A pharmacy benefit manager (PBM) is a third-party administrator of prescription-drug programs for end payers, such as private insurers, and Medicare Part D plans. With preferred formularies and exclusion lists, PBMs dictate which drugs consumers can receive from their plan without incurring additional out-of-pocket costs. They also leverage access to their formularies, and threats of exclusion, to negotiate rebates and discounts from the world's drugmakers.
In theory, a pharmacy benefit manager's independence keeps its interests in line with healthcare consumers. In practice, Express Scripts is the only truly independent PBM and also happens to be the largest. CVS Health runs the second largest PBM, but its chain of retail pharmacies leaves its independence somewhat questionable. The next largest PBM, OptumRx, is a subsidiary of UnitedHealth Group, America's largest healthcare provider.
Pharmacy benefit managers point to expert understanding of prescription-drug markets as a source of value for their customers. However, it's sheer size that gives them power to negotiate discounts and rebates from drugmakers. Express Scripts began the year managing pharmacy benefits of about 85 million Americans, of which about 25 million were on its preferred formulary.
That degree of leverage has been changing drugmaker attitudes toward pricing, but not necessarily in a way pharmacy benefit managers appreciate. For example, Novartis recently launched Entresto for treatment of a form of heart failure that affects more than 2 million Americans. At about $4,600 per year, Entresto isn't cheap, but the standard of care is. This is why Novartis is touting a long-term study that shows Entresto significantly reduces these patients' risk of heart attack or stroke.
Express Scripts didn't bite, but Novartis has inked value-based pricing arrangements directly with insurers Cigna and Aetna. The deals include a base rebate that will rise or fall depending on Entresto's performance in the real world. If patients on the drug are less likely to require costly hospitalizations, the rebate will be lowered. If it saves the insurers less than expected, the rebate will increase.
Healthcare investors will want to keep an eye on this trend. In the years ahead, value-based pricing could play a larger role, and simply developing better drugs might not lead to bigger sales.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at [email protected]. Thanks -- and Fool on!