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Read related papers by:
Dana Safran and colleagues,
Bruce Stuart and colleagues,
and Cindy Thomas and colleagues
I N T E R V I E W:
T O A N & A T L A S
19 April 2005
Wrangling Prescription Drug Benefits:
A Conversation With
Express Scripts’ Barrett Toan
Pharmacy benefit managers have an important role to play
in an increasingly complex health care system.
By Robert F. Atlas
ABSTRACT:
Express Scripts, one of the three largest U.S. pharmacy benefit management (PBM) firms, has had one chief executive officer since its founding in the late 1980s. As Barrett Toan prepares to retire (he will remain as nonexecutive chairman), his company and other PBMs have moved onto center stage. The recent surge in drug spending has spawned great interest in PBMs’ role, as well as controversy over PBMs’ business practices. Implementation of the new Medicare prescription drug benefit depends heavily upon the capabilities that PBMs offer. Toan discusses these matters, plus expectations for the future of his industry—particularly opportunities associated with electronic prescribing.
Robert Atlas: How did Express Scripts go from a relatively humble start inside a small managed care firm to the big company it is now?
Barrett Toan: It was called Express Scripts because initially we were going to be a mail-order company. Then, about the time I got involved, we decided that the right approach to the company was to manage prescription drug benefits, which is different than being a provider, like a pharmacy is as a mail provider. So we branched out and started managing networks of pharmacies. We had about 10,000 stores in a network in 1989.
The big development that really changed our industry was the advent of point-of-sale transaction processing. The first Medicare drug bill, the Catastrophic Coverage Act of 1988, said that to participate in the Medicare drug program, pharmacies had to submit claims online. All U.S. pharmacies needed to play, so they all invested in the systems, at a cost of about $5,000 per store. The law was later repealed, but the stores had already made the investment in online capability.
So we had a new technology to manage prescription drug benefits, which was this point-of-sale transaction processing system—an electronic connection between the benefit manager and the retail pharmacy. That together with mail service—which allowed us to get more competitive rates in retail by providing an incentive to use the lower-cost mail service—were the two major innovations that allowed Express Scripts to become the company it has become.
Atlas: Was the growth of the company purely organic, or were there mergers?
Toan: We grew organically for the first ten years. We started off with just the covered lives in the Sanus (later New York Life) HMO plans—about 400,000. When we went public in 1992, we had grown the membership to slightly under two million. We continued to grow organically up to about ten million lives. In 1998 we bought ValueRx, and in 1999 we bought Diversified Pharmaceutical Services, bringing membership to about twenty-five million lives. In 2001 we made one other acquisition that added five million. Today we’re at fifty million covered lives.
Role Of The PBM
Atlas: How would you characterize the role of the PBM in the health care system?
Toan: PBMs exist because the systems you need to manage a pharmacy benefit are fundamentally different from the systems you need to manage medical expenses. The average medical claim is in the hundreds of dollars, whereas the typical pharmacy bill is $20 for generic or $80 for brand-name. The claims system has to be suited for high volume but low-cost claims.
Add to the efficient information system a network of retail pharmacies plus the mail-order pharmacy. So PBMs have grown up to negotiate discounts with retail, then to create competition with retail through home delivery and also add convenience to the network, and then also to have an information system that can efficiently and accurately process millions of transactions. We process over a million transactions a day. And we do it all point-of-sale, all real time, no paper. PBMs focus on making drugs more affordable. They also make drug usage a little bit safer through their drug utilization review systems.
Atlas: Would you say that with drug spending growing from about 7 percent of health costs a decade or so ago to perhaps 15 percent today, PBMs have done an effective job?
Toan: Yes. You can’t look at the percentage of medical costs that goes for drugs to say whether PBMs are effective in managing drug costs. The main reason that drugs have grown as a percentage of the medical dollar is the proliferation of drug therapies.
Today, as opposed to ten or fifteen years ago, the first-line therapy for almost all diagnosed diseases is a drug, and only later do you get into more aggressive interventions like surgery. Patients, universally, will seek a noninvasive or less invasive therapy, and the drug manufacturers have developed more and more therapies. If you look at why drug spending has risen, it’s the increase in utilization, which is a function of more people using the same drugs and the increased number of people using new therapy classes.
The fact that drug costs have doubled as a percentage of health spending is not necessarily a bad thing. The question is whether we’re getting the most efficient use of the pharmacy dollar. Now mind you, I’m not saying that we are. There is still a long way to go, but mostly the decision on how much a plan spends for drugs is the plan sponsor’s decision. They decide what the member’s copayment should be, how many drugs should be offered in each therapy class, how big the network should be, and whether to increase the use of mail service. So what we’ve seen is a balance between access to drugs (and to pharmacies) at the same time we’re trying to negotiate lower costs and develop clinical programs to reduce unnecessary care.
Atlas: In the 1970s PBMs were virtually a novelty, and then they reached market saturation very quickly. In the process, PBMs seemed to have become quite commoditized, with very little difference in the offering from one to the next. Are there really significant differences between the PBMs?
Toan: Yes, just as, for instance, if you were to ask what’s the difference between a Wal-Mart and a Nordstrom. They offer many of the same types of goods and services, but each has a different clientele. Express Scripts’ client base is mainly large managed care organizations, government entities, and union trust funds. Other PBMs have primarily large employer groups.
Our clients are very interested in trend management: to keep the overall cost, use, and price of drugs in some reasonable balance with access and cost to the member. We have by far the highest generic fill rate because of our focus on trend management. Others have a higher penetration in their mail-service pharmacies because that’s the solution many of their clients have asked for.
Atlas: What is that generic fill rate?
Toan: Our generic fill rate is about 51 percent of overall prescriptions, which is consistent with where the nation is as a whole. For funded programs—those serving commercially insured people—that’s high. Cash payers are more likely to use generics since they have to pay the full cost of their prescriptions. We expect that generic fill rate to exceed 55 percent by sometime in 2006.
Atlas: Is that where it would stop, or is there a target that you think is some sort of equilibrium?
Toan: No. If you use formulary design primarily to try generics before a brand-name drug, such formularies will typically produce about a 70 percent generic fill rate. Many important classes are going to go generic. By 2006 most therapy classes will have a very well-recognized molecule that’s generic. That will take the bar higher.
Drug Usage And Costs
Atlas: Do you support the argument that many pharmaceutical manufacturers make—that more use of drugs appropriately can save other forms of health care costs?
Toan: We studied this in the 1990s at Express Scripts by building an integrated medical and pharmacy database to look at episodes of care and see whether patients who were using prescription drugs had lower medical costs. We were very hopeful that we could demonstrate that, and in a few diseases we did. A good example would be AIDS. The retrovirals that help a person cope with AIDS do reduce the number of office visits, hospitalizations, and so forth, and they do offset medical expenses, albeit at considerable expense. But with the more common diseases—whether diabetes, hypertension, or asthma—the benefits of drug therapy are better outcomes, not lower costs. Our conclusion was that that’s probably appropriate. After all, drugs are invented to help people cope with disease, not to reduce their medical costs.
More Consolidation Ahead?
Atlas: Today there are about seventy or seventy-five PBMs. The lion’s share of the business is concentrated in the big three: Caremark Rx; Medco; and your company, Express Scripts. The big three PBMs all bulked up at least partly by acquiring other PBMs—notably, by Caremark having acquired AdvancePCS. Do you foresee further consolidation in the industry, especially given the light touch the government seems to be applying to other industries undergoing consolidation?
Toan: There may be more concentration simply because the successful companies gain market share.
Atlas: Put another way, if I’m CEO of a small PBM, is my future financial success going to be greater by growing market share or by getting to a point where I can be acquired by one of the big guys?
Toan: There would have to have some strategic reason, not simply an economic reason, for a larger PBM to purchase a smaller PBM. The benefits of acquisition are that the bigger the companies that merge, the better the synergies. If a big company buys a small competitor, the synergies are much lower, and the strategic rationale is usually absent. When we bought ValueRx, we got access to certain technologies and markets that we did not have. It was the same with Diversified: Our rebating system and claims system came from them.
Potential For Revenues
Atlas: Setting aside for the moment the opportunity posed by the Medicare prescription drug benefit, what are PBMs likely to do to grow revenue in the next several years?
Toan: Expansion into specialty pharmacy is an important new growth driver. Today about 15 percent of all drugs are specialty drugs—injectables like those for treating hemophilia or hepatitis—but most of those drugs are managed in the medical benefit and not by the PBM. There’s little value in managing them in the medical system, because the information systems to process specialty drugs are very primitive. They are typically handled through what is called the J-code. It’s more or less a manual process. Because of this, more plans are putting specialty drugs into the pharmacy benefit. PBMs can manage the benefit, apply clinical interventions, and use their mail-service distribution capability to increase efficiency and assure patients of consistent supply.
Spread Of Electronic Prescribing
Atlas: We hear a lot about e-prescribing, whereby the physician enters a prescription into a device that instantly transmits the data to both the PBM and the pharmacy of the patient’s choosing, with various screens or edit checks applied along the way. Much is said about the potential to reduce medication errors. It seems that the necessary technology exists now, but the actual take-up is negligible. What needs to happen for e-prescribing to become commonplace?
Toan: It should be mandated by the federal government. The federal government will be the largest payer of prescription drugs after the Medicare Modernization Act [MMA] takes effect in 2006, because it will pay all those costs, plus it pays somewhat more than half of all Medicaid drug costs. As lead payer, government should set the example by requiring for its programs that doctors write prescriptions electronically.
Atlas: Who funds this mandate?
Toan: It will end up being paid as part of the transaction cost that the plan pays through its PBM. A doctor’s office system vendor would provide connectivity from the doctor to the database that holds the pharmacy benefit information. The PBM would pay that vendor a transaction fee for sending the information—the prescription to be reviewed for clinical efficacy and lack of drug-to-drug interactions and so forth. The system will, of course, have to meet certain standards to ensure that the information sent is the right information, is clinically appropriate, and is timely.
So the doctor’s office would not have additional uncovered expenses. Plus, it would be inappropriate to pay the doctor, for example, more for writing a generic drug than for a brand-name drug or for sending it to the mail-order pharmacy rather than retail. The transaction cost should simply reflect the doctor’s cost of accessing the information. What the doctor would do with the information after he got it would be the doctor’s decision together with his patient.
Atlas: The PBM industry has created a standard with the RxHub utility. Some are concerned that PBMs will use this to their advantage.
Toan: Express Scripts is an owner of RxHub, along with Caremark and Medco. Together the three PBMs will invest $60 million to create this system, and RxHub has the eligibility files for our PBMs. But the idea is not to make money or in any way advantage the ownership to get the system to be used.
Together, we have always positioned RxHub to function like a public utility. The goal has been to prove that it is technologically possible and to build an infrastructure. We do not see this as a source of profits for the PBM.
The kind of information the doctor will receive should be the result of an open standard- setting process. We use NCPDP [the National Council of Prescription Drug Plans] as a sounding board for getting an open standard created for this industry. Like the point-of-sale transaction processing system we use for the pharmacy interaction, this has to be adopted through a standard-setting process that is larger than the PBMs to ensure that the information that is sent is consistent and fair.
Other Innovations
Atlas: What other innovations can we expect to see, and how will these help lower cost or improve the quality of care, or both?
Toan: There are several things I’m excited about as I look ahead. By the way, MMA promotes all of them. Many people criticize MMA, for example, for the doughnut hole. But the people who worked on that bill really hammered out some very progressive elements of legislation, e-prescribing being prominent. In addition, what the program does is provide a pharmacy benefit to an individual, not just through groups of individuals, as occurs today. A group decision-making process suboptimizes many of your opportunities for cost-effectiveness. For example, if you’re the head of human resources for a corporation that has 10,000 beneficiaries spread out in various marketplaces, you tend to want a large pharmacy network. And then you think, well, they have many different kinds of diseases, and doctors in different parts of the country may prefer different drugs, so you tend to have a fairly open formulary.
Now, if you’re creating a benefit for a single person, there are opportunities to customize the benefit and be more cost-effective for that individual. Some might want a very large formulary and not be bothered with knowing what’s most efficient. Others might want the most cost-effective opportunity. By giving the choice at the individual level, we can move toward optimizing the trade-offs between access and cost, and between ease of use and complexity of use. Call it mass customization.
Atlas: And you’re saying that PBMs’ technology can make that possible economically?
Toan: Right. The technology is always years ahead of the adoption of what the technology makes possible. The best example in our industry is how point-of-sale transaction processing revolutionized the way pharmacy benefits were provided. But it took years to put those benefits in place.
It used to be that there would primarily be a $5 or $10 copay. But with point-of-sale, you were able to customize benefits to have a three-tier or even a four-tier benefit, then put some clinical value-added into the system. That took years for plan sponsors to get comfortable adopting, but they have done so. As we go down the road with consumer-driven health care, health savings accounts, and the like, people are going to get more choices, and the technology will provide the information they need to choose. Again, it will take time—not just to make the information available, but also to get people comfortable using information to make those decisions that will optimize their benefit.
Challenges To The Business Model
Atlas: Let’s turn to some challenges to the PBM business model. Critics of PBMs assert that PBMs’ way of doing business is inherently at odds with the interests of their customers. Recent actions by various state governments and others seem to bear out this concern. Practices that at minimum raise eyebrows are (1) accepting rebates and administrative fees from drug manufacturers whose products PBMs give preferential status in their formularies, and then retaining unspecified portions of these sums rather than passing them along to customers; (2) paying health plans, ostensibly for data on plan members’ prescription drug usage, in return for securing the health plans’ business; and (3) leveraging the purchaser relationship to steer business away from retail pharmacies to mail-service pharmacies that the PBMs themselves own and that in fact generate large percentages of PBMs’ profits. How do you respond to these critics?
Toan: Those are theories. To understand the actual PBM practices, you need to know the details. Those kinds of concerns are overblown because the actual marketplace will not allow those practices to exist.
First, the rebates. Express Scripts will not accept any other form of revenue from a manufacturer except in the form of rebates, which are actually discounts from their prices plus administrative fees that are associated with those rebates. We negotiate at arm’s length through a closed bid process run on a two-year cycle. Those bids are opened, and we essentially have our rebates defined. We make those rebate offers known to our customers; that helps them shape their formularies. We pass on a majority of the rebate dollars to the plan sponsor, which can audit the actual payments made by the manufacturers. There’s a great degree of transparency in the rebating process. The idea that these are secret deals, black boxes, is a canard coming from people who oppose what we’re doing—which is making drugs more affordable and a little bit safer.
On the issue of whether PBMs should pay plan sponsors for data, we have a very strict policy on that, and I would assume other PBMs have similar policies. First, the amount of money that’s paid to help a group implement its program—for instance, if it has to issue new ID cards or send around new formularies—is reimbursed at fair value. Each of our clients certifies that these are legitimate costs, so that we can be sure that we’re reimbursing for services that had to be provided. Paying data fees is not a practice we would be comfortable with unless there were a very big direct benefit. We do some research that requires an integrated database, so having de-identified medical records can be useful in performing important research. But again, any consideration that might be given for something should be strictly justified based on the actual value to the PBM.
As for leveraging the purchaser relationship to steer business from retail to mail, at Express Scripts we believe that the model should be an economic one. Mail operates at less than 10 percent margins. Retail pharmacy operates at 22 percent margins. That difference should be shared with the member and with the plan sponsor in order to promote the use of mail.
That economic model is a very healthy one because it puts pressure on the retailers to have competitive prices. When plan sponsors make the decision to promote the use of mail, typically they’re doing so because their financial circumstances require it. The choice of mandatory home delivery is up to the client, not Express Scripts. We can no more require someone to put in a program that promotes mail than we can tell them what kind of copay structure they should have.
Atlas: It seems that retail pharmacies, and in particular independent pharmacies, see PBMs as a threat. Yet PBMs can satisfy major customers’ access standards only by contracting with vast networks of retail pharmacies. How would you characterize the state of play between PBMs and retail pharmacies, and how can a balance of interests be achieved?
Toan: We’ve always considered Express Scripts as part of the health care financing system. We make our money by making drugs more affordable. We make our money when a less costly generic or brand-name drug is used and when the most efficient distribution system is used. So we’ve tried to align our interest with that of our plan sponsors.
Retail, on the other hand, is part of the provider community. Providers would prefer not to have people bundling up their purchasing power and negotiating with them. That’s the way it used to be years and years ago. But those days are over, and group purchasing in health care is clearly the direction that we’re headed. So there’s a natural tension between the provider community and the organizations that are trying to optimize the benefit. But just as doctors have accommodated themselves more and more to managed care, the retail community will accommodate themselves to PBMs.
If you look at the actual financial results, I think in the most recent quarter Walgreens posted a 31 percent gain in net income. The number of independent pharmacies has increased during the last five years. So, in fact, the retail community has not been adversely impacted by the negotiations with PBMs. But there is a healthy, natural tension between the purchaser and supplier. That’s inevitable.
The Medicare Drug Benefit
Atlas: Let’s talk about the implementation of the Medicare drug benefit—first, the discount drug cards. We’re just about halfway through the planned life span of Medicare-endorsed discount cards, with about six million people having enrolled. How many different cards, both national cards and ones offered by Medicare Advantage [MA] plans, is your company involved in, and would you say that the discount card program has been successful?
Toan: We work with six national plan sponsors, including the Pharmacy Care Alliance (PCA), a joint venture with the National Association of Chain Drug Stores. A number of MA plans have offered a discount card that we service, too.
Defining success depends on one’s expectations. We were very disappointed with PCA. We had felt we would be able to interest a much broader population in signing up than we were able to do. At the regional level, though, some of the MA plans have been quite pleased with the results.
Atlas: What caused that disappointment?
Toan: The program got off to a terrible start. It was widely criticized. You had people telling beneficiaries not to enroll but to wait and see. Second, in our case, we had built a model with retail pharmacy where the retail pharmacists could promote our program, but the OIG [Office of Inspector General] guidance prevented pharmacists from promoting the card. So our marketing effort was neutralized. We got about a quarter-million people to join, so it wasn’t a complete loss. But we were hoping that more beneficiaries would get the benefit the card provides.
Atlas: Do you think a lot of bidders will step up to offer stand-alone prescription drug plans to take effect 1 January 2006?
Toan: Boy, I don’t know. I believe that there will be at least one in most regions, and there may be some that are nationwide as well. So there’ll be a threshold level that will allow CMS [the Centers for Medicare and Medicaid Services] to administer a PDP [prescription drug plan] risk-based option on a stand-alone basis in most regions.
Atlas: Do you see employers that offer drug benefits for retirees today keeping those benefits and seeking this federal subsidy, or are they more likely to drop them?
Toan: Initially they will keep their programs pretty much intact and take the subsidy. Eighty percent of our plan sponsors that offer a retiree drug benefit will qualify for this subsidy without making any changes to their programs. Those sponsors will probably take the subsidy the first year and then, over the course of the next year and a half, decide whether they want to do something other than what they’re currently doing. Over time, CBO [the Congressional Budget Office] estimates—and I would have to agree with them—that a large number of employers offering retiree pharmacy benefits today will stop offering drug coverage.
Atlas: PBMs are not themselves insurers and don’t take underwriting risks, yet MMA seems to invite PBMs to do just that. Will your company offer its own PDP, partner on a no-risk basis with insurers on PDPs in the market, or bid to be a government fallback plan? And what do you think other PBMs, particularly the ones not owned by insurers, will do?
Toan: The way the rules are written, it’s not very attractive to be a fallback plan. A fallback plan can’t later become a PDP, for example. We will concentrate on supporting our current clients with their programs, by simply doing what we do today and helping those people who qualify for the subsidy. There will be some clients who choose to form their own PDP. We’ll help them do that.
The option that would require us to market to individuals and take risks as a PDP is something we are evaluating. We would need pretty good assurance that we could manage the risk. We are evaluating the risk-adjustment mechanisms to see if they’re adequate.
We don’t want to make money by enrolling a population that doesn’t use drugs very much and therefore we get a windfall. And we don’t want to lose money because we happen to enroll a sicker population than we had underwritten. We would like to make our money by making drugs more affordable for the people we enroll and managing their benefits, with real integrity.
The individual enrollment element is an invitation to adverse selection, and we’re very concerned about that. So without giving you a yes/no answer, I think we have some pretty high hurdles to clear to file as a PDP yet. Now, in years two and three, once we see the mechanisms and once more people have enrolled, then it might be more likely.
Atlas: You wouldn’t be concerned about being a late entrant?
Toan: If we didn’t have other opportunities we’re pretty excited about, that would be a bigger concern. Don’t forget, one of the things a PDP has to do is market to individuals. We do not have a direct-to-consumer marketing organization. You also need to have insurance arrangements. Those would be new for us to develop, too. So there’s a big investment up front. We want to take this one step at a time. [Since 27 January 2005, when this interview took place, Express Scripts has filed to offer its own Medicare PDP, although on a limited basis focused on its existing customer base.]
Atlas: Given some of the things you just said—the nature of the benefit being voluntary, the fact that there are gaps in the coverage with the doughnut hole, and the likely confusion around the open enrollment situation—do you predict that participation by Medicare beneficiaries will be as high as the government has been forecasting?
Toan: Certainly the discount card was a disappointment. Now, that was not a funded benefit, and traditionally unfunded discount card programs in pharmacy have not been widely used. This is a funded benefit, but it comes with an up-front deductible and a pretty big doughnut hole. I think we will get participation in the program, but I’m not sure it will be widely adopted the first year.
Atlas: If Congress were to reopen discussion of Part D, the drug benefit, to make improvements, what changes would you suggest?
Toan: First, mandate electronic prescribing. And I would mandate it, by the way, for Medicaid and commercial plans as well, because the clinical benefits should be available for everyone. And if they don’t mandate that the doctor write the prescription electronically, they should at least mandate that the patient at the doctor’s office has a right to go online and get the same information the doctor would get if the doctor used the system, like the formulary.
I also think that the initial years of the program should have much less risk sharing for the plans, to get a lot of plans into the program and make sure there’s competition. To the extent that a lot of groups don’t sign up to offer the pharmacy benefit in the early years, then CMS, which has the ability to do this administratively, should allow for much less risk sharing up front. Bring more competition to the market and then let the market settle out over time by ratcheting up the risk over, say, a three- or four-year period.
Restructuring Health Care
Atlas: Looking more broadly, what is your view on how we ought to restructure the financing and delivery of health care in this country so that more people can be covered and everyone can better afford the cost of care?
Toan: The consumer-driven health care effort is a legitimate one. The patient today is much more a part of the equation for delivering health care. Many of the drugs that patients take are drugs the patient requested and the doctor agreed were appropriate. But the fact that patients are becoming more of a driver of the kinds of care they are getting means, to me, that more responsibility for the cost of that care should be borne by the patient than is true today.
The analogy I would make is this: If you had a car insurance program that paid for 80 percent of the cost of oil changes, there would be a huge increase in the number of oil changes. Now, I don’t think we should make people 100 percent responsible for all of their costs, because there is randomness, and you want to protect against the catastrophic situation. But because people are so much more responsible for the kinds of care they’re getting, they should be more responsible for the cost. And then there should be more opportunities for them to select among products that balance those costs and types of care that are inherent in the system.
To come back to MMA, in many ways I think that what Congress came up with embodies a lot of things that are worth trying. And we’ll find out whether or not it works. If it doesn’t work, then we will need to do something different.
After a decade in three states' governments, Barrett Toan founded a managed care company in St. Louis in the mid-1980s, then started running its pharmacy unit, now known as Express Scripts, in 1989. Bob Atlas (bob.atlas{at}comcast.net) has consulted on health care strategy, policy, and management for twenty-five years.
Read related papers by: Dana Safran and colleagues, Bruce Stuart and colleagues, and Cindy Thomas and colleagues
DOI:
10.1377/hlthaff.w5.191
©2005 Project HOPE–The People-to-People Health
Foundation, Inc.
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