Workers' Comp

The PBM Evolution

Pharmacy benefit managers are becoming a greater force in clinical case management, adapting to higher customer expectations. 
By: | November 2, 2015 • 8 min read

The impact of pharmacy spend on the bottom lines of workers’ compensation payers remains a concern, especially as the opioid epidemic rages on.


That is the case even though drug costs have stabilized somewhat over the past few years — increasing at a slower rate and in some cases remaining flat.

They rely heavily on their pharmacy benefit managers to help keep utilization under control and contain costs. But despite the crucial role PBMs fill — or perhaps because of it — questions have been raised concerning their place in the industry going forward.

PBMs first emerged in the late 1980s, filling the need for a way to keep rapidly rising drug prices in check.

Without a middle man to hold the pharmaceutical industry accountable to consistent pricing standards, there was little to prevent gross overpricing by manufacturers or to guarantee reliable prices from region to region. PBMs provided stability and predictability in the market, and eased the billing process for payers by unifying vast networks of pharmacies.

d Rey Quinones, vice president of product development, Helios

Rey Quinones, vice president of product development, Helios

Serving a primarily financial purpose, PBMs secured transactional cost savings for health plan payers through the creation of pharmacy networks and rebates from pharmaceutical manufacturers.

“When PBMs first started, they were primarily focused on financial and administrative aspects, like reducing the amount of paper billings that occur, and providing transactional savings,” said Rey Quinones, vice president of product development for Helios.

“The second thing they provided was access. By establishing pharmacy networks, PBMs helped ensure injured workers had access to their prescribed, claim-related medications.”

Move to Clinical Management

But it wasn’t long before PBMs started to fill a larger, more critical role for their clients, expanding their horizons and shifting into the clinical side of pharmacy cost management.

“They have absolutely evolved because they had to,” said Cheryl Larson, vice president of the Midwest Business Group for Health, a nonprofit business coalition comprised primarily of human resource and health benefit professionals.

Whether independent or owned by a health plan, PBMs developed and began to offer more clinical services in order to stay relevant and competitive.

“There were clinical initiatives taking place within health plans, or maybe through specialty pharmacy programs, or employers were hiring disease management companies to help with adherence,” Larson said, “so in order for [PBMs] to be more relevant, they had to move in the direction of clinical management.”

Ron Skrocki, vice president of product management and development, GENEX Services

Ron Skrocki, vice president of product management and development, GENEX Services

Those clinical management services include utilization review conducted by a physician or pharmacist, and recommendations for interventions on high-risk claims, such as sending educational materials to the claimant, communicating directly with a prescribing physician, assigning a nurse case manager, or ordering urine drug monitoring.

“PBMs’ clinical interventions were not very robust 10 years ago. There were weak utilization controls,” said Ron Skrocki, vice president of product management and development at GENEX Services. “But PBMs have to be the backbone, the guardians of the intervention process, and interventions have now become more tangible.”

Even formularies, which began as a tool to limit prescriptions to certain brands or types of drugs, have become tailored to fit more specific clinical needs.


“We created workers’ compensation-related formularies,” Quinones said. “In group health, you have formularies that are somewhat indifferent to where you are, what line of business you’re in — the list of medications covered is very broad. In workers’ compensation, the medications you cover are really more focused, and more individualized because each claim is unique.”

At Helios, a team of pharmacists determined what medications were most commonly prescribed for different types of workers’ comp injuries, and broke them down into categories by time after injury. For instance, a medication needed in the first six weeks of treatment may not be appropriate later on.

“The level of accountability is evolving and we’re starting to see the PBM model evolve to meet the needs of employers as key purchasers.” — Cheryl Larson, vice president, Midwest Business Group for Health

They later developed surgery formularies, since the medications required post-surgery would certainly be different than if no surgery had taken place. For example, a narcotic would make sense to manage the pain of an invasive procedure, but not to manage the pain of a strained ankle after a fall.

Broader changes in health care may also drive the expansion of clinical services. The move away from fee-for-service to a more holistic, outcomes-based reimbursement model, for example, emphasizes a patient’s entire course of care and recovery, rather than isolated treatments for specific conditions.

“PBMs have focused their attention on the cost of medication, which is a function of unit price and utilization,” said Ken Martino, president and CEO of Injured Workers Pharmacy (IWP). “This is a narrow focus that can over-emphasize cost containment over outcomes based on the overall treatment plan a doctor has established for the patient. There has to be more of a balance between cost containment and patient outcome.”

Transparency Issues

Payers have grown more sophisticated and aware of how pharmacy costs impact their overall medical spend.

For a PBM, serving their core function of delivering cost savings requires maintaining strong relationships with drug manufacturers in order to get the best rebates and discounts, but clients are demanding that their own relationships with their PBMs earn a greater priority — namely by seeking more transparency on deals with manufacturers and the spread of fees PBMs charge to pharmacies and payers.

“Specialty drugs and biologics are the future of pharmacy, and involve some costly medications and treatments. As medical treatment and medications evolve, so must the PBM industry.” — Ken Martino, president and CEO, Injured Workers Pharmacy

“Employers have gotten a lot smarter in recent years,” Larson of MBGH said. “We represent large employers, and they’re relatively sophisticated and have good relationships with their suppliers, whether it’s a PBM or a health plan, and their contracting reflects that they know where their rebates are going, that they are transparent.”

Most payers don’t have access to what PBMs pay to a pharmacy, so they cannot determine the “spread” — the difference between what a PBM pays a pharmacy for filling a prescription and what it charges a payer, and ultimately pockets as profit.


Same goes for manufacturer deals. If the manufacturer promises a steep discount on a particular drug, PBMs may be motivated to place that medication in their formulary even when a more effective or safer option might exist.

In 2012, the U.S. Department of Labor issued regulations that any entity providing goods and services to an ERISA plan administrator — namely, PBMs — had to “disclose both direct and indirect compensation to enable pension plan fiduciaries to determine whether they are paying reasonable compensation for those goods and services.”

In 2014, the ERISA Advisory Council re-examined those regulations.

With flat per-member, per-month fees, clients know that PBMs have no financial incentive to support less effective or less safe prescriptions.

According to a summary of the Council’s findings, “plan sponsors of group health plans who testified at the Council hearings were unanimous in their view that they face many challenges managing pharmacy benefits on a cost effective basis. However, plan sponsors uniformly testified that PBM services are a valuable part of this effort.”

In other words, health plan and workers’ comp payers recognize how vital PBMs are to prescription management, but they want to have a look behind the curtain to see what exactly their money is buying.

Cheryl Larson, vice president, Midwest Business Group for Health

Cheryl Larson, vice president of nonprofit Midwest Business Group for Health

“The level of accountability is evolving,” Larson said, “and we’re starting to see the PBM model evolve to meet the needs of employers as key purchasers.”

As their clinical initiatives indicate, PBMs have acknowledged those needs and are working to better align their goals and incentives with their clients’ by shifting the focus to overall care and improved outcomes.

More PBMs — especially newer, smaller players — are also moving away from spread pricing, rebates and per-claim fees as sources of revenue. Instead, they charge clients flat per-member, per-month fees and establish performance standards agreed upon by both parties. With this model in place, clients know that PBMs have no financial incentive to support less effective or less safe prescriptions.

Strategic Partners

While PBMs are making moves towards more transparent contracts, rebuilding a business model takes time and a certain amount of foresight to ensure new agreements benefit both parties long term.

Some experts say PBMs can foster more trust and openness with their clients by evolving from a straightforward vendor into a “strategic partner,” adopting a more consultative approach in clinical care.

In that way, the clinical teams at PBMs will be looked upon as subject matter experts and expected to provide more guidance as biologics and pharmacogenomics become more widely available.

They are already being drawn more deeply into the claims management process, taking a seat at the table alongside adjusters when tricky claims are discussed and treatment decisions made.

“Specialty drugs and biologics are the future of pharmacy, and involve some costly medications and treatments,” Martino said. “As medical treatment and medications evolve, so must the PBM industry. This will require PBMs to develop closer relationships with patients, physicians and pharmacists — they must engage in the treatment or they could be left out.”

It might also mean getting involved in regulatory affairs. Workers’ comp and health plan payers agree that stricter regulations are needed in order to control physician dispensing and the sale of repackaged drugs — two of the biggest cost drivers. While PBMs cannot control what drug manufacturers do with their supply, they could add their two cents to the public discussion and advocate for legislative change that would limit those practices.


“From a legislative and regulatory standpoint, we have greater acknowledgement for the benefit that our data and experience can bring to the table,” Quinones of Helios said. “For example, our government affairs team is actively engaged in closed formulary discussions taking place in many states. PBMs have been using formularies for decades, so we have a lot to share there.”

“PBMs have had to grow more robust in tracking regulatory change,” Skrocki of GENEX said. “There is more of a regulatory and compliance focus now.”

Martino also forecasts greater consolidation among PBMs, pharmacies and health plans, which would to some degree eliminate the issue of lack of transparency by aligning the interests of the entities. This would also fit into the more integrated, outcomes-based health care world.



Part I: The Pharmacy Cost Creep

Spending on prescription drugs accounts for a large share of workers’ comp medical costs, but utilization can be controlled.

R10-15-15p30-32_5Cost_inDep.inddPart II: Data Key for Claims Controls

Sophisticated pharmacy data allows workers’ comp payers to spot utilization red flags.


112015_10_indepth_150pxPart III: The PBM Evolution

Pharmacy benefit managers are becoming a greater force in clinical case management, adapting to higher customer expectations.

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Lead Story

Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.


Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.


Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”


By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]