Startup pharmacy benefit managers are counting on regional health plans to drive their growth, saying that local insurers are increasingly interested in contracting with new PBMs that promise more transparent operations and aren't owned by their competitors.
Abarca and Triple-S Management inked a new three-year contract in August, with the independent Blue Cross Blue Shield licensee apparently attracted to the startup PBM out of a desire not to do business with its competitors. Five BCBS plans in June launched Evio, a Denver-based pharmacy services and analytics company that some 20 million members nationwide will rely on to bypass legacy PBM operators.
"Everybody from the Blues on down is looking in other directions," said Antonio Ciaccia, president of 3 Axis Advisors and head of 46brooklyn Research.
These announcements reflect growing skepticism about the work of the "big three PBMs"—CVS, Cigna's Express Scripts and UnitedHealth Group's OptumRx—which control at least 80% of the market, according to a University of Southern California report in 2020. These PBMs operate through opaque "spread pricing" models, which means they charge payers more than they reimburse the pharmacy for a specific drug and retain the difference.
While spread-pricing has received wide attention for its lack of transparency, "the most recent game is PBMs are creating group purchasing organizations and hiding the rebates at that layer of the enterprise," Ciaccia said. Many of these GPOs have partnered with PBM startups that claim to operate independently and more transparently than the big three, further complicating regional health plans search for a PBM that doesn't do business with their competitors.
"Keep your friends close and your enemies closer. What's happening is their own competition is counting on them and relying on the sort of the core functionality of the PBM model," Ciaccia said. "It makes you wonder, 'Well, how are they going to conquer the beast when they're living on the beast?'"
'There's a balloon squeezing effect'
In 2014, Group Health Cooperative of South Central Wisconsin switched from one of the large, national PBMs to Navitus, a PBM owned by SSM Health and Costco Wholesale. The Madison, Wisconsin-based integrated health system was attracted to Navitus' ability to customize coverage and its transparent operating model, said Mike Ochowski, a formulary pharmacist at GHC-SCW. While larger PBMs typically rely on spread pricing, Navitus operates under a pass-through model, which means it derives revenue from a set administrative fee and returns all rebates and discounts received from drugmakers back to its clients.
"We know our market very well and trying to shoehorn their national formulary into our market just left too many opportunities that we weren't willing to concede," Ochowski said.
Ochowski estimated that Navitus has cut its per-member drug costs by about 10% monthly. Regional health plans like GHC-SCW account for about half of Navitus' 800 customers which represent 7.3 million lives, Navitus' CEO David Fields said.
As the PBM-insurer industry becomes more integrated, regional plans' interest in "undoing relationships" with their competitors has driven growth at the Grand Chute, Wisconsin-based PBM, Fields said.
"My biggest competitor in my market now also is my PBM and, in theory, has access to my data," Fields said. "That's a very uncomfortable feeling for these regional health plans."
Still, the company is not completely independent.
Navitus recently contracted with Ascent Health Services, a GPO owned by Cigna's Express Scripts, Ciaccia said. Ascent's customers include WellDyne, a startup PBM similarly marketing more transparent operations; Prime Therapeutics, a pass-through PBM used by 18 BCBS plans; and Kroger's independent PBM. Health systems rely on GPOs to purchase drugs and supplies at volume discounts.
"While I don't know the numbers, that begs the question, 'What did Navitus see that I don't?'" Ciaccia said. "Are they getting a better deal entering into an agreement with their own competitor versus them trying to achieve it in the open marketplace? There's a balloon squeezing effect.'"
Giving competitors business gives customers options
Demand from regional health plans has influenced Capital Rx's tech roadmap.
The New York-based startup PBM is in the process of building a functionality to serve government customers, said Matt Gibbs, president of commercial markets. The three-year-old company manages about 600,000 lives and counts one health plan as a customer: Friday Health Plans, which operates in the exchange market. Once Capital Rx's government system is live by July 2022, the company expects health plans to make up about half of its business.
"It's definitely a regional play," Gibbs said. "The regional plans, they don't want to be doing business with their competitors anymore. They're scratching their heads, like why are we giving them our data and our money?"
The company, which markets itself as "the ethical pharmacy benefit manager," has already attracted calls from locally based insurers, Gibbs said. He credited Capital Rx's approach to pharmaceutical pricing for driving interest. Capital Rx bases its drug prices on the federal government's list of actual prices retail pharmacies pay for drugs, allowing insurers and pharmacies to see what customers are charged, Gibbs said.
Still, the company reportedly relies on Zinc, a GPO owned by CVS Health to coordinate its rebates. Gibbs declined to comment on Capital Rx's GPO.
"It's a harsh reality, but pharma has decided everything goes to these GPOs, and if you want to have a competitive offer, you've got to go into those," Gibbs said. "I don't like it, but it's where we're at."
In some instances, the gray area between startup and legacy pharmacy operators has inspired regional health plans to launch their own PBMs.
In 2005, Buffalo, New York-based Independent Health spun its in-house PBM as a separate subsidiary. In the years since, Pharmacy Benefit Dimensions has grown to serve some 110 employer customers that are responsible for a combined 500,000 lives. The combination with its parent company has helped Pharmacy Benefit Dimensions gain leverage in the local market, and access discounts that the big three PBMS are able to offer, Chief Operating Officer John Rodgers said.
While the company has focused on the employer market, interest from regional health plans has picked up recently, Rodgers said. Most health plans ask about Pharmacy Benefit Dimensions' ability to offer customized service compared to their competitors.
"If they're all on the same exact platform they're not differentiating themselves at all," Rodgers said.
By partnering with legacy GPOs, smaller PBMs like Navitus, Capital Rx and Prime Therapeutics may be looking to offer regional insurer customers more choices, like a pass-through model along with the traditional spread-pricing operation, said Raymond Brown, a licensed pharmacist and clinical pharmacy leader for managed pharmacy at Mercer.
"I think rebates are where they've fallen short in the past," Brown said. "There's obviously this network discount, there's some components of functionality, but I do think rebates are probably one of the reasons they went after the pass-through strategy. But if they can access those GPOs, and get a higher level of rebates for their customers, could they compete a little bit more in the traditional model?"