Mr. Perkins: It should be neutral to positive for the PBM industry. The PBMs have been proven cost-containment vehicles, and the Obama Administration, trying to rein in health care costs, is actually using PBMs as part of the solution. PBMs drive down the cost of prescription drugs in many different ways, one being formulary design, and one being the enormous amount of scale they have in purchasing drugs and negotiating reimbursement with payers, and payment terms with retail pharmacies. They also help drive down the costs by aligning their goals with the payers' goals, that being PBMs promote generics and mail delivery as ways to control pharmacy spend, and they do so while making greater margin on generic dispensing and mail distribution. Therefore, PBMs' goals are aligned with payers' goals, especially in a recessionary environment because as they promote greater generic utilization or brand-to-generic switching, the result is higher margin for the PBMs. So they not only save the payer money, they also save the consumer money by assigning a lower copay or sometimes a zero copay for the generic drugs. The business model of the PBMs helps drive down the cost of prescription drugs. Therefore, in the current recessionary environment, the Obama Administration has taken the pressure off of PBMs because they are recognized as a cost-containment vehicle and part of the solution.
TWST: Are generics more of a recent incorporation into the PBM model?
Mr. Perkins: There has been a significant ramp in the number of generics, especially for blockbuster drugs. When a branded drug is released, time must pass for the branded patent to run out or for generic drug companies to launch their generic version at risk, resulting in a time lag. Once a drug becomes a blockbuster, you may have a 10-year period before a generic can be launched. So generics are not a new phenomenon. But these blockbuster drugs and the successful generic versions of them are a more recent occurrence. The PBM business model was originally based partially on making money on branded drug rebates, which has changed because PBMs now make more money on switching from branded to generics drugs than they do on retaining branded drug rebates. Therefore, PBMs now are more aligned to switch a patient from a branded drug to a generic alternative and also to switch from retail to mail.
Tickers included in this excerpt: AMED, CHSI, CVS, ESRX, HMSY, LHCG, MHS, SXCI, WLP
For more information call (212) 952 7433. The Wall Street Transcript does not endorse any of the comments made by interviewees, and does not make stock recommendations.