PBM Leaders: A Conversation with Ken Paulus, Prime Therapeutics President and CEO, Part 3

Third of four parts

The collaboration with Express Scripts rocked the boat a little bit. I sent you the quote from Adam Fein, who said that “Prime's current management system team is working to rapidly undo the strategy of the previous team. Rather than trying to build out its own PBM capabilities, the company is becoming increasingly dependent on outsourcing to Express Scripts business.” So I'd like to ask three questions. One could you just give us a little sense of the particulars of this collaboration. What exactly are you sharing or exchanging with Express Scripts? And are there particular successes you might highlight?

The core of the relationship is around a GPO, a group purchasing organization, by the name of Ascent. Express Scripts had this vehicle that they use for their own purchasing in pharmacy for a few years.

When we went to the market, and we put out to the Big Three, and actually a couple of others, was there interest in working with Prime, take our 30-35 million lives with whatever number they represent, and working together to improve the cost of goods sold for our clients. We had several, you know, organizations respond, we went through a very robust RFP process and Express Scripts landed at the top. And the model is pretty straightforward, actually. We, together, co-own this GPO. We're a minority owner, their majority owner. It is based in Switzerland. It’s fully transparent. We have direct access to all of the contracts in the GPO. We have employees that work in the GPO with with their employees. So it's a real shared effort.

I think we both benefited from it. We took our lives and together created a GPO in this market, that's 100 million lives, a big chunk of the United States. And then we … went out to work with pharma and said, yey, we want to work with you, let’s find a way to make healthcare more affordable and advance formularies and rebates and pharmacy strategies together in ways that are helpful.

It’s been hugely successful. (It has resulted in) literally the billions of dollars of savings for our clients that we wouldn't have otherwise seen.

The beauty of the relationship is we didn’t really hand over the keys. Unlike Adam’s perspective on this, we didn’t really change anything at Prime other than that.

We still process our own claims. We own the claim system. We do all of our own PAs, contact center, utilization management — we do everything ourselves. But that piece sits off behind the scenes, and then feeds our systems.

So it's been a fairly elegant solution for us as a way to save significant dollars for clients and members, and employers but do so without giving up our strategic optionality, which is continuing to run our own business.

So I don't think (Adam Fein) really understood the depth of the relationship. We didn't get into it publicly. But it's really a focused effort around purchasing that's been really beneficial for Express Scripts , for ourselves, and really, for our clients more than anything else.

I'd say Express Scripts has done a fabulous job of managing this. They're professional. They're very good at it. We pay an admin fee, basically, to have them oversee that GPO activity.

It’s been worth every penny. It’s really been a terrific partnership in a lot of ways.

So this GPO, just by combining with Express Scripts, and you (together) have 100 million lines, this is, in broad strokes, a question of bargaining power that when you go to pharma, you just have that many more lives? Is that it?

That's interesting but really not the core. I think the core of the performance improvement was more along the lines of being more strategic and and aligned with our formulary strategy.

In the past, Prime and our Blues clients were a little bit more customized, flexible, not aligned, not consistent, not even reliable for pharma. Pharma would say, well, what are you going to do? And we would give them 23 different answers with 23 different Blues plants. We don't do that anymore — or at least a lot less than we used to.

Now I think pharma can count on us when we say we're going to do x, y and z, I'd say we're consistently doing x, y and z. And then, what comes from that is, of course, stronger rebates. That’s the way the model is structured.

But you could have brought consistency to your 23 Blues pans without Express Scripts. If that was the issue, you had a herding cats problem with the Blues plans and everybody wanted to have a bespoke formulary, couldn't that have been solved internally at Prme without entering into this GPO?And just a follow-on question: Does this mean that the formulary at Prime — which you've just said is now more unified— is similar to the formulary and tiering at Express Scripts? Do you guys meet about formularies and bring them together as a result of this GPO?

I'd say a couple things. One is definitely the maturity of Prime — and our Blues Plans — over the last two years has advanced significantly around how we manage formulary.

So part of this, we just had to do ourselves — no question. Was this the catalyzing event to make that happen? I think it probably was. So we needed a catalyzing event — we needed a crystallizing event — to force us to say, you know what, this old model — do whatever you want — it isn't really working. We were 15% behind the marketplace on cost of goods sold, easily, maybe more. So we needed a crystallizing event. This definitely served as that event.

In some cases, when Express and Prime align — and it's not purposeful in terms of we sit down with them and say, let's do x, y and z, it's more opportunistic — when it lines up, there's no question we both benefit. And that's been helpful. And that's probably the strength of numbers, as you've mentioned. Again, it's not that we're sitting down and strategizing with them, but we are taking advantage of alignment when it occurs, opportunistically.

I'm sure there's some benefit just to have a greater scale. I mean, this is a scale business. So my guess is that it's pieces of all of these things.

If we just did the scale thing without the crystallizing event probably wouldn't change much, there would have been some lift, but not a lot.

It's really, all of these forces working together that created value. And without giving away, like I said, our strategic optionality, which means we're basically still doing all the functions of the PBM except for the procurement.

Not to extend the metaphor too far, anytime you try to herd cats, there's going to be some pushback, right? Clawing and scratching. So how much friction did you encounter if you've tried to bring sort of uniformity to the formularies of the 23 Blues plans.

I'd say, first, or it's a journey. And we probably started at the one-yard line … we're probably at about the 50-yard line now. So there's more work to be done, for sure.

Second, I would say, by and large, I give a ton of credit to the Blues plans.Generally speaking, newer leaders in the last three years — there were a lot of retirements, a lot of CEOs moved on or retired, (and) were replaced by up-and-comers — who were much more assertive with how they're running their business. So I think that helped a lot. Our board is very much an activist board — CEOs of Blues plans that are really excited about moving faster and further.

Third, they were falling behind. I think they were feeling the lack of competitive rates and performance. And they were losing business, particularly in the ASO (administrative services only) market.We were noticing, we just weren't winning, we weren't competitive. So I think they knew they had to do something — that was a part of it.

There were reasons for this thing coming together that were business reasons. And if they didn't do it, I think they would not have grown, or they couldn't even stay where they are today. And that's really changed again. Again, a lot of it is leadership. A lot of it was timing … putting this in front of them. They were decisive and quick to respond.

So they moved beyond this utility approach into something that's much more assertive marketwise.

Was there friction and were there issues? There were. Cost of goods sold is broken up into two pieces. It's the rebates in pharmacy and buying medications and it's pharmacy dispensing and the networks, if you will. We were off on both of those.

One of the things we noticed was, we definitely saw better rebates through alignment and the different activities we talked about.

But we're also the highest paying retail pharmacy network pharmacy payer in the marketplace. We realized, wow, we probably need to sharpen our pencil there a little bit.

With that came … that's hard to do. It's hard to go back out to your market of dispensers and retail pharmacies and say, hey, you know, we're gonna have to deal with this because we're just not competitive. We did we got through it, but it was not a straight line. It was a lot of work.

Did you lose some dispensers? Did your network change?

Not really. But it wasn't without some difficult conversations. We didn't really lose anybody; I think our network is virtually the same. But I think a lot of our partners got used to Prime paying 20% more than the market, and I understand that.We just couldn't afford it anymore.

Our goal is to make healthcare more affordable, and our employers are paying the premium. And at some point, they don't want pay anymore, so they were going elsewhere.

It was kind of self-correcting.The good news with competition in our country is it does create self- correction opportunities and that was one. It was a good example, though of hard work and friction that came out of this process. It wasn't just, oh, we're done, and we don’t have to worry about this and we just saved $2 billion. It wasn't that easy.

I think when this (the Express Scripts deal) was announced, it was announced as a three year collaboration. I think it was announced in 2019, the end of 2019. So the end of that three years is not that far away. So do you expect (the collaboration) to continue? And if so, what sort of adjustments might you be making?

It’s a good question. I think, by and large, it is working as advertised, there are a few things that we think need to be tweaked and tuned. My guess is that we'll figure that out with our partner.

If for some reason we didn't, then we have the flexibility to go back out to the market. We have a big book of business. It's very attractive.

I think we're (in) early innings. We haven't had those conversations yet. Express Scripts has done a fabulous job of managing this business. We think there's opportunities to make it better. And that'll play out here over the next 12 to 24 months.

We have multiple extensions on this contract. So our first go-back-out-to-the- market is three years, so another year and a half from now. But we can just continue to roll (the contract) over as well. So I don't think that decision has quite been made yet. It’s still early.