WHAT ARE PBMs, AND ARE THEY GOOD INVESTMENTS?

The journey of a pharmaceutical from the factory to your body can be filled with twists and turns. Indeed the American healthcare system has been criticized as convoluted, opaque and expensive.  Here at Sick Economics, we believe that knowledge is power. So we asked our Healthcare Analyst Dabin Im to demystify the forces that control price and supply of medicine in America. Our goal? First to help you understand the forces that drive the pharmaceutical business; second to help you profit from those forces….

What is a Pharmacy Benefit Manager?

Pharmacy benefit managers, PBMs, play an essential role in healthcare. They form contracts with the key players in the pharmaceutical supply chain, from drug manufacturers and insurance companies to retail pharmacies. When PBMs were first established, their initial purpose was to save time for insurance companies by processing patients’ prescription medications on their behalf. PBMs quickly realized that they could expand their business. Now, they also help patients achieve their health goals and control their medication cost. 

PBMs provide a wide variety of services. One of these include mail-order pharmacy. After a pharmacist verifies the prescription, automated machines package and label the prescriptions, which are then delivered to patients’ homes. This is beneficial for patients who have lifelong diseases and have limited access to transportation. PBMs also develop their own formularies, which are lists of drugs covered by health insurance. Formularies determine how much patients are going to pay for which medications depending on their insurance plan. In other words, PBMs determine which medications patients should take by limiting their options. Physicians are likely to prescribe medications that are on the formulary because they are the most affordable, even though it may not be the best medication for the patient. Is it ideal? No, but the price tag is important. 

One of the main duties of pharmacy benefit managers is to form contracts with pharmaceutical companies. Because PBMs serve over 266 million Americans, they have superior purchasing power and can get bulk discounts like you do at Costco. Drug manufacturers give PBMs a rebate, which is a certain percentage of the drug costs, for having their medications listed on the formulary. It is a win-win. PBMs get a discount, and the drug manufacturer gets to sell more drugs by having their drugs on the formulary. Rebates serve as an incentive for PBMs to list one manufacturer’s drug over that of another manufacturer. PBMs also may lean towards putting the more expensive drug on their formulary because a higher rebate means a higher profit. 

PBMs claim to pass on these savings to patients, helping them afford medications. But is that really true? If so, then why are drugs getting more and more expensive? A study that looked at the relationship between changes in drug price and patient expenses cleared up some of this confusion. For patients that pay prescription co-pays (fixed fees), their out-of-pocket costs did not increase when the drug prices increased. However, it was different for patients that pay deductibles, which is the amount that the patient is responsible for paying before the insurance company chips in. For this patient population, increasing drug costs resulted in a 15% increase of their out-of-pocket expenses from January 2015 to December 2017. Drug manufacturers and PBMs do not reveal the amount of rebates that are given, so it may be unfair to jump to conclusions. However, when the study put the two and two together, there was no evidence that PBMs passed on these rebates to help patients afford their medications. In fact, as shown here, prescription drugs are expected to get even more expensive.

Besides forming contracts with pharmaceutical manufacturers, PBMs also form contracts with independent and chain pharmacies. The pharmacy dispenses the drug, and in return, receives reimbursement from the PBMs for the drug and for dispensing it.  Lastly, PBMs work with variety of health plans, including commercial health insurance, self-insured employers, Medicaid, and Medicare Part D to manage drug benefit plans on their behalf. 

So, you might be wondering, how does a PBM affect me? Well, it would not be an exaggeration to state that they determine the cost of medications. It’s not the pharmacist that tells you how much you have to pay for the medication. It’s the PBM, and the pharmacist is just the messenger.

Generally, PBMs have three streams of revenue: administrative fees from various health plans, rebates from drug manufacturers, and pharmacy ‘spreads’ – the difference between what health insurance pays PBMs and what PBMs pay pharmacies for the drugs. PBMs have been gaining attention due to the lack of transparency in their practices and continuously rising prescription drug prices. This controversy even led to a Supreme Court hearing with Arkansas in the efforts of regulating PBMs. However, there are a few reasons why PBMs will most likely never go out of business. In fact, the PBM market size in the U.S. is expected to exceed $700 billion in revenues by 2025.

1. PBMs have full access to all of their patients’ data, which could be used to tremendously improve patient outcomes. PBMs have a coherent database that contains patient information, such as medical history, medication adherence rates, and doctor visits. Using this data, the PBM can help provide patient-specific digital solutions to improve their overall health. For example, Express Scripts has a mobile app where patients can easily access their medication list, order refills for home delivery, set up dose reminders, and make payments. These features increase medication adherence rates and save patients multiple trips to the pharmacy. In addition, PBMs have an opportunity to make therapeutic recommendations based on patient-specific health factors.

2. The rapid growth in specialty drugs for rare disease states will increase the demand of PBMs. There is great excitement with all the innovative immunotherapies, gene therapies, and cancer drugs that will save lives. However, their price tags will not be as exciting to say the least. PBMs’ purchasing power is needed to negotiate prices with drug manufacturers. Additionally, the expansion of specialty pharmacy will accelerate in the coming years. Life-changing specialty drugs will enter the marketplace for patients with rare diseases, for which medications are not currently available. Specialty pharmacies work with PBMs to offer a full range of patient-centered clinical services to enhance the safety, quality and affordability of care.

3. The PBM business model will shift from fee-for-service to value-based care. This new model incentivizes retail pharmacies and drug manufacturers. It holds them accountable for the quality of their products and services. For example, a PBM negotiates a certain drug price with the drug manufacturer on the insurance plan’s behalf. If it leads to expected outcomes, such as improvement in the patient’s condition, then the health plan will pay the negotiated price. However, if the patient has unexpected serious side effects, then the drug manufacturer will have to pay the price. Therefore, it leads to a more reasonable pricing approach and a broader selection of formularies. It also promotes patient-specific care by preventing overprescribing and wasting medications.

3 PBM Stocks to Look Out For 

Three PBM have great control as they make up about 77% of the market share in 2020. That means that 77% of prescriptions in the United States were processed by only three PBMs. Because these three PBMs already have so much control over the market, it is highly unlikely that another PBM would come close. The three PBM stocks to watch for are CVS Caremark, Express Scripts, and OptumRx. They are like the Verizon, T-Mobile, and AT&T of wireless service providers.

CVS Caremark – under CVS Health (NYSE:CVS)

Most people think of CVS as a nationwide community pharmacy chain. However, it has many other subsidiaries. Here is a timeline of CVS Health’s acquisitions that make up what it is today. 

2006: CVS acquired MinuteClinic, which is an affordable walk-in medical clinic that provides services, such as treatment for uncomplicated illnesses and preventative care. 

2007: CVS merged with Caremark Rx, which is a PBM, and formed CVS Health. 

2015: CVS bought Omnicare, which provides pharmacy services in the long-term care setting for seniors.

2018: CVS acquired Aetna, which is an enormous health insurance company.  

CVS Health is one of the biggest healthcare companies that owns a pharmacy chain, a PBM, an insurance company, and a long-term care company. It is exciting to see what CVS will acquire next. The possibilities seem endless to say the least.

Express Scripts – under Cigna (NASDAQ:CI)

In 2018, Cigna, a global health service provider, acquired Express Scripts, a PBM. Express Scripts not only serves as a PBM in the United States but also in Canada. It focuses on providing digital care, such as telemedicine. Cigna acquired MDLive, which is a telehealth platform where doctors are on call 24 hours virtually, which is convenient and more affordable for patients. MDLive provides urgent care, behavior health therapy, dermatology, and wellness screenings. 

OptumRx – under UnitedHealth Group (NYSE:UNH)

UnitedHealth is an insurance company that has two subsidiaries: OptumRx and BriovaRx. OptumRx is a PBM that also has medication home delivery services. BriovaRx is a specialty pharmacy that handles drugs that are very high cost and complex for complicated diseases. OptumRx bought Catamaran Corporation, which was the fourth largest PBM at the time. Their merge has been a huge stepping-stone for UnitedHealth Group. 

Bonus: Humana (NYSE: HUM)

Although the top 3 PBMs are most likely going to keep their ranks, there is another PBM on the rise. Humana is one of the biggest insurance companies in the U.S. that has its own PBM called Humana Pharmacy Solutions. Humana has various subsidiaries, such as Humana Military (administers prescriptions for TRICARE), Humana Pharmacy (provides prescription mail-order service), and SeniorBridge (provides in-home care and caregiving services for seniors). It adopted value-based care, which focuses on quality over quantity.

What makes Humana unique is that it heavily focuses on preventative care. Through its Go365 Wellness Program, members are rewarded for taking care of their health by following recommendations, such as regular exercise, flu shots, and getting the recommended health screenings. Its goal is to prevent and reduce future healthcare costs such as surgery and hospitalization before it’s too late.

What about Amazon? 

Amazon has been gaining attention in the healthcare industry since it acquired PillPack, which is an online pharmacy. Because Amazon also owns Whole Foods Market, some speculate that Whole Foods could even have its own retail pharmacy inside. However, Amazon does not have its own PBM… at least not yet. Instead, PillPack has partnerships with multiple PBMs that help manage its prescriptions.

Next Steps

Now that you know what PBMs are, what they do, and why they are gaining attention, it is now your time to make a decision on whether it is worth your investment. No one can predict the future of PBMs, but one thing remains certain. They have expanded their role in healthcare so much that they are most likely not going away.