Opinion: The Need for Value-Based PBMs

February 19, 2019

The concept of value-based care has begun to percolate through hospitals, doctor’s offices, and even Medicare, the behemoth of U.S. healthcare. It’s time for this principle to be embraced by PBMs.

The concept of value-based care has begun to percolate through hospitals, doctor’s offices, and even Medicare, the behemoth of U.S. healthcare. It’s time for this principle to be embraced by PBMs.

Essentially, transitioning to value-based care is moving from a volume-based revenue model-getting paid for how much is sold-to an outcomes-based one-getting paid for how much is saved and for improving health. A value-based healthcare entity essentially takes on the financial risk of not hitting their volume-based revenue targets if the outcomes or “value” doesn’t hit adequate thresholds established by the Centers for Medicare & Medicaid Services or other payers such as commercial insurers. Value-based entities make less money if they don’t do well against those metrics. They’re therefore incentivized to do better, not to do more.

But the momentum around value-based care and the corresponding reimbursement/revenue model remains predominantly focused on hospitals, health systems and physicians. Pharmacy spending, at $333 billion, or 10% of U.S. healthcare spending, continues to take a back seat.

Because PBMs play such an essential role today, their evolution to a value-based model is critical for bringing down healthcare costs-managed healthcare organizations cannot do it on their own. Getting bigger via vertical integration isn’t a solution in itself; we need to rock the system to shift the longstanding paradigm that’s historically improved shareholder returns, but not overall health care costs or outcomes.

Value-based care is extremely smart for commercial insurers from a cost management standpoint, but it has done very little at face value to control increasing healthcare costs for employers. The total cost of healthcare in 2019 is estimated to average $14,800 per employee, according to the Society for Human Resources Management. Health benefit costs are increasing at twice the rate of wage increases and three times that of general inflation. Prescription drugs account for approximately 25% (and growing) of that price-point, with spend on specialty drugs growing at double-digit rates. Meanwhile, the strengths of the newly merged organizations now place all of the top three PBMs solidly among the U.S. Fortune 25.

What incentive exists, though, for these financially-abundant organizations to move the needle on employer-related pharmacy spend? The traditional rebate-based model between manufacturers and PBMs has been immensely successful. But for a plan sponsor, celebrating a higher rebate is like evaluating your weekly grocery spend by how much you saved by being a club member, not by how much you spent overall and whether you bought appropriate food. Even if the government pushes a change in rebates, it will be optical at best, with the arbitrage-based financial model (buy for X, sell for Y, and retain the delta) thriving under a different name.

Related: Top 6 Pharmacy Challenges of 2019

How will that help employers struggling with rising pharmacy benefit-related costs?

This is where the need for a value-based PBM model becomes critical. Here are the characteristics of a value-based PBM model:

  • Financial model that is not based on discounts and rebates but rather on driving the right financial and clinical outcomes, i.e., built on sustainability of spend and trend.

  • Value proposition based on fundamentally prescribing and filling the “right” drugs versus the drugs that have a higher rebate value; this in turn drives towards the most appropriate utilization mix for the membership over time thereby lowering gross spend.

  • Drives towards the truly lowest net cost (PMPM-based) as opposed to optically managing it via higher rebate checks.

  • Willingness for the PBM to take downside financial risk in their contractual relationship with the employer, i.e., putting money at risk if the PBM doesn’t hit the promised financial guarantees.

  • A business model that is based on “doing the right thing” with no external market pressures (e.g., manufacturers)-in this case doing the right thing not just sometimes or most of the times, but every single time.

  • Finally, a model that realizes that the PBM is a thriving part of the healthcare continuum and requires an unwavering focus on clinical excellence with the pharmacist coexisting with the physician and registered nurse as a part of the patient’s care team.

The reason we believe value-based care and reimbursement models will work in the hospital space is because current market conditions have made it critical for providers (hospitals, health systems, etc.) to be willing to take on a level of financial risk. Average operating margins for health systems declined by 38.7% between 2015 and 2017 with operating revenue falling to 5.5% in the same timeframe, according to a recently-published Navigant Consulting study. Hospitals and health systems need to improve their margins and have realized that supporting a reimbursement model based on value is a vital means to that end.

Similarly, a true value-based PBM model is going to come from players who are hungry to showcase themselves as the “right model” and as a result are willing to put their money at risk to prove the same. While the extremely large players may talk about value-based PBM models, their incentive to disrupt themselves in the pursuit of proving value is markedly lower. They are already incredibly wealthy organizations and if the model that’s driving that kind of financial success isn’t broken, there’s really no need to fix it.

The traditional PBM model earns the PBM much more money than it saves its clients. Moving PBM models toward value ensure employers and other plan sponsors have partners who are more appropriately incentivized to take care of both their employees and their pocketbooks.

Karthik Ganesh is chief operating officer at EmpiRx Health.