The election result of November means that there is a jump ball again in national health care policy, but the big health care players haven’t paused from what they’ve been doing. They’re still consolidating like mad.
That’s particularly true in the business of distributing and paying for pharmaceuticals.
The latest news came last week when the OptumRx unit of Minnetonka-based UnitedHealth Group said it would “partner” with CVS Health, operator of both a huge retail network of pharmacies as well as a head-to-head competitor of UnitedHealth in the business of managing pharmacy benefits.
One good feature for consumers that the companies are promoting is the ability come next July to fill 90-day prescriptions at the same cheaper price at a CVS store as they can get through mail order.
While this partnership sounds like CVS plans to give discounts, investors in CVS cheered this news. They had hoped CVS would counter the “unexpected marketplace actions” its CEO described in a downbeat investor conference call in early November.
These actions included CVS starting to lose business as Defense Department participants moved to a different preferred supplier. Then there was a new “strategic alliance” between Walgreens and Eagan-based Prime Therapeutics, a pharmacy benefit manager affiliated with Blue Cross plans.
Altogether CVS stood to lose about 40 million prescriptions per year. As CVS took pains to point out, the most profitable prescription is the last one filled, given its big network of stores and other fixed costs.
CVS was already on the outside looking in as OptumRx and Walgreens Boots Alliance earlier this year struck a deal that looks a lot like the agreement just announced between OptumRx and CVS.
Here’s the interesting thing about all this: What CVS competitors including OptumRx have been doing with these various deals was responding to the tough competitor that CVS created by putting its Caremark pharmacy benefit management business together with its own drugstores.
Another way to put this is that the already blurry line between what a health insurance company does and a pharmacy company does has been getting even harder to see.
It’s also important to note that these recent market moves are the jockeying of giants in the health care business. OptumRx’s revenue in the most recent quarter exceeded $15 billion, booked while overseeing 252 million prescriptions. Express Scripts and CVS Caremark are even bigger, and together they account for 73 percent of prescriptions in 2015, according to a report by the Drug Channels Institute. The top six including Prime Therapeutics manage 96 percent of prescriptions.
These companies, called PBMs, grew awfully large serving as classic middlemen, helping employers and insurance plans keep down the cost of medications. The easiest way to cut costs, although it’s getting to be more of a challenge, is getting patients to take generic drugs rather than the far-more-expensive branded equivalent.
The PBMs also negotiate discounts from drug companies and retailers, operate mail-order pharmacies and keep close tabs on the availability and effectiveness of cheaper medication options.
That’s what these companies do, but how they get paid for it isn’t as easy to understand. One market analyst agreed to talk about PBMs this week only without being named, and his tutorial began by walking through a chart of the drug distribution pipeline created earlier this year by USA Today and Kaiser Health News.
At the top of this complicated chart for a typical drug was the “average wholesale price,” or AWP. As Kaiser pointed out, however, AWP informally stands for “Ain’t What’s Paid.” By the time this $250 drug got through the channel, the pharmacies got $14, a drug wholesaler took $2.50 and the insurers and the pharmacy benefit manager split $62.50 in rebates.
One of the big problems in health care, of course, is never quite knowing exactly what something we need really should cost. There isn’t anything about this process of moving drugs through the distribution system that makes figuring that out any easier.
There sure seem to be efficiency gains to be made by bringing all of this under one economic umbrella, of course. But without going through a formal merger (and often even after) it can be difficult to find the costs to eliminate.
It does make some sense to see health insurers and pharmacy benefit managers on the same side of the table, a big reason why UnitedHealth acquired the big Catamaran pharmacy benefit business in the summer of 2015. In trade journals it’s more or less reported as fact that OptumRx has an edge on competitors in data analysis and technology, keeping an eye on the overall cost of the patient, from office visits to lab results to the cheapest effective medications.
CVS we think of as a drugstore chain, particularly after it acquired the pharmacies out of Target Corp. stores. Bear in mind, though, that it’s now called CVS Health and its vision is far more ambitious than operating drugstores.
The trajectory of its growth dramatically changed with its acquisition of the pharmacy benefit manager Caremark nearly 10 years ago. Now services are a far bigger part of the company than retail sales.
It’s no surprise that Walgreens Boots Alliance is often rumored to be mulling the acquisition of Express Scripts Holding, the largest pharmacy benefit manager and still independently owned. Walgreens is also still trying to complete a deal to buy Rite Aid, which itself has a smaller PBM.
Walgreens’ CEO since 2015, the Italian dealmaker Stefano Pessina, has been direct about the consolidation he thinks needs to happen in the industry.
“I couldn’t have been clearer since the very beginning,” he said, on an investor conference call earlier this year. “I have seen this market and I am really convinced that vertical integration is a necessity.”