Pharmacy benefits: Setting the stage for 2019

Hard to believe, but we are in the final stretches of yet another year. That means most of us are beginning to think about the new year, what changes might be in store, and what can we expect. While these points as they relate to pharmacy benefits will be addressed in my next article, but first, I’ll set it up by discussing what we saw in 2018 and how it might impact the year ahead.

In the years leading up to 2018, consolidation or horizontal integration across pharmacy benefit managers (PBMs) was a major driver of change. Competition was whittled down to a few, select jumbo carve-out PBM providers that wield enormous buying power and influence throughout the entire pharmacy supply chain. Individually and collectively, they created a paradigm shift in which plan sponsors began abdicating control to the PBM for oversight of the pharmacy program (including allowing drugs to be excluded from the formulary, accepting required step therapies/prior authorization, and more frequent formulary changes).

Related: Pharmacy benefits ripe for transformation?

Why were plans willing to tolerate these disruptions? Concessions were driven largely by the reality that no other effective model existed. Despite claims to the contrary, the majority of today’s PBMs use near-identical methods for controlling drug spends and reporting value to their clients. Moving forward, we will be required to evaluate new solutions based on redesigned criteria.

Vertical integration

The recent health plan/PBM acquisitions are based on value propositions that are in stark contrast to historical best practices. The vertical integration of CVS Health/Aetna, Cigna/ESI, and UHG/Catamaran (OptumRx) presents a paradigm shift toward medical and pharmacy integration. The perceived value of this integration will challenge the prevailing belief that carving out pharmacy from the health plan to a specialist will result in lower cost and better member experience.

Biosimilars’ role in lowering specialty costs

Biosimilar availability in the marketplace holds great promise for millions of dollars in plan cost savings, but have yet to be maximized in the U.S. As with generic products, significant price decreases will not occur until multiple biosimilars enter the market. Current biosimilars offering a 10-35 percent savings off the innovators’ list price is not enough to offset rebating strategies. Unfortunately, this prohibits the PBMs from aggressively promoting the biosimilar.

In addition, regulatory process, manufacturer patent litigation, and prescriber concern regarding interchangeability has severely hampered the impact biosimilars have made. More than 40 biosimilars are approved in Europe, but only three are available today in the U.S., where uptake has been terribly slow. To provide an example of the magnitude of this problem, Prozac® lost more than 80 percent of its market share within six months of its generic equivalent launch. In contrast, Remicade® remains at roughly 50 percent market share after two years of biosimilar availability.

Government influence

Drug pricing is being pressured from all angles within the government. In May, the Trump Administration published its blueprint for addressing drug pricing concerns (American Patients First), which focused on driving competition, increased negotiation, incentives for lower-priced drugs, and lowering out-of-pocket costs.

Earlier this year, the government began making significant policy changes, such as—for the first time—allowing step-therapy (including for biosimilars) in Medicare Part B.

The administration is also focused on bringing more biosimilars to market with the FDA’s July 2018 release of the Biosimilar Action Plan, which will shift the dynamic of the U.S. biosimilar market.

Specialty pharmacy growth and challenges

Specialty growth has been—and without a material change, will continue to be—a huge source for PBM profits, resulting in one of the most concerning areas of misaligned interests within the PBM model.

Analysts predict that specialty pharmacy, of the highest trending components of healthcare, will equal 50 percent of the total drug spend by 2020—yet some plan sponsors are already there. According to the Pharmacy Benefit Management Institute, the average annual cost of a specialty patient in 2015 was $52,486—higher than the median wage! While specialty patients today represent only one-to-two percent of the population, there are 30 million individuals who have a rare condition. Yet, only five percent of them have a treatment available. This is a clear target for drug manufacturers which are developing new medications priced in the hundreds of thousands of dollars annually.

The rebate bubble’s impending burst

The list price of a drug that members in high-deductible health plans pay has zero correlation with the true net cost of the drug after rebates. That said, both Express Scripts (ESI) and CVS say that they return 95 to 98 percent of rebates to plan sponsors. While they did not disclose how much of the rebates were shared five years ago, our firm attests to the fact that many more sponsors today receive 100 percent of rebates when compared to five years ago.

This has certainly put pressure on PBMs to grow revenues elsewhere, not to mention immense pressure to make rebates go away all together. To be clear, ESI and CVS reported the “percentage of rebates” they share, but specifically did not discuss the “percentage of total manufacturer revenue,” which would be much lower.

Worth noting: There are significant revenue streams that flow from drug manufacturers to PBMs that are contractually defined as anything but rebates. In fact, some PBMs have gone so far as to remove inflation protection rebates from their rebate contracts with manufacturers. By creating a separate contract with manufacturers for the same dollar value but under a different contractual structure, the PBMs can retain more profit.

Plan sponsors are skeptical

Plan sponsors are becoming less trustworthy of the PBM value proposition. Large employers and coalitions are seeking ways to disaggregate the current PBM model by leveraging PBMs’ technology and scale, while stripping out the areas of misalignment. In its simplest form, this could mean contracting with a specialty pharmacy that is not owned by the PBM or no longer using the PBM for rebate management, and instead contracting directly with the manufacturer or third-party rebate aggregator. The vertical consolidation has not helped this feeling of skepticism.

According to the National Business Group on Health, 56 percent of employers were skeptical that consolidation would lower cost and improve both quality and the customer experience. It’s for some of these same reasons that Amazon has been investigating the PBM space and is expected to continue to invest in ways that disrupt the current PBM market, whether leveraging its logistical prowess through the wholesaler licenses it owns, developing a direct-to-consumer solution focusing on transparency and consumerism, or continued acquisitions of strategic solutions, such as PillPack, which was announced in June 2018.

Clearly, we have had a busy year and there are no signs of letup anytime soon. Part 2 of this series will delve into our predictions for 2019.

Read more about what’s changed in pharma over the past year: 

• Democratic wins in midterms have pharma industry on notice
• Amazon has just entered the drug-distribution business
• Senate unanimously approves ban on pharmacy gag rules

Scott Vogel (scott.vogel@confidio.com) is a partner at Confidio, a technology enabled pharmacy benefit consulting firm serving millions of members nationally.