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

High Net Worth

High Net Worth Clients Live in CAT Zones. Here’s What Their Resiliency Plan Should Include

Having a resiliency plan and practicing it can make all the difference in a disaster.
By: | September 14, 2018 • 7 min read

Packed with state-of-the-art electronics, priceless collections and high-end furnishings, and situated in scenic, often remote locations, the dwellings of high net worth individuals and families pose particular challenges when it comes to disaster resiliency. But help is on the way.


Armed with loss data, innovative new programs, technological advances, and a growing army of niche service-providers aimed at addressing an astonishingly diverse set of risks, insurers are increasingly determined to not just insure against their high net worth clients’ losses, but to prevent them.

Insurers have long been proactive in risk mitigation, but increasingly, after the recent surge in wildfire and storm losses, insureds are now, too.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy,” said Laura Sherman, founding partner at Baldwin Krystyn Sherman Partners.

And especially in the high net worth space, preventing that loss is vastly preferable to a payout, for insurers and insureds alike.

“If insurers can preserve even one house that’s 10 or 20 or 40 million dollars … whatever they have spent in a year is money well spent. Plus they’ve saved this important asset for the client,” said Bruce Gendelman, chairman and founder Bruce Gendelman Insurance Services.

High Net Worth Vulnerabilities

Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

As the number and size of luxury homes built in vulnerable areas has increased, so has the frequency and magnitude of extreme weather events, including hurricanes, harsh cold and winter storms, and wildfires.

“There is a growing desire to inhabit this riskier terrain,” said Jason Metzger, SVP Risk Management, PURE group of insurance companies. “In the western states alone, a little over a million homes are highly vulnerable to wildfires because of their proximity to forests that are fuller of fuel than they have been in years past.”

Such homes are often filled with expensive artwork and collections, from fine wine to rare books to couture to automobiles, each presenting unique challenges. The homes themselves present other vulnerabilities.

“Larger, more sophisticated homes are bristling with more technology than ever,” said Stephen Poux, SVP and head of Risk Management Services and Loss Prevention for AIG’s Private Client Group.

“A lightning strike can trash every electronic in the home.”

Niche Service Providers

A variety of niche service providers are stepping forward to help.

Secure facilities provide hurricane-proof, wildfire-proof off-site storage for artwork, antiques, and all manner of collectibles for seasonal or rotating storage, as well as ahead of impending disasters.

Other companies help manage such collections — a substantial challenge anytime, but especially during a crisis.

“Knowing where it is, is a huge part of mitigating the risk,” said Eric Kahan, founder of Collector Systems, a cloud-based collection management company that allows collectors to monitor their collections during loans to museums, transit between homes, or evacuation to secure storage.

“Before, insurance was considered the only step in risk management. Now, our client families realize it is one of the many imperative steps in an effective risk management strategy.” — Laura Sherman, founding partner, Baldwin Krystyn Sherman Partners

Insurers also employ specialists in-house. AIG employs four art curators who advise clients on how to protect and preserve their art collections.

Perhaps the best known and most striking example of this kind of direct insurer involvement are the fire teams insurers retain or employ to monitor fires and even spray retardant or water on threatened properties.

High-Level Service for High Net Worth

All high net worth carriers have programs that leverage expertise, loss data, and relationships with vendors to help clients avoid and recover from losses, employing the highest levels of customer service to accomplish this as unobtrusively as possible.

“What allows you to do your job best is when you develop that relationship with a client, where it’s the same people that are interacting with them on every front for their risk management,” said Steve Bitterman, chief risk services officer for Vault Insurance.

Site visits are an essential first step, allowing insurers to assess risks, make recommendations to reduce them, and establish plans in the event of a disaster.

“When you’re in a catastrophic situation, it’s high stress, time is of the essence, and people forget things,” said Sherman. “Having a written plan in place is paramount to success.”


Another important component is knowing who will execute that plan in homes that are often unoccupied.

Domestic staff may lack the knowledge or authority to protect the homeowner’s assets, and during a disaster may be distracted dealing with threats to their own homes and families. Adequate planning includes ensuring that whoever is responsible has the training and authority to execute the plan.

Evaluating New Technology

Insurers use technologies like GPS and satellite imagery to determine which homes are directly threatened by storms or wildfires. They also assess and vet technologies that can be implemented by homeowners, from impact glass to alarm and monitoring systems, to more obscure but potentially more important options.

AIG’s Poux recommends two types of vents that mitigate important, and unexpected risks.

“There’s a fantastic technology called Smart Vent, which allows water to flow in and out of the foundation,” Poux said. “… The weight of water outside a foundation can push a foundation wall in. If you equalize that water inside and out at the same level, you negate that.”

Another wildfire risk — embers getting sucked into the attic — is, according to Poux, “typically the greatest cause of the destruction of homes.” But, he said, “Special ember-resisting venting, like Brandguard Vents, can remove that exposure altogether.”

Building Smart

Many disaster resiliency technologies can be applied at any time, but often the cost is fractional if implemented during initial construction. AIG’s Smart Build is a free program for new or remodeled homes that evolved out of AIG’s construction insurance programs.

Previously available only to homes valued at $5 million and up, Smart Build recently expanded to include homes of $1 million and up. Roughly 100 homes are enrolled, with an average value of $13 million.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work.” — Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“We know what goes wrong in high net worth homes,” said Poux, citing AIG’s decades of loss data.

“We’re incenting our client and by proxy their builder, their architects and their broker, to give us a seat at the design table. … That enables us to help tweak the architectural plans in ways that are very easy to do with a pencil, as opposed to after a home is built.”

Poux cites a remote ranch property in Texas.

Curt Goetsch, head of underwriting, Private Client Group, Ironshore

“The client was rebuilding a home but also installing new roads and grading and driveways. … The property was very far from the fire department and there wasn’t any available water on the property.”

Poux’s team was able to recommend underground water storage tanks, something that would have been prohibitively expensive after construction.

“But if the ground is open and you’ve got heavy equipment, it’s a relatively minor additional expense.”

Homes that graduate from the Smart Build program may be eligible for preferred pricing due to their added resilience, Poux said.

Recovery from Loss

A major component of disaster resiliency is still recovery from loss, and preparation is key to the prompt service expected by homeowners paying six- or seven-figure premiums.

Before Irma, PURE sent contact information for pre-assigned claim adjusters to insureds in the storm’s direct path.

“In the high net worth space, sometimes it takes longer potentially to recover, simply because there are limited contractors available to do specialty work,” said Curt Goetsch, head of underwriting for Ironshore’s Private Client Group.


“If you’ve got custom construction or imported materials in your house, you’re not going to go down the street and just find somebody that can do that kind of work, or has those materials in stock.”

In the wake of disaster, even basic services can be scarce.

“Our claims and risk management departments have to work together in advance of the storm,” said Bitterman, “to have contractors and restoration companies and tarp and board services that are going to respond to our company’s clients, that will commit resources to us.”

And while local agents’ connections can be invaluable, Goetsch sees insurers taking more of that responsibility from the agent, to at least get the claim started.

“When there is a disaster, the agency’s staff may have to deal with personal losses,” Goetsch said. &

Jon McGoran is a novelist and magazine editor based outside of Philadelphia. He can be reached at [email protected]