Anthem's breakup with Express Scripts to prompt greater PBM scrutiny

Anthem's decision to cut ties with its long-time pharmacy benefit manager Express Scripts, saying it withheld billions in cost savings, is bound to turn up the heat on PBMs over the soaring cost of prescription drugs.

It also means Anthem is on the hunt for a new PBM in a highly consolidated industry that doesn't switch partners often. Express Scripts will be left with a gaping hole in its revenue that experts say will be tough to repair.

"What we're seeing with Anthem is some frustration in the market," said Michael Rea, CEO of RX Savings Solutions, a company that sells software to health insurers and self-insured employers to help them lower their drug costs. "The market is demanding accountability and relief" over rising prescription drug prices.

David Balto, an antitrust attorney formerly with the Federal Trade Commission and a critic of the PBM industry, said Anthem's move is a game changer. "It's becoming transparent that PBMs are engaging in shell games to gain profits, and payers and customer are paying the price."

Express Scripts said Monday that Anthem, its biggest client, will not renew its contract with the PBM after the current agreement expires at the end of 2019. The two have been locked in a feud for more than a year after Anthem claimed Express Scripts withheld billions in savings and overcharged Anthem for its services by $3 billion annually. Anthem sued the PBM for $15 billion last year.

Express Scripts denied those allegations and countersued Anthem. Anthem declined to comment on the announcement.

Health insurers, along with employers and consumers, have long complained that prescription drugs are unaffordable. The issue has become a national dilemma.

Employers point to drug prices as a reason for continued cost-shifting to the employee. Insurers blame high cost drugs for rising premiums.

Drug costs accounted for about 10% of total U.S. healthcare spending in 2015, which topped $3.2 trillion. And list prices for prescription drugs rose more than 12% in 2015, although net prices rose only 2.8%, according to IMS Health.

Insurers and consumers have looked for someone to blame, and pharmaceutical companies have taken most of the heat. Their pricing practices were put under the microscope after Turing Pharmaceuticals hiked the price of an old, life-saving generic drug by more than 5,000% overnight in 2015, and then again after drugmaker Mylan raised the list price on EpiPen epinephrine auto-injectors by 550% over eight years.

But attention has slowly been turning to the role PBMS play in driving up the cost of prescription drugs. PBMs are the behind-the-scenes middlemen that handle prescription drug benefits for self-insured employers and health insurers. They process drug claims and negotiate drug discounts with pharmaceutical companies. They also build networks of pharmacies and help manage the formulary.

PBMs have been criticized for keeping their practices shrouded in secrecy. They take a cut from the rebates they secure from drugmakers, but it's hard to know how big that cut is. The deals between PBMS and drugmakers are guarded by non-disclosure agreements.

Ultimately, Anthem decided that Express Scripts' cut was far too big.

"Carriers and consumers want to know what true costs are and they want to do everything they possibly can to understand what they're paying for," said Tom Borzilleri, former CEO of PBM ValoreRx who recently launched InteliScript, a technology company that provides drug price transparency to the doctor and patient right in the exam room.

Borzilleri said PBMs play a critical role in the healthcare system, but the nondisclosure agreements under which they operate allow them to develop secret profit schemes.

"A move taken by an organization as large as Anthem is going to be a wakeup call to other large PBMs to really reassess their business structure as well as their pricing structure," he said. Otherwise, insurers will take their business elsewhere.

Express Scripts' shares plummeted more than 10% in the wake of the news that it lost its largest client. It's a huge blow to Express Scripts' business. Anthem's contract accounted for about 18% of the PBM's revenue in the first quarter of 2017, which totaled $24.7 billion. Express Scripts recorded $100.3 billion in revenue in 2016, and Anthem accounted for $17.1 billion of that.

Express Scripts will struggle to make up the gaping hole left by Anthem. Insurers and self-insured employers don't often switch up their PBM partners, said Craig Oberg, a managing consultant at PBM consulting firm the Burchfield Group. He added that PBMs typically renew their clients at 92% to 94%.

But even without Anthem, Express Scripts still boasts more than 65 million members and handles more than one million prescriptions annually, the PBM told investors Tuesday.

"With or without Anthem, our strategy, independent business model and unique solution collectively position us for a strong future," Express Scripts CEO Tim Wentworth said.

Anthem has a couple of options. It could take its business to CVS Health, UnitedHealth's PBM unit OptumRx, or Prime Therapeutics, which manages drug benefits for not-for-profit Blue Cross and Blue Shield companies, analysts said.

Or, Anthem could move its PBM business in-house to have more control over the drug benefit, like UnitedHealth has done with OptumRx—one of the insurer's biggest revenue drivers.