When Big PBM Business Models Are “Dead Men Walking”

Takeaway: What Big PBM is not "getting" in their search for growth is that the energy of a whole era is coming to a head in a long line flash. People are pissed off, at scale.

Updates since original publication on Fresh Paint on September 3, 2024:

  • September 12 to integrate Big PBMs’ “declining” to correct Congressional testimony

  • September 17 to integrate Express Scripts suing the FTC over its July report

  • October 18 to integrate David Joyner replacing Karen Lynch as chief executive of CVS Health

  • October 23 to integrate PBM model is a ‘dead man walking’ storyline from HLTH 2024

  • November 2 to integrate ‘How to Make ExpressScripts Irrelevant in One Slide’

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The Fall From Grace will be Hard and Fast

There are people who believe in little green men. A flat earth. Looming Armageddon. There are others who believe, or at least say they believe, that cigarettes cause neither addiction nor disease.

After the executives of the nation's largest cigarette companies testified about their unconventional beliefs at a Congressional hearing [in 1994], Democrats in Congress cried foul and asked the Justice Department to launch a criminal investigation into whether they had perjured themselves. After all, the claims ran counter not only to common sense and mainstream scientific research, but the industry's own internal documentation.

But in the eyes of the law, ''truthful'' testimony does not necessarily gibe with what most people know to be true. Even though little green men do not exist, the earth is not flat, life goes on and cigarettes are addictive and deadly, those who make such false assertions under oath or otherwise tap dance around the truth do not necessarily run afoul of the law.

The bottom line is that witnesses before Congress can believe whatever they want. '

'What those executives said before Congress was basically an opinion,'' said Joseph DiGenova, a former Federal prosecutor in Washington. ''They can believe whatever they want to believe, even in the face of scientific evidence.''

….from Big Tobacco Grew Long Noses, but It's Not a Crime by Marc Lacey (New York Times, September 26, 1999)

While most everyone else left for vacation over Labor Day, James Comer, the chair of the House Committee on Oversight and Accountability, sent letters to Patrick Conway, the CEO of UnitedHealth’s Optum Rx; Adam Kautzner, the president of Cigna’s Express Scripts; and David Joyner, at the time president of CVS’ Caremark, arguing that statements they made in a July hearing contradicted committee findings and research by the Federal Trade Commission.

Comer is threatening the leaders of the three largest pharmacy benefit managers in the country with steep fines — or jail time — for allegedly lying in a recent congressional hearing.

During the hearing, Conway, Kautzner and Joyner testified that their PBMs, which control 80 percent of the market, treat affiliated and unaffiliated pharmacies equally when setting rates, negotiating contracts and telling patients where to dispense their medications. Those statements were lies, suggests Comer’s letters, which cite committee and FTC evidence to argue that PBMs increase revenue at their own pharmacies at the expense of other businesses.

Comer had asked the executives to correct their statements by Sept. 11. They all declined.

Here’s Caremark’s rebuttal, which its legal team stylized to not directly address evidence collected by the House Oversight Committee and cited by Comer that Caremark reimburses competing pharmacies below the acquisition cost of drugs (and below what it pays its own pharmacies) and that some patients are being forced to fill their prescriptions from Caremark-affiliated pharmacies. Express Scripts and Optum Rx said they were not revising the July testimony. And Express Scripts doubled-down, suing the FTC and demanding that it withdraw its report.

‘Tipping points’ are moments when an outbreak of sentiment becomes an epidemic, a trend becomes destiny and a leader’s fate is sealed. They tend to be visible only with a particular elevation and distance, with vision at a system level. Anyone can spot a tipping point after it’s been crossed; beforehand is something else entirely. [Note: David Joyner has since become chief executive of CVS Health, replacing Karen Lynch as part of an attempt to turn the struggling system around; since January this year, CVS has lost around $35 billion in market value.]

In the world of complexity science, tipping points are also known as critical transitions — such mathematical cliff-edges influence everything from the behavior of financial markets and the spread of disease to the extinction of species. The financial crisis of 2007-09 is often described as one. So is the moment that Covid-19 went global. The steady, upward turn of the dial on a host of threats and crises acting simultaneously and interactively, feeding on and fueling each other as a feedback loop, is hard to “fix” because its effects are always ‘out there’ in the ether somewhere.

Invariably, it’s always someone else’s cluster of problems to deal with.

And so the goal of any well-compensated executive leader in healthcare — average annual compensation last year of the country’s largest health plan CEOs was around $20 million — is often to ride the bouncing ball for as long as possible, fighting gamely to stay on top, hoping not to be on the bottom when it bounces. Which is what happened to Brian Kane, who was “removed” as Aetna’s president by Lynch after less than a year on the job. Lynch was replaced by Joyner two months later.

A Different 'Aspect Ratio'

Reality is hard to know, because of all the hired bullshit and the meticulous analyses that is always directionally correct. So you have to disregard the validity of the volumes of data from the Big PBM archives. What these markets are not "getting" in their search for strategic fit is that the energy of a whole era is coming to a head in a long line flash. People are pissed off, at scale.

Big PBM is at a tipping point, sitting at the edge of strategic collapse. From Healthcare Dive’s coverage of HLTH 2024 (PBM model is a ‘dead man walking.’ What comes next?):

Executives from healthcare organizations as varied as Amazon’s online pharmacy, retailer Walgreens, insurer Blue Shield of California and drugmaker lobby PhRMA called for an end to the pharmacy benefit manager model during HLTH 2024, saying the middleman structure misaligns incentives and drives up costs of drugs.

“This business model is a dead man walking,” Paul Markovich, president and CEO of Blue Shield of California, told Healthcare Dive on the sidelines of the conference. “Having something that opaque, where the incentives are so misaligned between the supplier and the customer base — it is just not going to last.”

“How we get paid right now in pharmacy was set up 25 to 30 years ago, where we actually aligned incentives around getting people to use generics. Getting that would [have lowered] healthcare costs [then],” said Rick Gates, Walgreens SVP and Chief Pharmacy Officer. “But the system doesn’t work the way it was designed ... We’ve got to figure out how not to have it where you’re losing money on one to make money on the other.”

Gates and other executives shared ideas to reshape the pharmacy model, ranging from offering more pricing transparency to changing fee structures.

“I think we need to take an ecosystem that really hasn’t changed much since I graduated from pharmacy school and disrupt it,” Gates said. “So I’m actually excited when you see the innovation coming — the direct consumer, what Amazon’s doing, it’s actually a good thing.” (Click here for more insight on ecosystem-centered market strategy).

The “'I believe that nicotine is not addictive” testimony by the top executives of the seven biggest tobacco companies didn’t result in their criminal prosecution, but it did result in a $246 billion judgment that ultimately led to the downfall of an industry. [In another move that ran counter to common sense, Philip Morris tried to pivot away from cigarette sales and extend the Marlboro brand into healthcare, acquiring three pharmaceutical companies in 2021. It didn’t go well].

Jail time won’t (and shouldn’t) happen for Big PBM leadership.

The businesses Conway, Kautzner and Joyner inherited is an economic system which has been self-generating itself for decades. And these leaders have a fiduciary duty to defend it at all costs. So it’s no surprise that Express Scripts went on the offensive suing the FTC, alleging, among other things, that the FTC “ignored [the Big PBM] evidence in drawing its conclusions and exhibited unfair bias.” According to the complaint, 75 percent of the interim report’s citations were to public sources rather than to information collected from PBMs in the investigation.

The head-scratcher for Big PBM strategists and defenders to deal with is this: the ‘system advantage’ they invested billions in over the years -- an economic moat which includes decades of data and administrative complexity packed and packaged and positioned into value propositions for the sales teams — is not protecting the castle from getting stormed.

But it's not just Big PBM.

For everyone in every industry and government, ‘expert knowledge’ of the past -- the database of use cases -- has reached its productivity frontier; we have entered strange new territories. We need new maps to guide evolution.

You have to harness the anger, not the analytics. Which is one reason I wouldn’t bet on McKinsey being able to turn itself around, I wouldn’t bet on Starbucks being able to turn itself around, and I wouldn’t bet on “37 years of pharmacy benefit management experience” (per CVS Health’s press release announcing David Joyner being CEO) doing much to “directly address the challenges our industry faces, more rapidly advance the operational improvements (emphasis added) our company requires, and fully realize the value we can uniquely create.”

Strategy isn’t operations. And markets aren’t about efficiency. Both are about power and control.

It's the aspect ratio of leadership that has to change.

Out of One, Many

Atomizing customer segments, an unrelenting flood of product promotion and fragmented service options, structural stalemate, infinite media channels, hyper-commoditization, new government regulations and the exponential rate of growth of technological change have made market strategy more complex to define, more costly to implement, and less effective for all industries.

That comfortable mental furniture used as the centerpiece of brand management — the principles of branding, awareness, positioning, message, share of voice, and customer loyalty — is now coming apart at the seams. Responding requires a new logic, a different operating theory for how the world works.

From How to Make Express Scripts Irrelevant in One Slide:

And what’s been revealed by the latest news hurricane around the Big PBM business model is this throughline: The ability to process the economics of healthcare in the United States is the ability to manage the engine behind the world's largest economy. The big picture everyone involved (and we are all involved) should see is that real innovation in healthcare has almost nothing to do with the humanity-saving potential of all things digital, especially if it's pointed at the past.

Solving the mad riddle of how to "fix" healthcare anywhere in the world starts by making a narrative turn, using different words to power a Big Strategic Rotation. The goal is to shift the center-of-gravity for competition and creativity. And that roadmap begins and ends differently, with an intentional reorganization of markets into new economic systems (“ecosystems”), which are then managed as a single organism.

For employers, the playbook has been relatively straightforward: control health costs through benefits designs that drive smarter purchases and eliminate unnecessary services. Narrow networks, price transparency, on-site/near-site primary care, restrictive formularies, value-based design, risk-sharing contracts with insurers and more have become staples for employers. But this playbook is not working for employers, and it’s about to stop working for Big PBM.

Writes Paul Keckley in his column this morning (In Healthcare, Near-Sightedness is “Normalcy”):

Near-sightedness in healthcare is manifest in how its executives are compensated, how partnerships are formed and how Board discussions are orchestrated by management. Organizational success is defined by (1) access to private capital (debt, private equity, strategic investors); (2) sustainable revenue-growth; (3) scalable costs; (4) opportunities for consolidation (the exit strategy of choice for most) and (5) quarterly earnings. A long-term view of the system’s future is rarely deliberated by boards save attention to AI or the emergence of Big Tech. A vision for an organization’s future based on long-term macro-trends and outside-in methodologies is rare: long-term preparedness is “appreciated” but near-term performance is where attention is vested.

Understandably, It pays to be near-sighted in healthcare: our complex regulatory processes keep unwelcome change at bay and our archaic workforce rules assure change resistance. …until it doesn’t. Industries like higher education, banking and retailing have experienced transformational changes that take advantage of new technologies and consumer appetite for alternatives that are new and better. The organizations winning in this environment execute near-sightedness with precision and leverage use M&A prowess and/or private equity investments for longer-term preparedness.

Though near-sightedness is understandable, given the relative importance of our industry in the economy and day-to-day living, it's no excuse for lack of attention beyond nor the reluctance of its tribal leaders to take action.

As respected healthcare marketer David Jarrard wrote in his blog post yesterday “As the aggravated disunity of this political season rises and falls, healthcare can be a unique convener that embraces people across the political divides, real or imagined. Invite good-minded people to the common ground of healthcare to work together for the common good that healthcare must be.”

Thinking and planning for healthcare’s long-term future is not a luxury: it’s an urgent necessity. It’s not “normal” in our political and healthcare systems.

For the most part, we are either asking the wrong questions, or our questions are based on the wrong framework. For all the business schools, executive MBA programs, ambitious leaders, re-org survivors, investment analysts, market prognosticators and industry disrupters everywhere working to “expand access, drive greater affordability, and achieve better health outcomes” for hundreds of millions of patients-as-consumers-as-employees, here’s some questions to mold the ‘kinetic sand’ of the American Way of Healthcare into something better, a more original narrative from which to change the nature of competition in the largest and most lucrative market on Earth:

  1. What are the similarities between the Big Tobacco and Big PBM industries, and how might these similarities lead to the downfall of Big PBM?

  2. How does the current healthcare system’s focus (obsession?) on “cost control” and efficiency power the Big PBM model, and what are the potential negative consequences of this focus (obsession)?

  3. What are the potential consequences for the Big PBM industry if they fail to adapt to the changing demands of employers and patients, and what are the possibilities to invent a new health economy?

  4. Can Big Pharma save Big PBM?

Imagine being forced to wear blinders and suddenly seeing the world in a narrow “portrait” view, asks Nicholas Carr in his latest Substack.

“Not only would your new perspective be dangerous, limiting your ability to see your immediate surroundings. It would feel cramped, even claustrophobic. It’s no surprise that Stanley Kubrick, in filming the disturbing “Here’s Johnny” scene in The Shining, deliberately subverted the screen’s horizontality by framing Jack Nicholson vertically in a doorway.

“The aspect ratio of our lives has changed. By narrowing our field of view, cutting off our peripheral vision, the phone doesn’t just remove us from space and foster a sense of claustrophobia. It isolates us. A horizontal frame places a person in a landscape. It emphasizes the ground in which the figure stands. It provides context. It tempers vanity and hubris. Verticality erases the landscape, the ground, the context. The figure stands alone, monumental in its solitary confinement.”

Really big growth curves in healthcare start with a new format of interaction between markets, a horizontal frame. Healthcare is the economy, not something statistically separate from it. The objective shouldn't be chasing a tech-lead vision of “data interoperability” but market interoperability.

You can’t tech your way to “fixing” healthcare.

The better way to script market access is through market integration, where “value” becomes a flow, not an end state. It's not just one market that produces a health outcome; it's an infinite number of markets interacting simultaneously over time, as a cohesive ecosystem.

More to The Big Vision Thing:

Healthcare’s dominating and defining ‘form factor’ is an entire system of thought and belief organized around “cost control” and operational improvements as the way to "lead a company for the benefit of all stakeholders, including customers, employees, patients, and shareholders."

It's the wrong aspect ratio.

/ jgs

John G. Singer is Executive Director of Blue Spoon, the global leader in positioning strategy at a system level. Blue Spoon was the first to apply systems theory to solve complex market access and integration challenges in the pharmaceutical industry. For a mind stretch: john@bluespoonconsulting.com

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