The Evolution of PBMs with The "PBM Princess", Rachel Strauss of EHIM

This video features an in-depth discussion on the Pharmacy Benefits Management (PBM) industry, focusing on the evolution toward transparency, the complexities of pharmaceutical rebates, and strategies for cost containment. Rachel Strauss, the "PBM Princess" of EHIM (recently merged with ProCare RX), provides expert commentary on the market dynamics, emphasizing that PBM selection should prioritize strategy and partnership over simple price quotes. The conversation highlights EHIM's history as a transparent, "no rebate" PBM and how its acquisition by ProCare RX was driven by the need to integrate advanced back-room technology and data capabilities while maintaining a focus on lowest net cost for clients.

A central theme explored is the deceptive nature of pharmaceutical rebates, which the speakers refer to as the "seven-letter four-letter word." The core issue is the misalignment of incentives: PBMs set up to maximize rebates are often incentivized to keep the highest-cost medications on the formulary, delaying the adoption of cheaper generics or lower-cost alternatives. The speakers stress that true transparency involves showing clients what is driving the rebates, getting down to the claim level, and ensuring that any collected rebates are passed through quickly to the plan sponsor, rather than being held for months as "float." This discussion underscores the necessity of moving beyond simple discount audits to evaluate a PBM’s underlying formulary philosophy and commitment to lowest net cost.

The podcast also addresses the influx of competition, including Mark Cuban’s Cost Plus model, which is noted as essentially a return to spread pricing, albeit transparently disclosed. The analysis suggests that when all factors are accounted for, PBM pricing should generally be within a narrow 3-4% margin of each other, meaning that true savings must come from clinical strategy and effective claims management, not just repricing games. Furthermore, the discussion touches on the volatile specialty drug market, including the pushback against third-party carve-out vendors by manufacturers and the ongoing debate surrounding coverage for new high-cost drugs like Ozempic for weight loss, which forces employers to grapple with philosophical questions about whether obesity is a choice or a disease state.

Looking toward the future, the speakers predict that regulatory reporting mandates—specifically those requiring PBMs to track and report dollars and rebates—will expose companies whose earnings are heavily reliant on withholding or manipulating rebate dollars. This increased scrutiny will force the industry to prioritize creativity, collaboration, and the effective use of data. The key for consultants and plan sponsors is to demand actionable insights from their PBM data, moving beyond simple reporting to implement programs that address compliance issues, manage trend, and mitigate risk proactively.

Key Takeaways

• PBM Selection Must Go Beyond Price: Due to the complexity of pricing models (spread, PEPM, transaction fees, rebates), most PBMs should be within a 3-4% margin of each other if operating honestly; therefore, selection must be based on clinical strategy, data access, and partnership commitment, not just the lowest initial quote.
• Rebate Misalignment is a Core Problem: PBM structures designed to maximize rebates often force plans to keep high-cost brand drugs on the formulary, preventing the shift to generics or lower-cost alternatives, which ultimately drives up the total net cost for the client.
• Demand Granular Data Transparency: Consultants must require PBMs to provide data that shows exactly what is driving the rebates, down to the claim level, to ensure the PBM is truly working toward the lowest net cost for the plan sponsor.
• Beware of RFP Games: PBMs may use different assumptions or high-impact formulary shifts in RFPs to show misleading projected savings (e.g., saving 30% on an incumbent’s own claim file); consultants must get guarantees and assumptions in writing and conduct post-implementation audits.
• Data Must Be Actionable: PBM data is useless unless it is turned into actionable insights; PBMs should be proactive in identifying trends (e.g., poor diabetic medication compliance, narcotic usage) and proposing specific, collaborative programs to mitigate risk and manage trend.
• Regulatory Exposure is Increasing: Upcoming reporting mandates will require PBMs to track and disclose dollars and rebates, potentially exposing companies that rely heavily on rebate earnings they were previously withholding, forcing a shift in financial models.
• Specialty Drug Strategies are Evolving: The market is seeing pushback against third-party specialty carve-out vendors by manufacturers who argue these programs were intended for members to offset out-of-pocket costs, not for employers to save money, indicating a need for PBMs to integrate specialty management internally.
• Understand PBM Incentives: When vetting PBM consultants, ensure their incentives are aligned with the client's goals; some PBM consultants charge higher admin fees than the PBM itself, creating a conflict of interest.
• Future Focus on Risk Management: The future of successful PBMs will be defined by their ability to manage risk, contain cost, and create healthier populations, moving beyond being merely an AWP (Average Wholesale Price) or NADAC (National Average Drug Acquisition Cost) pricing engine.
• Ozempic Coverage Debate: The decision to cover high-cost anti-obesity drugs like Ozempic is a philosophical and financial choice for self-funded employers, tied to the debate of whether obesity is a disease; this decision must be weighed against the potential reduction in comorbidities and associated medical costs.

Key Concepts

• Spread Pricing: The practice where a PBM negotiates a low price with a pharmacy but charges the client a higher, marked-up price, keeping the difference (the "spread") as profit.
• Lowest Net Cost: A PBM strategy focused on ensuring the total cost of medication to the plan sponsor, after accounting for discounts and any passed-through rebates, is minimized, often prioritizing formulary flexibility over maximizing rebate collection.
• Rebate Aggregation: The process where a PBM or third-party company pools the claims volume of multiple clients to gain greater negotiating leverage with pharmaceutical manufacturers for rebates.
• Formulary Exclusivity: A condition in some rebate contracts that requires a specific drug (often high-cost) to be the sole covered option in its therapeutic class, preventing the PBM from shifting to a lower-cost generic or competitor, even if one becomes available.
• Trend Management: The strategy of controlling the year-over-year increase in pharmaceutical spend for a client, often achieved through clinical programs, formulary design, and member compliance initiatives.

Examples/Case Studies

• Incumbent PBM Repricing Game: A consultant stripped a client’s claim file of identifying information and submitted it to the incumbent PBM as a new prospect. The PBM returned a proposal showing 30% savings on the group's own previous year's claims, demonstrating that the PBM was withholding potential savings from the existing client.
• Humira Skyrocketing: The example of Humira becoming the number one specialty drug in the country was cited not as a result of a sudden epidemic, but as a consequence of aggressive marketing and formulary placement driven by PBM incentives.
• Diabetic Medication Cost Reduction: A recent example was given where a major insulin product was significantly reducing its cost, highlighting the challenge PBMs face in immediately capitalizing on such reductions if they are locked into rebate contracts for competitive products.