Verticals gonna vertical
As we wrote last week, the recent dust-up between CVS’s pharmacy benefit management (PBM) subsidiary Caremark and Walmart, during which the retail giant threatened to sever its relationship with CVS over a dispute regarding reimbursement levels before finally coming to a settlement, is a harbinger of things to come as the healthcare landscape becomes dominated by massive, vertically-integrated competitors.
A new investigative piece from The Columbus Dispatch this week seems to confirm this view. Examining previously-undisclosed data about CVS’s drug plan pricing practices as part of Ohio’s Medicaid program, the article reveals that CVS paid its own retail pharmacies much higher reimbursement rates than it offered to key competitors Walmart and Kroger to provide generic drugs to Medicaid beneficiaries. According to the article, CVS would have had to pay Walmart pharmacies 46 percent more, and Kroger pharmacies 25 percent more, to match the levels of reimbursement it paid its own retail pharmacies, data that are cited in a state report on the Medicaid pharmacy program that CVS is engaged in a court battle to keep secret. The reimbursement differential is “startling information”, according to a former Justice Department antitrust official quoted in the article. A spokesman for CVS maintained that the PBM’s payment rates are “competitive” and influenced by a complex range of factors. Underscoring the opaque and complicated methodology drug plans use to determine payments to retail pharmacies, independent pharmacy operators were paid more than CVS stores, as were Walgreens stores. A separate analysis of PBM pricing behavior in New York uncovered similar evidence, according to Bloomberg.
The Ohio and New York pharmacy stories are yet more evidence that, as healthcare companies continue to expand their control over greater segments of the “value chain”—combining, for example, insurance, distribution, and care delivery—they are able to flex their market power in ways that look increasingly anti-competitive. Hospitals that “own” their referral sources, insurers that “own” the delivery of care, and pharmacies that “own” drug benefit managers all edge closer to creating closed, proprietary platforms that can lock out competitors in any one segment.
That’s a feature, not a bug—indeed, much of the logic of population health is predicated on “network integrity”: keeping consumers inside a fully-controlled ecosystem of care to enable better coordination and reduce duplication and inefficiencies. Yet as giant healthcare corporations turn themselves into Amazon-style “everything stores”, we need to keep a watchful eye on competition.
Red flags to watch for: using the courts to maintain secret agreements or block the free flow of talent or information, “vertical tying” behavior that requires all-or-nothing contracting, and pricing strategies that leverage market power in one segment to raise prices in another.
The biggest flaw in using “market competition” to lower the cost of care: most companies hate actually competing in the marketplace—a problem made even more vexing by vertical integration.