for this article. So, I may alter my perspectives as more information comes out.

1. Does unbundling really cut out PBMs?

Blue Shield of California’s self-congratulatory press announcement oh-so-modestly claims: “The nonprofit health plan is transforming how medications are purchased and supplied.”

In reality, Blue Shield will be acting as the general contractor for a subset of pharmacy benefit management services. From my perspective, it has always been true that the various functions of pharmacy benefit management can be performed by different entities: an employer, a health plan, the government, an independent PBM company, a pharmacy, and more. (See Section 5.1. of The 2023 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.)

The press announcement sort of explained the roles of its five subcontractors. Here’s my summary along with a bit of context:
  • Amazon Pharmacy will deliver nonspecialty brand and generic prescriptions by mail, and provide “24/7 access to pharmacists.” So, everyone’s favorite “disrupter” will be no more than an in-network mail pharmacy. Unknown: Will beneficiaries be able to access Amazon Prime subscription pricing, i.e., the GoodRx-like option that relies on Cigna’s Express Scripts business via the PBM’s wholly owned Inside Rx business? If they can’t access the Prime/Inside Rx prices within their benefit, will Amazon present these prices to the patient anyway?
  • Mark Cuban Cost Plus Drug Company (MCCPDC) will provide pricing “at the pharmacy pick-up counter.” It sounds like MCCPDC’s role will be to establish retail prescription prices via its Team Cuban savings card. However, the card is only accepted at a few thousand independent pharmacies plus Kroger’s nearly 2,300 pharmacies. Note that MCCPDC currently provides pricing for a subset of generics and a handful of brand-name medications. Presumably, MCCPDC has also agreed not to compete with Amazon’s mail pharmacy, the Amazon Prime retail discount card, or Amazon’s RxPass generic program. I guess everyone is hoping that beneficiaries won’t use the Internet to check any prices, right?
  • Abarca will process claims. Abarca operates Darwin, its proprietary, cloud-based PBM platform. Abarca currently manages 5.3 million covered lives and $8 billion in annual drug spend. Blue Shield of California has 4.8 million lives, so the deal will add materially to Abarca’s activity level.
  • Prime Therapeutics will negotiate rebates. Really? As far as I know, Prime sources formulary rebates via Ascent Health Services, the Switzerland-based business owned by Cigna’s Evernorth business. At some unspecified future date, Blue Shield believes it will negotiate directly, but I’m not sure how many manufacturers will provide better deals to a regional plan with fewer than five million beneficiaries.
  • CVS Caremark will provide specialty pharmacy services. Despite firing CVS Health’s Caremark business, Blue Shield will still utilize the most profitable and opaque part of CVS Health’s PBM operations. Does Blue Shield know that specialty pharmacy dispensing is a disproportionate share of the large PBMs’ total gross profits, due partly to such non-transparent revenue sources as 340B contract pharmacy participation, copay maximizers, and manufacturer fees? CVS Health is already the largest dispenser of specialty drugs. Who will control prescription pricing of specialty drugs? What happens when a beneficiary comparison shops for a specialty generic at Amazon Pharmacy or Mark Cuban’s mail pharmacy?
To me, this looks like an intriguing and partially overlapping set of businesses, each of which has its own profit incentives and objectives.

2. What’s missing?

There are a few crucial aspects of pharmacy benefit management that were omitted from any of the press coverage. These include:
  • Retail pharmacy network contracting and management
  • Formulary development and management
  • Enrollment and member services
  • Utilization management
Perhaps Blue Shield of California will rely on Prime, which itself has turned over a majority of its retail pharmacy network contracting to Express Scripts. Or maybe it will take over more activities in addition to its role as general contractor. Or maybe Blue Shield has always provided these services, instead of relying on Caremark.

Regardless, I was struck by the fact that no one has commented or opined on precisely which (if any) of the five vendors will provide these services.

3. Will this really be better and cheaper?

Paul Markovich, Blue Shield’s chief executive officer, said: “The current pharmacy supply chain is a forest of opacity and profit.” In multiple media interviews, he has complained about Caremark’s delay in adding a generic version of Zytiga to the formulary.

I’m a long-time critic of the warped incentives baked in the U.S. drug channel, so I generally agree with Mr. Markovich’s sentiment. PBMs often seem to prefer high-list/high-rebate over low-list-price products in such categories as hepatitis C and insulin biosimilars. What's more, drugs like Zytiga also have specialty pharmacy profit streams that extend far beyond rebates.

The press release claims that the new approach will “simplify the system and cut unnecessary costs.” For now, I’m skeptical that Blue Shield can efficiently corral these subcontractors while maintaining an attractive beneficiary experience with lower total expenses. It’s unclear if the headline “$500 million in medication savings” figure counts the new internal administration costs to coordinate everything and provide the additional services that I note above.

Here’s my comment from the original WSJ story:
The company’s plan is challenging, according to experts, who said it is likely to prove difficult to coordinate so many different parties, some of which might have overlapping or competing businesses. Blue Shield and its partners might also struggle to broadly implement new pricing with drugmakers that would match the discounts negotiated by the biggest pharmacy-benefit managers, they said.

“They are trading the black box for a collection of competing interests,” said Adam Fein, chief executive of the Drug Channels Institute, which provides research on the drug-supply chain. “They may be biting off more than they can chew.”
4. Why become the general contractor?

If Blue Shield wanted a transparent and presumably more satisfying PBM relationship, the marketplace could oblige. Why didn’t Blue Shield try to restructure its existing PBM contract? Why not work with one of the many smaller, more transparent PBMs that would surely welcome the business opportunity? Possible partners include Capital Rx, Navitus, WellDyne, and more.

To me, this is the most significant and puzzling aspect of their decision.

5. Will this be the start of something new?

Shares of the major insurers with PBMs took a big hit from the Blue Shield news. Perhaps investors were influenced by the many overly-credulous journalists who breathlessly parroted back the talking points from the press release.

Kudos to Bob Herman at STAT for being among the few journalists to ask tough questions.

Investors may be wondering if employers and plans will at long last try to reform the warped incentives baked into the US drug channel, per my Barbie-themed comments last week.

Or, perhaps Blue Shield of California will save money simply because CVS Health had been overcharging for PBM services—which has a whole different set of implications.

We’ll all be watching to see if this move triggers more plan sponsors to rethink pharmacy benefits. For now, it’s an exaggeration to call this deal pretty, pretty, pretty good.

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