Rethinking The Management Of Pharmacy Benefits With Waltz Health

A pharmacist assists a customer by handing them their medication in a brown paper bag across the counter at a pharmacy.
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In this episode of the FutureHealth Podcast Series, Mark Thierer, Co-Founder and CEO of Waltz Health, and Jeff Park, President of Waltz Health join Charles Rhyee, Health Care Technology Analyst. They discuss the pharmacy benefit management (PBM) industry, which has been instrumental in managing down the cost of prescription drugs and healthcare.

PBMs have continued to evolve as the healthcare landscape has changed. More recently, we’ve seen new entrants enter the market using technology to disrupt the status quo. Yet, the industry is not without controversy. It’s often criticized for lack of transparency and misaligned incentives, particularly around rebates. We also explore how we’ve gotten to where we are, who’s to blame, and how to solve the biggest issue: making drugs more affordable for the consumer. 

Mark and Jeff, both longtime PBM industry veterans, have helped transform the industry over the past 20+ years. They started with SXC Health Solutions growing it into Catamaran, which became one of the major players in the industry before being sold to United Health Care’s OptumRx in 2015 for $13B. They are now back with Waltz Health, a digital health company developing technology-enabled ways to bring down prescription drug costs.

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Transcript

Speaker 1:

Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.

Charles Reed:

Hello, my name is Charles Reed, TD Cowen’s Healthcare Technology Analyst, and welcome to the TD Cowen FutureHealth Podcast. Today’s podcast is part of our monthly series that continues TD Cowen’s efforts to bring together thought leaders, innovators, and investors to discuss how the convergence of healthcare, technology, consumerism and policy is changing the way that we look at healthcare and the healthcare system. And in this episode, we’re taking a look at the pharmacy benefit or PBM industry, which has been instrumental in managing down the cost of prescription drugs and plays a vital role in holding back the rising cost of healthcare.

Yet the industry is not without controversy, often criticized for lack of transparency, perverse incentives, particularly around rebates, but it’s also an industry that has continued to evolve as the healthcare landscape has changed. And more recently, we’ve seen new entrants enter the market using technology to disrupt the status quo of the PBM industry.

And in this episode, we explore how we’ve gotten to where we are, who’s potentially to blame, and how do we solve the biggest issue making drugs more affordable for the consumer? And to help us discuss this topic, I’m joined by Mark Thierer, Co-founder and CEO of Waltz Health, and Jeff Park, President of Waltz Health. Mark and Jeff are longtime industry veterans of the PBM space and helped transform the industry over the past 20 plus years, starting with SXC Health Solutions, growing it as catamaran to become one of the major players in the PBM industry, before being sold to United’s Optum Rx in 2015 for 13 billion.

They’re now back here with Waltz Health, the digital health company, developing technology able ways to bring down prescription drug costs. So thanks for joining me today, guys.

Mark Thierer:

Thank you, Charles. It’s great to be with you today. So

Charles Reed:

Maybe to start, if we look back, gosh, 20 years or so, you would find a very different landscape for PBMs. There were multiple players at the time. They were all independent, largely probably driven by rebates for profitability. Specialty wasn’t that big yet, neither was mail order. Maybe talk a bit about what the market looked like at that time.

Mark Thierer:

Yeah, Charles, and thanks again for having us. You’ve always been a great student of this business. Look, I paged back and thought about it many times and Jeff and I talk about it a lot. If you wind back and think about the 1990s when PBMs were heating up, there were really three primary players, Metco, Express Scripts and Kirmer at the time, and then call it 50, maybe 75 middle market players, younger PBMs trying to gain footing. And we had a pretty fortunate position in that market because at the time, SXC was positioned as the intel inside. We were clearing claims for roughly half of those players and gave us a very unique, I’d call it a 360 degree vantage point.

And so in those early days, it was all about billion dollar blockbuster drugs. You’ll remember Lipitor and Pravachol and Paxillin and it was about rebates. The business is about rebates, and then in the early innings migrated to mail order where 90 day supplies are going to be bigger rebates and lower prices. So that was what the early days were like, and just as a reminder for all the shrapnel the industry takes, we were saving money for clients big time back then and continue to do so. And so early days were important and now we find ourselves at a very different spot. But it’s fun for me to think back on what it was like back then.

Charles Reed:

You mentioned a few of those. When we look forward today, what do you think the biggest changes to the industry has been since back then?

Jeff Park:

Charles, it’s Jeff Park. Nice to hear your voice again and appreciate you giving us an opportunity. First of all, when you look at what the change has been, the focus has always been the same, even from the time when Mark was talking about, which is bringing down the cost of prescription drugs, and that is driven by price and utilization, so price being the most important piece. But as you know, high cost branded drugs drive costs, and we have continued to find ways to introduce new products into the industry that have been blockbuster drugs, but also significant costs. So of the 6.9 billion prescriptions that are written in Phil, what was different is today 90% of them are generic. Back 15, 20 years ago, it was 65, 75%, but the big cost drivers are specialty, so less than 5% of the prescriptions are driving more than 51% of the cost.It’s really shifted what our role as an industry is to drive down and make managed savings. So that’s probably the biggest change.

Mark Thierer:

The other change I’ll add to Jeff’s comment is the configuration of the industry’s change. And now you see vertical integration with insurance companies owning PBM and the three largest PBMs are obviously attached to a very large insurance company. And so you have to ask yourself, what’s going on here and why is this happening? And it’s happening because drugs have become perhaps the most important part of the healthcare equation. They’re certainly the most visible and highly utilized portion of the benefit, but if you stop to think about it, integrating pharmacy into medical management, which is the whole thesis here, has become a very critical value driver in healthcare broadly.

The other reason is there’s tremendous profitability in the pharmacy businesses, and this is why these insurance companies have placed higher bets on that fortune of their businesses. And so it’s really made the business more complicated, but on many levels, there’s method to their madness of combining with PBM.

Charles Reed:

Yeah, touching on that, with the major PBMs folded into big insurance carriers, has it really changed how the PBM model itself works, or is it more just having the pharmacy benefit more tied to the medical benefit?

Jeff Park:

Well, I think it’s changed it in many regards. First of all, by having a combined offering of medical pharmacy, but also all of the peripheral components alongside of it, which is rebid aggregation as well as group purchasing organizations and wholesaling. Although it may be set up to drive for bigger scale, the industry requirements per scale is much different. It’s added a lot of complexity and the complexity has added a lot of confusion and a lack of trust. And so there’s a lack of trust in that the PBM and the payer systems are working as effectively as they need to drive down costs that patients can see. And so really needing to bring in more visibility to what’s happening, and tools and technology are a solution to do that.

Mark Thierer:

The other fortune of that, Charles, and I know you’ve got another question, but to add to Jeff’s comment, the big change there with the vertical integration of health plans with PBMs is the PBM model was closed before. It’s even more closed now. And when I say that, exclusive specialty offerings, exclusive formula, exclusive mail order, all these things to try and keep it in the four walls of these integrated PBM health plan entities, that’s become more pronounced. And you hearing them talk about in their public comments pharmacy first, it’s really elevated the importance of pharmacy and healthcare. When you have insurers talking about their managed pharmacy programs first in things like investor days and elsewhere, you can answer your own question, which is it has really become critical for these integrated properties.

Charles Reed:

Yeah. And certainly one of the controversies also sits around specialty pharmacy. That these captive specialty pharmacies given, Jeff, to your point that over 50% of the spend is coming to this category alone. How has that relationship changed over time? It almost seems like it’s really the primary driver of a PBM model itself. Is that the right way to think of it?

Jeff Park:

Well, 51% of the costs are where the biggest dollars are, and it’s also where a lot of the profitability is. So spread revenues, rebating, specialty dispensing, these are still at the core of where profitability sits, and it’s really wrapped around a supply chain model, bringing better pricing, lower costs and clinical programs to these patients. And if you’re looking at Hayers and they’re asking questions, “Where are my costs going?” It starts with what was specialty, what is specialty cost going to be and what’s the future look like in specialty? It is where all of the dialogue is. We as an industry have figured out how to get a 90-day supply of a low-cost generic into your hands. We need to be worried about how to manage specialty costs.

Mark Thierer:

That’s really true. And I’ll add by saying, if you just rewind the tape a little bit, the specialty business has been fascinating to be part of, and we’ve had the good fortune of helping to drive the newer models, and way back in the Caremark days, Caremark Therapeutic Services was the innovator and the start of this whole thing.

And now all of a sudden it’s 51% of the costs running through the pharmaceutical supply chain. So it grew very rapidly. Big investment was required to build these factories and the capability to handle high-cost, very complex medications, primarily injectables. It grew out of the old mail order model. It was really a derivative of the mail order model. And then we back in the Catamaran days built a dedicated, highly technical specialty pharmacy starting in Jeffersonville, Indiana, and now it’s gone on and this industry has become front and center in all of PBM. In fact, over half of the profit of any of the big three P&Ls is in specialty. And that didn’t use to be like that.

Charles Reed:

Yeah. Maybe want to switch gears a little bit and then talk about where we’re now. Obviously we just touched on that specialty is a major portion of driver, rebase to a certain extent has fallen down the pecking order, at least from the PBM standpoint. But funny enough, it remains in the spotlight of consumers or how do you say it? In front of regulators and Capitol Hill and quite frankly, as long as I’ve been following this industry, this industry has always been seen to be cast not in a favorable spotlight. And curious, given a lot of what we just talked about in helping customers save money, why do you think that’s been the case?

Mark Thierer:

I think it’s been the case because of market power. And PBMs have unbelievable market power. All the years that Jeff and I were in the traditional PBM business, we had a lot of power. What do I mean? The businesses we do business with were price takers. Pharma was a price taker. The stores were a price taker, wholesalers were price takers, and in fact, the employers who bought our services were effectively price takers. The market power that PBMs exert has put them in this very, very enviable position and profitable position, but it’s also put you up on the pedestal, and nobody likes being on the receiving end as a price taker. So it’s not a great place to be on the other end of a negotiation when you’re coming up with the short end of the stick. And anybody who does business with these large integrated models are at a disadvantage from a negotiation standpoint.Nobody likes to be in that position. That is where just negative, all the negative messaging that you hear, that’s where it comes from in my opinion.

Jeff Park:

But at its core as well, I’d say patients and payers, they don’t really trust or want the government to solve the problems that are happening in healthcare. It’s too complicated. And to Mark’s point, they’re not necessarily looking to the PBMs to think they could be trusted to police themselves across these multiple pools and profitability that they have. And so really what’s needed is new technology to drive better thinking into what’s happening. And the markets have changed. And being able to introduce price competition at the point of care, at the time you’re standing at a pharmacy and ensure that patients are getting lowest price, tools and technology are available, marketplaces are being created. It is what the industry is looking for.

Charles Reed:

That’s interesting you bring that up because I feel the one area that’s been overlooked for a really long time is the patient at the point of care. Their out-of-pocket costs, particularly with high deductibles. If anyone’s getting really the short end of the stick, it really is the consumer. And it’s interesting for an industry that’s really been focused on lowering the cost of drugs, why has the PBM industry overlooked the member for so long? And why is it only now that you’re seeing this renewed focus on the member?

Mark Thierer:

It’s a really good question, and the answer is because growing up in the PBM industry, consumers didn’t buy our service. Health plans and employers bought our service. And we never spent a lot of money thinking about the consumer. We never really focused on marketing to, or even appealing to the consumer. They weren’t part of the decision process to award us the business. It’s been under-invested because they weren’t a decision maker. And now these health plans have had to cost ship so much of the burden to the member, the member is in the mix big time. And now they’re ill-equipped in some cases to actually deliver a consumer experience that’s meaningful.

So this is what we’re focused on, and I know at some point we’ll talk about Waltz Health. We’re all about the consumer. We’re all about tools and technology to enable them to make better decisions and to see, have clarity and see into the channel and see price. So this has been missing, it’s never been provided. It’s still not being provided, and it’s a huge market opportunity.

Charles Reed:

And yeah, we’ll jump into that very shortly, but maybe before we do, just obviously a lot of focus on Capitol Hill, on the PBM industry, and I know Jeff, your point is that I think most people would rather not have the government intervene, or many people at least, would rather not have the government intervene in this. But there are in a minute attempts over the years to legislate PBMs including a number of bills that are trying to approach the issue in some fashion, particularly around transparency and maybe around spread pricing. I guess your thoughts, do you expect these policy efforts to result into any meaningful changes over the near to medium term?

Jeff Park:

Well, first of all, it’s a great question. It’s complicated business to change. That’s the one thing that’s for sure. And the second thing that’s for sure is that divided government makes it difficult to make change through legislative effects. So there’s always been discussion and there’s going to continue to be discussion about driving clarity and transparency of price clarity and transparency of rebating and where those values need to sit, whether the patient to your earlier question is paying more of the dollars. Last year, 82 billion dollars were paid for by patients for their prescription drug costs. And so they’re not part of the recipient pool for rebate dollars that are occurring months and months later. It’s creating this dislocation of where the money is.

So the government is working in a way to try to drive access to care. They don’t want restrictions and networks. Reducing price and targeting profits, which is rebate, but it is difficult to legislate those changes.Really better answers is competition drives down price. And opening up clarity around price and capabilities is a better tool, and that is what payers and patients are accessing.

Mark Thierer:

Charles, you’ll know this, but I chaired PCMA and was on that thing for 10 years and chaired it in the middle and was on the Hill and talked to many of the current senators as well as congressmen and their staffs about the machinery that’s required. The industry has an obligation to come up with new approaches and police themselves, rather than having lawmakers legislate from Washington D.C. because it’s very hard for them. You’ve been following this industry for two decades. It’s very hard for a legislator lawmaker to be smart enough on this industry to actually get it right on what changes need to be made from a legislative standpoint.

I will say this, I’ve never in my life, and I’ve been doing this a long time, seen more saber-rattling from the Dems, from the Republicans, from the actual HHS, from everyone, including the supply chain itself, farm of the stores. There is so much saber-rattling going on, changes are required, I actually think some amount of this is going to take, but it will be the market that drives healthier changes, not the government. And that’s our opinion.

Charles Reed:

Yeah, because ultimately, I think the question people are trying to ask is we continue to see drug prices go up year-on-year, and I think people are looking for people to blame for this. And I guess the question is who is really to blame for rising drug costs? There’s a number of stakeholders in this. Maybe your thoughts on who we should be really looking at?

Jeff Park:

Well, certainly enough blame to go around, so I’ll start with that. To your point, manufacturers are continuing to drive high prices for these new products that are coming to market, but they’re also seeing seven to 12% annual pricing increases on these new medications that are still in the marketplace getting increased prices. And these innovator products are also driving up rebating, which is part of the profit pools for PBMs and utilized by payers. So there’s certainly enough blame to go around on what’s driving price.

When you think about what payers have been trying to do, which is as the utilization of these high cost drugs have increased, they’ve been trying to find ways to put programs in place to either reduce access to some of these products or shift the costs into the patients. So there certainly is enough blame. It’s difficult for for-profit entities and people that are looking to drive growth in their business to try to avoid and ignore where profits can be made in business models. So there’s a lot of blame to go around.

But I do think clarity and transparency of where the money is and that is required to help unsork this tangled mess of where it is, and one of the reasons what’s exciting about Waltz is that we brought together a team of people who built the industry, the platforms, the technology that runs it, the systems, and we understand where pricing is. And so I think we’re uniquely suited to find a way to change some of these from evolving into the new models.

Mark Thierer:

Yeah, and so I think what Jeff said is the key.

Jeff Park:

We’re not really focused on blame, Charles. We’re focused on a better management approach. And aligning incentives, because the blame is a byproduct of misaligned incentives, relative price, rebate, utilization. We’re coming at it with a pretty clean sheet and we’re going to align incentives. And it won’t be the government that chalks the field. We think it’s going to be the market and we’re going to be right in the middle of it.

Charles Reed:

Yeah. No, I want to jump into here, into Waltz perhaps. One last question though because you brought it up. When we think about misaligned incentives, it seems though in part to employer customers, you look at the data, they prefer rebates. They get these guarantees and it makes it hard for PBMs to push through low net cost models. They’ve existed for years now. We don’t see a lot of as much uptake of them as you would’ve really hoped, that would have this more greater transparency. How do you change that?

Mark Thierer:

Well, I think what you just suggested is the dirty little secret, which is employers do like the rebates and they just take them and they put them into their own P&Ls as they continue to cost shift to members. What’s happening here is members who are paying more and more of the freight are getting smarter. And that’s not going to work. This notion of employers taking a rebate and moving it into the core business rather than the benefit that they’ve committed to their unionized employees, to their staff and salaried employees, this isn’t going to work. As members get smarter, they’re not going to be able to do that.

So I think you’ll see a trend toward making sure that rebate dollar is in the price of the drug at the store. Making sure that rebate dollars is passed on to the member in full. And I do believe that’s a major change that you’ll see not in the long term, that’s in the short run. And so much of what’s been lobbied for on the Hill is in and around that idea. We’re all over that idea and creating a technology tool set to make it happen.

Charles Reed:

Yeah. So let’s jump into Waltz then. Mark and Jeff. Mark, maybe a little background on how you came around? Obviously after Canterbury, you spent some time at United, both of you there, you stepped away after a few years. Maybe talk about how you came up with the idea of Waltz?

Mark Thierer:

Yeah. Well, I’ll tell you, Jeff and I were both at Optum Rx, and that was a wonderful experience because it’s a $500-billion enterprise, United Healthcare and the market leader for a reason. It’s a very well-run business, and they’ve got a very large services business in Optum, and Optum Rx is the largest operating unit inside it. And so we’d been asked and tasked to make that integration of the Catamaran and Optum Rx business happen and we did so successfully. So when I came out of there and Jeff went on to a new adventure, I grabbed my son Jonathan, who was working for me inside Optum Rx in the network pricing area, and we founded Waltz Health with a goal of rewiring the pharmaceutical supply chain.

Now, this is a business we love, we helped build it. It’s a very good business, but there are areas that can be improved, big time. Logarithmic improvements. And so we set out for the benefit of consumers and their planned sponsors to move some of the power and some of the economics into their pocket. This is what needs to happen. So put our, I’ll call it our old band back together. It’s not just Jeff and I, we actually have 35 people who know what to do, who help build what was SXC, then Catamaran, and much of what Optum Rx is today, these 35 people are domain experts.

Every one of them knows this industry like the back of their hand. And they’ve been coupled now with technologists who are coding in the latest and greatest technology tool sets. And so we built a product line, Charles, it’s really a five-point product line, and I won’t grind you through the whole thing, but it’s all aimed at building marketplaces to provide price. Price access, price transparency, and putting it in the hands of the consumer. The first place we started was in the retail pharmacy.

In the discount card space, which is very fragmented and the big guys don’t play as heavily there. And we started there for a reason. We built a tool that we call Marketplace Search, and this tool is a price comparison tool that’s resident at the pharmacy counter. It’s now installed in 5000 stores at four of the leading six chain pharmacy drug stores in the United States. By the time these pilots are finished, it’ll be closer to 15,000 stores. What to do? You the member walk up to the store and you take out your fall, you punch in a QR code right there, it’s sitting on the counter. And in two clicks you now have the lowest price. For that drug, that day, that dosage in that store. And that is disrupted. We’ve organized, I’d call it reorganized the discount card space.

We took that tool and moved it into the funded space. And so we took marketplace search for pharmacies and embedded in what we call marketplace search for health plans. And you know there’s a number of competitors out there with offerings, some of them single card offerings, and it’s basically doing plan pay comparison to cash pay. So many members are asking, “Why is it that I have insurance with a great insurance company and yet I could pay less money with cash than the insured benefit?” And this is a big problem happening approaching 15% of the time. This is why you’re seeing insurers put these integrated benefits together. And our tool, which we launched in conjunction here with Carillon, it’s called Insure-RX in their product line, we’ve white labeled it, is a very comprehensive too. For those members, they’ll get the lowest price for that. Drug that day in that store every time.

And so that’s our second and really important product. And from there, we’re using this bridge, call it a bridge between cash pay and plan pay. And think of that bridge growing and coming very expanded over time because we’re going to move that same technology into the specialty space with the intelligent specialty engine. And here we have at the core of this a comparator engine. The integrated comparative engine is what we’ve patented, and basically it’s a tool that allows you price comparison with lots of ingestion of data.

And the specialty engine is targeting, creating a marketplace for high cost specialty medications, not a closed network single pharmacy model. It is an open network model where price is updated daily. And this marketplace is aimed at taking 10 to 15% of the cost out of the specialty drug spend. So if you’re an employer or a health plan, you’re spending tens, hundreds of millions of dollars in specialty. We’re talking about taking very material months amounts of money out.

And this is all through a technology enabled tool set focused on the consumer, helping them understand how to make the best decisions. So that’s what we’re doing at Waltz, where our value drivers are marketplaces, our value drivers are reducing friction in the system using technology to do it. And our biggest value driver is the consumer. We’re giving consumers knowledge and tools just to be a better shopper, and it’s really actually never existed. So we’re very excited about it.

Charles Reed:

Yeah, a lot to unpack there. Maybe starting with Marketplace Search for discount, cash pay market, to your point, that market’s become a significant part of overall pharma spend. Maybe a little bit more, how does Waltz, how does Marketplace Search differentiate from probably other better known players like GoodRx or Cuban’s Cost Plus Drugs, maybe help us understand what’s different here?

Jeff Park:

Great. Well, Charles, there’s a couple of things. First of all, two great companies and their intent is to try to focus on bringing down cost to patients. So I think a great step forward, we’re aligned on that initiative. When you look at unpacking specifically the value propositions for plans, payers and PBMs around what being able to introduce these marketplaces in for these 90% of the drugs that are generics, let me unpack that a little bit for you.

First of all, as you know, generics are averaging out at about $38 across the board, is the net effective price for a generic drug. Patients have much higher variability based on where they are on their copay, their deductible, their co-insurance. It can range and be quite variable. And then the price of the drugs are variable. And so it introduces so much variability that there are many situations where patients when they show up are paying a higher price than the lowest and best available price to them. So by introducing these types of tools and technologies into the ecosystem that we helped build while we were at Catamaran and SXC, we can drive in real time lowest price and compete multiple networks. Not one network, not one card, but multiple cards to ensure that the patient and the plans are getting the best price available to them.

So that’d be one of the distinctions. Now where’s the value get created? Patients on average when these are in place, they’re saving $8 per prescription on their drugs. And the plans are saving $6. So there is a real savings that are available to the plans and to the patients by making sure they can access these lowest net costs.

Mark Thierer:

And I’ll just add, because you named two phenomenal companies, it’s very disruptive and people are talking about them for good reason. GoodRx is a scaled business and very successful consumer focused, and Cuban is all anybody wants to talk about. But they are slices of a smaller idea. We’ve got a very large idea in terms of reorganizing the entire supply chain and they’re part of it, and they will be an important ally in this new journey. So I hope that helps you get grounded on what we’re thinking.

Charles Reed:

Yeah. No, that does. And so when we look at the bigger picture, and the one that really jumps out to me is your marketplace for specialty. And maybe go a little bit more into that because the way I understand it is for most employers, let’s say TD for example, with our PBM, if I’m not mistaken, I’m going to assume we’re exclusive with the specialty pharmacy of our PBM. So how do you then approach this market when a lot of employers are already wrapped up into an existing PBM relationship that is tied to an exclusive specialty pharmacy?

Jeff Park:

Yeah, you have it. So repeat the point that you’re trying to make, which is if you’ve got a PBM and a locked-in specialty, there isn’t price competition for that product. It is set and you’re dispensing from one location. So that certainly doesn’t introduce lowest bets cost. Also in that type of contracting arrangement, the price is set on aggregate average annual guarantee. Notice none of those were the direct price of the drug. So it creates a lot of inefficiency. And if specialty is 51% of the total cost, payers are focused on finding ways to drive down those costs and either contract in unique and new ways and unlock this value proposition that’s trapped in behind a PBM contract in many cases.

But it is about finding savings. So let me tell you a little bit about it, and that’s how you can drive savings. So if we can deliver 10 to 15% savings in specialty, people are much more interested in figuring out how and what do I need to do to drive disruption? And that comes from competition of each of the drugs. We’ve got some of the largest PBMs in our specialty contract. They don’t have to have locked in pricing. They’ll compete byproduct by price.

Now if you look at a specialty drug really quick, the drugs again can be 1500 to $20,000. When we go through the mathematics of what we’ve been able to show with our clients and prospects, it’s material. So we’re seeing pharmacy cost savings of almost $260. We’re seeing in addition to that, the ability to drive savings net of rebates on biosimilars and generic over $500. So you’re looking at $800 in savings on each of these claims that can hit. This is a material amount of money and it’s what’s driving the discussion.

Mark Thierer:

And so you know Jeff was our CFO. It’s always been about the money. I’ll tell you strategy-wise, we’ve got two levers. One is pharmacy selection, the second is product selection. So we are going to find the most optimal dispensing site for that member for that drug inside their plan. And we’ll do that through a series of network dissipation agreements and leading edge specialty dispensing pharmacies. Then we move to product selection, because doctors write for these prescriptions, they’re our choices. Many times in the specialty space, especially oncologic agents, we’ve got lots of specialty drugs that are generic.

And then there’s biosimilars and then there’s financial assistance programs that you have to wrap into the calculus. So how do you select a product based on lowest net cost for that member for that drug. And here you’re going to need a handshake with the physician because on occasion they’ll be required a new prescription. But we’ve got people here who out build the specialty industry, and that’s what we’re setting out to do. We’re making it simple on pharmacy and product selection, saving money for the benefit of the member and the plan spot.

Charles Reed:

It sounds like where we’re moving away from what used to be, I think in the past a lot of things were carved out. You carved out specialty, you carved out mail, PBM was carved out for medical, but then it went into this period where everything was bundled together. Are we moving back to a period where we’re starting to disaggregate, unbundle these services? I think the impetus for bundling was in theory, greater efficiency because you had a single vendor, you could aggressively price down a single contract. But the way, when you think about, what you’re talking about with specialty here, the goal we want to do, we want to unbundle it. Is that the path we’re moving towards?

Mark Thierer:

Yeah. And that is the path, we’re creating a new path, Charles, and that is exactly where it’s headed. So if you step back, what are we talking about? We are talking about unbundling the contracts because the PBM industry has always been about two big value drivers. One, software to make good decisions around prescription drugs. And two, contracts. Contracts with the supply chain. When I say that, I mean manufacturers, generic manufacturers, wholesalers, data players. So this old notion of combining software with a new set of contracts is what we’re doing with Waltz Health. We’re not going to be a pharmacy, we’re not going to touch bills, we’re just going to touch data and prescriptions, and route them to the most appropriate place to save people money.

And so in the old world, these were no cut, no trade, three-year contracts, exclusive, my pharmacy only, my fixed price. Price increases are good for me, bad for you. We’re going to turn that on its head. And this is going to be a real-time marketplace with real-time updates on price. And the people who accrue benefit are the members and the plan sponsors who pay those bills. So this is actually pretty simple. It’s the how that becomes the challenge. And here you need to know the right people. And you need to have relationships with the people who pull the trigger on how do you re-contract, put new economics around the price of these drugs and move that price savings, those concessions to the member. So that’s what we’re doing and we’re talking to the right people in the supply chain to make that happen. This will take some time, but it is a big idea.

Charles Reed:

When you look at the big PBMs, it’s not like they’re sitting on their hands here. You’ve had players like CBS and Cigna through their PBM businesses launch new programs. I think True Cost over at CBS. Both of them have partnered with GoodRX on the discount card side. All of them offer some type of net cost models. So you’re seeing the big play. I know Optum has announced a few things recently as well. When you look at that, you’re seeing an industry that’s responding and evolving as well.

And I think the biggest challenge when we talk to consultants is that they would love to be able to move their clients to the innovative next generation type PBM, but then the incumbent comes in either matches price or offer something similar. So how do we break through and really expand this industry again into the next phase?

Jeff Park:

Yeah, well, there’s a lot there, Charles, but if you think about what has been the case, three-year lock contracts, Mark said, “No cut, no trade.” But the consultants are looking for something different. They’re looking for annual price checks. They’re looking to open up to see new platforms and technology solutions that can drive down price, but in the end, you have to be able to deliver savings. There is a truth to being able to show what you can deliver.

The old way where we started the discussion today, which was around what the models used to be was built on scale and scale buying was better. But when three to 4% of the prescriptions are driving 51% of the cost, it’s not about scale. It is about being able to be strategic and surgical about managing these costs more effectively. I think that the industry’s talking about transparency and talking about delivering lower costs. I think that’s great. Honestly, the industry needs it.

Delivery and execution, and how they flow through the systems, that’s different. And that takes time. It’s difficult to see exactly what happens. When you have large organizations that own the dispensing, that own the rebate aggregation, that own the wholesaler and own the PBM. When you next say, “Transparency,” it’s difficult to understand transparent on what. And so being able to have technology that delivers clarity and a team that understands where the money is, with the relationships to be able to get the trust to deploy these types of solutions, the large plans and payers is part of the answer.

Charles Reed:

When we think of unbundling, the biggest example we’ve seen recently is Blue Shield of California. They’re looking to unbundle their PBM services and they’ve spread it across a number of players. It’s interesting though, when you look at it, it looks very complex. And I think the question arises is what types of clients have the capability to manage that type of unbundled relationship? Is it limited to big players like a Blue Shield of California? Or what about the average size employer that’s a few thousand employees or perhaps even less? What can they do to benefit from this shifting trend or how do they take advantage of that?

Jeff Park:

Well, first of all, I think I’d applaud the move. It was a bold step. Breaking apart, shaking up. It’s an indicator of disruption and evolution, and people trying new models. And so it’s not unusual for some of the largest players, the largest payers, and particularly the West Coast in California to be driving some of these new models and new ideas. But smaller players, employers and others can participate in these types of disruptions and changes. But it does come back to the same fundamental principles. Can we reduce the cost of care for our patients? Can we deliver excellent care for our employees and members that are part of our plan? And how do you do it more efficiently?

It used to be much more complicated, but evolution and technology, cloud computing, machine learning and AI has really opened up the opportunity to unlock values and propositions to engage members in ways that were never here before. And so although the big models and the changes may be happening at the largest players, it is usually where it starts. We see an opportunity for this to transition in the industry.

Mark Thierer:

And I want to add to that here because it’s important. When someone like Blue Shield of California create such a big splash and such a big change, you’ve got a market leader basically blowing up the traditional model, but they went to players to reconstruct a similar solution. So you look at the five players who are underpinning the reconstruction of that solution, they’re going to need to staff up and get bringing capabilities to link those all together and make them work. Because it is that 10,000 life employer that they’re selling to, that want to benefit from those cost reductions and service enhancements.

I don’t think in a perfect world, rebanding together a smaller set of players to create a service offering that you just had is necessarily the pathway to the new world or the pot of gold. We do think it’s a realignment of incentives with a new set of contracts. Moving this technology around electronically for the benefit of the member. And so I do salute them and agree with Jeff, big move. We’re coming at it 12 to 24 months down the line here with an entirely new technology enabled tool set focused on consumers and lowering costs. So a little bit different than what’s going on at Blue Shield of California.

Charles Reed:

Yeah. And then certainly we’ll see how that works out over time. Maybe as we close out here, what should we be looking out for from Waltz over the next 12, 24 months? What can we expect to see?

Mark Thierer:

Well, I appreciate the question, Charles. It’s been great talking to you. We’ve been in the market talking to the smartest consultants in the business. We’ve been talking to the biggest buyers. We’ve been talking to pharma, we’ve been talking to the stores. We’ve been talking to some of the early disruptor competitors that you just mentioned, and we have been in the market talking about our new model. So what you can expect to see from us is a rapid deployment of what we built our first two products, our in-market, good product market fit, but this intelligent specialty engine. We’re betting the business on it. It’s the future of spend management in all of PBM.

And ultimately, we’re trying to build free market machinery to lower the prices, to lower the cost of prescription drugs to members. This is free market machinery versus government mandated price control, which in our view is a failed enterprise. So you can look at us and say, “Okay, we’ve got market leaders like Carillon on signing on, and there’s going to be many more like it.” You could expect more of the same to come from us as we go out to rewire the pharmaceutical supply chain and move those savings onto the member and the planned sponsor, that’s what we’re doing.

Charles Reed:

Great. Well, we’re looking forward to that. We’ll end it here and Mark and Jeff, great to speak with you guys again, and I’m glad to have you back in the industry and look forward to keeping tabs on the progress as you go forward.

Jeff Park:

Thanks, Charles.

Mark Thierer:

Thank you Charles. Good to see you again.

Speaker 1:

Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.


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