As pressures mount against the largest pharmacy benefit managers, a new disruptor is entering the field: UNC Health.
The University of North Carolina-affiliated health system announced a plan this month to launch UNC Health Pharmacy Solutions, a "transparent" PBM for employers seeking an alternative to CVS Health subsidiary CVS Caremark, Cigna division Express Scripts and UnitedHealth Group unit OptumRx, which dominate the market.
Growing concerns over how the leading PBMs make money have created opportunities for smaller rivals to gain traction — and for other companies to enter the market.
The Chapel Hill-based nonprofit health system sees a unique opportunity to create an additional revenue stream and bring in new patients, said Penny DeFalco, executive director of managed pharmacy solutions at UNC Health.
UNC Health was motivated to create a PBM based on its experience providing pharmacy benefits to its 33,000 workers. The health system has been working on bringing its PBM to market since 2019, when it ditched one of the big three, which DeFalco did not name, and created a PBM for its employee plan.
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“Our costs were skyrocketing,” DeFalco said. UNC Health has since in-sourced key PBM functions and customized its formulary to focus on lower net cost drugs.
UNC Health Pharmacy Solutions is similar to others that market themselves as transparent. UNC Health will charge clients administrative fees and pass through all rebates to plan sponsors. The health system has saved 32% on employee pharmacy costs and expects to deliver similar results to employers in North Carolina and South Carolina, DeFalco said. The health system may consider partnering with businesses in bordering states down the line, she said.
The provider is also leveraging its expertise in care delivery by providing population health management and chronic condition management to PBM members, including one-on-one virtual appointments with clinical pharmacists to ensure medication adherence and to monitor side effects, DeFalco said.
“The primary focus is strengthening the relationships with employers, because I think that, in turn, helps the health system,” DeFalco said. “They're going to come to you and seek help for their care, so it's sort of all connected.”
Mike Lawrence, co-CEO of venture capital firm Two Dot, which is helping UNC Health externally launch the PBM, said he has been fielding inquiries and accepting bids to begin partnering with employers next year. The health system’s reputation could also give it a competitive edge against the for-profit conglomerates that own the major PBMs, he said.
“The excitement we’re seeing is a health system saying, ‘Hey, we want to deliver great care. We actually think that we can provide great bedside support, but also great clinical support and great pharmaceutical support at the same time,’” Lawrence said. “We're trying to bring together all those worlds.”
UNC Health joins a short list of health systems operating a PBM, but industry leaders expect more providers may pursue them. Providence Health & Services of Renton, Washington, St. Louis-based SSM Health and Salt Lake City-based Intermountain Health also have PBMs with pass-through models.
There are strong financial incentives for nonprofit health systems to enter the PBM market, said Meredith Rosenthal, a health economics professor at Harvard University.
Nonprofit hospitals and health systems are facing financial challenges as expenses rose faster than revenue last year, S&P Global Ratings reported this month. Median days cash on hand for nonprofit hospitals and health systems last year also fell below 200 for the first time in a decade, according to S&P Global Ratings.
These upstart PBMs don't have to beat CVS Caremark, Express Scripts or OptumRx to succeed, Rosenthal said.
“The margins the PBMs are enjoying are so high, so you could be at a little bit of a disadvantage and there's still a lot of money to work with, even if you can't make nearly as much as CVS Caremark,” Rosenthal said. “If you make a third of that, it's still incredibly profitable, especially when you think about hospital profits being about 1% their operating margins.”
Health systems operating PBMs may specifically be trying to capitalize on specialty drugs that drive significant PBM revenue, said Steven Lieberman, the president of Lieberman Consulting and a health policy fellow at Brookings Institution.
“Is this simply a play that amplifies that trend of health systems trying to get a better control of specialty drugs, particularly since specialty drugs are ones where there are still attractive margins?” Lieberman said.
There’s also skepticism among industry experts over whether a health system can pull this off. To effectively run a PBM, a company needs to be adept in information systems, which may be beyond a health system’s expertise compared with a health insurer's, said David Balto, an antitrust attorney who was policy director of the Federal Trade Commission's Bureau of Competition under President Bill Clinton.
While employer and insurer sentiment about PBM vendors is shifting, UNC Health Pharmacy Solutions and other newer PBM entrants face an uphill battle.
The landscape comprises around 70 players, but CVS Caremark, Express Scripts and OptumRx have a combined market share of about 80%, and the top six PBMs control 90%. Larger PBMs generally can use scale to extract better rebates from drugmakers, which at face value could look attractive to benefits brokers even though it may not mean lower overall savings.
The existence of PBM startups indicates that the market is flawed, but the newer companies have yet to disrupt it, Balto said. That could be changing. Next year, 6% of large employers intend to change PBMs and one-third will reassess their partners, according to a Business Group on Health survey.
“The market is ready for a transparent model — one that looks at things more holistically — and so I think the timing is right,” DeFalco said.
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