Tech

Massive drug-industry middlemen are in trouble for overcharging customers, and now companies are ditching them in favor of smaller upstarts

  • Drug-industry middlemen called pharmacy benefit managers are in trouble for overcharging customers.
  • That’s driving business to companies that promise transparency and say they operate differently.
  • But breaking in is tough for alternative PBMs that aren’t valued as highly by powerful consultants.
  • See more stories on Insider’s business page.

Pharmacy benefit managers are facing a wave of fresh scrutiny from states over the secretive ways they turn profits.

That’s helping to fuel business at smaller firms and venture-backed startups that say they operate differently.

PBMs are middlemen that handle prescription-drug benefits for health plans and companies that provide health benefits for their employees. About 157 million people get health coverage through their jobs.

PBMs say they save companies money by negotiating discounts from drugmakers, but official audits in Ohio, Delaware, Florida, and other states have exposed how some PBMs mark up drug prices and pocket the difference.

Several states are investigating PBMs’ billing practices, The Wall Street Journal reported in May. In June, the insurer Centene settled lawsuits in two states without admitting fault and said it had set aside over $1 billion to settle similar disputes in other states. CVS Health also disclosed in a quarterly filing in March that its PBM was at the center of multiple investigations and lawsuits. A CVS spokesperson told Insider that the company discloses litigation regardless of merit.

Employers and other PBM customers have long been kept in the dark about how PBMs profit — and confidential, highly complex contracts have made it nearly impossible for them to know whether they’re getting a good deal.

But as employers struggle to afford rising drug costs, they’re increasingly questioning traditional PBMs and looking for alternative companies that promise to pass through all discounts and other costs without taking a margin, consultants and other healthcare experts say.

“Employers are very interested in transparency. Their biggest frustration is the opacity of the supply chain and not really understanding if everything is getting passed through or not,” said Brian Marcotte, a former CEO of the Business Group on Health who advises the PBM startup WithMe Health.

Alternative PBMs like WithMe, Capital Rx, and Navitus Health Solutions that say they make money only through administrative fees say their businesses are growing as employers look for transparent options to help control costs.

Still, it’s not easy to find a foothold in an industry controlled by three PBM giants — CVS, Cigna’s Express Scripts, and UnitedHealth Group’s OptumRx — and experts say transparency doesn’t necessarily mean lower costs.

Business is booming for some PBMs that promise transparency

Traditional PBMs profit through “spread pricing,” when they charge health plans more than they pay pharmacies to dispense drugs.

They also negotiate discounts in the form of rebates from drugmakers in exchange for putting a drug on a formulary, or a list of covered drugs. Expensive drugs fetch higher rebates but could increase costs for employers and workers in the long run, experts said.

A growing number of smaller companies have sworn off these tactics and said they pass through all discounts and other drug costs, making money only by charging administrative fees.

Business is booming for one of these so-called pass-through PBMs, Navitus. The firm, based in Wisconsin, handles drug benefits for Costco’s 300,000 employees and their families.

A headshot of David Fields, the CEO of Navitus.

David Fields, the president and CEO of the pharmacy benefit manager Navitus.

Navitus


Despite the COVID-19 pandemic, 2020 was Navitus’ biggest year for customer growth in its 20-year history. The company serves over 7 million people and has signed up another 1 million for future months, whereas five years ago it served 5 million people. It plans to reach 15 million customers in the next five years.

“Most of our customers have grown disillusioned with the big three and realize that there now is a different way to do this that can drive different outcomes,” Navitus CEO David Fields told Insider.

Employers’ drug costs drop by 15% on average after switching to Navitus, because the company doesn’t take spread or chase high rebates, Fields said.

Fields said the company’s relationship with Costco, which bought a minority stake in the PBM in 2020, had lent it credibility. Now more large employers that previously thought Navitus was too small to work with are looking to it for help managing drug costs, he said.

Startups that handle drug benefits are attracting new customers and investors

Capital Rx, a startup in New York that launched in 2018, grew its customers by 400% in 2020 and is planning to come close to that level of growth again this year, CEO AJ Loiacono said. The PBM expects to serve more than 1 million people across more than 200 employers in January 2022.

Capital Rx has raised $69 million from investors like Transformation Capital and Edison Partners. The business, which charges customers a flat administrative fee, is built on the concept that prescription drugs should have a set price that everybody pays — just as over-the-counter drugs like Tylenol do — and that a PBM shouldn’t determine or mark up the price.

Loiacono said that all Capital Rx customers got the same drug prices, based on the federal government’s list of the actual prices retail pharmacies pay for drugs. Customers can see the prices paid to pharmacies, while pharmacies can see what the customers are being charged, Loiacono said.

That’s different from how things work at traditional PBMs. Their agreements with companies contain not specific drugs but descriptions of types of drugs, like generic and brand-name, that can easily be manipulated, Loiacono said. Companies pay those PBMs the “average wholesale price” of drugs minus some discount, but that doesn’t reflect actual drug prices, he said.

Capital Rx is resonating with employers who are questioning not only traditional PBMs but the consultants who put them in poor contracts, Loiacono said.

“What people are suddenly understanding is that the fortunes the PBMs and carriers are making are being extended to some brokers and consultants,” he said.

WithMe Health, which launched in November, is focused on managing and guiding patients in order to lower employers’ costs.

The PBM wants to make sure patients are taking the right medications and the cheapest versions available. It says it uses data, technology, and a pharmacist-led team to do this. Traditional PBMs have focused less on managing patients effectively and more on rates and rebates, said Joe Murad, the CEO of WithMe.

Murad said WithMe charges a flat monthly fee per person — that way, its guidance is influenced not by the desire for more transactions and higher rebates but by what’s in the patient’s best interest.

WithMe has raised $48.5 million from VC firms like OMERS Ventures. Navitus has also invested in and partnered with the company.

The young startup serves more than 25 employers as a PBM, and it’s “growing dramatically,” Murad said. Because employers want choice and going up against the entrenched PBMs is hard, WithMe said, its medication-guidance services can sit on top of a traditional PBM model.

miami pharmacy coronavirus

Sonia Rojas, a pharmacy technician, works in the P & P Pharmacy on December 22, 2020 in Miami, Florida.

Joe Raedle/Getty Images


Pass-through PBMs are competing against industry giants that have tight relationships with consultants

Getting an employer to switch to a smaller, alternative PBM can be a tough sell. Employers rely on consultants, and consultants haven’t historically valued transparent PBMs highly, Marcotte said. Consultants give a lot of weight to rebates and discounts and less to things like drug management, he said.

Several sources also said that shifting to a transparent PBM model does not necessarily mean employers will save money on drug costs.

“Even though the big players do take margin, they’re also big, so their scale allows them to negotiate prices at a lower level,” said David Dross, a pharmacy-benefits consultant with Mercer.

That’s kept some employers from trying alternative PBMs. Still, Dross said his practice was seeing more employers, particularly in the western US, moving to pass-through PBMs not because they think they’ll save a lot of money but because they’re “philosophically opposed to the idea of spread pricing.”

Magda Rusinowski, a vice president at the Business Group on Health, said employers want transparency so they can get a better idea of what’s driving their high pharmacy costs. While that desire is prompting employers to look at alternative PBMs, it’s also put pressure on traditional PBMs to become more transparent, she said.

Centene, for example, which settled lawsuits in Ohio and Mississippi over its PBM earlier this month, said it had eliminated spread pricing and restructured its business to be more transparent.

But Linda Cahn, a PBM expert who helps employers write airtight PBM contracts, said that while many companies claim to pass through all discounts, few actually do. Some exploit loopholes in contracts to get around their promises; they might choose to pass through their most expensive rates while still taking spread off their least expensive rates, she said.

Michael Yang, a managing partner at OMERS Ventures who’s on the board of WithMe, said the industry has a long way to go before transparent pass-through PBMs become mainstream. But he’s optimistic.

“The big three have ridiculous market power,” he said. “I’m not here to tell you every employer is dropping the big three and going to a pass-through transparent model. That’s the brave folks, and that’s few and far between right now, but it is absolutely the future.”

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