Prescription medicine price is on a significant rise and one of the most rampant reasons for rising healthcare cost worldwide. To understand how prescription drugs work let us step back to understand the value chain from drug research to making it available to the masses.

Drug research is a long and costly process. Once the drug is approved (which may take up to 20 years), the drug is available in the market for masses. Except for OTC (over the counter) drugs, all other medications need a certified doctor’s prescription to buy. The pharmaceutical companies use drug distributors to supply these drugs to various pharmacies (CVS, Walgreens, Walmart) across the countries, and the pharmacy sells the drugs to end customers based on the approval from the insurance companies (customer participates are part of different insurance providers). The insurance company, in turn, uses PBM (Pharmacy Benefits Manager) to process the pharmacy purchase claims.

In this blog, I will focus on PBM, their role, and how by transforming PBM core functions the healthcare cost can be reduced. I will try my best to make it a simple read, in case you still have questions feel free to leave your comment below and I will try my best to respond.

What is PBM?

The simplest analogy I can draw a PBM is to a wholesaler. Like a wholesaler, PBM negotiates the price with the manufacturers (pharmaceutical companies such a Pfizer, Merck) and/or distributors (such as Cardinal health). They usually won’t tell transparently their discount structures to insurance companies (such as Aetna, UHG) but promises them to bring the drug cost significantly down because of bulk buying.

What is the PBM Role?

PBM offers following services to an insurance company

• Contract Negotiations with participating pharmaceuticals and distributors
• Design formulary – Different pharmaceutical companies have different drugs for the same disease. For Example Merck and Boehringer Ingelheim, both make medicine for type 2 diabetes. Also, once the drug goes off-patent, generic companies can replicate the drug and make it available at a cheaper price. Formulary design helps to stack all these drugs based on insurance coverage, doctor prescriptions, and the cheapest available option.
• Processing claims – How much the patient and insurance company should pay, prior authorization services for costly drugs, issue resolution, reporting, etc.

How PBM Operate?

PBM operates on deep discounting models. The idea is simple, stack various drugs on formulary design and negotiates on rates with the manufacturers or distributors, add a price on top of it and operate in a cost-plus model. This model is how the majority of the PBM works. Some of the PBMs are going for the clinical outcome model as well (I will talk about it in the latter part of the blog) but this type of model is in the experimentation stage than mainstream.

What Is Happening in the PBM world?

The standalone PBM companies have almost vanished from the US market. CVS acquired Aetna, Walmart in talks to buy Humana, Cigna acquiring Express Scripps (last standing PBM) and the 14 blue insurance companies have Prime Therapeutics as their PBM provider.

Why the PBM industry is consolidating with insurance companies? The answer lies in the following statements

• The 90s was the era of blockbuster drugs. Pharmaceutical companies were at a boom and most of the common facilitating diseases such as diabetes, cardiovascular, hypertension had treatments available. In the current era, most of the drugs have got off patent. In fact, 90-95% of patented drugs are off patented, and these medications have a generic version available in the market. Generic drugs are far cheaper than patented drugs and because of this, the core deep discounting model of PBM is challenged, as the drugs are already at a very cheap price.
• The specialty drug market, on the other hand, is at rising (17% year on year). These are drugs treating diseases such as cancer or Hep C and the pharmaceutical companies are not giving deep discounting like they used to do before.
• Because of rising costs, there is a paradigm shift from a deep discounting model to a clinical outcome model. In such a model, the pharmaceutical companies sign up for the outcome of the treatment. They can be penalized if the outcomes are not met.

Because of these reasons the PBM and insurance companies are merging. When an insurance company is part of PBM, the focus will move from discounting to the clinical efficacies and they can make the participating pharmaceutical companies responsible for end outcomes. Government mandates on the outcome are soon going to be mainstream.

Why PBM Should change?

The increasing cost of healthcare is becoming unmanageable both for end customers and the government. Pharmacy cost is contributing significantly to the overall healthcare cost for any country. When PBM will focus on the clinical outcome the incentives and behavior of the participating entities will change as well. With the advent of data analytics, data sciences linking drug efficacies to patient health to the behavioral intervention will dramatically help in making healthcare accountable

How PBM can impact healthcare cost?

In summary, a restructured PBM approach can significantly address the rising healthcare cost

• Focus on the clinical outcome – writing contracts to incentivize and penalize drug manufacturers based on the drug efficacies
• Focus on providing the right medicine, not the cheapest, resulting in treating the patient better and faster
• Provide population health management solution – the lifestyle of individuals is as important as taking medication. Drug adherence, diet influence, and exercise are critical elements for a healthy outcome

Prescription drugs contribute to 17.1% of the total healthcare spending in the US. Though it is by far not the highest, two critical factors to note are hospital expenses (47.1%) and doctor expenses (28%). When medication is correctly adhered to, clinical outcomes are rigorously monitored, PBM can impact the reduction of hospital and doctor expenses.

Thanks for reading,

Reference: https://www.drugcostfacts.org/us-healthcare-spending

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