The Opportunity To Unbundle And Disrupt Pharmacy Benefit Managers (Part 2)

This two-part article was researched and written in partnership with Cathy DuRei, President of Rumbly Health. Part 1 delved into what a PBM is, why they are under scrutiny, and their eroding position in the market.

Amazon, already one of the most highly-valued companies in the world, has been able to raise its gross margin - a measure of its pricing power in the market - from 9% in 2010 to 22% in 2022. A huge part of the reason? The growth of the company’s third party sales, which grew from 30% to 58% of Amazon’s consumer business during the same time.

Amazon, which started primarily as an online bookstore, has transitioned into a full marketplace platform. It connects buyers and sellers, allowing buyers to provide reviews of products, and allow all users to use that data to make decisions.

The company’s success can largely be attributed to it taking advantage of two concepts, with the first one being network effects: the presence of consumers attracts suppliers, which in turn attracts more consumers. The second is its platform business strategy, where Amazon established itself as the marketplace, and thereby takes a cut of all sales – a much better position to be in than being a vendor in the marketplace.

Smart companies are embracing network effects and platform business strategies for a reason: they grow faster, scale more efficiently, are more profitable, and see higher valuations by investors. Platforms also have rapidly displaced incumbents and now dominate formerly staid industries. Taxis (Uber). Air travel (Bookings.com). Business applications (Microsoft and Salesforce.com).

And we’re starting to see platforms and marketplaces in healthcare. It’s time PBMs start paying attention.

Rethinking the Optimal PBM Role — As Platforms

What does this mean for PBMs? It’s a dramatic rethink of the role they play, the services they provide, and the way they create value for customers and shareholders alike. It requires a design of the business that is more open and transparent, and focused more on facilitation of services than the provision of services. It starts with the role.

Rather than negotiate rebates with pharmaceutical manufacturers, a PBM platform would provide a common way of contracting and allow those manufacturers to list available products and prices (or rebates in return for volume). Rather than actively managing a network of pharmacies, a PBM platform would likewise offer a common contracting mechanism and means of transacting claims (as they do today) for pharmacies to make available their services and prices. Perhaps most importantly, rather than developing their own formularies and utilization management programs, a PBM platform would provide technology infrastructure and data exchange to enable third party service providers to develop and operationalize such offerings.

The PBM would go from black box to transparent marketplace. See Exhibit 4. In doing so, it may help to finally unravel the forces - including the PBMs but surrounding them, as described above - that make today’s system work at times for industry constituents but so rarely for the consumers they purport to serve.

The Benefits of A Platform Marketplace For Prescription Drugs

An oft-repeated mantra used by CEOs of merging organizations is that “combining our two organizations will better allow us to serve our customers and save money from synergies.”

The memo (or at least the service aspect) seems to have missed the growth-through-acquisition PBM industry, judging by the fact that the industry as a whole has a very low Net Promoter Score (NPS). It’s not entirely surprising, given the vast array of services that PBMs provide and the relative complexity around each one: for instance, negotiating rebates with pharmaceutical companies is transactional; developing and managing adherence programs to influence consumer behavior and improve consumer health, requires entirely different competencies.

This may be why a cottage industry of PBM consultants has cropped up. There is a significant market opportunity for consultants to advise employer clients on how to constantly get the most out of their PBM services.

One obvious benefit of a PBM platform marketplace model: it would allow these consultants to develop, market and compete for clients using their own products. Formulary products. Utilization management systems. Optimized benefit structures and contracts. Patient adherence programs. And more.

If one believes that competition breeds excellence (as does the current U.S. government executive branch), then a PBM platform model that enables a marketplace of service providers to compete - and for clients to rate and provide feedback on them - could unleash tremendous service creativity and improve client satisfaction. (And the converse may explain why today’s PBM NPS is so low: among the big three competing for a client’s business only once every three years, there’s simply not much competition).

Perhaps most importantly, however, a PBM platform marketplace connecting pharmaceutical manufacturers, pharmacies and clients would also finally expose drug costs to true market forces. All would be working with more information. All would be subject to the decisions made by others. Some would win, some might lose temporarily. But the availability of data and information - about prices, volumes, services, cost and clinical impact, and customer feedback - would ensure that a true market could begin to function, and unleash innovation.

By way of just one example: today, pharmaceutical manufacturers and PBMs are locked in a constant state of low trust and contention. In a future state in which the PBM was not the negotiator but marketplace facilitator, the two could explore how data transacted on the marketplace could be used for innovative new purposes. As envisioned by independent biopharma consultant and American Enterprise Institute Visiting Scholar, Kirsten Axelsen, “When PBMs use the data they collect with privacy protections to support patient care including adherence for their medications and identifying patients with higher risk health conditions who may need additional support, that is valuable to the health system, patients, and to biopharmaceutical companies.”

The role of PBM as marketplace facilitator and data purveyor also could help power the transition to value-based care arrangements. Today, pharmaceuticals are largely treated as a separate line item, distinct from medical costs. But if PBMs make data available (appropriately, within all applicable state and federal rules) to third parties and plan sponsors, those entities could utilize those data to incorporate pharmacy programs into broader value-based care initiatives.

If platforms and marketplaces have proven to beat out other industry incumbents, improve the customer experience, lower costs, unlock innovation, all while returning enormous value to shareholders, then why haven’t we seen PBMs embrace this approach?

It comes down to one word, with many contributing factors: inertia.

“You Can’t Get There From Here?” The Barriers To Getting To a PBM Marketplace Model

Although the rewards will be great, PBMs who might want to pursue a platform marketplace model will face challenges. First, the largest PBMs employ thousands of people doing hundreds of jobs, all of which would need to be rethought and redesigned with a different pursuit in mind. Second, PBMs themselves have stakeholders - perhaps most notably shareholders - who are accustomed to the current predictable (and profitable) business and may push back or slow down a new strategy.

There are also industry stakeholders who are vested in the current system. Employers who are addicted to rebates. Broker consultants who rely on a piece of the pie. Pharmaceutical brand managers who have corporate support to provide rebates to ensure a successful product launch.

“There’s a lot of gray dollars floating through the system. People’s budgets are tied to it,” says AJ Loiacono, CEO of CapitalRx, an innovator in the PBM space. Douglas Hoey, CEO of National Community Pharmacist Association (NCPA) seems to agree. Hoey, recommends that employers be sure to “trust, but verify” information one’s broker shares, and seek revenue details to garner awareness of any rebate dollar or other financial incentive sharing with the broker.

There are legal, regulatory and plenty of technical issues to overcome as well. Health information is highly regulated and sensitive, subject to state and federal laws regarding how, with whom, and under what conditions it can be shared.

On the technical side, there are significant challenges to overcome: prices for individual prescriptions are notoriously complex (e.g., Strength? Form? Days supply?) and products come on and off the market with frequency. Furthermore, boiling all of this information down in ways that make sense to a layperson benefit manager who is responsible for making benefit decisions for her company may be a bridge too far.

And if third parties are to provide many of the services, how to attract them to working with the very entity that provides the services today? And how should a PBM vet these third parties, if at all?

With all of these challenges, it’s almost as if shifting the PBM industry to a marketplace platform model is like turning the Titanic. Fortunately, there are rescuers nearby, and reason to believe that among the many PBMs, one or two might be nimble enough to pull it off.

What Can (And Should) Stakeholders Do To Get Started?

Much of what needs to happen has already begun: state and federal policymakers, regulators, and shifting structures of demand (from decision-making at the institutional level to the consumer level) has provided the necessary jolt. The question is not whether change is coming, but how fast, and what each stakeholder can and should be doing to encourage the process.

To that end, here are initial suggestions that each of us in the healthcare ecosystem should start taking to position ourselves for a more transparent future:

• PBMs: first, for those who are missing the raging wildfire around them, open your eyes. Work with internal and external stakeholders to help management and your Board of Directors to understand that your strategic moats are eroding and the current business model is unlikely to survive. Second, begin diving deep into understanding how network effects work and the difference between platform business strategy and ‘pipeline’ thinking. Third, realize that transformation will be difficult from an entrenched position, so think about ways to drive innovation and experimentation outside of the business if necessary: through joint ventures or new investments in subsidiaries that can prove out new models unencumbered by the parent company’s modus operandi.
• Employers: push your PBM to be transparent: beyond simple reporting, PBMs should provide access via APIs for you and your service providers to access data in real time. Employers pay the bills and are entitled to all data. For senior executives and Boards, hold your benefits department accountable for trend and spend, not rebates. And demand information on any rebate “gray dollar” intake for benefit brokers or consultants you use.
• Benefit and PBM consultants: The future is coming. For those brokers making money off the gray dollars, wise up. For consultants who are providing excellent service today to their clients, realize there’s a better future in which you can provide a lot more value if the PBMs open up access to data. Encourage your clients to push for that.
• Technology startups: Scale still matters, and it’s a key reason why the big three PBMs have continued to win in the market. But their day is coming. There are ways to turn the big three’s success against them. Pharmaceutical manufacturers have been conceding strategic value for short-term gains from the PBMs for years, but they are realizing their mistake. There is a bright future for them if PBM marketplace platforms succeed. Further, tapping into network effects from other sources can provide value and growth in the meantime.
• Consumers: There are more price, service and delivery options than ever before. And many of them are easy and intuitive to use. Tap into them and encourage others to do likewise. Speak to your employer’s HR department about bringing in new players and platforms, if you can. An individual may only be an individual, but collectively we have tremendous power.
• Regulators and policymakers: The challenge of looking at an overall broken system is becoming overzealous in efforts to fix it. PBMs do serve a vital function in today’s system: they are a part of the reason that overall prescription drug prices have grown only modestly in recent years. What policymakers and regulators should focus on is transparency among not just PBMs, but all of the “gray dollars” that flow through the system, and ensuring that market forces are allowed to function accordingly.

A Better System Is Coming

Coming full circle to the start of this two-piece article: if a corporation is a person, and the ideas in this article help to bring down a PBM (or three), does that constitute murder?

Count 106 year old Samuel Bender among those consumers who wouldn’t be weeping. Having simple solutions to help him and his daughter find affordable medications is far more important than the welfare of corporations.

Again, it’s unlikely that things will change all that rapidly. The largest of the PBMs have established business models that deliver billions in profits to shareholders (including likely, if indirectly, many of the seniors in Samuel Bender’s community at Laurelmead). Large established streams of profits improve access to capital to defend their business interests, and shareholders accustomed to predictable performance are likely to make change slow to come.

But external forces, from political to regulatory to consumer-led, are likely to force the PBMs’ hands over time. Miller of Cigna suggests the company is headed down the path of platform thinking, as evidenced by its expanding its formulary services into digital therapeutics and other innovation.

Upstart competitors like CapitalRx (along with others like Rightway and Transcarent) who pursue a more open, transparent model that fosters competition and unleashes innovation are likely to accelerate Cigna’s and others’ transformation. And as they prove out their models in the market, momentum will build. As we’ve seen in so many other industries, “platforms beat pipelines”. So it may happen overnight, but it is coming.

For Samuel Bender, the wait for innovation that leads to a simpler process for him and his daughter is OK: “I’ve been around 106 years. What’s it to me to wait a few more?”