What does Amazon’s healthcare venture mean for the PBM industry?

As brokers search for ways to reduce healthcare costs for employers, some of the focus has shifted toward transparency in drug pricing. Large employers including Amazon, Berkshire Hathaway and JPMorgan Chase took matters into their own hands when they launched their own joint healthcare venture, called Haven, in March.

But what do big changes like Haven mean for pharmacy benefit managers? Employee Benefit Adviser sat down with Jake Frenz, founder and CEO of the PBM SmithRx, to discuss the need for transparency in the PBM space, what Amazon’s new healthcare venture will mean and whether tactics like reference-based pricing will work.

Do you think PBMs need to be more transparent? What needs to change in the industry?

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I believe that. But first, why is it so complicated? Why is it that brokers, consultants, benefits managers — who do this for a living — need an explanation of what PBMs do or how they make money? That’s crazy to me. All of the components that come into the pharmacy benefit, there’s still a lot of complexity there. You have the retail component, mail, generic brands, specialty medications, rebates, these clinical programs that focus on chronic comorbid, or really sick high-cost patients, to deliver better care at a lower cost. There’s so many pieces here.

There’s legislation and discussion about making this more transparent, but I think it’s going to be a very long evolution. This is where I think some of the larger employers and progressive brokers could set an example. I want to support those people.

Do you think legislation is going to have any kind of impact on transparency?

I like anything that causes attention [to the fact] that there’s an issue in this industry. Legislation that’s swirling, the “60 Minutes” reports — awesome. But I don’t think that’s going to change the industry or how PBMs operate and make them any more transparent. I think it will actually obfuscate a lot of the components even more and make it harder for employers to see what they’re paying for. Its cause for larger employers and the thought leaders in the broker space to find a differentiated pathway forward that focuses on the patient. That is super important, and I think that is what we have a unique opportunity right now to do. People are really unhappy with their pharmacy benefits. Everything they’ve been told over the last five years hasn’t been delivered. That’s where we can create more of a ground swell.

What do you think about big companies like Amazon, JPMorgan Chase and Berkshire Hathaway getting into the healthcare space? What kind of impact do you think they will have on care and drug pricing?

Amazon moving into the drug space and the benefits space just shows that we have one of the most disruptive companies in the world saying this isn’t right. coming to market with Atul Gawande leading is fantastic. He’s an academic and a practicing physician. He has a lot of innovative ideas on how to focus on that patient. [He knows] how to focus on the employee, the family and getting to that core component on why we have healthcare, which is lost in a lot of fee-for-service models. [I’m also] seeing these large self-insured companies moving to the market to deliver better, high quality care. Walmart is making a lot of strides there too, not only with their employee population but how they think about their real estate their storefronts, developing onsite clinics, there’s a lot of [innovation] happening with really smart self-insured companies.

Do you think we’ll see more companies move toward self insurance?

I don’t know if more will move toward self insurance, but I think more employers will move to have control. Hopefully, this Haven opportunity [as well as companies like] Boeing and Caterpillar, who have always been progressive, will get better data. They’ll get irrefutable proof points on why their models are much more effective on driving care. I think if you focus on the patient and driving care, you’re going to increase the quality of care significantly and that’s going to reduce cost —even if you have a higher cost structure on some things.

[With] self insurance, there are a lot of barriers from an education standpoint. There’s just a lot more risk associated with stop loss, reinsurance — it’s just so complicated. There’s a much bigger risk profile for a benefits manager to look at that option, versus the fully insured option they have today.

Any other trends you’re seeing to that end?

I do see a move toward level funding, where groups are coming together to form a pool. I don’t think that works well when you have brokers or entities that are scraping the same margins out of the channel. [But] it works when you have more transparent vendors. We work with a few where we provide the pharmacy benefit component for a level funded plan and I think there’s some good benefits to be had there. [There is] also a longer term control mechanism that we can put to market, [to provide] more flexible and more robust offerings under a much lower cost structure.

Do you think reference-based pricing will have an impact?

I think it’s a really great idea. I love moving around the fee-for-service model. [It’s easy] to understand in theory, but in its application it creates a lot of friction. I don’t know if the reduction in cost is worth it from an employee patient basis and what the long term impacts are going to be. You’re putting a huge tax on the administration of this, and you need really tight controls to be able to do an effective reference-based pricing program. You also need these healthcare systems that have unlimited resources. You need their buy in. If you have someone negotiating these prices, hopefully you have some schedules that have been developed over time where they’re accepting a certain rate structure. But that’s not contractual, there’s a lot of flux there. There’s a lot of external work and effort that goes into it. It’s not long term sustainable.

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