Prescription medicine prices are rising alarmingly, adding to the steep climb in healthcare costs worldwide. What is causing this increase? What impact does it have on pharma companies, medicine distributors, patients, hospitals and caregivers, health payers, service partners, and others?
To understand how prescription drugs work, we need to understand the value chain from drug research to making it available to the masses.
Drug research is a long and costly process. Once the drug is approved (which may take up to 20 years), the drug is available in the market for the masses. Except for over-the-counter (OTC) drugs, all other medications need a certified doctor’s prescription to be bought. The pharmaceutical companies use drug distributors to supply these drugs to various pharmacies (CVS, Walgreens, and Walmart) across countries, and the pharmacy sells the drugs to end customers based on the approval from the insurance companies (customer participants are part of different insurance providers). The insurance company, in turn, uses Pharmacy Benefits Manager (PBM) to process the pharmacy purchase claims.
In this blog, I will focus on Pharmacy Benefits Manager (PBM), their role, and how healthcare costs can be reduced by transforming Pharmacy Benefits Manager (PBM) core functions. I will try my best to make it a simple read. In case you still have questions, feel free to leave your comment below and I will try my best to respond.
What is a PBM?
A PBM is like a wholesaler. And like wholesalers, PBMs negotiate the price with the manufacturers (pharmaceutical companies such as Pfizer and Merck) and/or distributors (such as Cardinal Health). They usually won’t be transparent about their discount structures to insurance companies (such as Aetna and UHG) but promise them to bring down the drug cost significantly in the case of bulk purchases.
What is a PBM’s role?
A PBM offers the following services to an insurance company:
- Contract negotiations: PBMs negotiate with participating pharmaceutical companies and distributors.
- Design formulary: Different pharmaceutical companies have different drugs for the same disease. For example, Merck and Boehringer Ingelheim both make medicine for Type 2 diabetes. Also, once the drug goes off patent, generic companies can replicate the drug and make it available at a cheaper price. Formulary design helps to stack all these drugs based on insurance coverage, doctor prescriptions, and the cheapest available option.
- Processing claims: Decision making on how much the patient and insurance company should pay, prior authorization services for costly drugs, issue resolution, reporting, etc.
How does a PBM operate?
PBMs operate on deep discounting models. The idea is simple — stack various drugs on formulary design and negotiate rates with the manufacturers or distributors, add a price, and operate using a cost-plus model. While this is how the majority of PBMs work, some are going for the clinical outcome model as well (I will talk about it in the latter part of the blog). This model is in experimentation stage rather than part of the mainstream.
What is happening in the PBM world?
Stand-alone PBM companies have almost vanished from the US market. CVS acquired Aetna, Walmart is in talks to buy Humana, Cigna is acquiring Express Scripps (last standing PBM), and the 14 insurance companies have Prime Therapeutics as their PBM provider.
Why is the PBM industry consolidating with insurance companies? The answer lies in the following statements:
- The 1990s: The era of blockbuster drugs.
Pharmaceutical companies were experiencing a boom and most of the common facilitating diseases, such as diabetes, cardiovascular issues, and hypertension, had treatments available. In the current era, most of the drugs have gone off patent. In fact, 90-95% patented drugs are no longer patented and these medications have generic versions available in the market. Generic drugs are far cheaper than patented drugs and because of this, the core deep discounting model of PBMs is challenged as the patented drugs are already very cheap.
- The growing specialty drug market
The specialty drug market is growing (17% year over year). These drugs are used in treating diseases such as cancer or Hepatitis C, and pharmaceutical companies are not giving deep discounting like they used to do before.
- From a deep discounting model to clinical outcome model
Because of the rising cost, there is a paradigm shift from the deep discounting model to the clinical outcome model. In such a model, the pharmaceutical companies sign up for the outcome of the treatment. They can be penalized if the outcomes are not met.
The above factors combine to give enough reason for PBMs to merge with insurance companies. When an insurance company is part of a PBM industry, the focus will move from discounting to clinical efficacies, and they can make the participating pharmaceutical companies responsible for end outcomes. Government mandates on the outcome are soon going to be mainstream.
Why should PBMs change?
The increasing cost of healthcare is becoming unmanageable—both for end customers and governments. Pharmacy cost is contributing significantly to the overall healthcare cost. When PBMs focus on the clinical outcome, the incentives and behavior of the participating entities change as well. With the advent of data analytics, data sciences’ linking of drug efficacies to patient health and behavioral intervention can dramatically help in making healthcare more accountable.
How can PBMs impact healthcare costs?
To summarize, a restructured PBM approach can address the rising healthcare costs:
- Focus on the clinical outcome: Writing contracts to incentivize and penalize drug manufacturers based on drug efficacies
- Focus on providing the right medicine, not the cheapest: This results in treating the patient better and faster.
- Provide a population health management solution: The lifestyle of individuals is as important as taking medication. Drug adherence, diet influence, and exercise are critical elements for a healthy outcome.
Prescription drugs contribute to 17.1% of the total healthcare spending in the US. Though it is by far not the highest, two critical factors to note are hospital expense (47.1%) and doctor expense (28%). When medication is correctly adhered to and clinical outcomes are rigorously monitored, PBMs can help reduce hospital and doctor expense.