Monday, May 04, 2020

Insurers + PBMs + Specialty Pharmacies + Providers: Will Vertical Consolidation Disrupt Drug Channels in 2020? (rerun)

This week, I’m rerunning some popular posts while I prepare for this Friday’s video webinar: Industry Update and COVID-19 Impact: PBMs & Payers.

Life was very different when I originally published today’s article. 2020 is not turning out to be quite what any of us expected. However, the pandemic has exposed some intriguing pros and cons of vertical consolidation. Click here to see the original post and comments from December 2019.

The largest insurers, PBMs, and specialty pharmacies have now combined into vertically-integrated organizations. As I explain below, these companies have also been rapidly integrating with healthcare providers.

I also provide an updated look at these companies and highlight strategies that they are using—or could use—to control the channel. I believe that these insurer / PBM / specialty pharmacy / provider organizations are poised to restructure U.S. drug channels by exerting greater control over patient access, sites of care/dispensing, and pricing.

If they can effectively coordinate their sprawling business operations, they will pose a substantial threat of disruption to the existing commercial strategies of pharma companies.

Will they succeed by better managing care and costs, or merely by extracting higher profits from our convoluted system?


The chart below provides an updated illustration of the major vertical business relationships among the largest companies:
  • UnitedHealth Group (UHG)
  • CVS Health
  • Cigna
  • Anthem
  • Humana
  • Prime Therapeutics
[Click to Enlarge]

What’s notable is how quickly these organizations have added provider services that deliver medical care to patients. Examples include:
  • Primary care and medical groups: Partners in Primary Care (Humana); HealthHUB (CVS Health); OptumCare Medical Group (UHG); CareMore Medical (Anthem); Family Physicians Group (Humana)
  • Ambulatory care and clinics: HealthHub / Minute Clinic (CVS Health); MedExpress / Surgical Care Associates (UHG); Conviva (Humana)
  • Hospice care: Aspire Health (Anthem)
  • Home health: Kindred (Humana)
Note that they have also avoided acquiring hospitals and health systems, which are administratively bloated and have overpriced care platforms.

These organizations are reaching critical mass. For instance, UnitedHealth Group recently disclosed that 46,000 physicians are either employed or contracted by its Optum businesses. That amounts to about 5% of the roughly 1 million professionally active physicians in the U.S. The company has added 10,000 physicians over the past year, due primarily to the acquisition of DaVita Medical Group.

Consider this map of OptumCare’s U.S. presence, which appears on its website:

[Click to Enlarge]

Josh Raskin at Nephron Research has astutely noted the financial incentives for these vertical integration transactions. Healthcare services are not restricted by risk-based capital requirements or profitability regulations that insurance companies face. Consequently, integration into pharmacy and provider services can allow the companies to retain a greater share of revenues. For better or worse, this is a consequence of our for-profit U.S. healthcare system.

Note that Cigna partners with providers via its Cigna Collaborative Care program, which are accountable care organizations (ACOs) with primary care physicians. However, Cigna does not directly own healthcare providers.

The chart above excludes retail companies that are not (as of now) part of larger organizations with insurers. Examples include: 1) Walmart, which operates retail clinics and has opened its first Walmart Health center, and 2) Walgreens, which partners with health systems that own and operate retail clinics within Walgreens retail locations. Walgreens is also experimenting with Humana’s Partners in Primary Care and with OptumHealth’s MedExpress for its in-store clinics. See A Tale of Two Chains: Walgreens Exits Pharmacy Clinics While CVS Reinvents In-Store Care.


Vertical integration enables insurers to gain greater control of downstream pharmacy and provider assets. Consequently, insurers could more effectively implement site of care and formulary management strategies.

Consider the following five implications for drug channels:

1) Control over pharmacy care and dispensing.

Physicians who are employed by the insurer can be mandated to send patients to the specialty pharmacies and providers owned by the vertically integrated organizations. Steering prescriptions and referrals to in-house medical care has become common among hospitals. See The Hidden System That Explains How Your Doctor Makes Referrals from The Wall Street Journal.

Today, health plans typically require a patient to use the specialty pharmacy that the plan or PBM owns and operates. That’s why a handful of companies dominate specialty drug dispensing channels, per our list of the top 15 specialty pharmacies. Enforcing this behavior can be harder when the physician and pharmacy are part of different organizations. For instance, the prescribing physician may not be aware of a payers’ pharmacy network design until after a patient leaves the office. Alternatively, a smaller independent pharmacy can break into a payer’s network by developing relationships with providers. Control over prescribers helps an insurer better direct dispensing activity.

2) Prescribers’ formulary compliance.

Physicians can be rewarded based on compliance with the PBM’s preferred formulary. This compliance can be especially important for medical benefit drugs, for which administering utilization management programs has typically been much more difficult.

3) Transparency to coverage and out-of-pocket costs.

Keep an eye on such innovations as Optum’s PreCheckMyScript and Express Scripts’ ScriptVision. These tools let physicians see a patient’s coverage and out-of-pocket costs before writing a prescription. Such technologies are designed to be implemented throughout a network—but are probably more effective and more highly utilized within a set of interconnected businesses.

4) Buy-and-bill utilization management.

Ownership of clinics enables much greater control over provider-administered drugs—including opportunities to tighten utilization management, negotiate greater rebates from manufacturers, and drive greater biosimilar adoption. For example, Optum’s MedExpress clinics currently offer infusion therapy in select Florida and Indiana locations for people with UnitedHealthcare or Humana insurance.

Provider-administered drugs have experienced a substantial shift from community physician practices to hospital outpatient facilities. This has occurred both in the Medicare Part B program and at commercial health plans. These trends are driven by vertical integration between hospitals and physician practices. See Section 6.3.1. of our 2019–20 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

However, hospitals can generate more revenue and profit from drug administration than can independent physician-owned facilities. This significantly raises the drug costs that payers face. See Still Possible: Hospitals Overcharge Health Plans for Specialty Drugs.

Consequently, commercial health plans try to move infusions to lower-cost sites of care. This is typically achieved with utilization management strategies that guide patients to lower-cost and/or better-performing sites of care. But employed physicians and in-house clinics make site-of-care management much easier.

5) Buy-and-bill channel management.

A physician office or clinic that is owned by a vertically integrated organization can be required to obtain provider-administered specialty pharmaceuticals from the company’s own specialty pharmacy. This practice is called white bagging. It has displaced buy-and-bill for a significant share of provider-administered drugs in commercial health plans. By owning the infusion site, the insurer bypasses the challenge of getting hospitals to accept white bagging. See Section 6.3.2. of our 2019–20 distribution report for more on white bagging trends.

In CVS, Express Scripts, and the Evolution of the PBM Business Model, I highlighted how PBMs’ profits will evolve. That analysis remains relevant, but this post’s deeper focus on vertically integrated organizations highlights new opportunities and threats for manufacturers.


In graduate school, I learned an important lesson: In theory, theory and practice are the same. In practice, they are different.

The ideas and scenarios I’ve outlined may not come to pass. Just because these companies own a large set of disparate healthcare assets doesn’t mean that the companies are truly integrated and coordinated. For now, their strategies have focused on non-drug healthcare services, because that’s where most of the money is spent.

Many employers are also skeptical about whether the savings will flow back to payers. According to a new J.P. Morgan survey, half of top human resources executives don't believe that integrating medical and drug benefits will drive overall healthcare savings. Here are two notable quotes:

  • "There's too much money to be made. They're not offering integrated services to give up revenue."
  • "More ways to hide money."


What’s more, vertical integration in healthcare has a mixed track record. For example, hospitals have been rapidly acquiring physician practices. They purportedly seek to provide integrated, comprehensive care for patients with complex, chronic conditions. Hospitals may also want to engage in risk-based contracting with third-party payers, which is easier to price and manage when physicians are employees.

However, independent studies typically find little evidence that physician-hospital integration has improved the quality of care or reduced costs. (source) Evidence instead suggests that hospitals’ absorption of physician practices has resulted in higher hospital prices for commercial payers. (source) Hospital employment of physicians also is associated with lower physician productivity and higher operating costs among the physician practices.

There may also be significant anticompetitive concerns about this ongoing vertical consolidation. Craig Garthwaite, a professor at Northwestern University’s Kellogg School of Management, outlined potential antitrust issues in his June 2019 Congressional testimony.


Disruption of U.S. healthcare is unlikely to come from Amazon or venture-backed technology companies. They will be lucky to pick off a few pieces of healthcare delivery. And Medicare-for-All is a pipe dream that will never come true.

Instead, I believe 2020 will be the year in which the pharma industry and patients start to feel the effects of these vertical consolidations. Will you be ready?

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