Double-Digit Spike in Drug Costs Prescribes Profits for PBMs

The spike in employer spending on prescription drugs is now forecast to jump around 10% for the next three years, according to a new report that puts pressure on companies to dramatically alter pharmacy benefits.

And while that's bad news for workers, employers, and taxpayers picking up the tab for rising drug costs, it's good news for pharmacy benefit management companies, also known as PBMs, and their stocks, which have been captivating investor attention lately. These companies are essentiallythe middlemen between drug manufacturers and employers when it comes to purchasing prescription pharmaceuticals. PBMs wrench discounts from drugmakers, buying them in volume for their employer and government health-plan clients. Rising drug costs mean good things for PBMs going forward and their stock prices.

Aon Hewitt , the large employee benefits consulting and outsourcing firm, says in a new report that U.S. pharmacy costs for active employees and retirees are expected to increase 9.5% this year. The trend is expected to continue, with Aon Hewitt projecting a 10% increase in 2016 and a "similar rate increase in 2017," the benefits consultancy said.

"Medical cost increases over the past few years have offset some of the higher pharmacy costs in the short term, but for 2015 and 2016, there will be more pressure than relief on pharmacy cost," Tim Nimmer, global chief actuary for the firm's Aon Health unit, said in a statement accompanying the report.

"This is primarily due to high price inflation for brand and specialty drugs, a slowdown in blockbuster drugs losing patent protection, generic dispensing rates leveling off, and the robust pipeline of specialty drugs including the new Hepatitis C treatments," Nimmer said, referencing the pills sold by Gilead Sciences and AbbVie that cost $1,000 more per pill that are busting employer budgets for drugs.

Aon Hewitt's report comes at a time when the investor spotlight is focused on pharmacy benefit management companies such as Express Scripts , CVS Health and its Caremark PBM unit, and UnitedHealth Group , which recently agreed to buy pharmacy benefit manager Catamaran for nearly $13 billion and merge it with UnitedHealth's OptumRx Corp.

Though Aon Hewitt's report doesn't mention PBMs, its analysis says the double-digit cost increases projected over the next three years come "before plan design changes." While those benefit designs are ultimately controlled by employers, changes in co-payments, deductibles, and cost-sharing for drugs also come with the help of a PBM.

"If left unmanaged, these issues could have a significant impact in pushing these increases even higher," Aon's Nimmer said. "Over the past few years, employers have implemented a number of strategies to lower medical costs, including cost sharing through higher co-pays or high-deductible plans, implementing high-performance networks, promoting consumerism, and optimizing vendor partners."

PBMs are already making headlines by aggressively negotiating exclusive deals with Gilead and AbbVie, excluding one drug over the other in contracts that are forcing the drugmakers to bring down the prices of the expensive hepatitis C pills that can cost more than $80,000 for a course of a treatment per patient.

"On the specialty side, PBMs have been aggressively negotiating rebate contracts with manufacturers to keep the total cost of these medications in a range employers can reasonably absorb," John Malley, leader of Aon Hewitt's innovation pharmacy team said. "Employers should continuously monitor their pharmacy pricing, either through discussions with their current PBM or a competitive bid process, to ensure they are receiving the full value of these improved rebate contracts."

Ultimately, these trends and the key role of PBMs right in the middle of the evolving healthcare landscape are something for investors to keep a close eye on, as rising drug costs will likely be a boost to these increasingly important businesses.

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Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Aon, CVS Health, Express Scripts, Gilead Sciences, and UnitedHealth Group. The Motley Fool owns shares of Express Scripts and Gilead Sciences. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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