Insurers, employers see payoffs switching to smaller PBMs

Smaller pharmacy benefit managers may be having more than a moment as some health insurers and employers show the major players the door.

Insurance companies and employers fed up with commonplace industry practices are ditching PBMs owned by CVS Health, Cigna Group and UnitedHealth Group, and instead are inking contracts with smaller competitors pushing transparent business models.

Related: Upstart PBMs aim to shake up the market

The newer entrants have a long way to go to truly upset the market's dynamics, but their sales pitch comes at a time of increased focus on large PBMs by regulators and legislators.

CVS Caremark, Express Scripts and OptumRx processed almost 80% of the 6.6 billion prescriptions filled nationwide last year, according to a Federal Trade Commission preliminary report released Tuesday. The top six players control more than 90% of the market and the FTC found those companies use tactics to point patients toward higher cost drugs. Earlier this year, federal lawmakers were close to passing bipartisan legislation to rein in the major PBMs' actions that inflate their revenues.

The smaller companies seek to set themselves apart. They are passing along drug rebates, disclosing cost negotiations with drugmakers, reimbursing pharmacies at higher rates and rejecting spread pricing, the practice in which a PBM charges a payer more than they reimburse the pharmacy and then keeps the difference.

“It's been a really refreshing model,” said Nick Kraft, chief growth officer at Capital District Physicians' Health Plan, which dropped CVS Caremark two years ago to partner with CapitalRx to administer pharmacy benefits for its 400,000 members. At times, CVS Caremark would recommend excluding a generic medication over a brand drug in favor of a higher rebate, he said.

“We spreadsheet against these large PBMs, and we couldn't look more different,” Kraft said, adding the nonprofit health plan has seen costs drop 9% for commercial members under the contract.

The Pharmaceutical Care Management Association, a trade group representing the six-largest PBMs and others, said in a statement the industry welcomes competition from newer entrants.

As the bigger companies rack up a negative reputation in Washington, D.C., payers are looking to distance themselves.

“We don’t want to get mixed in or muddied up with any of those other practices that may be associated with some of the other PBMs,” said Pat Mitsch, vice president of pharmacy at UCare.

The nonprofit health plan ended its 13-year relationship with Express Scripts and in January began a multi-year contract with Navitus Health Solutions, a pass-through PBM owned by St. Louis-based SSM Health and Costco Wholesale Corporation.

Navitus has delivered on its transparency pledge and its leaders are easily accessible,  Mitsch said. It’s too soon to estimate cost savings but the plan expects to spend less on pharmacy for its 600,000 members, he said.

UCare also was motivated to switch PBMs to support local pharmacies, which have called out the major PBMs for forcing unfair contract terms that deliver lower reimbursements than those delivered to PBM-affiliated pharmacies.

For example, Dared Price, owner of Graves Drug and Damm Pharmacy in south central Kansas, said he must decide between accepting lower reimbursements from the established PBMs or cutting contracts and losing a significant share of business. Under a contract proposal from one of the big three companies, which he declined to name, his seven pharmacies could lose between $5 to $6 per prescription filled.

“If it wasn’t such a big part of your business, you would definitely not sign them because it’s just such a bad deal,” said Price, who is also vice president of PBM OreadRx.

Geisinger Health Plan, which works with Navitus, has never contracted with one of the major PBMs but doesn’t count them out when re-evaluating contracts.

“I call it the stalking horse process,” said Michael Evans, Geisinger's chief pharmacy officer. “We always kept one of the Big 3 or Big 4 in the [request for proposal] to see how they compared against [the other PBMs]. It was interesting where they would give you information, but if you asked the ‘why?’ or the ‘what?’ or the ‘where?’ we never really got the truth.”

One of Geisinger's biggest challenges is persuading employers to adopt the transparent approach. The insurer, which counts 600,000 members, has lost employer clients to health plans operated by the major players pitching big rebates. 

“One of the big three comes in and says, ‘Geisinger has been giving you $30 million, and we're going to give you $55 million in rebates.’ What they don’t understand is they have to spend $3 for every dollar they get in return,” Evans said.

Investment company Voya Financial is one company betting on a smaller partner. It began a multiyear contract with retailer Costco Wholesale Corporation's PBM Costco Health Solutions in January, ending its relationship with CVS Caremark. 

Voya Financial, which has 7,200 U.S.-based employees, has received pushback from employees who have seen their medications lose coverage under the switch. Also, the technology isn’t as advanced as CVS', said Carole Mendoza, vice president of benefits.

The savings are worth it, she said. The net prices for medications should be lower for employees 95% of the time, and most employees immediately see the savings since the majority of them are enrolled in high-deductible health plans.

Voya anticipates 10% savings for both its employees and the company. Some employees who have moved to cheaper alternative medications have seen their costs drop up to 25%, she said. Voya didn't increase employee health premiums last year because of the anticipated savings from switching PBMs.

“By managing the formulary more tightly and driving to better outcomes and lower costs, we’re saving money for the plan overall ,which helps to keep total costs down, and that means employee premiums can be lower,” she said.