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May 6, 2022

Pharmacy benefits managers are under pressure. Here’s the Rx

Here are three threats PBMs face today and how to overcome them using a tool they already have: data

The top three US pharmacy benefits managers (PBM) together own nearly 80% of the $450 billion pharmacy benefit market. That outsized market position, however, only appears safe.

The reality is, incumbent PBMs face pressure from all sides. New competitors are claiming they can deliver the lower drug prices employers and consumers demand. Meanwhile, regulators are pushing for transparency, especially into the PBM practice of using drug manufacturer rebates to plump up profits. 

PBMs that ignore these shifting forces will lose customers. It’s time to move away from business models that rely on rebates and “pay for play” formularies, toward data-driven business models.

PBMs that make this shift will drive down drug costs, stay profitable, grow their market share, and improve consumer satisfaction and health outcomes. It’s a win-win-win.

Three changes and how to adapt

While the industry pressures are unmistakable, PBMs already have the raw materials—the data—they need to effectively anticipate and adapt to these changes. Here are the three most compelling change drivers and what PBMs should do about them:  

  • Change 1: competitors are targeting rebates and promising transparency. New PBM players plan to capitalize on dissatisfaction with PBM performance. Some, including Mark Cuban’s Cost Plus PBM and Costco Health Solutions, are passing rebate dollars directly to their customers to eliminate what Costco calls “the spread and gamesmanship present elsewhere in the industry.” 

    Because rebates are based on drug list prices, it’s a general rule that the more expensive the drug, the larger the rebate. That creates a perverse incentive for higher cost drugs to wind up on formularies, and consumers and employers rarely benefit from the rebates. If these young PBMs can show that rebates don’t help contain costs and base drug prices on a transparent “at cost” model, then employers, health plans and consumers could save money, and rebates could become irrelevant.

    The solution: outcomes-based contracts
    . Incumbent PBMs cover about 75% of US consumers who have prescription drug benefits. That gives them leverage to negotiate evidence-based contracts with drug manufacturers.

    PBMs could track the results of a drug therapy with a health plan’s specific member group, and then show the manufacturer whether the drug delivered as promised. If it did not, the manufacturer would pay a refund.

    The drug efficacy data would also help PBMs make data-driven decisions about which drugs to include on their formularies. As an additional competitive advantage, PBMs could develop granular, custom formularies for health plans, specifying drugs for member/patient cohorts based on historic outcomes data.
  • Change 2: increased regulations aimed at PBMs. A growing wave of regulatory activity is designed to wash away murky practices and pricing in existing PBM models. Since 2017, states have passed more than 100 laws aimed at PBMs.

    At the federal level, CMS recently proposed a rule to increase price transparency in prescription drug costs for Medicare Part D beneficiaries. That rule would affect how PBMs reimburse pharmacies. It could also require that rebates go to Medicare beneficiaries where and when they pay for their prescription. If that happens, states would probably require commercial plans to do the same.

    The solution: integrated views of pharmaceutical and medical data. PBMs must untangle themselves from rebates and spread pricing, and show they deliver real solutions to contain rising drug costs.

    One powerful way for PBMs to do this is to give care managers and providers a single, comprehensive view of a member/patient’s medical and pharmacy data. That comprehensive clinical picture is critical for achieving better outcomes by recognizing care gaps, identifying poor adherence and enabling earlier inventions.

    PBMs could ensure these offerings complement the industry’s investments in data interoperability compliance. By working with multiple partners to administer a comprehensive set of benefits, PBMs could help members/employees receive the maximum in benefits and services for the lowest cost and best outcomes possible.
  • Change 3: empowered, cost-conscious customers. With new PBM players in the market, employers and health plans have real options now for managing their pharmacy benefits. Employers may want to work with a company that can take on fiduciary responsibility, while regional health plans may choose independent PBMs vs. those owned by competitors.

    Consumers with high health plan deductibles or co-pays can turn to members-only wholesale clubs, like Costco or Scriptco. Or they can forgo their insurance benefits and take advantage of immediate savings with cash-pay discounts from GoodRx, Blueberry Pharmacy, Amazon Prime and Cost Plus Drugs. Each direct-pay transaction reduces PBM rebates—and relevancy.

    The solution: predictive analytics tools. By applying AI and analytics tools to their data sets, PBMs could help member-patients make well-informed decisions about drug therapies. They could also make cost-comparison apps and tools available to self-pay consumers and those with individual or high-deductible plan coverage.

    Such tools could help consumers and their providers more easily compare drug therapies based on data from similar patients instead of relying on manufacturer advertisements or anecdotal evidence from providers and social sites.

    Predictive analytic insights also could enable health plans, employers and even communities to understand emerging health patterns, make interventions or identify best practices. Such data could be useful on many levels; pharma manufacturers could use it for R&D, providers for targeting social determinants of health, and payers for evaluating network performance.

Filling the data gap

PBMs originally were formed not just to negotiate volume discounts on drugs but to also provide pharmaceutical expertise that most health plans lack. Existing PBMs have the data necessary to fill that gap, target drug prices, improve health outcomes and carve out a new role for themselves in the healthcare ecosystem. 

While the newer PBMs could conceivably offer such services, incumbents have the larger data sets right now. But this competitive advantage won’t last forever. Competitive pressures are increasing, while rebate income potential is dropping.  

By experimenting with data-driven business cases, PBMs can identify value propositions that will help them expand and sustain market share by helping the industry reduce drug costs and spend more wisely on therapies.

Laura Topor

Healthcare/Pharmacy Consultant

Picture of DIgitally Cognizant author Laura Topor

Laura Topor is Sr Manager, Healthcare/Pharmacy, Cognizant Consulting. She has experience in pharmacy benefits management, payer & provider ops, health IT, e-prescribing, regulatory compliance, process improvement & strategic planning.

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