More Employers Turning to Benefit Startups to Manage Drug Costs

The heads of the Philadelphia Teamsters health fund knew it was a gamble to switch its prescription drug benefits from CVS Caremark, a giant in the industry, to a startup with few clients and big promises. The risk paid off.

Capital Rx Inc. offered the Teamsters Health & Welfare and Pension Trust Funds of Philadelphia and Vicinity more than $4 million in savings the first year in 2019 compared to CVS, Executive Director Maria Scheeler said, and actual costs were even lower. From 2019 to 2022, expenses consistently came in below projections—nearly 10% lower than expected over four years.

Capital Rx also provides the Teamsters with more in-depth cost reports and easily adapts to the Teamsters’ requests, she said. When the union discovered its employees lost home infusion services after the switch, Capital Rx established its own home nursing benefit within three weeks.

“Nothing was out of the realm for them,” she said.

More and more employers are migrating to smaller pharmacy benefit managers—which manage the prescription drug benefit of insurance plans—in an attempt to curb rising costs and comply with strengthened fiduciary duties. But ditching the industry giants can be scary in the complex world of drug negotiation and delivery, where the three major PBMs control 80% of the market.

Forty percent of employers surveyed by the Business Group on Health are considering implementing transparent PBM models in the next two years either with the big three companies or smaller startups, according to data released Aug. 20, while 29% implemented a transparent program in 2023. Sixty-two percent are working with their current PBM on new programs in 2024 and 2025.

“They’re all being considered and I think it’s all fair game,” Business Group on Health President and CEO Ellen Kelsay told reporters.

Newer PBMs have entered the market in recent years with promises to cut costs through transparent and innovative business models, like passing through manufacturer rebates, swapping brand-name drugs for generics, and sourcing medications through cost-based vendors like the Mark Cuban Cost Plus Drug Company.

Traditional PBMs, by contrast, frequently base profits and discounts on the drug’s price, which critics say encourage the use of more expensive medications and inflates employer costs. But the dominant players also now offer transparent and cost-based options too, marking a broader shift in industry trends.

“PBMs welcome competition and differentiate themselves through the services, contract terms, and products they offer,” said Greg Lopes, spokesman for PBM industry group Pharmaceutical Care Management Association.

Survey Data

Employer groups are increasingly seeing members break with the three big PBMs of Express Scripts, CVS Caremark, and Optum Inc., which are all highly integrated with insurance companies and pharmacies.

Around one-third of the Purchaser Business Group on Health’s 40 members have started to switch or are considering switching because of concerns around misaligned incentives, said Lauren Remspecher, director of health-care benefits innovation and member solutions.

“This is why we started to see a lot of our members either make a switch to a smaller or more transparent PBM model or start to include them in their procurement policies just so that they can sort of evaluate what opportunities exist there,” she said.

Health Transformation Alliance CEO Robert Andrews estimated around 10% to 15% of its members use the smaller PBMs. Eighty-five percent still use the traditional big three, and the reasoning behind the decision varies from brand-name loyalty to questions of scalability and range of service offerings. But many employers still view the traditional PBM model as conflicted, he said.

“If you make money in selling the drug, are you really going to be giving sound advice?” he said.

The PBMs refute this characterization.

“We compete for business on our clinical capabilities, patient support programs, and drug trend analytics and insights, but most importantly on our ability to lower drug costs for our customers, regardless of list price,” Optum CEO Patrick Conway told the House Oversight Committee last month.

CVS Caremark spokesperson Phil Blando said the company has fully retained 99.7% of its business for 2025, pointing to a new model that offers cost-based pricing, as well as models that prioritize lower-cost generic drugs.

“Smaller PBMs largely adjudicate claims, which is a bare minimum requirement to be a PBM,” he said in a statement. “We continue to lead in ways no one else does.

Fiduciary Liabilities

Employers are paying more attention to drug costs after Congress strengthened fiduciary duties in the Consolidated Appropriations Act of 2021. The law requires fiduciaries to ensure that third-party compensation is “reasonable,” increasing scrutiny on pharmacy benefit managers and their costs.

“There’s definitely an increased risk now associated for employers, and as a result, they’re really wanting to demand that their health-care partners are supporting them as a fiduciary,” Remspecher said.

A number of employers are facing lawsuits from workers over health-care costs in the wake of a 2020 rule forcing insurance companies to disclose negotiated rates with medical providers. The highest-profile case was filed by a former employee of Johnson & Johnson in February, and Wells Fargo was hit with a similar suit on July 30.

The plaintiffs accuse the companies of negligence in their roles to keep health-care costs low, pointing to a number of other employers that reduced costs by switching benefit managers.

PBMs can block employers from accessing pricing data or restrict them from performing audits, said Jonathan Levitt, a founding partner of Frier Levitt. Consultants can also require hidden commissions as a condition of including a PBM’s bid for an employer contract, in what Levitt called the “unspoken underbelly” of the industry.

Capital Rx gives clients all relevant pricing and fee data and allows independent audits, CEO Anthony J. Loiacono said. Express Scripts President Adam Kautzner also told lawmakers that its clients have the same rights.

Lingering Issues

Startups aren’t solving everything. The smaller PBMs are often reliant on group purchasing organizations owned by the big three, which are all under investigation by the Federal Trade Commission. Capital Rx uses Express Scripts’ Switzerland-based GPO Ascent for its self-insured clients, for example.

Those arrangements give the big PBMs insight into the little PBMs’ costs, Levitt said.

And hidden fees to GPOs, consultants, and other vendors are often buried in the overall costs, he said. The large PBMs also offer arrangements to pass through manufacturer rebates to employers, but it’s often impossible to determine whether any PBM is living up to its promises.

“In a utopia, you’d have uniformity in contract language, so the PBM cannot narrowly define rebates to exclude all these other dollars,” Levitt said, pointing to a July settlement that Illinois struck with CVS Caremark to pay the state $45 million in hidden rebates related to its GPO Zinc Health Services LLC.

Blue Shield of California is attempting to bust up the traditional PBM model in a different way by trying to negotiate pricing agreements directly with brand name manufacturers without rebates or hidden fees. In the meantime the insurance company is launching a program in 2025 that will integrate five different companies to perform the core PBM functions.

CVS Caremark will handle specialty drugs while the Blues-plan owned Prime Therapeutics LLC—which contracts with Express Script’s GPO Ascent—will handle other drugs. The Mark Cuban Cost Plus Drug Company will be an in-network pharmacy.

Some of the smaller PBMs bid on the Blue Shield contract but were not “mature enough” at the time, CEO Paul Markovich said. And since Blue Shield was aiming to hire the “best in class” for each separate function, he said, it limited their ability to compete.

“It’s very difficult, I think, for an early stage pharmacy benefit manager company to be able to say, well, we’ve got a home delivery capability that matches Amazon,” he said.