CalPERS Bids Reveal Big Three PBMs’ Drug Trend Forecasts and Pricing Strategies

Last week, the California Public Employees' Retirement System (CalPERS) announced that it had selected UnitedHealth Group’s OptumRx as its new pharmacy benefit manager (PBM). Read the press release.

The three big PBMs—Express Scripts, the Caremark PBM business of CVS Health, and the OptumRx business of UnitedHealth Group—all vied for this $4.9 billion contract. Luckily for us, the CalPERS evaluation process was made public.

Below, I peek into the bidding documents to shed light onto each PBM’s drug trend projections and pricing strategies. As you will see, there are significant differences in how each company approached the CalPERS contract—and in what each PBM forecasts for pharmacy benefit spending increases through 2021.

WHAT THE DEUCE?

The five-year CalPERS contract (2017-2021) covers pharmacy benefits for members enrolled in the CalPERS self-funded PERS Select, PERS Choice, and PERSCare Preferred Provider Organization health plans. The contract also covers those enrolled in the Anthem Blue Cross, HealthNet, Sharp, and UnitedHealthcare HMO plans. In total, the contract includes prescription drug benefits for nearly 486,000 members and their dependents.

The three biggest PBMs—CVS Caremark, Express Scripts, and OptumRx—bid for the CalPERS contract. As we describe in Section 5.1. of our 2016 Economic Report on Retail, Mail, and Specialty Pharmacies, nearly three-quarters of all prescription claims are now processed by these three companies:

You can find the public bidding materials under Item 10 of the May 17 Pension and Health Benefits Committee Agenda webpage.

The Comparison of Solicitation Proposals (Attachment 5) summarizes the committee’s qualitative scores for the three PBMs. There were five major categories: firm’s capabilities; management plan; work plan; staffing plan; and financial plan. Each category was divided into sub-categories that were ranked on a scale of 1 star (inadequate) to 5 stars (excellent or outstanding).

With only one exception, all PBMs received three to five stars on all 72 sub-category rankings. In the final summary rankings, all three PBMs received four stars.

Bottom line: The goofy star ratings concluded that the PBMs were comparable. The decision, therefore, came down to dollars and cents.

BTW, it was a good week for OptumRx, which also won the Texas Employees Retirement System (ERS) PBM contract away from Caremark.

BLAST!

The CalPERS cost projections for 2017-2021 shows each PBM’s estimates for total projected cost.

OptumRx projected a total cost of $4,876,978,018, which was $72.9 million (-1.5%) less than Express Scripts’ bid but $22.3 million (-0.5%) less than CVS Caremark’s bid.

Along with the bids, each PBM provided a per-member, per-month (PMPM) projection, which excluded member copayments and coinsurance. Using these data, we computed the drug trend—the year-over-year changes in CalPERS’ drug spending. Note that changes in spending are affected by (1) changes in unit costs and (2) changes in utilization. For background, see Chapter 4 of our 2016 pharmacy report.

The chart below summarizes the results by PBM.

[Click to Enlarge]

Here are three key insights from these projections

• CVS Caremark projected the fastest growth in drug trend. Its total projected costs were lower than OptumRx’s costs in the first part of the contract period, but higher in the final two years (2020 and 2021). CVS Caremark’s forecast implies big up-front savings, perhaps due to formulary exclusions and network changes. Over time, it projected higher drug trend, so its final cost figures were higher than OptumRx’s bid.

• For 2019, OptumRx projected that its drug trend will be about 1.5 percentage points less than that of the other PBMs. If OptumRx’s trend for that year ends up being comparable to that of the other PBMs, then I estimate that its bid would be almost comparable to CVS Caremark’s bid. We don’t know whether the committee performed any sensitivity analyses on these varying forecasts.

• Express Scripts submitted the highest total projected cost despite having projected the lowest drug trend in three of the four years. This result came from its initial cost. For the contract’s first year (2017), Express Scripts’ projected costs were $19.4 million (+2.4%) higher than OptumRx’s bid—and $25.8 million (+3.3%) higher than CVS Caremark’s bid.

These results may not be fully generalizable. For example, we don’t have the details on the benefit plan design behind these projections. Nonetheless, the bids reveal a lot about how the big PBMs are competing during a busy PBM selling season. Damn you, vile RFP!