Provided that federal regulators bless UnitedHealth Group Inc.’s $12.8 billion acquisition of Catamaran Corp. later this year, it appears to be a relatively small price to pay for a deal that some experts contend will boost competition rather than shrink it among pharmacy benefit manager companies.
The deal announced this spring would create the nation’s third-largest PBM company by combining UnitedHealth Group’s pharmacy-benefits business, OptumRx, with Schaumburg, Illinois-based Catamaran, which manages more than 400 million prescriptions annually on behalf of 35 million people — about 1 in every 5 prescription claims in the United States.
But when companies grow bigger, some argue that a more powerful industry player could justify raising prices and limiting access to vital prescription drugs. With the skyrocketing costs of these drugs, along with the perception of a dwindling marketplace in the post-acquisition landscape, caution is understandable.
“There was concern in the marketplace that this would lead to some of these PBMs being able to charge what they want, which would lead to a lack of price competitiveness,” said Ritu Malhotra, vice president and national pharmacy benefits practice leader at consultancy Segal Co. The UnitedHealth deal, however, could foster fresh competition among industry heavyweights Express Scripts Holding Co. and CVS Health Corp. “The industry had gotten a little lopsided, and the third and fourth players were distant from the top two.”
Adam Fein, president of Pembroke Consulitng Inc., echoed those sentiments in an email, stating: “By acquiring Catamaran, OptumRx is signaling that it wants to compete more seriously as a stand-alone PBM. Large employers will now have a third large, viable competitor when bidding their PBM business.”
PBMs are the intermediaries between the employer and other players in the health care system, Malhotra said. They can save companies significant dollars by using the buying power of enrollees to bargain for lower prices from drugmakers and contract with pharmacies. They can also help patients adhere to their medications through specialty pharmacies and disease management experts and act as the employer’s guide through the increasingly complex world of prescription drugs.
And the role is in high demand. Managing pharmacy benefits is expected to quadruple to a $400 billion market in 2020, up from $100 billion in 2014.
It may come as a surprise to some that a union of this size only moves UnitedHealth into the No. 3 slot among the nation’s largest PBMs, but Express Scripts holds the top spot by volume, with 90 million lives covered while CVS is No. 2 at 85.1 million lives, according to a study from publishing and information company Atlantic Information Services Inc. UnitedHealth will reach about 65 million covered lives when the deal is completed.
The pervading fear around any large-scale consolidation, whether it’s UnitedHealth’s acquisition of Catamaran or RiteAid’s proposed purchase of EnvisionRx for $2 billion in combined cash and stock, which is also expected to close later this year, is that the deals will decrease competition and ultimately hurt the employers who, in theory, would be at the mercy of their PBMs.
This year’s activity comes four years after Express Scripts’ blockbuster $29.1 billion acquisition of Medco, and SXC Health Solutions Corp.’s $4.4 billion deal to acquire Catalyst Health Solution Inc.
The Express Scripts deal ignited lawsuits charging antitrust violations by shrinking competition and raising consumer prices, shining a spotlight on an industry that few tracked and even fewer understood.
Yet UnitedHealth Group’s acquisition of Catamaran differs in that the combined strengths of the two companies creates a competitive third PBM at the top of the industry to negotiate prices and drive down costs for both employers and employees.
“The combined entity has a unique value proposition,” Malhotra said. “Catamaran comes in with really strong technological sophistication. With UnitedHealth Group’s clinical analysis, the pairing makes them a really unique PBM.”
Traditionally, competition, not industry domination, has been the driving force behind corporate consolidations, explained Jonathan Roberts, an executive vice president at CVS Health.
“The industry has been consolidating for quite some time, and I think it will continue to consolidate,” said Roberts, who is also the president of CVS/caremark, the pharmacy benefit management and mail service pharmacy division of CVS Health. “Size and scale are important in this business. You need to be able to invest back in the company with technology enhancements, whether that is a move to digital or to keep up with regulatory changes. We view what continues to happen as a natural evolution of the industry.”
Companies, like living organisms, evolve to compete against their peers and defend against predators. The predator in this instance is the rising cost of prescription drugs. With the help of mergers and acquisitions, PBMs are able to bargain for lower prescription drug costs more effectively and work to ensure that the health of the employees taking these drugs is protected.
Feat of Strength
The role of a PBM is not new. Express Scripts has been in existence for 28 years. The historical lack of interest in PBMs has a lot to do with the fact that, for the past 15 years, the pharmacy industry has been relatively steady because of a rich pipeline of generic drugs. Easy access to generics kept the price of branded drugs low, a fact that gave many employers the courage to navigate the prescription drug market on their own.
“Historically, because pharmacy costs were relatively flat, the benefit didn’t have to be aggressively managed,” Roberts said.
Until 2014, the year-to-year inflation rate for generic drugs held below 1 percent, according to the 2015 “Workers’ Compensation Drug Report” conducted by Helios, a workers’ compensation PBM headquartered in Memphis, Tennessee. Then in 2014, the average wholesale price of generic drugs rose nearly 10 percent.
Without generics to act as a deflationary agent in the market, the cost of specialty drugs skyrocketed. According to an Express Scripts study, “Super Spending: Trends in High-Cost Medication Use,” 575,000 Americans had medication costs in excess of $50,000 in 2014 — almost $29 billion and an increase of 63 percent from 2013. Cancer and hepatitis C drugs lead the way as the most expensive, according to the report (See “Specialty Drug Costs: Hard Pills to Swallow,” June 2015, p. 34).
Hepatitis C drugs, in particular, were costing patients $1,000 a day and in excess of $150,000 to cure, said Brian Henry, vice president of corporate communications at Express Scripts. Many employers’ response to the high cost put their employees at risk.
“In a marketplace where there was really only one drug available, what a lot of companies did was ration the care for only the sickest patients,” Henry said. “As you can imagine, if you had hepatitis C you would want to get the treatment, but that wasn’t an option for the majority of patients.”
Suddenly, PBMs were a hot topic among employers.
Using its size and consequent buying power, Express Scripts was able to intervene on the part of employers and employee patients when a competitor drug entered the market last December. Express Scripts brokered a deal to provide exclusive access to the new drug, which had similar adherence and clinical data at a much more accessible price point. As a result, the PBM was able to drive down the cost of care by 67 percent.
But all large PBMs are not created equal, which keeps the market competitive.
More than One Way to Get the Job Done
Express Scripts’ strength lies in its size, brokering expensive deals as in the case of the hepatitis C medication. According to Henry, it operates on a “pure-play PBM model,” meaning that it focuses on mail order and specialty drugs and primarily deals with its members over the phone.
“Our size gives us the ability to act as an independent counterweight for clients in the marketplace,” Henry said.
CVS/caremark runs on an integrated model that includes the PBM, retail pharmacies, specialty pharmacies, immediate care clinics and pharmacy advisers, Roberts said. CVS’s approach addresses another leading reason prescription drugs are so expensive: nonadherence. In order to be considered adherent to a prescription drug regimen, a patient must take their medication 80 percent of the time.
“If you take 100,000 retirees, for example, their medical costs are around $1.2 billion,” Roberts said. “If we could keep all of those retirees on their medications, we could actually reduce the overall health care cost by $230 million. When people historically think of a PBM, they think about managing drug costs, but I think people often miss the value we can deliver to their members around keeping them on their medication.”
The strength of UnitedHealth’s new OptumRx is its ability to collect and analyze user data. Tracking patient usage data as soon as possible in the claim means that employers are less likely to spend wastefully.
“You want to capture a company’s pharmacy expenses as soon as possible so that you can start looking at that data and then manage it clinically to ensure that they are related to the claim and that it is the right medication for the disease and stage of the disease as well,” said Sarah Berger, vice president of marketing at Helios.
Even though Helios is a smaller PBM, it provides a platform that manages patient data similar to Catamaran’s. The process begins with the first prescription, or “first fill,” that an employee receives after a company partners with a PBM. From there, all data regarding patient usage, response to the medication and market cost are tracked to ensure that the employee is healthy and the employer is not overspending.
PBMs that effectively deliver utilization management services to company clients are expected to be in high demand, especially with the anticipated release of a new specialty drug developed to treat high cholesterol later this year.
The injectable drug, known formally as PCSK9 inhibitors, for instance, is a more expensive treatment than the generic statins such as Lipitor to treat and manage high cholesterol, Roberts said. The generic equivalent of Lipitor costs between $200 and $300 a year. This new drug will likely cost between $6,000 and $10,000.
Utilization management technology will allow employers to effectively discern which employees should be on which drugs based on their past response to statins.
“It should be used by people whose condition is not controlled by statins,” Roberts said. “They’ve been on a statin, and their cholesterol is still higher than it should be. Or they can’t tolerate statins. If we use the new drug to treat those people, then the cost is more justified than if you just opened it up and let anyone who wanted to be on the new drug be on it.”
Small Package, Big Results
Access to upward of 68,000 pharmacies across the United States has historically given large PBMs like Express Scripts and CVS the advantage over their smaller competitors. However, Roberts and Malhotra both anticipate a move to formulary solutions that will make smaller players more competitive in the pharmacy benefits market.
The PBMs will create a preferred list of products that will be vetted by pharmacy therapeutic committees made up of leading physicians, pharmacists and experts across the country, Malhotra said. They will analyze the formulary design strictly from a clinical lens and not a cost lens. Narrowing the selection of prescription drugs in this way will increase competition among drug providers and drive down costs for employers.
“In the end the manufacturers give the PBMs a rebate for any of their products the benefits manager chooses to dispense,” Malhotra said.
A narrower market helps smaller providers that typically have access to only 20,000 pharmacies, Roberts said.
Bells and whistles aside, choosing the correct PBM comes down to knowing an organization’s workforce and its needs.
“At the end of the day it’s collaboration and communication,” Berger said. “And we find the most success when we can have frank, open communication with our clients where we can work together toward a goal of right medication, right time to get the right results.”