By Mike Waterbury
As I reflect on the recent news stories and commentary pieces about changes in healthcare, I can’t help but think how little the average person really understands about how we deliver and pay for healthcare in America. It’s no surprise, because it’s really complicated. There’s a myriad of players with their individual interests in the game, from providers and health plans to organizations many people may never have heard of, like Pharmacy Benefits Managers. The American Pharmacists Association defines PBMs as being “primarily responsible for developing and maintaining the formulary, contracting with pharmacies, negotiating discounts and rebates with drug manufacturers, and processing and paying prescription drug claims. For the most part, they work with self-insured companies and health plans striving to maintain or reduce the pharmacy expenditures of the plan while concurrently trying to improve health care outcomes.” How PBMs relate to other healthcare factions is key to many of the recent healthcare developments.
If we want to improve outcomes and control costs across healthcare in the U.S., we need to understand the details necessary to fix the core issues. Then we can drive efficiency, with accountability and a clear understanding of where healthcare dollars are going.
Here are some of the key developments we’re all reading about.
- Anthem to leave Express Scripts and move to CVS Caremark, Anthem to start IngenioRx
- Amazon/Berkshire Hathaway/JP Morgan come together to address Healthcare cost
- CVS/Caremark to acquire Aetna
- Cigna to acquire Express Scripts
- United Healthcare’s OptumRx to Pay Rebates to Consumers at Point of Sale
Let’s try to figure out what all of this really means.
First, Some Background
If you rewind five years, there were three models for administering pharmacy benefits in this country:
- Integrated benefit model (UnitedHealthcare/OptumRx) – The health plan owns a PBM and sells the value of integration of the benefit. Data-sharing leads to better outcomes by using pharmacy as a real-time leading indicator of health, rather than waiting the typical 90 days it takes to process medical claims through the system. Health plans bundle fees and services to generate higher profitability. There is also a lack of health plan competition in markets with few choices – driving higher costs with the hope of better outcomes.
- Vertically Integrated Service Model (CVS and Caremark) – This model integrates the PBM and the pharmacies. The supposed advantage is leveraging better solutions and data integration within the pharmacy benefit. The real value, however, is to the PBM through minimizing competition with other large pharmacy chains by controlling prescription volume and consumer traffic into their stores to drive profitability. This model also invested in other healthcare solutions to provide for better outcomes and access, like in-store clinics, with unproven results to date.
- Bigger is Better model (Express Scripts) – This model strives for lower cost through more volume. This translates to more purchasing power with pharmaceutical manufacturers, pharmacy chains and drug wholesalers. This approach has focused on controlling administrative costs, resulting in a one-size-fits-all mentality with less transparency and higher profits for the PBMs.
And the Winner Is?
As we examine the major healthcare developments in the news, lets connect Anthem leaving ESI, CVS buying Aetna and Cigna buying ESI. It’s safe to conclude that the “Bigger is Better” model along with “Vertical Integration” model did not work. Therefore, the winner is the “Integrated Benefit” model. Now the question is, what does this all mean and what we can expect in the future?
Why Does It Matter?
What’s the advantage of controlling the entire health care benefit? Big players can control all the pricing levers and create an opaque pricing strategy to maintain and improve profitability. In the past, PBMs were disruptive and successful driving down cost through steerage, aggregation of volume and drug selection. While they’ve continued to impact results as price increases and specialty drugs have driven up costs, they’ve kept a large percentage of that value in profit.
PBMs also won a significant share of the self-funded pharmacy market from health plans. It’s no surprise that the health plans want that high-margin, very profitable business back. One way to get that back is to buy the PBM, which they did. It is an important distinction that in one case the PBM bought the health plan and in the other case the health plan bought the PBM. But the results are the same. Without disruptive, value added solutions, these plans are not adding net new growth. That means they have to double down on making more money from their current business by controlling pharmacy.
This is NOT good news for middle market consumers or employer groups. It could mean higher cost, more one-size-fits-all solutions and a bigger black box.
None of the recently announced changes are happening in a vacuum, so they will create additional changes.
- Expect Anthem to buy a PBM, they cannot stay with CVS given the conflicts with Aetna.
- A standalone PBM may provide a solution to the big health plans that do not want to use a competitor’s PBM (Aetna, Cigna or United) and believe Prime can’t handle more business.
- Big employers are going to fight back.
One big employer play is the Amazon, Berkshire Hathaway and JP Morgan partnership to challenge the healthcare status quo. The Healthcare Transformation Alliance, made up of 40 plus employers and roughly 7 million lives, has also been hard at work trying to disrupt the current healthcare model. These employer partnerships are getting a lot of attention. But we’ve already seen that bigger is not better. This triumvirate of big businesses will face many challenges in their new territory. If they hire industry knowledge from big healthcare companies, they’ll get experts at today’s way of running healthcare. It would be hard to expect better results from them. So, we will see if anything changes as these big players’ profits increase, costs go up and quality does not improve.
While I welcome the entry of new players with fresh ideas, I would caution them with the old onion cliché. They need to keep pulling back layer after layer to get a complete understanding of the complexity and interrelationships of the current system. It is not as it appears from the outside. Ideally, they should find an unbiased guide to help them reveal all the nuances of the healthcare onion. Only then can they use their problem-solving prowess to attempt positive change.
What’s in Everyone’s Best Interest?
Conflicts of interest are a reality in healthcare and most other businesses. They can create challenges between delivering what’s best for customers or what’s best for the bottom line. Those companies willing to acknowledge conflicts, put them aside and focus on creating better client solutions will succeed.
If you are making healthcare decisions, you must make sure the partner you choose is not tied to the status quo and fat from significant profits they make off the current system. I applaud new thinkers who make the effort see the entire picture and understand the opportunities even in today’s system. Focus on the disruptors and change agents and you will find a partner that can deliver greater value, better outcomes and a fairer return on your healthcare dollar.
The Future Can Be Bright
We’re fortunate to live in a world with clinicians and physicians working hard to develop effective drugs and treatments that help us live longer with a higher quality of life. It’s up to leaders on the administrative and business side of healthcare to do their parts and make access to those amazing treatments easier and more affordable. Working together, we can fix the core issues, streamline delivery and take care of more people more efficiently. Then the healthcare headlines will be about the latest breakthroughs and improved outcomes. That’s the future we should create for the number one healthcare system in the world.