Renzo Luzzatti has done nearly everything in the pharmacy space over the past 30 years short of dispensing pills and seeking prior authorization. He knows all too well how the cost of prescription drugs has become a competitive burden for employers. As president of US-Rx CARE, a “fiduciary” pharmacy benefits manager (PBM), his mission is to fix the system’s inherent flaws, slash costs without depriving people of care and steer them away from therapies they shouldn’t be on in the first place.
Three major components drive the disruptive solution he helped pioneer: offering a service with no conflicts of interest, protecting health plan participants, and making fully transparent utilization and financial information available. The fiduciary PBM model serves as an antidote to the industry’s so-called Big Three: Express Scripts, owned by Cigna; CVS Caremark, the pharmacy service segment of CVS Health, which also owns Aetna and nearly 10,000 retails stores; and OptumRx, the pharmacy service segment of UnitedHealth Group Insurance. Together, those leading players account for 80% of the PBM market share and serve about 270 million Americans, according to the National Association of Insurance Commissioners.
Luzzatti says that while there are just north of 100 total PBMs, no more than 30 to 40 of them matter. In a recent wide-ranging interview edited for space and clarity, he explains more about key differences between traditional PBMs and other models as well as what needs to be done not only to help save money but also to improve clinical outcomes.
Please tell us about the inherent conflict of interest associated with PBMs being beholden to the large health insurance carriers that own them.
LUZZATTI: It is a bit of a conundrum. We’ve been fighting that battle since we started in 2000. The BUCAHs [Blue Cross Blue Shield, UnitedHealth, Cigna, Aetna, Humana] are trying to protect their turf in numerous ways. They’ll say, ‘if it’s fewer than 1,000 lives, we won’t let you have our network with a carved-out PBM option.’ Full stop. The other way is they’ll say, ‘If you want to carve out your PBM, your fee for the TPA (third-party administrator) service will double.’
Please explain the difference between a carve-in and carve-out program.
LUZZATTI: Carve-in means you have common ownership of the pharmacy and the medical side. They’re all under one roof. Carve out, in terms of the PBM, means the plan may provide the medical benefit, network and claims processing, but a separate entity independent of that plan provides the PBM services.
We have heard a lot about spread pricing, revenue-sharing agreements and rebates on so-called discounts. Why is this model so flawed?
LUZZATTI: A lot of folks will say, ‘God, it’s so complicated. It’s a black box. I just don’t understand it.’ That’s why the PBM contract is probably the least commonly read contract, so they have no idea what they’re signing up for. Your traditional PBM is in business to sell drugs to members at a profit, which can occur in numerous ways, like spread pricing, in which a PBM pays the pharmacy one price and charges the client a higher price. The problem with that is the markup is at the discretion of the PBM. It’s not disclosed and so you have a non-transparent revenue stream going to the PBM that nobody can measure or monitor. PBMs can manipulate that revenue stream very well.
A lot of money flows between the drug manufacturer and PBM in ways that incentivize the PBM to push that manufacturer’s products. Now we’ve got a direct conflict of interest in that regard. There’s a revenue source coming from the PBM that the client doesn’t have access to that influences everything the PBM does and all the decisions it makes. You’ve got dispensing profits, which could be markups or discounts from wholesalers. It could be discounts that they get from the manufacturer that are not disclosed.. You’ve got direct rebates. ou’ve got administrative fees. And you’ve got service fees – all kinds of money that the PBMs collect from drug manufacturers that are not called rebates and that they don’t have to share with anybody. And that could represent a significant portion of the money flowing from drug manufacturers to PBMs.
If drug manufacturers are paying money to a PBM, they expect a return on their investment. How do they get it? Sell more product. That’s their only revenue source. How do you sell more product by paying a PBM? You tell them to put it in a lower copay tier so it’s more attractive to a health plan’s members. You tell them you can do prior authorization, but it can’t be very rigorous. You can’t prefer a competitor’s brand over ours. So in that regard, the PBM is really part of the sales division of the drug manufacturer.
It’s easy to be intoxicated by promises of savings, but they come with strings attached. So how can employers get more control over the money they’re spending on pharmacy benefits?
LUZZATTI: Employers focus on discounts and rebates as a metric for making a purchasing decision with their PBM. The problem with that is you get all these promises. We had a client that moved from one PBM to another. The new PBM promised $10 million in savings in the first year on the back of better discounts and rebates. Their costs actually went up $5 million. That’s a $15 million swing, yet they met all their guarantees. You’re trying to discount trend in pharmacy costs, but you’re not impacting trend. You’re shaving pennies, whereas you’re ignoring where the real dollars are. That’s in utilization, and that’s where most PBMs really fail. They have no incentive to do better.
To what extent are specialty drugs driving up the cost of prescriptions?
LUZZATTI: Specialty pharmacy is now a focus of many drug manufacturers. It is exploding the “spend” for health plans and plan sponsors because of all the manufacturer is putting into R&D. Drugs are expensive, and given how PBMs are profiting off of every drug that goes through, they have every incentive to maximize the volume of dispensing of specialty medications. So it’s no surprise that specialty medications are now accounting for more than 50% of drug spend and growing at double digits a year. There’s very little protection for an employer to prevent the PBM from running up a bill. The cost is just unsustainable. One large claim could bankrupt a company.
In recent years, the Big Three have been challenged by “transparent” or “fiduciary” PBMs. How exactly do they work and why are they so important?
LUZZATTI: There are numerous PBMs that have come into the marketplace that refer to themselves as “transparent.” Transparency is not a legal term. It’s whatever you want it to mean. Transparent PBMs charge a flat fee, but there are transparent PBMs in the marketplace that own the mail order and specialty pharmacy. And there are transparent PBMs that retain rebates. That’s a conflict of interest. They cannot be a fiduciary and never will be. But yet they’re out there saying they’re running a clean shop.
Fiduciary, on the other hand, is a legal term that’s defined by ERISA (the Employee Retirement Income Security Act of 1974), and it’s applied to plan sponsors. There are fiduciaries responsible for stewardship, and you can apply that terminology to vendors. So it’s a very different environment from the PBM world that’s trying to make the biggest profit off of every prescription that runs through the system. For us, it was easy to take a fiduciary stance, which we have done from the beginning, because we never had any conflicts of interest.
Do you expect more government oversight of PBMs now that they are on the hot seat in Washington and state capitals?
LUZZATTI: More at the state level. For years, states could do whatever they wanted, but it didn’t trump ERISA which as a federal law supersedes state laws. Florida and other states are passing laws, but the problem with that is it’s creating a patchwork of conflicting and inconsistent requirements. So it’d be nice if there was some federal standard that set the plate for everybody. I don’t have a lot of faith in Congress to fix this problem based on everything we’ve seen and the amount of money that’s going into their coffers from PBMs and the insurers that own them. We tell clients, ‘You can wait for the government to fix this problem or you can hire us or companies like us because there are options that already exist.’ They’ve just got to be willing to make the leap.
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