Decoding the Clues to Express Scripts' Strategy

As a follow-up to Insights from the 2011 Express Scripts Drug Trend Report, let's delve into what’s said—and unsaid—in the report about Express Scripts' strategy.

Going beyond the numbers, the report tells us a lot about the company's industry view and the now-biggest PBM’s future business model. Below, I consider four key topics:

• The post-2015 showdown in generic launches
• The specialty boom
• Pharmacy network design
• Personalized medicine

I picked these topics because they spotlight emerging opportunities for Express Scripts along with the risks associated with the PBM business model evolution. See if you agree.

REVENGE OF THE GENERIC BOOM

A big chunk of Express Scripts’ drug trend report focuses on such topics as “New Insights Into Nonadherence” and “Innovative Solutions for Enhanced Patient Care.” These sections are more than PR puffery because they highlight a fundamental transition facing the largest PBMs.

The generic wave peters out by 2015-16, which will put profits under pressure. For a typical large PBM in 2011, generic drugs from mail pharmacies (excluding specialty drugs) accounted for only 16% of equivalent prescriptions but 51% of per-prescription profits. (See Exhibit 49 of the 2011-12 Economic Report on Retail and Specialty Pharmacies.) Plus, mail dispensing and profits are under pressure from the retail pharmacy industry, as outlined in The Great Mail Pharmacy Slowdown and via preferred networks (see below).

In a world of low-cost generics, the quality of care—adherence, compliance, appropriate utilization—becomes more important than the unit price per pill. Hence, PBMs need to offer programs to payers that emphasize clinical and health care services intended to improve patient outcomes and lower the client’s total health care costs.

How valuable will plan sponsors find these services? Or, to put it less delicately, will Express Scripts be able to make the same level of profit on these services as it does with its current business model?

THE SPECIALTY BOOM STRIKES AGAIN

Specialty is poised to be 40-45% of pharmaceutical manufacturer sales by 2016. About half of the specialty spend occurs in a provider’s locations and is covered by a patient’s medical benefit. Express Scripts has long seen this spending as a major market growth opportunity, as I pointed out last year in Express Scripts' Disruptive Specialty Strategy.

This year’s drug trend report further clarifies Express Scripts’ vision, noting:

“Another important element of a comprehensive set of specialty solutions is the ability to manage patients regardless of where they receive medications: home, doctor’s office, hospital, clinic or any other location. Providing consistent, coordinated care across all treatment locations allows us to treat the specialty patient, not just the pharmacy drug utilizer. Patients benefit through better coordination of care. Plan sponsors benefit through better visibility to the most clinically sound and cost-effective channels.” (page 31)

Cancer care is the biggest target, since 78% of cancer specialty spending occurs in the medical benefit. (See the table on page 40.) The Medco acquisition brings some important capabilities, as I discuss in Cancer Care and the Future of PBMs.

Part of this solution involves white-bagging (per New Data on Specialty Pharmacy’s Challenge to Buy-and-Bill), while another part involves distribution to providers via CuraScript Specialty Distribution (SD). I estimate that Curascript SD is the third-largest specialty distributor behind AmerisourceBergen’s subsidiaries and McKesson Specialty. (See Exhibit 4 of the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.)

Some providers will discount this grand vision, but Express Scripts is also telling plan sponsors that PBM management will benefit providers. See the discussion on page 33 regarding “Supporting Specialty Providers.” At least one survey found that almost half of oncology practice managers want buy-and-bill to end for infused cancer therapies. See The Future of Buy-and-Bill According to Payers and Oncology Practices.

There is a compelling story, but it’s certainly no slam dunk given how entrenched interests—physicians, health systems, and distributors—may prefer maintain the status quo.

REVENGE OF THE RETAIL PHARMACY NETWORKS

This year's report contains a brief but fascinating discussion of “The Future of Retail Pharmacy Networks,” a.k.a., the Walgreen kerfuffle. Express Scripts clearly states its intention to offer more preferred (but not restricted) network designs, stating:

“For release in early 2013, Express Advantage NetworkSM is a new choice-based solution that combines tiered retail networks with member engagement and cost sharing to achieve greater savings for plan sponsors with minimal member noise. With Express Advantage Network, members will still have access to an open network of pharmacies but at higher copayments.” (page 29)

These network models fit comfortably within the Express Scripts “consumerology” framework. Preferred networks use consumer incentives to shift prescription volume into the pharmacies that provide lower costs for the payer. Consumers retain the ability to choose their pharmacy, while being partially exposed to the costs of this choice. Presumably, a consumer is more likely to maintain higher adherence and compliance to medication therapy given this (incentivized) choice.

Medicare Part D has been the leading indicator for preferred networks because consumer preferences get expressed clearly. Part D beneficiaries annually choose a new plan for themselves, rather than having a benefit administrator or HR department make the choice on the beneficiaries’ behalf. The data clearly show that seniors are selecting these models (per See Humana-Walmart Preferred Network Plan Wins Big in Part D).

Express Scripts will be jumping on this bandwagon for its commercial clients. However, they do face the risk that payers could save so much from narrower retail networks that mail becomes even less attractive. Perhaps it’s no coincidence that narrow networks have been most aggressively marketed by PBMs that lack mail-order fulfillment capabilities. Consider Restat and the economic estimates in Pharmacy Profits in Preferred Networks with PBM Transparency.

There's also an open question about the upcoming selling season. A small number of plan sponsors have been switching away from Express Scripts to keep Walgreens in their network, but most appear to have accepted the change...for now.

SON OF PERSONALIZED MEDICINE

Express Scripts cautiously frames pharmacogenomics as just one component of personalized medicine:

“Personalized medicine is typically considered to be the application of genomic and molecular data to better target healthcare delivery. One aspect of personalized medicine, pharmacogenomics, examines the influence of genetic variations on drug response in individual patients. The field holds great promise, but it also comes with associated costs and many unanswered questions.” (page 8)

On pharmacogenomics, Express Scripts has always taken a more nuanced, skeptical position than Medco. You know what I mean if you’ve ever spoken to the respective Chief Medical Officers of the formerly separate companies. As a comparison, see May 2010's Medco's Pharmacogenomic Future.

Again, the economic value of these programs is still unproven, as the quote above illustrates. Look for a dramatic scaling-back of David Snow’s vision.

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Even if you think my interpretation is a shot in the dark, I encourage you to read the report yourself and make up your own mind. Feel free to highlight anything that I missed in the comments below.