Massive vertical mergers in healthcare could change the pharmacy benefit manager (PBM) payment model going forward, a shift that could focus on net drug pricing instead of rebates.
Several PBMs are already making that transition, and another could be following close behind. Analysts say new consolidated negotiating power will drive changes to PBM models without impacting cash flow.
During an investor conference on Friday, Centene executives repeatedly touted the company’s investment in a new tech-forward PBM, RxAdvance. CEO Michael Neidorff and Chief Financial Officer Jeff Schwaneke boasted about the PBM's “very successful” initial rollout in Mississippi. The company plans to roll out the solution nationwide in 2019 and 2020.
But Neidorff also said he’s also been in discussions with RxAdvance chief marketing officer and former Apple CEO John Sculley about how to flip the PBM model on its head.
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“I’ve been talking to them and saying, 'How do we find a way using all these systems to get away from rebates and get to net pricing?'” he said. “You talk about ultimate transparency—that gets us there. If we can do some of that, we can be transformative and make some significant contributions in reducing healthcare costs.”
CVS Caremark is already making moves in that direction. Shortly after closing its $69 billion acquisition of Aetna, CVS announced that it is shifting its payment model to rely on 100% pass-throughs with a model that focuses on “guaranteed net cost.”
CVS Caremark President Derica Rice said such an approach offers a simpler economic model. Express Scripts has also announced a “preferred flex formulary” for 2019.
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Analysts with Fitch Ratings believe a net cost approach to PBM pricing will be the new normal following vertical integrations between CVS-Aetna and Cigna-Express Scripts. Those distinct shifts come as the Trump administration has set its sights on recalibrating the traditional PBM rebate system and, at times, blasting middlemen for increasing drug costs.
Those changes could be “disruptive” to current business models, according to Fitch. New net pricing models could take some heat off the industry, they added, but it’s not likely to materially change the amount of money that flows through those business lines.
“We believe it is unlikely CVS and Cigna would forego [sic] drug manufacturer rebates without a corresponding offset of higher fees on other services,” they wrote. “Even if rebates or other forms of spread pricing are used, the PBM operations of CVS/Aetna and Cigna/Express Scripts are expected to comprise a material amount of projected pro forma cash flows for the combined CVS/Aetna and Cigna/Express Scripts companies.”