Mergers and Acquisitions Continue Without End: Will the Industry Get Vertigo From Vertical Integrations?

Horizontal Integrations Were the Hallmark of the 1980s, 1990s, and 2000s

Boardrooms love economies of scale.

Ideally, scale provides a reduction in the cost of producing the next unit of product or service while maintaining the ability to charge the same or a similar price for each unit. It also has another advantage: purchasing leverage. Many companies in the pharmacy space in the 1980s, 1990s, and 2000s were gobbled up to achieve these ends—pharmacies, wholesalers, pharmacy benefit managers, and even pharmaceutical manufacturers—adding diversification as an additional reason for active merger and acquisition activity, as their horizontal integrations were often related to offering new products.

Vertical Integrations Have Been the Hallmark of the 2010s

Yet at the turn of the century, and then into the 2010s, we started to see an altogether different type of integration, for fundamentally different reasons. Unlike horizonal integrations, which are principally about size, vertical integrations are about positioning in and sometimes manipulating the marketplace to gain an advantage through channeling and packaging distinct functions of the product or to serve the supply chain in a manner that cannot be done simply by getting bigger doing the same thing.

Recent Mergers Are Causing a Great Deal of Apprehension and Tension in Cigar Rooms

In the backrooms of the pharmacy industry, there has been a lot of whiteboarding over the past few years. Everyone is asking themselves, How do I maintain access to markets if my competitors are vertically integrating? How do I stay relevant? What if my competitor vertically integrates and now my customer is owned by my competitor? What if my supplier is now owned by my competitor?

We are at the peak of the age of frenemies in pharmacy. It is a geometric impossibility to both horizontally and vertically integrate without major tension and uncertainty in the transition. Partners become competitors, and competitors become strategic friends. If there are only a small number of companies providing the pieces, such as pharmacies, pharmacy benefit managers, specialty pharmacies, and wholesalers, then the marketplace quickly starts to look like college football and conference realignment, and no one wants to be left without a seat.

The Medical Benefit and Its Services: The Final Frontier

With health reform came population management and accountability transfer from plans to providers. The 2 key ingredients to population management are the ability to touch the population frequently and the ability to move clinical measures and channel patients to the most cost-effective provider of care, at the appropriate level of care.

Not too many years ago, those whiteboards lit up with eureka moments. “We need to remove the wall between the pharmacy benefit and the medical benefit. Health reform cannot be done effectively without active alignment and participation of pharmacy.” So, then it became a question of who is taking over whom. Will the pharmacy world be a dominant influencer of the medical world, or will the reverse be true?

All the major insurers will soon have a major stake in both the financing and provision of pharmacy products and services. Or, put another way, all the major players in pharmacy will now run the medical benefit. Which will hold? It is hard to tell. UnitedHealthcare is set to become the largest employer of physicians in the country and perhaps the world. CVS Health’s net income dwarfs Aetna’s. With every passing day, insurance and pharmacy interests are buying, pulling, or partnering strategically with medical and hospital services, as well as ancillary service providers. We are watching an epic battle play out in front of us, with payers becoming providers and providers becoming payers, all because that adversarial relationship, meant to keep one another in check, never bore the affordability fruits of a well-functioning marketplace for which policy pundits had hoped. Instead, the relationships only served to increase total health care spend to the benefit of both.

What Will Be the Role of Manufacturers?

Nearly lost in all this activity are the pharmaceutical manufacturers, which for both regulatory and structural reasons do not get to participate in vertical integrations. Or will they? Much like ignoring the filibuster in the Senate, once the veil is pierced, it will be tough to hold back the water now that that dam has sprung a leak. A group of now 7 major hospital systems have joined to launch a nonprofit generic manufacturer focused initially on drugs of high need that are susceptible to shortages. Is Pharmaceutical Research and Manufacturers of America looking at that and saying, “If they can get into manufacturing, why can’t we get into providing care and insurance?”

Where Will It All Land? It Is Hard to Say, but One Change Is Certain

Nobody can say with an honest smile that they know where this will all land, but the pressures continue to build as employers get increasingly frustrated, Medicaid and Medicare are questioned, the national debt nears $20 trillion (that is 20 million millions, by the way), and patients (voters) consistently rank health care as their No. 1 concern, which is saying something with everything else that is going on in the world. Change will come, but what it looks like is anyone’s guess. Yet one change is certain. Pharmacy will not be operating in a silo anymore.

Troy Trygstad, PharmD, PhD, MBA, is vice president of pharmacy programs for Community Care of North Carolina, which works collaboratively with more than 1800 medical practices to serve over 1.6 million Medicaid, Medicare, commercially insured, and uninsured patients. He received his PharmD and MBA degrees from Drake University in Des Moines, Iowa, and a PhD in pharmaceutical outcomes and policy from the University of North Carolina at Chapel Hill. He also serves on the board of directors for the American Pharmacists Association Foundation and the Pharmacy Quality Alliance.