Tuesday, May 30, 2017

Behind the War Between Health Insurers and Pharmacy Benefit Managers

Pharmacy benefit managers and health insurance companies, in theory, should be close partners. But Anthem's protracted litigation with its PBM, Express Scripts, and its decision in April not to renew their contract when the current one expires at the end of 2019 shows how fraught the relationship can be.

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The job of PBMs is to negotiate lower prices from drug manufacturers and pass the savings on to insurers and patients, keeping a cut for themselves. Whether PBMs are passing on enough of the savings or keeping the biggest shares for themselves is a long-running bone of contention that has created suspicion between them and their insurance company partners and among patients and elected officials worried about high drug prices.

Insurers have struggled to respond to questions surrounding PBM practices. Anthem is trying litigation against Cigna. UnitedHealth runs its own PBM, OptumRX. Cigna once ran its own, Catamaran Corp., which it sold to UnitedHealth in 2015 for just over $12 billion. While Cigna no longer offers a standalone PBM business, it still does much of its own drug price negotiation in house.

Because of the uncertainty over where PBMs best fit into the drug distribution chain, the three managers that dominate the PBM business each have a different business model. Express Scripts is the only independent among the Big Three. Optum is part of an insurance company and CVS Health, the country's largest pharmacy chain, runs CVS Caremark.

The uncertainty has also led to continual consolidation of PBM ownership and speculation that insurers and retailers are trying to expand their presence in the business of negotiating drug prices. Express Scripts has been eyed as a possible takeover candidate after with the eventual loss of Anthem, its top customer. By some estimates, Express Scripts could fetch $60 billion from a buyer like Walgreens.

Walgreens will get to test drive the PBM business if it ever wins federal approval to buy drugstore rival Rite Aid, which bought small PBM EnvisionRx in June 2015.
Other big PBM deals in recent years include Express Scripts' $29.1 billion acquisition of Medco Health Solutions Inc.in April 2012. Going forward, there's talk that Cigna and Anthem may each want to operate their own in-house PBMs or acquire one that they can scale up.

"It's a very complex industry," said Jane Lutz, executive director at the Pharmacy Benefit Management Institute. The Big Three CVS, Express Scripts and OptumRX have three-quarters of the market share and their valuation propositions vary along with their approaches to driving drug prices lower also vary.

The process is so baffling to employers that buy insurance for employees that they seek outside help evaluating just the PBM component of their benefits package. Says Lutz, "90% of employers hire consultants to help them manage that process."

The opacity of the PBM business, particularly because PBMs don't reveal the prices they negotiate with their drug manufacturers even to their insurance company partners, has led to legislation on Capitol Hill to require more transparency and to activist campaigns at PBMs and drugmakers.

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