President Trump and Department of Health and Human Services (HHS) Secretary Alex Azar recently laid out the main planks of a drug pricing blueprint for the US in a speech held on 14th May. The overall message was that players up and down the drug supply chain have been taking advantage of, and failing, American patients and that the role of pharmacy benefit managers (PBMs) would need to be closely examined as a result. This ongoing debate has been taking place against a backdrop of potential groundbreaking transformations in the industry, including vertical integration of the marketplace due to potential mega mergers, and a slew of innovative, groundbreaking technology solutions. Can PBMs keep hold of the margins they have become accustomed to over past years in spite of these revolutionary changes?
Price transparency
Price transparency has become a dominant theme in the pharmaceutical industry with President Trump promising the HHS and consumers that the role of PBMs will be closely examined in the ongoing drug pricing debate. Essentially, people are still not entirely sure what a PBM does and why they are needed in the first place. How this will play out in policy remains unclear, however, as Trump has indicated that Medicare would not be able to negotiate directly on behalf of the government to the pharma industry, which is basically the current role of a PBM.
In spite of the latest debate, price transparency issues for PBMs are not new with discussions over the recent years covering point of sale rebates, per claim charges, and cost transparency at mail. Indeed, prices are starting to stabilize, as PBMs are no longer asking retailers for the large discounts they had been pushing for over a period of many years. Notwithstanding, an unresolved issue remains with the PBMs continued demand for increased rebates from pharma manufacturers, accompanied with the threat of manufacturers being kicked off of formulary if they do not comply. Whilst Trump has warned the industry that drug price increases could potentially be limited to consumer inflation levels, experts question whether the PBMs would simply end up demanding egregious pharma rebates due to the amount of money they would stand to lose on the administrative side for specialty drugs. If this were the case, both the PMB and pharma industries would need to be regulated to avoid patients losing access to certain drugs or having them drop off of the formulary for the benefit of a PBM’s earnings.
Mega mergers
Potential profits gained through specialty drugs is indeed one of the main reasons behind the mega mergers between managed care companies and PBMs. The total spend on these specialty drugs is between $125 -150 billion, which equates to approximately 40% of the overall pharmacy spend today. Because almost the identical amount of spend goes to the medical side (being processed as J codes to physician offices and hospitals), better integration with the management of the medical side is therefore anticipated to translate into increased profits for the merged entities.
Further, vertical integration is expected to contribute to an uptake on biosimilar products on the health plan side, with priority going to the fully insured book of business (where the majority of money is to be made). In addition, vertical integration will allow some businesses to better protect the retail portion of their businesses currently under threat from the likes of Amazon through better exposure of zero co-pay clinics.
Technology solutions
The industry is currently overseeing an increased drive towards the provision of wraparound care services for the consumer through health plans or managed care pieces. Smaller specialty management companies are best placed to provide these nimble technology solutions relating to big data sharing and predictive health algorithms. Although in the future, of course, it is still a possibility that these technology companies could eventually be bought out by the larger merged entities.
Level playing field
Overall, PBMs are facing regulatory pressures over pricing transparency, profits squeezed due to vertical integration, and potential upheaval due to innovative technology solutions. PBMs still control many levers however, and due to the centrality of their position within the industry there is a chance for them to maintain the level playing field they currently enjoy. Margins may be protected after all.
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