The Rise of PBM Purchaser Advocacy: A Case Study

Published in America’s Benefit Specialist on 4/01/2021.

Brian Klepper

Employers now devote about 20 percent of their health plans’ total spend to drugs and, for many employers, that figure can be as high as 30 percent or more. The prescription drug supply chain is intentionally complex and opaque, which renders it inscrutable to all but the small group of professionals long seasoned in that niche. Even though it’s well known to be highly wasteful, few organizational purchasers have been able to implement tactics that force greater efficiencies in this part of health care.

Pharmacy Benefit Management (PBMs) firms are increasingly influential components of the US drug machinery, managing prescription drug benefits for health plans, employers, and other payers. Maneuvering behind the scenes, they dictate total drug costs for insurers, define which medications patients’ will have access to, and determine how much pharmacies are paid. These roles have made them powerful; the top three PBMs – Express Scripts, CVS, and Optum Rx – are behemoths that control some 75% of the US PBM market. 

The top PBMs have also come to generate higher revenues and profits than major insurers. For example, in 2017 Aetna reported revenue of $60.5 billion and profits of $1.9 billion. In the same year, CVS’s pharmacy benefit management business alone generated $130.6 billion in revenue and profits of $4.8 billion.

The interdependence between health plans and PBMs has also prompted stronger business relationships between the players, evidenced by Aetna’s recent merger with CVS and Cigna’s acquisition of Express Scripts. Optum Rx is a subsidiary of United Health Group.

Their financial strength and role in the marketplace have made the dominant PBM business models seemingly invincible. But there are chinks in their armor: the well-documented sleight-of-hand mechanisms that drive their extraordinary profitability numbers at the ever-increasing expense of American business. Withholding manufacturers’ rebates, manipulating formularies to optimize the profitability of specific drugs, adding a hefty margin to and hiding the true cost of each drug, failing to disclose account details, and many other suspect business practices now define the mainstream PBMs. It’s not unreasonable to argue that traditional PBMs represent an antiquated model, a market vacuum waiting to be filled.

As was inevitable, a new crop of transparent, progressive PBMs is emerging in the marketplace – e.g., Capital Rx, Costco Health Solutions, Flipt Rx, Mako Rx, Veracity Rx – and are focused on driving lower costs and better health outcomes by highlighting fixes to flawed PBM approaches. Below, I describe the approaches of one innovator, Flipt Rx, to driving better performance.

An interesting backstory provides some context. Flipt was founded by Aaron Greenblatt, whose family has owned a generic drug manufacturing business, G&W Laboratories, for more than a century. Reviewing G&W’s own employee health plan, Dr. Greenblatt realized that the PBM

managing their pharmacy benefit was charging G&W as much as 1,600 percent of what they had sold their own drugs for into the wholesale market and directly to pharmacies. That raised the question of where the money was going and became the impetus for building a better model. Starting from scratch, they designed a PBM that took advantage of cleaner administrative approaches and leading-edge engagement and technological capabilities. Here are some of the structural elements baked into Flipt, an anti-PBM PBM.

  • Most PBM-employer agreements are intensely lengthy – 300 pages is common – complicated and loaded with ambiguous and unfavorable terms for the purchaser. Flipt uses a straightforward contract – 17 pages – that is clear and easily understood.
  • Flipt does not use “spread pricing” and makes no money on the drugs. Instead, it charges a modest per member per month (PMPM) administrative fee.
  • Flipt passes all rebates through to its customers and provides reporting that makes those transactions transparent.
  • Flipt has developed a “smart adjudication” capability that reduces administrative load and streamlines fulfillment. For example, its adjudication system looks for evidence in the enrollee’s medical or lab claims that meet the criteria for prior authorization. It should soon be able to extend that function by incorporating member-reported outcomes data as a key element of the enrollee’s file.
  • Flipt invites audits by its clients.
  • Flipt uses an evidence-based formulary. It relies on independent third-party assessments from sources like The Institute for Clinical and Economic Review (ICER) for fairly market-priced medications. 
  • Flipt recommends that its clients/health plan sponsors use value-based benefit designs. This means that Flipt encourages customization of the formulary to include high-value medications, and offers its plan sponsors the option to cover, exclude, or increase member cost share for low-value drugs.
  • High tech/high touch approaches make smarter drug purchases easy and are core to Flipt’s model. Enrollees can download a robust and popular mobile app, Apple or Android, that lists the pricing of each prescribed drug at pharmacies in the enrollee’s region, as well as what that individual’s costs will be, based on his/her health plan design.
  • The app texts the enrollee if a therapeutic equivalent drug – that is, a different drug that produces the same or comparable clinical impact – is available at a lower cost. If the enrollee chooses that option, Flipt will facilitate the prescription change with the physician. This texting function lets members proactively find lower-cost alternative drugs prior to the pharmacy filling the prescription.
  • A concierge function is equally foundational. Sometimes members need help moving between pharmacies or working with their physicians to change medications. So Flipt offers an easily accessible concierge support team to help members facilitate these key transactions.
  • Flipt will guarantee PMPM savings with plan sponsors with 5,000+ members.

Flipt claims that its clients typically realize drug savings of 20-30 percent, which should translate to a total health plan cost reduction of 4-9 percent. That’s a strong warranty, especially for a company that guarantees performance. 

But the larger point is that Flipt represents a fresh and powerful new approach to prescription drug management. Like its few like-minded competitors, it brings together an array of approaches that engender employer trust and enhance the drug acquisition experience for both the enrollee and the employer. Its business model drives high-value drug choices, which improves health outcomes and lowers costs. By incorporating third-party guidance, it conveys to purchasers that its practices are founded in science. 

In short, this new crop of pass-through, transparent vendors represents a new paradigm, a high-performance drug management alternative, that merits the close inspection of benefits managers and benefits advisors.

Brian Klepper is a health care analyst and advisor focused on identifying, vetting, and connecting high-performance health care vendors with organizations that hold health care clinical and financial risk.

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