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November 16, 2020

Collinsville startup aims to upend the powerful, opaque drug-pricing system

Photo | Steve Laschever Michael Waterbury, CEO of Collinsville-based Goodroot.

Prescription drugs are costing employers and their workers plenty of money, and even big companies may feel there’s not much they can do about it.

There are many factors placing employers at a disadvantage when it comes to lowering their pharmacy costs, experts say, including highly profitable drugmakers, powerful middlemen called pharmacy-benefit managers (PBMs) that play a key role in the opaque process of setting drug prices, and increasingly, health insurers, like Greater Hartford’s Cigna and Aetna, that have recently merged with those PBMs.

A fast-growing Collinsville upstart, led by entrepreneur and former pharmacy-benefits executive Michael Waterbury, is working to change that picture and it’s sure to be an uphill climb.

RemedyOne manages, audits and negotiates drug rebate programs and designs and optimizes drug benefits to help payers (like an employer or health plan) get a better price on medications.

The company has been hard at work the past five years winning business from large employer groups, health plans and middle-market PBMs by offering customizable, specialized services, often at a lower price point, since Waterbury says the company is willing to earn a smaller profit margin in order to increase scale and leverage by building its roster of covered lives.

The privately held RemedyOne, which anchors a handful of related fledgling companies under a recently named corporate umbrella called Goodroot, has since built its annual revenue to a range of $100 million to $300 million and is profitable, according to Waterbury, who said much of the top line gets paid out to clients in the form of prescription drug rebates, a common discounting method in the pharmacy industry that’s sometimes criticized for its lack of transparency.

Waterbury, who led the formerly Avon-based Magellan Health Services’ specialty pharmacy unit from 2011 to 2014, has watched as PBMs have grown increasingly powerful in the healthcare world. In many ways, Connecticut is ground zero for that trend.

In two late 2018 deals worth a combined $137 billion, CVS Health, whose longtime PBM CVS Caremark has top market share, acquired Hartford-based Aetna, while Bloomfield-based Cigna bought Express Scripts, the nation’s second-largest PBM.

Both PBMs are major earners, with over $14 billion in 2017 profits. Though the acquisitions cleared federal antitrust review, patient advocates criticized the vertical integrations, arguing the deals may lead to higher shareholder profits but not lower-cost health care for consumers.

For his part, Waterbury sensed opportunity. The bigger PBMs get, the more likely they are to offer standard menus of covered prescription drugs, known as drug formularies, to their health plan and employer clients. He said those standard offerings are inefficient and may not provide the best possible pricing, particular for smaller employers.

“Bigger is not better,” Waterbury said of PBMs.

While Goodroot mainly targets self-insured employer groups for now, in addition to plan administrators and other clients, it one day aspires to launch a fully insured product for smaller employers, who have little opportunity to tweak their plan designs to lower costs.

Scaling up

Waterbury has grand aspirations of upending an increasingly entrenched system that drives up the price of health care.

However, to put any noticeable dent in that system, Goodroot will need leverage to negotiate with drugmakers and other players. To do that, the 41-employee company must further build its roster of 100- plus clients and approximately 2 million covered patient lives.

“When you start to understand the space, it’s really all about aggregation,” said Erik Wallace, Goodroot’s recently hired chief commercial officer. “You need to scale, you need a distribution arm, you need a sales organization to bring this to market.”

Photo | Michael Marques
Erik Wallace, Goodroot’s recently hired chief commercial officer, is hiring more salespeople to expand the company’s client base.

Building those areas is Wallace’s task, and he intends to hire six sales people in the near term who will work to expand Goodroot’s client base beyond its current concentration in the Northeast. Another goal is to win a large marquee client with a household name.

“It’s a lot of pressure on me to be able to deliver,” Wallace said.

Wallace joined Goodroot in early October, choosing to leave British medical device maker Smith & Nephew, where he climbed the corporate ladder to vice president of U.S. robotics.

Wallace listened to Waterbury’s pitch about building a group of companies that could lower drug costs at the expense of major industry players, and his first reaction was doubt.

Goodroot, while it’s grown quickly, isn’t big enough for major PBMs and others to feel its presence yet, he told Waterbury at the time.

“When they feel the mosquito bite, what are we going to do then?” Wallace asked. “They could buy us and shelve us, or kill us with litigation.”

Waterbury told him that once employers were educated about the ways in which the system leads to inflated drug prices, no insurer or PBM would be able to justify it. He was also inspired that Waterbury was sinking his own money into the venture, which has no other significant backing to speak of.

“Mike’s not scared,” Wallace said. “We’re this tiny little business that emanates out of Collinsville, but we have tremendous potential if we can just get it out to the market.”

While Goodroot may be willing to make a lower profit margin compared to some industry leaders, Waterbury said continuing to produce a positive bottom line — something RemedyOne has done since 2016 — will be crucial if the company is going to accomplish its high aims.

“You have to make money, you have to have enough capital to invest and take on risk,” Waterbury said. “It’s not a nonprofit, that’s for sure.”

College health plans

Springfield-based WellFleet, one of the largest U.S. administrators of student health plans, has been one beneficiary of Waterbury’s approach.

WellFleet, which is owned by Berkshire Hathaway and counts UConn among its 230 university clients, hired RemedyOne four years ago to help it forge a contract with a new PBM and act as WellFleet’s ongoing pharmacy consultant.

WellFleet CEO Drew DiGiorgio said it was tough to find the right match, given his company’s college student niche.

“None of the commercial PBMs were meeting our needs,” DiGiorgio said. “They’re focused on people, on blood pressure medication and cholesterol medications, and there’s a lot of fat on those lines. My college students are on behavioral health medications, contraceptives and specialty drugs.”

With RemedyOne’s help, WellFleet, which uses Cigna’s provider network around the country, built its own private-labeled PBM called WellFleetRx, with a heavier focus on medications college-age patients tend to take. Nearly four dozen of those drugs are offered with no copay charged to the patient.

DiGiorgio said the change is saving money for university clients and students.

“It’s been a win-win all around; we’ve reduced the drug trend,” he said. “We had a negative year last year on drug trend.”

Through its work with RemedyOne, WellFleet has also realized other savings, related to promised discounts or rebates on drug prices.

“Just because your contract says you’ll get a 65% discount doesn’t mean you’re actually getting it,” he said.

Waterbury’s team determined WellFleet was actually getting something like 62% and confronted the PBM, which quickly made good on the missing (and valuable) 3%.

“Here’s a million dollars,” DiGiorgio said.

Haves and have nots

In the prescription drug industry, as is the case in many industries, negotiating favorable terms often comes down to leverage and scale.

Large companies that self-insure their health benefits can expect a bit of wiggle room when it comes to negotiating prescription drug costs in their plans.

But it’s not as good as you might think, according to drug-pricing expert Eric Pachman.

“Even the largest of them are still in bad contracts, from our experience,” said Pachman, president of Ohio-based nonprofit 46brooklyn Research, which uses complex federal datasets to study and report on drug-pricing trends. “They may just be in slightly better versions of bad contracts.”

Things are more dire for companies and employees who buy traditional health insurance. Those firms have little opportunity to change plan designs, don’t get direct drug rebates, and can’t access claims data, he said.

The way drug pricing works, according to Pachman, is supremely complicated and it leads to arbitrarily high costs for consumers, particularly employees of smaller businesses, as well as those who need high-price drugs to live, such as insulin for diabetics or specialty drugs for illnesses like multiple sclerosis.

“For the vast majority of people, this is a problem,” he said.

Part of the challenge is that the U.S. Food & Drug Administration, unlike regulators in other developed nations like Australia, approves drugs based on the efficacy and safety, with no consideration of value (medication cost vs. patient outcomes).

“There is no public arbiter of cost-benefit in the U.S. marketplace,” he said.

“That job has been given to this private PBM marketplace and we are entrusting them to police the system, which is designed to churn out higher and higher-cost drugs.”

Pachman, who is vaguely familiar with Waterbury and RemedyOne, said the company appears to fit in with a few others that are seeking to lower pharmacy costs for employers through novel reimbursement models or other strategies. Another example is Navitus Health Solutions, a PBM owned by a St. Louis-based health system, which passes through 100% of drug rebates to its clients, charging only an administrative fee, thereby removing potential conflicts of interest that can arise when PBMs divvy up drug rebates with their clients. Warehouse retail chain Costco bought a minority stake in Navitus earlier this year.

“The more players that can be out there doing the same thing, chipping away at this problem, the better,” Pachman said.

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