PBM Leaders: A Conversation with Ken Paulus, CEO and President of Prime Therapeutics, Part 1

Welcome to our PBM Leaders series!

Over the next several months, we will be having conversations with a variety of industry leaders and experts from a variety of perspectives. We’ll delve into current PBM business trends and policy debates. Our goal is to share information, insights and ideas about a complex part of the American healthcare system.

For our first piece, Managing Editor Peter Wehrwein had a conversation with Ken Paulus, CEO and president of Prime Therapeutics, a PBM headquartered in a suburb of the Twin Cities that is owned by 23 Blues plans. Paulus has been Prime’s CEO and president since May 2019. As Paulus discusses, he is a relative newcomer to the PBM industry. Before Prime, he held leadership positions — including CEO, president and chief operations officer — at Allina Health, a Minneapolis-based integrated health delivery system. Earlier in his career, Paulus was president and CEO of Harvard Vanguard Medical Associates, the staff model partner of Harvard Pilgrim Healthcare in Boston, and chief operating officer of Partners Community Healthcare, the risk-bearing entity of the Partners Healthcare System that includes Massachusetts General Hospital and the Brigham and Women’s Hospital in Boston.

This transcript has been edited for clarity and length.

First of four parts 

The first question is about PBMs in general.As you know, they're often described as middlemen in the drug supply chain. And I think they have some reputational difficulties — that they don't provide value, that they just extract value from the supply chain. And, as you know, there are lots of transparency issues around rebates. The trade association has filed a lawsuit trying to block some of the transparency rules. So putting this into a question, how do you think PBMs should combat or address some of these reputational issues?

I should start with reminding you that I'm not a PBM guy. I spent 35 years in healthcare, largely on the delivery system side. And I spent 10 years at Allina, before that I was in Boston where I spent a number of years at Mass Generaland the Brigham. I come from the hospital, physician side of the equation.

Coming into this job, I knew very little about pharmacy and the PBM industry and how it worked and the machinations and dynamics of the industry. So you just have to put it in perspective: I'm not a deep, PBM-industry guy.

That surprisingly, has been very helpful to my work — the fact that I'm coming at it from a fresh perspective. And I can look at it and say, “Well, here's the things I like about the industry” — and we're doing a lot of good. And I never really understood it until now. And then I'd say, “Maybe some of the ways in which we do the work probably could be improved.

So I think in terms of the importance of the role (of PBMs), I can tell you now that I've been in this seat for two years, the counterweight, the counterbalance activity of the PBMs in healthcare — it's incredibly important. It's literally in the billions and billions of dollars of savings that the PBM industry provides to healthcare through this counterbalance to Big Pharma. Without that counterbalance, I’ve to tell you that healthcare would be a lot more expensive in this country. So I'm convinced that there's value there —and I wouldn't do the job if I didn't think there was.

Now, that said, the opacity of the industry, the complexity of it, is nothing short of stunning. I mean, to follow the funds flow of dollars that come from the top and work all the way through the industry down to the bottom— to the member and whatnot, and even providers, in some ways — is incredibly complicated. It did take me a few months to unravel all that. And I do ask the question to myself often, why does have to be so complicated? And I don't think it does.

I actually think we're heading towards a very different model. The industry is going to have to move away from these complex funds flow, treatments of rebates and whatnot, into a pass-through, transparent model. It's too confusing for the purchasers of healthcare. I do think we're heading there.

I can tell you one of the great things about Prime is that we're a pass-through, transparent PBM. We're owned by 23 blues plans. They sit on the board They know exactly what's going on. They know where the dollars go. And I'd say 95% of the funds that we receive from pharma get passed through to the plans, and then passed through to the members, the employers and other parties. We think that should be 99% and we're shooting for that for 2022. So we're continuing to move aggressively towards transparency and pass through and really just live on administrative fees and that’s it.

I do believe the entire industry is likely headed in that direction. We're not there yet, for sure. You know there's a lot of what's called spread pricing where the industry takes pieces of rebates off the top … I’ll bet, three, four or five years from now, we're out from under that very complicated opaque model, and mostly using something much more transparent and clear and understandable.

So I think we'll land in a place where it'll be admin fee, and gain sharing: If we produce results, we'll share the results of performance rather than take it up front as the percentage of rebates on a spread model.

Prime does get rebates though, right? I mean, maybe you are not in the rebate-chasing business, but (rebates) are still part of your margin and revenue.

In terms of the rebates, we don't take and keep any percentage of the rebates upfront. So we do pass it all through.

But it’s important to remember where did rebates come from, and, actually, it's a model that pharma initially promoted, that we're going to give you a discount, but only if you move market share, and the discount will be in the form of a rebate, because we don't want to pay it unless you actually move share. So we all have to remember that the whole rebate model started with pharma pushing for market share. I totally understand it, and I get it, and I support it.

Where it became complex was when the PBM industry (began) taking pieces of those rebates as a funding stream. PBMs need to have their costs paid for. I think that's reasonable. If you do it through spread pricing — take a piece of the rebates — or you do it through an admin fee, or some combination thereof, I'm OK with those costs being reimbursed. The question is, can we do it in a way that's really understandable to the system and to the industry and to members — and to doctors for that matter. And I think we can.

But it gets a bad name I think mostly because of the opacity and complexity. I think the fact that you need to have this counterbalance in the marketplace is really, really critical. And somehow that counterbalance needs to be paid for. It’s just a question of do you do it one way or the other. I don't think it changes, really, the model to be honest with you. It changes the funds flow. Changes the clarity. But it doesn't really change the need for having this counterweight.

So you see the industry moving towards a pass-through model and greater transparency. But what is going to move it in that direction?The PCMA has filed a lawsuit to block federal rules that would force transparency. At least to an outsider, it seems like the industry is digging in its heels here. It's not going to be simply public opinion that moves an entire industry. So what’s going to push things in that direction. What are the real levers of change?

A couple reactions. One is this lawsuit around transparency. I would say that there's two forms of transparency, there's good transparency, and then there's bad transparency.

Good transparency is (having) employers and members know exactly what the costs are, how it works, the funds flows, clear — everbody understands it.

Bad transparency is transparency that gets in the way of competition. And if we want to keep this counterweight — this counterbalance — with Big Pharma working, bad transparency could actually hinder competition and increased costs.

So we were a little bit more nuanced about transparency. We like the concept of the former, but don't want to lose that counterbalance, that counterweight strength of the latter. And this broad-brush approach to transparency, this regulation (that PCMA is challenging) – it throws the baby out with the bathwater, and that's not what we can let happen because then we've lost our counterweight, and quite frankly, healthcare costs are going to go up.

So what we want to do is try to be a little bit more nuanced, create that transparency opportunity, but not do so with the cost of losing competitive pressure on pharma.

I think that's really, really important.

In terms of the second concept of what will drive us, at least on the first part of transparency, forward, I think it's going to be the employers.

I think a lot of employers are, like, we don’t get what you guys do, we're worried that you’re taking too much off the table, we don't understand that. We're uncomfortable.

So big employers, particularly ASO (administrative services only) accounts, we're hearing more and more, we want a transparent model, we're willing to pay your fee or your costs with a reasonable margin. What we're not willing to do is have you spread us in ways that either we don't understand or are excessive or aren’t aligned with our interests.

So I think the pressure is going to come from employers. Big employer groups aren’t going to stand for the old model for much longer would be my guess.