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The PBM industry: A sea of constant change

I can remember almost 20 years ago when a few friends of mine went into the PBM industry. At the time, I had never even heard the term PBM (which means Pharmacy Benefit Manager) and didn’t know the companies for which they went to work. Since then, I’ve worked for a PBM and provided technology and consulting services to PBMs for the past 15 years.

The past decade has been a period of rapid growth for the industry with increased utilization of prescriptions (over 50% of Americans were taking a chronic medication in 2008) and an aging population (which uses more medications).

Traditionally, the industry has derived value for its customers through scale (i.e., the amount of lives managed). Because of that, the industry has experienced rapid consolidation focused on:

  • Increasing the use of lower cost prescription drugs (i.e., generics and formulary brand drugs);
  • Lowering the supply chain costs (i.e., costs paid to retail pharmacies); and
  • Increasing the use of the lowest cost channel for filling prescription drugs (i.e., mail order or 90-day retail).

This has been great. Clients have saved money. Consumers have saved money. And PBMs have grown to be large Fortune 100 companies. The key question I keep asking is, “What’s the limit on scale?” I’m not an economist, but I believe the cost curve has to flatten out at some point. Are we there yet? Perhaps not, but the differences in pricing have become much less over time.

The problem is that even with improvements, we’re still seeing an increasing drug trend. Two commonly discussed issues are: 1) the massive growth of specialty drugs which is expected to surpass traditional drug spend by 2018 and 2) the rise in generic drug prices.

In my opinion, there are four key things that PBMs should be focused on:

  1. How to manage specialty drugs
  2. Where to cut costs
  3. How to deal with regulation
  4. Which trends to “bet on” and how to innovate

Specialty drugs

While a clear definition of specialty drugs isn’t always agreed upon, most people usually focus on the high cost drugs and/or injectable medications. While these drugs represent only 1% of the total claims, they currently make up almost 30% of the total costs of pharmacy. Based on early data from the public health insurance marketplaces (also called exchanges), we may see a greater percentage of the population using specialty medications in several classes in that market.

The big question is whether traditional PBM cost management techniques – prior authorization, step therapy, formulary management – can contain the costs. While it’s possible that traditional tools can work, specialty drugs often require more complex care which leads to other questions about clinical management.

The PBM role in care management is still up for debate. Should they provide these services? Will payers expect them to? Will they get compensated for these services? Can they be more effective than other effects which have shown mixed results? I’m not sure. I believe that they should and can play a much broader role here, but I think it’s too early to tell.

Cost cutting

Years ago, PBMs had numerous levers to pull to reduce costs. They could push down the acquisition costs through use of mail-order. They could lower payments to pharmacies. They could increase demands for rebates from drug manufacturers. They could implement more step therapy-type programs to drive patients to use generics. All of these worked.

Today, savings are more challenging to find without massive cost shifting to the consumer. The focus now is on how to use technology to make PBM employees more efficient. That could include reducing customer service costs by re-engineering the call center and using new technology to increase efficiency. It might include looking at how technology can improve the prior authorization process and paper claims processing process. It could also include leveraging big data to segment and focus resources differently across the population. In many cases, PBMs can look outside the industry to see how other companies have embraced these solutions to drive down their costs.

Regulatory management

The biggest area of growth in the health care sector is in the regulated area of health care– Medicare, Medicaid, public marketplaces.Federal and state governments are clearly the biggest payers of health care costs, so PBMs have to think about how they create a culture of compliance and avoid sanctions.

This isn’t easy. Staying in front of regulatory changes and making sure to interpret them and institutionalize those requirements within the company requires significant focus and attention. This area alone has led to the growth of numerous companies that help with Star Ratings, build Accountable Care Organizations, and do reporting.

At the same time, the implementation of the regulations may be further complicated by the fact that some claims adjudication platforms or other IT applications don’t allow for agile development of new code. This forces companies to evaluate the trade-offs between modifying legacy systems or migrating platforms

Trends and innovation

This is an area I love. It’s fascinating to work with entrepreneurs and see their vision of the future and how to create value through innovation. The problem is that not everything works…something I’ve learned the hard way.

When you listen to some of these pitches, it’s easy to get focused on the “next shiny object.” Just look at the latest Rock Health report1, and you can see how much money has been flowing into the health care industry. You can also look at the latest focus on innovation across the corporate world and the “Lean Startup” movement as the large companies try to keep their edge in the industry.

Many companies are looking at how to offer solutions in the pharmacy space around digital technologies, big data, and customer experience. They are all focusing on different sources of value they can capture while leaving the PBMs focused on claims adjudication and supply chain management…leading to commoditization. PBMs have to decide whether to innovate or imitate and when and how to collaborate with these new companies.

The PBM marketplace continues to be an area of growth. Figuring out the specialty market and the regulated environment are critical to long-term survival, but determining how to grow through cost cutting, innovation, and new technology is equally as important. It’s an exciting time to navigate through the pitfalls and find value drivers to improve and sustain margins. This is the perfect time to step back; think about other industries; look at other areas of health care (e.g., pharma, providers); and re-invent the solution to find the next inflection point in the growth curve.

I’m excited about the opportunity. I hope you are too!

Related thinking: The Rising Tide of Pharmacy Benefit Cost and Complexity:A health plans roadmap to optimizing pharmacy services relationships

1Rock Health reports can be accessed online at http://rockhealth.com/resources/rock-reports/. Deloitte Consulting LLP is one of Rock Health’s twenty partners.


Author bio

George Van Antwerp is a managing director within the Strategy & Operations practice of Deloitte Consulting LLP. He focuses on pharmacy strategy and the convergence of specialty pharmacy across payers, providers, and life sciences.