In Land of Giants, Smaller PBMs Find a Niche

October 26, 2020
Susan Ladika
Susan Ladika

Volume 30, Issue 10

In the consolidated PBM industry, smaller companies say they can be nimble and not driven by rebates. But are they acquisition targets?

The pharmacy benefit management (PBM) industry used to occupy a rather small, obscure corner in the back offices of the American healthcare system. PBMs were just prescription claims processors. But over the past 20 years or so, the industry consolidated and the remaining companies became powerful middlemen in the complex pharmaceutical supply chain. Now the industry has an increasingly high profile (not always for favorable reasons) and has consolidated even further, with its large players owned by or partnering with even larger companies.

Yet plenty of smaller players have survived and even thrived by finding a niche, such as workers’ compensation, specialty drugs or certain types of diseases. They offer an alternative to dominant companies and the traditional marketplace, which can be layered and complicated, notes Daniel Jordon, managing director at the Graham Company, an insurance broker and consultant business in Philadelphia. They can be more aggressive and have more programs with cost containment as the goal, he says: “Many of them are not rebate driven. Many just want to be completely clinically driven.”

The niche players “keep the big folks on their toes,” says Joseph Paduda, president of CompPharma, a consultant to workers’ compensation PBMs.

Still, there is no question that the PBM industry is now a land where giants roam. Caremark, which is part of CVS Health; Express Scripts, which was acquired by Cigna in 2018; and OptumRx, part of UnitedHealth Group, accounted for about three-quarters of the market in 2018 as measured by prescription claims managed, according to Adam Fein’s Drug Channels website. Add in the next three biggest players — Humana Pharmacy Solutions, MedImpact Healthcare Systems and Prime Therapeutics — and those six companies control 95% of the PBM market, according to Fein.

Size gives the larger PBMs an obvious advantage when it comes to buying power. “If you don’t have really significant buying power, it’s really tough to compete,” Paduda says. The large PBMs have the means to negotiate rebates and discounts from drug manufacturers. The arguments about the role of large PBMs, rebates and discounts follow some well-trodden paths. The large PBMs contend that they use their buying power to negotiate lower drug prices and that employers and other payers receive a large chunk of those rebates. A report on PBMs by the Pew Charitable Trusts said that a survey of health plan and PBM executives found that the proportion of rebates from manufacturers to PBMs that gets passed on to health plans increased from 78% in 2012 to 91% in 2016. Critics of the industry say that the PBMs still pocket huge sums of rebate money and keep the amounts a secret. The Pew report says manufacturer rebates more than doubled between 2012, when they were just under $40 billion, and 2016, when they were reached $90 billion.

Because the smaller PBMs have less leverage with prices, “they have to compete on the basis of something else,” such as focusing on certain diseases or niche business, such as workers’ compensation, Paduda says.

“It’s a David and Goliath scenario,” with the small players competing against the large PBMs, says David Fields, president and CEO of Navitus Health Solutions, a midmarket PBM in Madison, Wisconsin. Navitus, which is a division of SSM Health, the Catholic integrated health system headquartered in St. Louis, and Costco, says it passes on all the rebates and discounts it receives and that its revenues come from a set administrative fee. In 2019, Navitus passed on $650 million in rebates back to its clients and expects to return $750 million to $800 million this year, according to Fields. “Rebate-chasing formularies tend to drive up the overall cost” of drugs, he says. “We believe they (rebates) are not the do all and end all.” Instead, Field says, Navitus looks to design the best formularies for its patients’ health.

Mesfin Tegenu, M.S., president of PerformRx, a midmarket PBM in Philadelphia and a division of AmeriHealth Caritas, a Medicaid managed care plan, acknowledged in an email interview the difficulties of being a smaller player in an industry dominated by companies with annual revenues in the billions. “Today’s midsize PBMs are navigating a business environment in a consolidated market. This inhibits competition by midsize PBMs, which may make innovation both in program development and technology more challenging,” he said.

Tegenu also mentioned the nimbleness that others say is an asset of the bantamweights. “Smaller PBMs bring significant flexibility and customization tailored to local market needs. They also adopt innovation faster to improve patient pharmaceutical expense at point of sale, while not causing inflation in brand drugs,” he adds.

Although smaller PBMs tend to do a good job for the employers and members they serve, they may be viewed as a little risky by clients because they typically don’t have a long history, according to Jordon at The Graham Company. He says that COVID-19 has made businesses even more cautious. They don’t want to rock the boat right now by switching to a smaller PBM, according to Jordon: “Everything feels a little unstable.”

Price of success

SSM Health announced in March that Costco was purchasing a minority stake in the PBM for an undisclosed amount. Fields says the cultures of the two companies are in sync because both support keeping costs low for their customers: “It’s incumbent to provide value to the customers we serve.”

Navitus isn’t the only PBM experiencing changes. In 2019, Anthem launched its own PBM, IngenioRx, to serve its health plan members and those of other plans.

Ironically, the success of the smaller PBMs may make them attractive acquisition targets, consolidating the industry even further. Paduda says larger PBMs may buy up their smaller competitors that focus on specialty medications because the cost of those drugs is so high.

In a report on PBMs earlier this year, S&P Global said that “large vertically integrated PBMs should continue to leverage their scale and vast services to maintain market share. … We continue to expect subscale PBMs are at greater risk of losing clients to larger competitors.” The financial analytics firm also said that it expects more consolidation among midmarket PBMs.

High drug prices are one of the main reasons the PBM industry has found itself in the spotlight and the subject of criticism, particularly withrespect to rebates. Early last year, the Trump administration proposed changing anti-kickback rules so rebates would go directly to consumers rather than PBMs; later in theplan was abandoned. But “it’s much more complicated than they think,” says Jordon. “How would we possibly unwind all this?” Instead, he says, “I think the market will solve itself.”

Paduda believes there will be significant pressure on Joe Biden to lower drug prices if he wins the presidency. Drug manufacturers are more likely to be affected by Biden policies, but PBMrebates and transparency may also come into play, in Paduda’s opinion.

““Irrespective of which party is in power, there will be a continued focus on transparency,” says Fields. “There’s not enough transparency going on, especially in the pharmaceutical world.”

Susan Ladika is a health and business writer in Tampa, Florida.

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