PBM scrutiny likely to increase after Anthem, Express Scripts breakup

Anthem's decision last week to cut ties with its long-time pharmacy benefit manager, Express Scripts, is being called a game changer for a segment of the industry that's increasingly under fire for pricing and transparency.

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

Express Scripts announced April 24 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.

Express Scripts' shares plummeted more than 10% in the wake of the news that it lost its largest client. Anthem's contract accounts for about 18% of Express Scripts' revenue.

"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.

Health insurers, along with employers and consumers, have long complained that prescription drugs are unaffordable. The issue has become a national dilemma and many point to it as a reason for continued cost-shifting to consumers.

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.

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 nondisclosure agreements.

"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," 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. Otherwise, he said insurers will take their business elsewhere.

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

Even without Anthem, Express Scripts still boasts more than 65 million members and handles more than 1 million prescriptions annually, the PBM told investors last week.

"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.

For its part, Anthem, which reported on April 26 a net income of $1 billion in the first quarter, a 43.7% increase over the same time last year, could take its business to CVS Health; UnitedHealth Group's PBM unit, OptumRx; or Prime Therapeutics, which manages drug benefits for not-for-profit Blue Cross and Blue Shield companies.

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.