By Thomas Borzilleri, Founder & CEO of InteliSys Health
November 2017 – The rumored $66 billion merger of retail pharmacy CVS and health insurer Aetna holds strong potential to inflict financial pain on American patients by artificially inflating prescription drug prices while reducing transparency and competition.
The Aetna-CVS deal is the latest in an ongoing trend that has seen health insurers seek to bring pharmacy benefit management (PBM) in-house. PBMs act as the middleman between drug manufacturers and payers, such as private health insurers and Medicare. With preferred formularies and exclusion lists, PBMs dictate which drugs consumers can receive from their health plans without being charged additional out-of-pocket fees. PBMs also leverage access to their formularies, and threats of exclusion, to negotiate rebates and discounts from drug manufacturers. PBMs generate the majority of their profits in two ways: the “ingredient spread” – the chasm between what a drug costs to manufacture and what they sell it for—and per-transaction fees.
Other examples of health insurers seeking to obtain more control over the PBM function include Anthem’s recently announced plan to launch its own PBM with CVS. Anthem took this step after a much-publicized falling out with its previous PBM partner, Express Scripts, which Anthem accused of overcharging on prescription drugs. Similarly, UnitedHealth Group got in on the PBM game via the 2015 acquisition of PBM Catamaran by its subsidiary OptumRx for $12.8 billion.
It’s no secret why these companies – or anyone – would want to claim a larger share of the prescription drug market – it’s a market that’s huge and growing. U.S. spending on prescription drugs in 2016 increased by 5.8 percent over the prior year to $450 billion based on list prices, and is expected to grow between 6 and 9 percent annually through 2021, according to research by the QuintilesIMS Institute.
What is truly unique about the proposed CVS-Aetna transaction is that CVS would not only acquire a health insurer, but Aetna could establish a brick-and-mortar pharmacy network for members to exclusively access. What’s in it for CVS? It could essentially trim competitors from the entire pharmacy network that Aetna currently maintains and possibly incentivize members and doctors to have their prescriptions sent to CVS locations. This deal would allow CVS to better control profitability that it could potentially lose through the imminent emergence of competitors like Amazon and essentially steer Aetna members exclusively to CVS pharmacies for all prescription drug purchases.
The problem with this type of consolidation is that members of these insurance companies’ health plans will be given fewer prescription drug options and there will be a reduction in price transparency. By restricting members from utilizing competing pharmacy chains to fill prescriptions, a combined CVS-Aetna would reduce convenience for patients and potentially lead to higher prescription-drug costs. Cost efficiencies will, indeed, come into play, but it’s an open question as to where those savings will land – with CVS-Aetna shareholders or consumers/health plan members.
Health insurance companies have long complained that they have been disadvantaged from the lack of transparency regarding drug costs, so the advantage they realize by bringing the PBM function in-house is that they will either obtain savings or they will gain a new profit center that they didn’t have before. That’s good for them, but it probably isn’t so great for consumers, as the door is wide open for the new company to limit or dramatically reduce access and options for its members.
Additionally, the deal would be a boon to the retail side of CVS’ business. For example, why do you think that when you walk into any CVS store that the pharmacy is in the back of the store and not by the front door? It’s because the pharmacy itself generates very low margins and everything in the front of the store generates the majority of profits. So for CVS, the deal would enable it to acquire millions of customers who may currently shop or have their prescriptions filled at competitor pharmacies by simply excluding those competitors’ locations and requiring members to get covered prescription claims filled only in their stores.
Frustratingly, for patients and consumers, technology already exists to cut out the middlemen and offer vendor-neutral drug-price transparency and competition. The problem is that powerful, incumbent players in the healthcare industry would prefer to pad their profits rather than offer consumers better prices. As a result, these players are actively lobbying to obstruct the emergence and adoption of technologies that will disrupt or interfere with the status quo.
The best place for a technology intervention is at the point of care, to guide decisions by doctors on what to prescribe, provide transparency to patients, and make sure they are prescribed the lowest cost and most affordable therapy. By deploying technology that displays the lowest-priced selected or alternative drugs at nearby pharmacies, for example, a new player such as Amazon could leverage such technology to disrupt the prescription drug industry, bypassing PBMs that pad prices while also empowering consumers to easily and conveniently discover the lowest prices for their prescriptions.
A combined CVS-Aetna will likely spin the idea that costs will be lower and maybe they will for the new company, but in the absence of full-market access and true price transparency available to the consumer, this is uncharted waters and we should be very cautious as to what the outcome will be. What’s good for the bank accounts of CVS and Aetna shareholders may not be so beneficial for the rest of us.
About the Author
Tom Borzilleri is founder and CEO of InteliSys Health, and formerly the founder and CEO of Valore’ Rx, a pharmacy benefit management company. Mr. Borzilleri is a serial entrepreneur with 30 years of experience incubating and launching successful companies across a variety of industries.
The idea for InteliSys came to life after Mr. Borzilleri founded Valore’ Rx. He realized that the so-called prescription “discounts” his company was offering included way too much padding. It was good business for his PBM, but it was bad for patients, insurers, and an unsustainable healthcare cost structure. He vowed to develop a technology solution that would uncover and offer the lowest prices at the point of care for both patients and payers.
NOTE: The views expressed here are those of the author and do not necessarily represent or reflect the views of Gibson Consultants.