Charting the course that has led to payer vertical integration and what it may mean for pharma manufacturers.
With the emerging and now well-chronicled shift in healthcare from one based on rewarding volume of services to one focused on the value of services provided, the pharmaceutical industry is searching for varying methods and formulas it can leverage to best adapt to the changes. One solution many are finding is vertical integration, which is built on the premise that in order to win in the value marketplace, a player needs to offer comprehensive services, have comprehensive data, and exert comprehensive control in the market.
Vertical integration has been increasing in the hospital system/provider space over the last several years. According to a recent physician survey conducted by the American Medical Association, 2016 marked the first year that less than 50% (47.1%) of practicing physicians owned their own clinical practice.1 The need for greater alignment, less variation, improved outcomes, risk diversification, and cost containment were clear driving factors.
Larger health systems create even more leverage and higher pricing. As a counterweight, payers are integrating as well. There has been a flurry of acquisitions recently, notably CVS announcing the purchase of Aetna and Cigna’s acquisition of Express Scripts-which itself recently purchased medical management company eviCore. Not all integration has been via acquisition. Anthem’s decision to break with Express Scripts and go its own way in the pharmacy benefit manager (PBM) space with the creation of IngenioRx represents another significant move in vertical integration.
The drivers for payers seeking to integrate are not all that different from those driving systems and providers. Payers are looking to expand business, diversify risk, have greater insight/control on both sides of the business (pharmacy and medical), and reduce costs while improving patient care.
For payers seeking to manage the total cost of care, drug management is a natural place to focus. When used appropriately, drugs can reduce medical complications and enhance patient health; uncontrolled drug use raises costs and can potentially cause harm. The increasing focus on drug costs, particularly specialty drugs, also motivates payers to be seen as part of the solution in order to stay relevant and competitive.
The challenge for payers is knowing what the true value of a medication is in the overall cost of care. The ongoing shift from volume to value has given rise to an increasing number and utilization of value tools to assess what value pharmaceuticals bring to the market. Each of these frameworks assess value differently and are intended for different uses and audiences. What is clear is that payers are increasingly accessing these tools as an input in their review of drugs.2,3 The Institute for Clinical and Economic Review (ICER), in an announcement last June, has even been tapped by the Department of Veterans Affairs (VA) to have ICER’s cost-effectiveness assessments used in the VA’s formulary decision-making.
What can we expect once the dust settles and the landscape shifts to predominantly integrated players? The purchase of Aetna by CVS will expand medical care access in clinics by potentially bringing direct patient care to thousands of retail CVS stores throughout the country. These community-based sites of care are intended to reduce patient cost. An expanded community-based care site footprint could also mean expanded sites of care for infusions and a resultant shift away from higher-cost hospital outpatient facilities.
These and other advantages will make CVS a leader in pharmacy/clinic access, pharmacy benefit services, and health plan benefits. Cigna’s purchase of Express Scripts would allow better, more efficient management of patients’ medical and pharmacy histories to reduce costs and improve patient outcomes.
If these acquisitions are approved by the Federal Trade Commission (FTC), the traditional carve-out PBM will become increasingly scarce. Anthem’s IngenioRx seemingly embraces a PBM model focused more on total cost of care and avoiding medical spend versus the more drug-focused, rebate-centric model that PBMs serving Anthem followed in the past.
What does this all mean for pharmaceutical manufacturers? At a minimum, the realignment brings an obvious increase in the leverage these powerhouses have in drug pricing negotiations. The sheer size of covered lives in these organizations will put significant pressure on manufacturers to propose rebate deals and contracting strategies above what is seen today. The combined data-gathering and -reporting resources may also make unique contracting opportunities available. The greatest change, however, will be entities with a myopic focus on either the pharmacy benefit or medical benefit disappearing in favor of organizations whose goal is to reduce the total cost of care. For manufacturers, that means presenting value propositions that take into account how the drug impacts all the costs-medical and pharmacy-related to treating the condition.
What will these integrated payers be seeking from manufacturers? Chiefly, a trifecta of information: the drug’s impact on pharmaceutical costs (its own and utilization of other drugs), how the drug impacts medical costs including procedures or utilization avoided, and the impact on total patient health. Telling this story will require manufacturers to use tools both old and new. Manufacturers will need to be prepared with robust budget impact modeling by segment
(commercial, Medicare, and Medicaid) that takes into account impact on total cost of care. Pharma organizations need to develop partnership strategies that are more aligned to the capabilities and information these combined entities find meaningful. Large integrated payers may seem similar to each other on the surface, but each will have its own ideas and strategies on how to reduce cost of care as well as differentiate in the market.
A manufacturer that can develop strategies to align with these payers’ primary objectives will have an advantage. For CVS/Aetna, a value partnership that furthers the entity’s clinic expansion goals may resonate. For Anthem, aiding in showcasing the value of its PBM integration may be key. Account understanding and segmentation will be just as important in the new world as in the old. For manufacturers of medical benefit products, there will likely be an increase in traditional PBM tactics being applied to the medical drug management.
As claims processing systems become more aligned and integrated, there will be greater data collection and real-time management of medical drug claims. Pharma will need to have a good understanding of the claims processing and utilization management process. The ability of manufacturers to understand the process and the criteria requirements will help in negotiating proper coverage based on product labeling and clinical data. Most importantly, manufacturers must be prepared to show a payer value proposition that tells a complete story in cost, healthcare utilization, and patient outcome across the episode of care.
The US healthcare landscape is changing rapidly to meet the challenges of an aging population and growing costs. Stakeholders all along the continuum are looking to address risk, cost, and outcomes. Multiple levers to address these issues are being used by the industry from value assessments to acquisitions and integration. The result will ideally be a different healthcare marketplace with increased focus on value, additional resources, and a priority on outcomes that reduce total cost of care. As payers and providers shift their mindset, so too must the pharmaceutical industry.
Kellie Rademacher is Vice President, Payer Access Solutions at Precision for Value. Jeremy Schafer is Senior Vice President, Payer Access Solutions at Precision for Value.
1. Kane, Carol K. Updated data on physician practice arrangements: physician ownership drops below 50%. AMA Economic and Health Policy Research. May 2017. https://www.ama-assn.org/about/physician-practice-benchmark-survey
2. Schafer JA, Galante D, Shafrin J. Value tools in managed care decision-making: current hurdles and future opportunities. J Manag Care Spec Pharm. 2017;23(6-a):S21-S27.
3. Schafer JA, Rademacher K, Serluco J. The rising use of oncology value tools by payers. J Clin Pathways. Aug. 2, 2016. https://www.journalofclinicalpathways.com/article/rising-use-oncology-value-tools-payers