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The rise of vertical integration in the US payer landscape

Is it a solution to addressing the challenges of the value-based marketplace?

healthcare

The rise of focusing on value in healthcare has necessitated changes in the managed care model, adding more focus on total cost of care and patient health. Payers and pharmacy benefit managers (PBMs) have responded by vertically integrating, which increases their capabilities, data set and population size to diversify risk. But how can manufacturers respond to these new customers?

PBM within a payer: Anthem

In October 2017, Anthem sent a shockwave through the PBM-health plan landscape by announcing the end of its relationship with Express Scripts and the formation of a new in-house PBM, IngenioRx. IngenioRx will be supported by CVS Caremark for five years in the areas of claims processing and prescription fulfillment, but the core point of control, formulary decision making, will be housed within Anthem.

How organisational outlook and goals may change

The primary differences in the interaction between Anthem and its new PBM will be full transparency and goal alignment. A common friction in the carved out PBM-health plan relationship has always been that the organisations are distinct and have different goals. As a result, aligning on goals can be challenging, especially if higher utilisation of specific drugs benefits one firm but not the other. Such goal misalignment can be exacerbated by a lack of transparency, which creates mistrust.

With IngenioRx, Anthem’s PBM should be fully aligned with the broader organisation’s goals. In addition, the ownership arrangement means that full transparency should be the norm, resulting in IngenioRx thinking and acting differently than a traditional PBM. First, IngenioRx will need to consider how drug management decisions impact cost on the medical benefit. Second, it will operate knowing that Anthem health plans will likely have full view of PBM strategy and contracts. Third, IngenioRx’s goals may differ from those of typical carve-out PBMs. They may focus primarily on lowering total cost of care and maximising low net cost drug utilisation (eg, generics) rather than driving rebate and owned-channel volume. Finally, IngenioRx will benefit from access to larger data sets, including medical claims, allowing more advanced analyses and decision-making.

The manufacturer approach

A manufacturer working with a PBM owned by the parent health plan should expect that any negotiated deal will be visible to the health plan(s). In addition, the focus on total cost of care is a key consideration. The manufacturer should approach the new organisation with a story on how a drug impacts the total cost of care, including any medical cost offsets. The manufacturer may consider integrated contracting strategies with the new entity. Since the PBM is likely to have access to medical claims, outcomes contracts that rely on diagnoses or medical events are now possible and may be valued by the PBM-health plan as a key differentiator.

PBM-national health plan mergers: CVS/Aetna, Cigna/ESI

Almost a decade ago Aetna entered into a ten-year strategic agreement with CVS Health for PBM services, similar to CVS’s current arrangement with IngenioRx. Since that time the two companies have intertwined their infrastructures to create a broad PBM offering. Should the proposed acquisition be successful it would further align their strategic and financial goals, allowing CVS/Aetna to create a comprehensive consumer offering that “fills an unmet need in the current healthcare system and presents a unique opportunity to redefine access to high‐quality care in lower-cost, local settings - whether in the community, at home, or through digital tools”.

Cigna’s recent announcement that it plans to acquire Express Scripts (ESI) was largely viewed as necessary to remain relevant. During a CNBC interview Cigna CEO David Cordani emphasised this acquisition would “[improve] affordability and personalization for customers and clients, and [drive] more choice, great alignment with healthcare professionals, and more value for everybody”.

How organisational outlook and goals may change

Both CVS and Cigna have been limited on the details of what their vertical integrations will mean when it comes to new offerings. However, what is clear is that they both are focused on value for the consumer, driven by local and personalised interactions. As CVS and Cigna face the looming entry of Amazon, Berkshire and JP Morgan into the healthcare space, their business models will come under continued pressure. They will need to innovate or become obsolete. Both mergers will create renewed focus on total cost of care, particularly for the PBM arms of each new entity. CVS and ESI will both benefit from reliable access to medical claims and medical benefit management opportunities. For CVS/Aetna, there has been discussion around alternative sites of care. Utilisation of offerings such as CVS’s retail pharmacies and healthcare clinics will likely be a component of the overall organisation’s goals for reducing cost of care and also growing revenue.

The manufacturer approach

Manufacturers can expect new opportunities as well as threats in vertical integration. The combined medical/pharmacy data sets mean a possibility of more options in value-based contracting. For CVS/Aetna, which will use its retail locations as a differentiator, manufacturers should explore innovative partnership opportunities with these retail entities. The broad approach from manufacturers should focus on total cost of care as both new organisations will have medical and pharmacy costs to consider.

PBM-medical management company merger: ESI/eviCore Healthcare

A traditional PBM, ESI announced it was purchasing eviCore Healthcare, a privately held company offering health plans and other risk-bearing, evidence-based medical benefit management solutions, including oncology management, for $3.6bn. The transaction closed on 15 December 2017. The acquisition signaled ESI leadership’s commitment to expanding beyond traditional pharmacy services and into the medical management space. This move supports more effective competition with the likes of Anthem/AIM Specialty Health, CVS/Caremark, and Magellan Rx Management.

How organisational outlook and goals may change

The goals for these and other similarly integrated companies are to provide managed care customers cost savings while striving for improved quality outcomes for clients and members.

As mentioned, organisational outlook is often different based on orientation and business models. In this example, we have a complementary integration of services with a PBM with its own integrated specialty pharmacy (Accredo) and a medical benefit management company with existing client relationships with health plan customers. These customer relationships often include vertically integrated PBMs and specialty pharmacies in competition with each other, possibly hindering growth opportunities.

ESI will be looking to accomplish several things. It will want to expand uptake of eviCore medical management decision support services to existing managed care and employer customers. In addition, it will look to expand ESI PBM services to existing eviCore customers. ESI may also develop more aggressive medical management services that help manage customer costs while driving additional volume to Accredo.

The manufacturer approach

It is imperative for effective account management to understand the interrelationship among the PBM, medical management capabilities, specialty pharmacy integration, and health plan customers. Manufacturers may want to consider:

  • Mapping out an integrated, multidisciplinary approach to this new organisation, as well as segmenting the potential customer impact of the combined Cigna/ESI/eviCore organisation
  • Developing relationships with the business teams, as well as with the medical directors, within the medical management arm of the new organisation
  • Exploring opportunities for total cost of care, or site of care, pilots for medical benefit drugs
  • Engaging in a decision support partnership that prioritises the generation of long-term real-world evidence.

Conclusion

The larger mergers may be pending federal approval but the direction of the market is clear:  vertical integration is seen as a solution to addressing the challenges of the value-based marketplace. Manufacturers should consider how customer goals will change as a result and ensure they have a value story that resonates in the new marketplace.

Jeremy Schafer is senior VP at Precision for Value, and Janet Serluco and Joseph Honcz are both VPs, payer access solutions at Precision for Value

11th July 2018

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