One of the commenters is a consultant working in the industry, and I found his comments to be extremely knowledgeable. As I mentioned in previous reports and articles, I found the world of PBMs to be enormously confusing, and even after spending weeks digging into Express Scripts, still felt that I had only scratched the surface in terms of understanding industry dynamics.
The question below was from a reader interested in the point that I had made that the PBM business seems to be shifting away from Express Scripts’ stand-alone model to a model that has the PBM integrated with either an insurance company or a brick and mortar pharmacy.
My reply was hedged because I hate trying to sound like I know something when I know I don’t, but the industry consultant’s comment to my question was really enlightening. I include all of our exchange below. Many thanks to an anonymous commenter, “pilrlr”.
Can you tell me how a PBM with a brick and mortar store model is better than the one that is a pure-play PBM and why the trend towards the retail model?
Thanks for the excellent question. As I mentioned in my reply to a commenter above, it took a long time for me to understand how PBMs functioned, and I’m still not sure that I have the intricacies worked out. To me, the business is Byzantine and an uneconomic unintended effect of a medical provision system that is truly insane.
So, I’m not sure that my comments will be completely satisfying. I’ve got one piece of direct evidence that brick and mortar PBMs have an advantage over stand-alone ones, and three pieces of indirect.
The copay that you pay when you pick up a prescription goes to the pharmacy. This is essentially the pharmacy’s profit for the drug. The PBM is rebated an amount based upon a theoretical wholesale price (which, as far as I can tell, no one actually pays), and some of this is passed onto the insurance company or other PBM client. A bricks and mortar pharmacy chain gets to keep a little more of the economic benefit of each drug sale, so from the perspective of a WBA or CVS, not pulling the PBM function in-house is leaving money on the table. This article mentions that WBA profitability will be boosted by bringing PBM function in-house, for instance.
Essentially, the best business to be in is the mail-order generics business. Prices for these long-term subscriptions are very low, but profit margin is very high for the prescription provider. Again, if a WBA or a CVS (NYSE:CVS) can wrest this mail-in generic business under its own roof, it allows the firm to capture more of the economic benefits of each prescription.
- ESRX management was extremely, terribly disappointed when Walgreens Boots Alliance (NASDAQ:WBA) bought a smaller PBM (Prime Therapeutics) some time back. Maybe I am reading too much into it, but I think that ESRX management’s exit strategy was to sell themselves to Walgreens.
- CVS is doing it and it looks like WBA wants to do more of it, judging by the acquisition of Prime.
- As I mentioned in the intro, the more I dug in to try to understand this business, the more it seemed to be something that naturally functioned as a business unit rather than a stand-alone business of itself.
If you ask this question from an insurer perspective, the answer shifts more to saving costs rather than generating revenues, but the reasoning is mostly the same. An insurer wants to maximize its own profitability by lowering its servicing costs as much as possible. Pulling a PBM into an insurer does this, because it allows the insurer to recapture more pharma rebates.
Hope this helps. If you have comments about my reasoning, I’m happy to hear them and happy to rethink my position if contrary evidence exists!
Comments from an Industry Insider
(Lightly edited for clarity)
Advantages to Insurers
Erik, you may be partially correct in that the insurer “saves” some money having the PBM pull rebates that are distributed to them. With rebates coming back to the PBM as high as 60% or more, no plan sponsor (but for the case of a truly transparent PBM that only charges an administrative fee for processing claims) knows exactly what of that rebate total is flowing back to the insurer.
PBM contracts are clouded with formulary rebates, volume rebates, switch fees, formulary management fees, prior authorization fees, and the list goes on. All these charges imposed by the PBM to the plan sponsor is the way PBMs claw back much of the rebate (and again, define what a “rebate” is).
In all of the consulting and research I have done, the insurer/plan sponsor ends up with the short end of the stick and the PBM smiles all the way to the bank.
What I discuss above has nothing to do with spread pricing that is common (charge plan more than pharmacy is paid), direct and indirect remunerations (DIR fees), patient clawbacks (OptumRx is great on this one), Medicare Part D recipients being pushed into the donut hole and catastrophic coverage far too soon, PBMs likely not paying back DIR fees collected from pharmacy providers to CMS (another cost for taxpayers), etc.
Advantages to Brick & Mortar Pharmacies
I suspect a PBM with a brick & mortar model has some advantages, especially in contracting – low costs on the left pocket shifts those savings to the right pocket. For example:
- DIR fees collected from the pharmacy left pocket comes right back to the PBM right pocket (if DIR fees are even extracted from their own pharmacies)
- Audit dollars recouped from the B&M stores flow right back to the PBM side
- The PBM/owned stores have no firewall, so what the PBM sees from competitors’ stores of the in-house pharmacies provides for a wide open opportunity to move patients to mail order, specialty pharmacy, or compounding pharmacy that once again is owned by the conglomerate (CVS Caremark is the first example anyone thinks of with this type of scenario).
The only PBM today that can be trusted to any degree is one that claims transparency and is willing to sign a fiduciary agreement with a plan sponsor/insurer.
I work with several of them; although it has been a long road to garner that trust, results I see show real savings for plan sponsors and their employee patients – the big four PBMs want nothing to do with that kind of model. We can only hope the Trump administration along with congressmen like Buddy Carter and Doug Collins of Georgia instill some common sense into the rest of our congressional delegation in Washington, D.C.
Want to see drug prices come down? Change the PBM model, and start watching the dollars flow backwards from the PBMs back to patients and plan sponsors – something long overdue. It can be done; people just have to listen and understand. Many of us who have worked a career on the retail side of pharmacy and did contracting for many years don’t yet know all the tricks the PBMs use, but we know enough to be dangerous. Watch out – we are coming after you!