Health Reform and Consolidation Are Bifurcating the Pharmacy Product and Service Marketplace

The term bellwether comes from an ageold practice in sheepherding of putting a bell on the sheep that leads the flock. Bellwethers are also looked to as a prediction of a future state or set of events. Bellwethers in the stock market are viewed as companies that are indicators of how the market is trending or doing as a whole.

Actions by 2 bellwethers in the health care space have caught my attention recently. They come from 2 different sectors, but are being driven by the same fundamental changes that are now pervasive and perhaps irreversible: health reform and consolidation. We are now entering a phase of health reform that focuses on payment reform that is meant to align health care financing and incentives with value in an “outcomes marketplace” through increasing gradations of imposing risk and reward on providers of care. And, although the current cycle of consolidation in retail pharmacy chains, pharmaceutical manufacturers, pharmacy benefit managers (PBMs), payers, and integrated delivery networks all predate health reform, the value-seeking policies and frameworks that the Affordable Care Act (ACA) set out have no doubt accelerated consolidation across the entire health care system. Time will tell if the ACA achieves its intended ends, but it is most certainly causing the systems’ participants to reevaluate their sustainability and growth strategies.

BELLWETHER #1: GROUP HEALTH COOPERATIVE OF PUGET SOUND

Group Health has been a stalwart of the integrated model of health care delivery and financing, pioneering the notion of up-front monthly premium payments directly to provider groups to deliver whatever care is needed for patients—in institutional settings and community care settings. Since 1947, Group Health has been a standard bearer for delivering high-quality care and managing utilization and cost through prevention, wellness, effective primary care delivery, and efficient and effective use of specialty care to its members. Rather uniquely, Group Health is run by its members (the patients literally determine board members) and driven by its emphasis on managing cost and utilization through achieving better health, rather than solely focusing on restricting access.

The Group Health model was certainly in the minds of many of the framers of the ACA, with respect to ideas and policy frameworks around accountable care. It was viewed by many in policy circles as the darling, in-theflesh example of the triple aim (better care à better health à lower cost (higher value),¹ and has an entire research portfolio with a foci to measure and achieve these ends.² Geisinger and Intermountain Healthcare, as well as the Kaiser Permanente Networks, would be similarly postured organizations that would fashion themselves as truly “integrated delivery networks.” All 4 of these organizations would say that their primary expression of value is attained through high-quality care that produces better outcomes.

Because of Group Health’s historic success in achieving that aspect of value, it was all the more remarkable to see Group Health voting members (patients) recently approve what amounts to a dissolution of the cooperative and a transformation into a Kaiser Network. A March 12 article in The Seattle Times put it well: “The plan, announced in December, allows Kaiser, with annual revenues of $60 billion, to acquire Group Health, with $3.5 billion in annual income. Proponents of the proposal—which is backed by Group Health doctors and local union members—said the acquisition is necessary to ensure the future of the co-op in an era of growing hospital and health-system mergers.”³ Despite all of Group Health’s effectiveness, lore, and grassroots culture, Group Health was simply too small to compete in the new leverage-oriented marketplace.

BELLWETHER #2: EXPRESS SCRIPTS

Express Scripts is no stranger to understanding the importance and effectiveness of leverage to drive down cost and build a sustainable business in the 21st century economy. Express Scripts’ ESI is the largest PBM in the United States, with more than $100 billion in annual revenue and more than 85 million covered lives under management. Much of its success is owed to its sheer size and ability to impose incredible leverage on pharmaceutical manufacturers and pharmacies to drive down cost for purchasers of its contracting, formulary, and third-party administration services. The driving force behind its success is rather elementary—use its size to keep drug product and pharmacy reimbursement costs down, keeping a portion of those savings, and passing the rest of it along to its clients. Its primary expression of value is lower costs.

But, a fairly important, although perhaps initially mostly symbolic, “toe-in-the-water” move by Express Scripts may be a harbinger of what is to come in the PBM industry. Recently, it announced an initiative to partner with pharmacies to create networks that are more focused on delivering outcomes. “Right now, people don’t differentiate and don’t prefer retailers based on their quality, it’s usually just a cost equation,” said Dr. Steve Miller, Express Scripts chief medical officer. “We think this is going to be huge in the marketplace, because you’re going to be able to get millions of patients higher quality care and lower cost on diabetes.”⁴

Therein lies the challenge—how does the system manage cost through management of unit price (keeping manufacturers and providers honest—eg, price of specialty medications) as well as number of units (keeping patients healthy so they don’t need more units—eg, hospitalizations).

A VEXING DUALITY

Group Health’s limitation wasn’t its ability to improve health, it was its inability to negotiate lower rates of necessary out-of-network providers and compete in a conventional insurance marketplace. Express Scripts’ limitation is that, at some point, only so much cost savings can be squeezed from hammering pharmacies on reimbursement and eliminating overpriced drugs from formularies. At some point, money has to be saved by making the populous healthy through optimal use of drugs, to be relevant in an “outcomes marketplace.” The problem can be framed in this question:

What if the business models to achieve savings from keeping drug costs and pharmacy reimbursement down are fundamentally different from models to achieve savings from keeping patients healthy?

For patients who are relatively healthy and require relatively straightforward care (with little need for care coordination, highly skilled providers, or intensive and frequent access to customized care delivery), the principal manner in which to provide value is through affordable, readily accessible medications and uncomplicated, lower levels of health care.

For patients who have multiple chronic conditions, unique sets of needs for ancillary support, and diverse sets of needs requiring multiple types of providers (eg, a patient with 4 chronic conditions, including a behavioral health condition, ongoing pain management concerns, 10 emergency department visits, and 5 hospitalizations in the past year, who is living alone at home), the primary manner in which to achieve value is through more effective and coordinated care delivery and provision of patient supports.

MARKET BIFURCATION

This reality will lead to a market bifurcation across the health care system, which will be especially pronounced within the pharmacy sector over the next decade since medications are our primary modality in improving health and avoiding expensive events and poor clinical and economic outcomes in future time periods (Figure).

Patients who utilize more health care services (eg, magnetic resonance imaging, hospitalizations, specialized procedures and supports) and who have modifiable risk (ie, patients whose use of those services can be avoided if more effective and organized care and use of medications can be achieved) will become the focus of population health management efforts aimed at reducing utilization and costs in the short run. This is the complex care marketplace.

Patients who utilize fewer health care services (eg, a young woman with no chronic conditions who uses oral contraceptives and gets a flu vaccination every fall) represent little modifiable risk through avoiding hospitalizations and other unwanted events. These patients are at the core of population health management efforts to improve outcomes in the long run, rather than the short run, and become the focus of consumerism efforts to influence purchasing behavior through health savings accounts and incentives to seek out alternatives to more expensive pathways to achieving health maintenance and wellness. This is the convenience care marketplace.

WHAT DOES THIS MEAN FOR THE PRACTICE OF PHARMACY?

The fundamental drivers for health reform and consolidation are the same—our system of care provides low value. Health reform and payment reform were going to happen regardless of who has been or will be in the White House or Congress. We simply can no longer afford to spend such a high proportion of our gross domestic product on health care and be globally competitive. Health care spending trends were (and some believe still are to a large extent) completely unsustainable. Reasonable people can disagree about which health policies and frameworks should be implemented. But, regardless of the “how,” the “what” is universally accepted and understood: the system needs to become more efficient and provide more value to consumers, patients, employers, and taxpayers.

Pharmacists are likely to find themselves migrating to 1 of these 2 marketplaces over the next decade as market forces will require. Both general practice models (convenience care and complex care) are essential to the efficient and effective constructs of care, but they are distinctly different in target population, value proposition, and business requirements (Table), making it very difficult for any single pharmacy operation to serve both marketplaces simultaneously. Thus, we will see a natural and necessary bifurcation in the marketplace into businesses and practice models that serve one marketplace or the other.

And, it’s about time. The notion that all pharmacy practice should be of the same standard, with the same intensity of care, with the same application of pharmacist skill, is nonsensical. Our system needs us to meet various patients, payers, and other care team members where they are with their needs to express value. There should never be a one-size-fits-all pharmacy model because it will never fit “all.”

Troy Trygstad, PharmD, PhD, MBA, is vice president of Pharmacy Programs for Community Care of North Carolina (CCNC), which works collaboratively with more than 1800 medical practices to serve more than 1.6 million Medicaid, Medicare, commercially insured, and uninsured patients. He received his PharmD and MBA degrees from Drake University and a PhD in pharmaceutical outcomes and policy from the University of North Carolina.

References

• Berwick DM, Nolan TW, Whittington J. The triple aim: care, health, and cost. Health Aff (Millwood). 2008;27(3):759-769. doi: 10.1377/hlthaff.27.3.759.
• Group Health Research Institute website. grouphealthresearch.org/our-research/publications/. Accessed May 19, 2016.
• Group Health approves acquisition by Kaiser Permanente. The Seattle Times website. seattletimes.com/seattle-news/health/group-health-approves-acquisition-by-kaiser/. Accessed May 19, 2016.
• Express Scripts looks for retail partners to reduce diabetes costs. CNBC website. cnbc.com/2016/04/28/express-scripts-looks-for-retail-partners-to-reduce-diabetes-costs.html. Accessed May 19, 2016.