Competition in pharmacy benefits market intensifies

While carving out pharmacy benefits management to a specialty provider generally lowers costs for self-funded employers, those seeking such unbundled arrangements are meeting resistance from the insurers that administer their health benefit programs.

Meanwhile, pharmacy benefit managers are intensifying their courtship of self-funded employers as competition escalates in the PBM market after the most recent wave of mergers and UnitedHealth Group Inc.'s decision to handle pharmacy benefit administration inside, experts say (see related story).

Today, more than half of self-funded employers contract separately for pharmacy and medical benefit administration, usually with a pharmacy benefit manager for pharmacy benefits and an insurer for medical benefits, said Scott Hengst, a pharmacy consultant at Lambertville, N.J.-based Health Strategies Group Inc.

To keep from losing pharmacy benefits administration business, some insurers, such as Hartford, Conn.-based Aetna Inc. and Indianapolis-based WellPoint Inc., have partnered with PBMs to provide those services at a more competitive price than they could if they were administered in-house, he said.

For example, WellPoint sold its PBM subsidiary NextRx to St. Louis-based Express Scripts Inc. in 2009 and then signed a 10-year pharmacy benefits administration contract with Express Scripts. Similarly, Aetna in 2010 entered into a 12-year contract with Woonsocket, R.I.-based CVS Caremark Corp., but kept its in-house PBM to manage clinical programs, protocols and oversight of its pharmacy benefits business.

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Conversely, Minnetonka, Minn.-based UnitedHealth Group Inc., which had contracted for more than a decade with Medco Health Solutions Inc. to provide PBM services to its plan members, severed ties last year with the Franklin Lakes, N.J.-based Medco on the same day Medco's takeover by Express Scripts was announced. UnitedHealth is taking pharmacy benefits management back in-house under OptumRx Inc., a rebranding of the former Prescription Solutions, a PBM that UnitedHealth picked up when it acquired Cypress, Calif.-based PacifiCare Health Systems Inc. in 2005.

Other insurers, concerned about losing revenues and rebates paid by pharmaceutical manufacturers for dispensing large amounts of certain drugs, are increasing the administrative-services-only fees charged for managing medical benefits if an employer attempts to contract separately with a PBM, sources said.

“Activity regarding jacking up ASO fees if you carve out isn't new, but insurers are a little bit more aggressive now than in the past,” said David Dross, managed pharmacy practice leader for Mercer L.L.C. in Houston. He said insurers “want to keep the pharmacy business because it's a source of revenue and a source of profit.” Frequently, “they retain the rebates as part of the arrangement and then say to the plan sponsor they are using the rebates to defray the administration fee, but the rebate is a good bit larger than the defrayed administration fee,” Mr. Dross said.

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Allan Zimmerman, national pharmacy practice director at PricewaterhouseCoopers L.L.P. in New York, said insurers are reluctant to unbundle the pharmacy benefit component from an ASO contract because it weakens their ability to purchase large volumes of prescription drugs at a discount.

“The PBM contract might have some sort of component based on volume, and unbundling and allowing spinoff of significant portions of the pharmacy benefit out of their scope and influence could have an impact on the tier or discount that they get. So if they lost another 1 million lives, they might fall a tier,” he said.

A few years ago, when Dan Pikelny, director of health benefits and productivity at Navistar Inc. in Lisle, Ill., attempted to carve out pharmacy benefits for a small group of employees Navistar attained through an acquisition, its insurer attempted to increase ASO fees. Instead, Mr. Pikelny moved the medical plan and pharmacy benefits administration away from that insurer.

“When we tried to pull it away to consolidate under our main PBM contract, the carrier threatened to increase ASO fees by 30%. We moved both the PBM and ASO away from that carrier, consolidating it with the Navistar program,” he said.

More recently, when bidding out separate contracts for medical and pharmacy benefits for 70,000 Navistar benefit plan members, CVS Caremark offered better pricing on a carved-out arrangement than Navistar could obtain in a bundled arrangement with its insurer, Mr. Pikelny said.

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“Many employers, if they went to their health insurer and said they wanted to carve out prescription drugs, of course the insurer balked,” said Nadina Rosier, North American practice leader for pharmacy benefits at Towers Watson & Co. in New York. Insurers said they would have to replace the lost revenue by increasing ASO fees anywhere from 10% to sometimes double, she said.

However, with pharmacy being the fastest-growing component of health benefits for many employers, “many self-insured employers have looked at the carve-out value proposition. On the financial side, there's the attraction of being able to negotiate more transparency and savings,” she said.

Moreover, because PBMs specialize in pharmaceutical management, they have better track records than insurers in addressing that component of self-funded employers' rapidly escalating health benefit costs, she said.

“You're hiring a company that only does pharmacy. By concentrating volume within a PBM, they have the best purchasing rights to negotiate the best deals with manufacturers,” said William A. Schlag, Boston-based senior vp in Willis Group Holdings P.L.C.'s human capital practice. “Second, they are able to build therapeutic resource centers with specially trained pharmacists to measure and monitor medication adherence. Health plans can do all those things. However, very few do because pharmacy is not the major part of their business.”