On August 17, 2023, Blue Shield of California (BSCA) made a significant announcement that it was unveiling a new model to transform prescription drug care and save millions of dollars annually.
Implications of New Model
The BSCA announcement resulted in significant ripples in the market. Stock values of PBMs were affected and a number of "industry experts" have weighed in on the significance of the new arrangement. Pharmacy benefits, and the delivery thereof, through PBMs and Healthcare Providers, is a significant matter for careful consideration. Pharmacy care and benefits are now the largest piece of healthcare costs, comprising approximately 35% of total spend. This is expected to grow, given the increase in the cost of specialty drugs. We can expect pharmacy costs could soon exceed 50% of total healthcare costs.
Role of PBMs
A strong and effective PBM aggregates costs of goods, directs positive clinical outcomes, and drives/enhances the overall member experience. In looking at the limited information available on the BSCA program announcement, I cannot help but ask myself if this is true innovation? The limited facts indicate the following:
- Specialty Drugs, accounting for approximately 50% of drug cost, will continue to be dispensed and managed by Caremark is a first-tier PBM, and one of the industry's largest specialty drug pharmacies.
- Rebates will be aggregated through Prime Therapeutics, another of the industry's largest first-tier existing. In fact, Prime negotiates its rebate arrangement through a GPO, alongside Express Scripts - another first-tier industry leader.
- It appears that the plan will be administered by Abarca, a long-time player in the industry. It is unclear what types or levels of administration Abarca will be performing. We do not know if Abarca or others will be performing clinical management, reporting and analytics, as well as building out the needed retail BSCA could leverage any combination of these and any other needed services from a number of sources.
New Model Implications
We are of the understanding that generics will be negotiated and supplied through Mark Cuban’s CostPlus Drug Company. The Cuban model sounds exciting but there are some issues the industry will have to address. It is common knowledge that margins on generics are higher than those realized on brand, and that these higher margins are cross-applied to offset the losses that many retail pharmacies realize when dispensing most brand drugs. The “savings” on generics could well result in an increase to brand drug costs, and difficulties in negotiating the retail network. While transparency and pass-through of true-net acquisition costs is exciting, in this case, it has significant potential implications for members who must use brand drugs.
- The inclusion of Amazon for home delivery is potentially exciting and significant. Home delivery of prescriptions typically sees a higher dispensing accuracy rate and lower cost than that which is realized through retail pharmacies. Prescription drugs are one of the last vestiges of goods and services for which consumers have decided to utilize “brick and mortar” over home delivery. Traditional PBMs have failed at aiding the patient/consumer to see the benefits of home delivery.
The potential growth of home delivery also has significant downstream ecosystem implications. There are presently 80,000 pharmacies in the United States. It is estimated that we actually need approximately 40,000. If home delivery “succeeds” we will see a” right-sizing” in the retail space. This “efficiency” could lead to lost jobs and potentially higher medication costs. PBMs are able to negotiate some of the highly advantaged retail network pricing, because of the oversupply of pharmacy sites. Less competition could lead to higher costs.
The potential oligopoly of a few major home delivery pharmacies could lead to dominance of market share for those entities, with the resulting increased ability to raise prices at will.
- Blue Shield announced a $500 million savings in costs. The amount is eye-catching but has not been detailed. Legitimate questions exist on the underlying assumptions and timeframe tied to the calculation. For instance, are some of these savings realized through improved clinical solutions, and/or negotiations for specialty drug costs and rebates? If so, couldn't this have occurred through an existing integrated model? It appears doubtful that the savings on ingredient costs tied to generics could result in $500 million.
- The announcement from Blue Shield noted that this new model would likely have its challenges around rollout. The disintermediation of the integrated PBM model has neither a positive nor negative implicit value. The key questions come to member experience. We need to ask what the members will see and feel as a result of this new model, and how it will affect adherence and compliance with prescription drug therapies. In other words, how will the use of this new model enhance member experience, and therefore the overall health of the covered population?
Summary
We have been working on a number of aggregation, clinical management, pricing, and member experience questions and models for our client base. We realize the importance of pharmacy benefits as a critical issue around access to care. We view access in terms of affordability/health equity, as well as ensuring our clients’ covered populations receive the right care in the right place at the right time.
Clients understand the importance of pharmacy benefits in the care continuum and hold us responsible for “pharmacy first” rather than “pharmacy only” strategies. We are excited by some of the emerging changes in the marketplace and are curious and anxious to see needed change occur. We also realize that the PBMs are needed partners with whom we are better off collaborating rather than confronting. This is not to say that some PBMs would rather keep things as they are and are unwilling to change. However, our practice is to think through and develop strategic initiatives that consider the existing and downstream implications tied to administration, compliance, finance, health equity, and member experience.
We will continue to monitor the situation and assess the potential implications.
