Category Archives: Pharmacy Benefits Management

United Healthcare: Anatomy of a Behemoth

Posted on by • Posted in Antitrust, Competition, Health Insurance Industry, Health Policy, Health System, Hospital, Hospital Industry, Market Consolidation, Market Power, Medical Loss Ratio (MLR), Optum Health, Optum Insight, Optum Rx, Pharmacy Benefits Management, Profit Model, Profit Motive, UnitedHealth Group, UnitedHealthcare, Value Proposition, Value-Based Healthcare, Vertical Integration • Leave a comment

medium.com/@tcoyote/united-healthcare-anatomy-of-a-behemoth-63dc5f1b485a

In the mid-1980’s, managed care advocate Dr. Paul Ellwood predicted that eventually, US healthcare would be dominated by perhaps a dozen vast national firms he called SuperMeds that would combine managed care based health insurance with care delivery systems. Ellwood was a leader of the “managed competition” movement which advocated for a private sector alternative to a federal government-run National Health Insurance system. Ellwood and colleagues believed that Kaiser Foundation Health Plans and other HMOs would be able to stabilize health costs and thus affordably extend care to the uninsured.

The US political system and market dynamics would not co-operate with Ellwood and his Jackson Hole Group’s vision. In the ensuing thirty-five years, healthcare has remained both highly fragmented and regional in focus. However, unbeknownst to most, during the past decade, as a result of a major merger and relentless smaller acquisitions, two SuperMeds were born- CVS/Aetna and UnitedHealth Group, that whose combined revenues comprise 14% of total US health spending.

CVS/Aetna is slightly larger than United, by dint of grocery sales in its drugstores and its vast Caremark pharmacy benefits management business. However, CVS’s Aetna health insurance arm is one third the size of United’s, and though CVS is rapidly scaling up its care delivery apparatus through its in-store Health Hubs, it remains is a tiny fraction of United’s care footprint. Despite being slightly smaller at the top line, United’s market capitalization is more than 3.5 times that of CVS.

United’s vast scope is difficult to comprehend because much of it is not visible to the naked eye, and the most rapidly growing businesses are partly nested inside United’s health insurance business.

United employs over 300 thousand people. At $287.6 billion total revenues in 2021, United exceeded 7% of total US health spending (though $8.3 billion are from overseas operations).

In 2021, United was $100 billion larger than the British National Health Service. It is more than three times the size of Kaiser Permanente, and five times the size of HCA, the nation’s largest hospital chain. United is both larger and richer than energy giant Exxon Mobil. United has over $70 billion in cash and investments, and is generating about $2 billion a month in operating cash flow.

Its highly regulated health insurance business is the visible tip of a rapidly growing iceberg. Revenue from United’s core health insurance business grew at 11% in 2021, compared to 14% growth in United’s diversified Optum subsidiary. Optum generated $155.6 billion in 2021 (of which 60% were from INSIDE United’s health insurance business). You can see the relationship of Optum’s three major businesses to United’s health insurance operations in Exhibit I.

Optum is the Key to United’s Growth

Understanding the role of Optum is key to understanding United’s business. It is remarkable how few of my veteran health care colleagues have any idea what Optum is or what it does. Optum was once a sort of dumping ground for assorted United acquisitions without a seeming core purpose. A private equity colleague once derided Optum as “The Island of Lost Toys”. Now, however, Optum is driving United’s growth, and generates billions of dollars in unregulated profits both from inside the highly regulated core health insurance business and from external customers.

Optum consists of three parts: Optum Health, its care delivery enterprise ($54 billion revenues in 2021), Optum Rx, its pharmacy benefits management enterprise ($91 billion revenues in 2021) and Optum Insight, a diversified business services enterprise ($12.2 billion in 2021). Virtually all of United’s acquisitions join one of these three businesses.

Optum Health: The Third Largest Care Delivery Enterprise in the US

By itself, Optum Health is almost the size of HCA ($54 billion in 2021 vs HCA’s $58.7 billion) and consists of a vast national portfolio of care delivery entities: large physician groups, urgent care centers, surgicenters, imaging centers, and now by dint of the recently announced $5.7 billion acquisition of LHC, home health agencies. Optum Health has studiously avoided acquiring beds of any kind: hospitals, nursing homes, etc. and likely will continue to do so. Optum Health’s physician groups not only generate profits on their own, but also provide powerful leverage for United to control health costs for its own subscribers, pushing down United’s highly visible and regulated Medical Loss Ratio (MLR), and increasing health plan profits.

Optum Health began in 2007 when United acquired Nevada-based Sierra Health, and thus became the new owner of a small multispecialty physician group which Sierra owned. The group did not belong in United’s health insurance business and came to rest over in Optum. Over the past twelve years, Optum Health has acquired an impressive percentage of the major capitated medical groups in the US- Texas’ WellMed, California’s HealthCare Partners (from DaVita), as well as Monarch, AppleCare and North American Medical Management, Massachusetts’ Reliant (formerly Fallon Clinic) and Atrius in Massachusetts (pending) , Kelsey Seybold Clinic (also pending) in Houston, TX and Everett Clinic and PolyClinic in Seattle.

Optum Health claims over 60 thousand physicians, though many of these are actually independent physicians participating in “wrap around” risk contracting networks. By comparison, Kaiser Permanente’s Medical Groups employ about 23 thousand physicians. United’s management claims that Optum Health provides continuing care to about 20 million patients, of whom 3 million are covered by some form of so-called “value based” contracts. Perhaps half of this smaller number are covered by capitated (percentage of premium-PMPM) contracts.

Optum Health straddles fierce competitive relationships between United’s health insurance business and competing health plans in well more than a dozen metropolitan areas. Almost half (44%) of Optum Health’s revenues come from providing care for health plans other than United.

When Optum acquires a large physician group, it acquires those groups’ contracts with United’s health insurance competitors, some of which contracts have been in place for decades. Premium revenues from other health plans, presumably capitation or per member per month (PMPM) revenues, are one-quarter of Optum Health’s $54 billion total revenues. These “external” premium revenues have quadrupled since 2018, largely for Medicare Advantage subscribers. Optum Health contributes about $4.5 billion in operating profit to United. It is impossible to determine from United’s disclosures how much of this profit comes from Optum Health’s services provided to United’s insured lives and how much from its medical groups’ extensive contracts with competing health plans.

Optum Health’s surgicenters and urgent care centers provide affordable alternatives to using expensive hospital outpatient services and emergency departments, potentially further reducing United medical expense. This creates obvious tensions with United’s hospital networks, since Optum Health can use its large medical practices and virtual care offerings to divert patients from hospitals to its own services, or else render those services unnecessary.

Though some observers have termed Optum/United’s business model “vertical integration”-ownership of the suppliers to and distributors of a firm’s product– Optum Health has actually grown less vertical since 2018, with revenues from competing health plans growing from 36% of total revenues in 2018 to 44% in 2021. A 2018 analysis by ReCon Strategy found at best a sketchy matchup between United’s health plan enrollment by market and its Optum Health assets (https://reconstrategy.com/2018/04/uniteds-medicare-advantage-footprint-and-optumcare-network-do-not-overlap-much-so-far/.

Optum Rx: The Nation’s Third Largest Pharmacy Benefits Management Business

Optum’s largest business in revenues is its Optum Rx pharmaceutical benefits management (PBM) business, which generates $91 billion in revenues, and processes over a billion pharmacy claims not only for United but also many competing insurers and employer groups. Pharmaceutical costs are a rapidly growing piece of total medical expenses, and controlling them is yet another source of largely unregulated profits for United; Optum Rx generated over $4.1 billion of operating profit in 2021.

Optum Rx is the nation’s third largest PBM business after Caremark, owned by CVS/Aetna and Express Scripts, owned by CIGNA, and processes about 21% of all scripts written in the US. Pharmacy benefits management firms developed more than two decades ago to speed the conversion of patients from expensive branded drugs to generics on behalf of insurers and self-funded employers. They were given a big boost by George Bush’s 2004 Medicare Part D Prescription Drug benefit, as a “pro-competitive” private sector alternative to Medicare directly negotiating prices with pharmaceutical firms.

Reducing drug spending is one key to United’s profitability. Since generics represent almost 90% of all prescriptions written, Optum Rx now relies on fees generated by processing prescriptions and on rebates from pharmaceutical firms to promote their costly branded drugs as preferred drugs on Optum Rx’s formularies. These rebates are determined based on “list” prices for those drugs vs. the contracted price for the PBMs, and are actual cash payments from manufacturers to PBMs.

Drug rebates represent a significant fraction of operating profits for health insurers that own PBMs, particularly for their older Medicare Advantage patients that use a lot of expensive drugs. Unfortunately, PBMs have incentives to inflate the list price, because rebates are caculated based on the spread between list prices and the contract pricel Unfortunately, this increases subscribers’ cash outlays, because patient cost shares are based on list prices.

Optum Rx generates about 39% of its revenues (and an undeterminable percentage of its profits) serving other health insurers and self-funded employers. Many of those self-funded employers demand that Optum pass through the rebates directly to them (even if it means being charged higher administrative fees!).

Unlike the situation with Optum Health, the “verticality” of Optum’s PBM business-the percentage of Optum revenues derived from serving United subscribers- has increased in the last seven years, to more than 60% of Optum Rx’s total business. What happens to the billions of dollars in rebates generated by Optum Rx is impossible to determine from United’s disclosures. However, our best guess is that pharmaceutical rebates represent as much as a quarter of United’s total corporate profits.

Optum Insight: “Intelligent” Business Solutions

The fastest growing and by far the most profitable Optum business is its business intelligence/business services/consulting subsidiary. Optum Insight was generated $12.2 billion in revenues in 2021, but a 27.9% operating margin, five times that of United’s health insurance business. Optum Insight is strategically vital to enhancing the profitability of United’s health insurance activities, but also generates outside revenues selling services to United’s health insurance competitors and hospital networks.

The core of Optum Insight is a business intelligence enterprise formerly known as Ingenix, which provided “big data” to United and other insurers about hospital and pricing behavior and utilization-crucial both for benefits design and administration. In 2009, Ingenix was accused by New York State of under reporting prices for out of network health services for itself and its clients, which had the effect of reducing its own medical reimbursements, and increasing patient cost shares. United signed a consent decree to alter Ingenix business practices and settled a raft of lawsuits filed on behalf of patients, physicians and employers. Its name was subsequently changed to Optum Insight.

By dint of aggressive acquisitions, Optum Insight has dramatically increased its medical claims management business, consulting services and business process outsourcing activities. . Most of United’s investment in artificial intelligence can be found inside Optum Insight. Big data plays a crucial role in United’s overall strategy. Optum Insight’s claims management software uses vast medical claims data bases and artificial intelligence/machine learning software to spot and deny medical claims for which documentation is inadequate or where services are either “inappropriate” or else not covered by an individual’s health plan. Providers also claim that the same software rejects as many as 20% of their claims, often for problems as tiny as a mis-spelled word or a missing data field.

Optum Insight software plays a crucial role in helping United’s health insurance plans manage their medical expense. Traditional health plan profitability is generated by reducing medical expense relative to collected premiums to increase underwriting profit. These profits are regulated, with highly variable degrees of rigor by state health insurance commissioners, and also by provisions of ObamaCare enacted in 2010.

Though its acquisition of Equian in 2019 and the proposed $13 billion acquisition of health information technology conglomerate Change Healthcare in 2021, United came within an eyelash of a near monopoly on “intelligent” medical claims processing software. The Justice Department challenged this latter acquisition and United may agree to divest Change’s claims processing software business as a condition of closing the deal. Even without the Change acquisition, Optum Insight processes hundreds of millions of medical claims annually not only for United’s health insurance business but for many of United’s competitors.

However, Optum Insight’s claims management system can also be used to increase MLR if medical expense unexpectedly declines, exposing the firm to federal requirement that it rebate excessive ‘savings’ to subscribers. This happened in 2020, when the COVID pandemic dramatically and unexpectedly added billions to United’s earnings due to hospitals suspending elective care. The chart below shows United’s 2Q2020 earnings per share almost doubling due to the precipitous drop in its medical claims expenses!

Hospital finance colleagues reported an immediate and substantial drop in medical claims denials from United and other carriers in the summer and fall of 2020. United’s quarterly profits dutifully and steeply declined in the subsequent two quarters, because its medical expenses sharply rebounded. The rise in

United’s medical expenses helped the firm avoid premium rebates to patients required by provisions of the ObamaCare legislation passed in 2010. The firm did voluntarily rebate about $1.5 billion to many of its customers in June, 2020.

However the most rapidly growing part of Optum Insight is its Optum 360 business process outsourcing business, which helps hospitals manage their billing and collections revenue cycle, as well as information technology operations, supply chain (purchasing and materials management) and other services. Through Optum 360, Optum Insight has signed five long term master contracts in the past two years’ worth many billions of dollars with care providers in California, Missouri and other states to provide a broad range of business services.

With all these different businesses, it is theoretically possible for one piece of Optum to be reducing a hospital’s cash flow by denying medical claims for United subscribers, while United’s health insurance network managers bargain aggressively to reduce the hospital’s reimbursement rates while yet another piece of Optum runs the billing and collection services for the same hospital and its employed physicians, while yet another piece of Optum competes with the hospital’s physicians and ambulatory services, diverting patients from its ERs and clinics, reducing the hospital’s revenues.

It is not difficult to imagine a future in which Optum/United offers hospital systems an Optum 360 outsourcing contract that run most of the business operations of a hospital system in exchange for preferred United health plan rates, an AI-enabled EZ pass on its medical claims denials and inpatient referrals from Optum physician groups and urgent care centers, at the expense of competing hospitals.

Managing these potential conflicts will be an increasing challenge as these various businesses grow, placing intense pressure on United’s leadership to get the various pieces of United to work together. To many anxious hospital executives, United resembles nothing so much as the Kraken, rising up out of the sea, surrounding and engulfing them- a powerful friend perhaps or a fearsome foe. As you might expect, United’s growing market power and growth has generated a fierce backlash in the hospital management community.

What Business is United Healthcare In?

United Healthcare is the most successful business in the history of American healthcare. The rapid growth of Optum and continued health insurance enrollment growth from government programs like Medicaid and Medicare has created a cash engine which generates nearly $2 billion a month in free cash flow. Optum’s portfolio has given United an impressive array of tools, unequalled in the industry, to improve its profitability and to reach into every corner of the US health system. United Healthcare is managed care on steroids.

United’s diversified portfolio of businesses gives the firm what a finance-savvy colleague termed “optionality”- the ability to redirect capital and management attention to areas of growth and away from areas that have ceased to grow, in the US or overseas. With its substantial investable capital, it will have the pick of the litter of the 11 thousand digital health companies as the overextended digital health market consolidates. United will be able to use its vast resources to build state-of-the-art digital infrastructure to reach and retain patients and manage their care.

United’s main short term business risks seem to be running out of accretive transactions effectively to deploy its growing horde of capital and managing the firm’s rising political exposure. United has had tremendous business discipline and has shied away from speculative acquisitions that are not immediately accretive to earnings. If its earnings growth falters, however, it will also encounter pressure from the investment community to increase dividends (presently about 1.2%) or share buybacks to bolster its share price, or else divest some or all of Optum in order to “maximize shareholder value”.

Answering the question, “What Business is United In” is simple: just about everything in health but hospitals and nursing homes.

Answering the questions- who are its customers and what do they want? — is a great deal harder. The customers United serves are in a sort of cold war with one another. United’s original business was protecting employers from health cost growth , and tempering the influence of hospitals and doctors by reducing their rates and utilization. By fostering so-called Consumer Directed Health Plans that expose many of their subscribers to very high front-end copayments, United and its health insurance brethren, have also increased their out-of-pocket costs, whether they have the savings to pay them or not.

There are also some ironies in United’s development. Optum Insight’s suite of hospital business services are designed to reduce administrative costs created in major part by United and other insurers’ medical claims data requirements. Its PBM business, originally intended to reduce drug spending by bargaining aggressively with pharmaceutical manufacturers has ended up pushing up drug list prices and consumer cost shares.

While presumably everybody benefits if United can somehow help patients become and remain healthy, it is still far from obvious how to do this. Managing all these markedly divergent customer needs will be a tremendous management challenge for whoever succeeds United’s reclusive (and very effective) 70 year old Chairman Stephen Hemsley.

What Does Society Get from this Vast Enterprise?

However, as Peter Drucker told a different generation of business giants, businesses are not entities unto themselves, accountable only to shareholders and customers. They are organs of society, and are expected to create social value. Americans are suspicious of vast enterprises, as businesses from Standard Oil, US Steel and ATT to Microsoft and Facebook have learned. As businesses grow and become more successful, public suspicion grows.

Private health insurers already face strident opposition from progressive Democrats, who believe that health coverage ought to be a public good, a right of citizenship provided publicly; in other words, that private health insurers have no business being in business. And large insurers like United also face intense opposition from hospitals and many physicians because they reduce their incomes and impose major administrative burdens upon them.

In the age of Twitter and TikTok, United is highly vulnerable to “event risks” that confirm the hostile narratives of the firm’s detractors that United is mainly about maximizing its own profits, not about improving the health of its subscribers or the communities it serves. It is not clear how many the tens of millions of United subscribers have warm and fuzzy feelings about their giant health insurer. Memories of the HMO backlash of the 1990’s reside in the firm’s corporate memory.

United has grown to its present immense scale largely without public knowledge. United has within its reach the capability of constraining overall health cost growth across dozens of metropolitan areas and regions, not merely cost growth for its own beneficiaries (roughly one in seven US citizens already get their health insurance through United). With its expanding digital health operations, it can deploy state of the art tools for helping United’s 50 million subscribers avoid illness and live healthier lives.

United also has the ability to damage the financial operations of beloved local hospitals and deny coverage to families, raising their out of pocket expenses. How United frames and defends its social mission and how it manages all the delicate and increasingly fraught customer relationships will determine its future, and in important ways, ours as well.

View at Medium.com

Mark Cuban’s drug company to sell name-brand diabetes drugs

Posted on by • Posted in Competition, Generic Drugs, Generic Insulin, High Drug Prices, Pharmaceutical Industry, Pharmacy Benefits Management • Leave a comment

https://mailchi.mp/c9e26ad7702a/the-weekly-gist-april-7-2023?e=d1e747d2d8

On Monday, the Mark Cuban Cost Plus Drugs Company (MCCPDC) announced via Twitter that it will begin to offer two branded diabetes drugs, Invokana and Invokamet, produced by Janssen, a Johnson & Johnson subsidiary. A month’s supply of these drugs, the first non-generics it has offered, will cost patients around $244, over 60 percent less than average retail prices. Prescriptions for these diabetes drugs fell from nearly 2M in 2020 to under 1M in 2022, and a key Invokama patent will expire next year, both factors that may have influenced Janssen’s decision to partner with MCCPDC.

The Gist: MCCPDC estimates that as many as 1M people who use these or similar drugs could benefit from the lower prices—not only the uninsured but also those considered “underinsured” due to high deductibles. 

Even though the deal is for two drugs with declining revenues, selling brand-name drugs from a pharmaceutical heavyweight is a notable step for the company.

As Congress continues to investigate PBMs for driving up drug spending through their pricing tactics, MCCPDC’s move offers a path to PBM disruption through direct competition. By cutting out the rebates retained by health plans and PBMs, MCCDPC can potentially offer better net payments to pharmaceutical companies, as well as reduced cost-sharing for patients—an arrangement that benefits both parties at the expense of traditional PBMs.

UnitedHealth Group hits a milestone in vertical integration

Posted on by • Posted in ACA, Diversification, Health Insurance Industry, Intercompany Eliminations, Medical Loss Ratio (MLR), Medicare Advantage, Operating Income, Operating Margin, Operating Performance, Pharmacy Benefits Management, UnitedHealth Group, Vertical Integration • Leave a comment

https://mailchi.mp/c9e26ad7702a/the-weekly-gist-april-7-2023?e=d1e747d2d8

Constrained by the Affordable Care Act’s medical loss ratio (MLR) requirement that health insurers must spend 80-85 percent of their revenue on medical services, payers have been pivoting to providing care, managing pharmacy benefits, and supporting other healthcare services, in order to fuel earnings growth. The graphic above shows why UnitedHealth Group (UHG) is seen as the health insurance industry’s most noteworthy model of this vertical integration strategy, thanks to its flourishing Optum division. 

Optum is now as big a profit driver for UHG as its UnitedHealthcare insurance arm, with each bringing in $14B of net earnings in 2022. 

Optum’s 7.7 percent operating margin is almost two points higher than UnitedHealthcare’s, which owes much of its revenue and earnings growth to its expanding Medicare Advantage (MA) business. As both sides of UHG’s business have grown, so too have intercompany eliminations, which have increased by over 80 percent in five years, reaching $108 billion in 2022. These payments from one division of UHG to another—mostly from the insurance business to the provider arm—allow the company to shift profit-capped insurance revenues into other divisions, driving increased profitability for the overall enterprise. 

It will be worth watching the trend in intercompany eliminations at other vertically integrated insurance companies, with an eye for whether integration truly results in lower cost of care for patients or just higher margins for the insurers.

Amazon cuts Alexa’s health capabilities

Posted on by • Posted in Amazon, Amazon Care, HIPAA, Pharmacy Benefits Management, Telemedicine • Leave a comment
https://www.axios.com/newsletters/axios-vitals-28ae8168-914d-4a05-a19c-d7f5f49542ae.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

Amazon has ended its support for its HIPAA-compliant Alexa health tool, Modern Healthcare reported.

  • Amazon rolled out the tools on Alexa in 2019, offering applications with a collection of hospitals, as well as telehealth company Teladoc Health and pharmacy benefits management company Express Scripts. 
  • The application allowed users to check the status of prescription refills, ask about their last blood-sugar reading, or even book a telemedicine appointment. Amazon has said all data will be deleted by the end of next week, per Modern Healthcare.

The big picture: Amid tech’s biggest slump in two decades, companies are tightening their belts and decreasing investments in secondary devices and voice assistants, Axios’ Peter Allen Clark recently reported.

Be smart: Amazon isn’t going anywhere when it comes to health care, but it is making some strategic cuts as it maneuvers the current economic environment, as evidenced by its acquisition of One Medical followed by its shuttering of Amazon Care.

Study finds Medicare could save billions buying generic drugs from Mark Cuban’s pharmacy

Posted on by • Posted in Cost-Plus Pharmacy, Federal Trade Commission (FTC), Generic Drugs, Health Policy, High Drug Prices, Opaque Pricing, Perverse Incentives, Pharmacy Benefits Management • Leave a comment

https://mailchi.mp/3390763e65bb/the-weekly-gist-june-24-2022?e=d1e747d2d8

 An analysis published in the Annals of Internal Medicine finds that if Medicare had purchased 77 common generic drugs from Mark Cuban’s Cost-Plus Pharmacy in 2020, it would have saved $3.6B dollars. That translates to more than a third of the $9.6B Medicare spent on generic drugs that year. 

In January, Dallas Mavericks owner and billionaire Cuban launched the generic drug company as a transparency play, cutting out pharmacy benefit managers (PBMs), negotiating directly with manufacturers, and selling drugs at a flat 15 percent markup.

The Gist: This isn’t the first study to find that Medicare overpays for generic drugs, as it’s unable to negotiate drug prices under current law. Another recent analysis found that Costco can offer consumers lower prices than Medicare drug plans for half of the most common generic drugs.

The fact that both Costco’s and Cuban’s pharmacies, neither of which accepts health insurance, can offer consumers cheaper generics is another indication of how PBMs’ perverse incentives and opaque pricing and rebate models lead to consumers being steered to higher priced drugs. We’re hopeful that the FTC’s new investigation into PBMs will shed light on their pricing practices, and create a path for lawmakers to finally address unsustainably high prescription drug prices.  

Mark Cuban’s pharmacy started with a cold email

Posted on by • Posted in Disruption, High Drug Prices, Innovation, Out of Pocket Expenses, Pharmaceutical Industry, Pharmacy Benefits Management, Strategy, Value Proposition • Leave a comment
https://www.beckershospitalreview.com/pharmacy/mark-cuban-s-pharmacy-started-with-a-cold-email.html?origin=CFOE&utm_source=CFOE&utm_medium=email&utm_content=newsletter&oly_enc_id=2893H2397267F7G
A Dallas-based generic drug startup bearing Mark Cuban's name just came out of stealth

The Mark Cuban Cost Plus Drug Co. launched its online pharmacy in January, offering low-cost versions of high-cost generic drugs. And it all started with a cold email. 

Alex Oshmyansky, MD, PhD, fired off an email to Mr. Cuban with a simple subject line: “Cold pitch.” The then 33-year-old radiologist told Mr. Cuban about work he was doing in Denver with a compounding pharmacy and the business plan behind a company he founded in 2018, Osh’s Affordable Pharmaceuticals. 

“I asked him a simple question, because this was when the whole pharma bro thing was going down,” Mr. Cuban said on NPR podcast The Limits, referring to convicted felon Martin Shkreli. “I was like, ‘Look, if this guy can jack up the prices 750 percent for lifesaving medicines, can we go the opposite direction? Can we cut the pricing? Are there inefficiencies in this industry that really allow us to do it and really make a difference?'”

Dr. Oshmyansky answered yes. Their weekly email correspondence continued for months. The Mark Cuban Cost Plus Drug Co. was quietly founded in May 2020, and Dr. Oshmyansky now serves as its CEO. The company is organized as a public-benefit corporation, meaning it is for-profit but claims its social mission of improving public health is just as important as the bottom line.

“We basically created a vertically integrated manufacturing company that will start with generic drugs,” Mr. Cuban told NPR. A major component of the strategy is to bypass pharmacy benefit managers, which Mr. Cuban likens to bouncers at a club.

“They’re the ones who say, ‘Hey, I’m controlling access to all the big insurance companies. If you want this insurance company to sell your drug, you’ve got to pay the cover charge. All these drugs pay the cover charge to these PBMs through rebates, and because they’re paying the cover charges, the prices are jacked up,” Mr. Cuban told NPR. “We said we’re going to create our own PBM, we’re going to work directly with the manufacturers, and we’re not going to charge the cover charge.”

The Mark Cuban Cost Plus Drug Co. marks the prices of its drugs up 15 percent, charges a $3 pharmacy fee to pay the pharmacists it works with, and a fee for shipping. “That’s it,” Mr. Cuban said on NPR. “There’s no other added costs. The manufacturers love what we’re doing for that reason.”

Others have set out before to disrupt pharma the way Mr. Cuban and Dr. Oshmyansky intend, but their downfall is cooperating or giving in to the PBMs, the entrepreneur noted. 

“People always ask, well why didn’t somebody do this before? The reality is there’s so much money there, it’s hard not to be greedy,” Mr. Cuban said on the podcast. “If you get to any scale at all, those PBMs will start throwing money at you and saying, ‘Look, just play the game.’” 

Mr. Cuban has indicated he has no intention to play the game. 

“I could make a fortune from this,” Mr. Cuban told Texas Monthly last fall. “But I won’t. I’ve got enough money. I’d rather f— up the drug industry in every way possible.”

UnitedHealth’s profits

Posted on by • Posted in Health Insurance Industry, Net Income, Operating Expenses, Operating Income, Operating Margin, Operating Metrics, Operating Performance, Operating Revenue, Pharmacy Benefits Management, Physician Practice Acquisition, Physician Practice Management • Leave a comment
https://www.axios.com/newsletters/axios-vitals-39805e09-f735-452d-8822-d60983748ac9.html?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

The second year of the pandemic did not dampen UnitedHealth Group’s finances, and the company actually surpassed its initial 2021 revenue and profit projections, Bob writes.

The big picture: UnitedHealth’s revenue has tripled from 2010 to 2021, and profit has almost quadrupled. The company continues to make more of its money from owning doctor groups and controlling pharmacy benefits instead of relying on health insurance.

A Brief History of Pharmacy Benefit Managers (How They Became the “Shady Middle Men” in the Drug Market)

Posted on by • Posted in Financial Incentives, Health Policy, High Drug Prices, Out of Pocket Expenses, Pharmaceutical Industry, Pharmacy Benefits Management, Rebates • Leave a comment
A Brief History of Pharmacy Benefit Managers (How They Became the “Shady Middle Men” in the Drug Market)

This is a guest post by Taylor J. Christensen, M.D. (@taylorjayc). Dr. Christensen is an internal medicine physician and health policy researcher with a background in business strategy and health services research.

Since any mystery in the healthcare system intrigues me, I’ve been working on understanding pharmacy benefit managers (PBMs) lately.

Why did PBMs arise in the first place, and how did they come to have this somewhat strange role in the drug market? Let’s look at the evolution of PBMs, which I will categorize into three distinct phases.

Forewarning: There isn’t a lot of publicly available information on this stuff, so some of this is my best piecing together of things I’ve read plus supplemented by direct communications with people who work for insurers or PBMs.

Phase 1

Way back before PBMs, people used to pay for medications 100% up front out of pocket. They’d keep their receipts and then submit them all to their insurer later for partial reimbursement according to their insurance plan’s formulary.

That clearly had some downsides. If a patient couldn’t afford the full price up front, they would be stuck choosing which of their meds they’re not going to get, which is bad for both patients (nonadherence) and pharmacies (lost sales). Insurers also had to spend tons of time reconciling shoeboxes full of receipts.

If only there were a way to integrate an insurer’s formulary into the pharmacy’s computer system so that patients only pay their exact copay at the time they fill a prescription! Everyone would be a lot happier. Patients wouldn’t have to forego quite so many medications, pharmacies wouldn’t lose out on as many medication sales, and insurers wouldn’t have to deal with people sending in shoeboxes full of receipts. Win win win.

Enter the precursors to pharmacy benefit managers—they were essentially groups of software engineers tasked with working with pharmacies to get insurers’ formularies into the pharmacies’ computer systems. And they succeeded! After that, when a patient showed up to fill a prescription, the pharmacy would simply enter the patient’s insurance information into their system and the exact co-pay for that medicine would magically appear on the cash register’s screen. The patient paid their amount, and the transaction was then sent to the insurer to reimburse the rest.

But how did these precursor PBMs evolve into today’s PBMs that, among other things, “manage benefits”? My guess is that it went something like this .  . .

Phase 2

These precursor PBMs got pretty good at integrating formularies into pharmacies’ systems, so they began to expand their customer base by helping lots of other insurers do the same thing.

Soon they became more familiar with all the complexities and intricacies of formularies than anyone else. And, as companies are wont to do, they leveraged that competency to make more money by offering a new service, which they maybe pitched to insurers like this: “Hey insurer, we already know all the details of your formulary. And we know where you could save money since formularies are kind of our thing. Why don’t you outsource your formulary-making efforts to us? We’ll make you a better formulary and charge less than it’s costing you to do it in-house right now. No-brainer, right?” And thus, not too long after their inception, PBMs officially started managing pharmacy benefits.

But that’s not where the story ends.

Phase 3 (dun dun dun)

Soon these PBMs found that they had amassed significant indirect control over which medicines patients get. Set a lower copay for a medicine and, sooner or later, more patients will end up taking it. And the one making the formulary is the one who sets the copays.

What did PBMs do with that power? They tried to leverage it to get better drug prices from manufacturers, which would allow them to offer an equivalent but cheaper formulary to their customers (insurers). But how, if they are not actually in the drug supply chain (that goes from drug manufacturers à drug wholesalers à pharmacies à patients) could they do that?

They cleverly reached out to the drug manufacturers directly and said something like this: “Hey drug manufacturer, we don’t actually have a direct financial relationship with you (yet). But we have significant control over how many sales you get because we set patients’ copays. How about we guarantee that your drug will, from now on, be the only one from its category in the lowest-copay tier? This will increase your sales quite a bit! And, in exchange for helping you get more sales, you can send us a “rebate” on every sale. So this is how it will work. We already keep track of every drug transaction, so every quarter we will send you the data to show how many patients using our formulary bought your drug, and you will send us a $10 rebate for each one.”

Contrary to popular belief, PBMs don’t keep all of this rebate money. Remember, their goal is to outbid other PBMs to offer the best formulary for the cheapest. And if the PBM market is competitive, they will have some degree of price competition that will force them to pass along some of those rebates on to their customers (insurers) in the form of lower fees.

I spoke with someone who works at an insurer and is in charge of contracting with their insurer’s PBM, and this person indicated that it is very possible for an insurer to get multiple bids from PBMs and identify which one is the best deal. Although, with the complexity involved, this process generally requires a specialist healthcare consultant who is an expert on navigating PBM contracts. I spoke with such a consultant, who had also worked for PBMs directly before becoming a consultant to insurers, and this person estimated that PBMs only keep about 20% of the rebates they receive from drug manufacturers. Other studies have been done on this topic, but attribution is tricky since PBMs are able to rename the monies they are receiving from drug manufacturers to fudge the numbers, which is probably why the Government Accountability Office reported in 2019 that PBMs only retain about 1% of rebates.

Well, there you have it. Phase 3 was the start of all the wheeling-dealing complexities that give PBMs their shady reputation.

I believe this is helpful background to have when you’re trying to improve the drug market (i.e., solve the problem of expensive drugs) because without understanding the incentives of the parties involved, you cannot get to the root of the problems with that system.

The Big Tech of Health Care

Posted on by • Posted in American Hospital Association (AHA), Antitrust, Arm's Length Transaction, Data, Data Control, Data Gathering, Data Governance, Data Integrity, Data Intelligence, Data Management, Data Mining, Data Ownership, Data Privacy, Dept of Justice (DOJ), Federal Trade Commission (FTC), Financial Incentives, Health Insurance Industry, Independence, Market Consolidation, Market Power, Market Share, Market Trends, Mergers & Acquisitions, Monopoly, Monopoly Behavior, Pharmacy Benefits Management, Self-Preferencing, Single Payer Health System, Single Payer Healthcare System, Vertical Integration • Leave a comment

https://prospect.org/health/big-tech-of-health-care-united-optum-change-merger/

Optum, a subsidiary of UnitedHealth, provides data analytics and infrastructure, a pharmacy benefit manager called OptumRx, a bank providing patient loans called Optum Bank, and more.

It’s not often that the American Hospital Association—known for fun lobbying tricks like hiring consultants to create studies showing the benefits of hospital mergers—directly goes after another consolidation in the industry.

But when the AHA caught wind of UnitedHealth Group subsidiary Optum’s plans, announced in January 2021, to acquire data analytics firm Change Healthcare, they offered up some fiery language in a letter to the Justice Department. “The acquisition … will concentrate an immense volume of competitively sensitive data in the hands of the most powerful health insurance company in the United States, with substantial clinical provider and health insurance assets, and ultimately removes a neutral intermediary.”

If permitted to go through, Optum’s acquisition of Change would fundamentally alter both the health data landscape and the balance of power in American health care. UnitedHealth, the largest health care corporation in the U.S., would have access to all of its competitors’ business secrets. It would be able to self-preference its own doctors. It would be able to discriminate, racially and geographically, against different groups seeking insurance. None of this will improve public health; all of it will improve the profits of Optum and its corporate parent.

Despite the high stakes, Optum has been successful in keeping this acquisition out of the public eye. Part of this PR success is because few health care players want to openly oppose an entity as large and powerful as UnitedHealth. But perhaps an even larger part is that few fully understand what this acquisition will mean for doctors, patients, and the health care system at large.

If regulators allow the acquisition to take place, Optum will suddenly have access to some of the most secret data in health care.

UnitedHealth is the largest health care entity in the U.S., using several metrics. United Healthcare (the insurance arm) is the largest health insurer in the United States, with over 70 million members, 6,500 hospitals, and 1.4 million physicians and other providers. Optum, a separate subsidiary, provides data analytics and infrastructure, a pharmacy benefit manager called OptumRx, a bank providing patient loans called Optum Bank, and more. Through Optum, UnitedHealth also controls more than 50,000 affiliated physicians, the largest collection of physicians in the country.

While UnitedHealth as a whole has earned a reputation for throwing its weight around the industry, Optum has emerged in recent years as UnitedHealth’s aggressive acquisition arm. Acquisitions of entities as varied as DaVita’s dialysis physicians, MedExpress urgent care, and Advisory Board Company’s consultants have already changed the health care landscape. As Optum gobbles up competitors, customers, and suppliers, it has turned into UnitedHealth’s cash cow, bringing in more than 50 percent of the entity’s annual revenue.

On a recent podcast, Chas Roades and Dr. Lisa Bielamowicz of Gist Healthcare described Optum in a way that sounds eerily similar to a single-payer health care system. “If you think about what Optum is assembling, they are pulling together now the nation’s largest employers of docs, owners of one of the country’s largest ambulatory surgery center chains, the nation’s largest operator of urgent care clinics,” said Bielamowicz. With 98 million customers in 2020, OptumHealth, just one branch of Optum’s services, had eyes on roughly 30 percent of the U.S. population. Optum is, Roades noted, “increasingly the thing that ate American health care.”

Optum has not been shy about its desire to eventually assemble all aspects of a single-payer system under its own roof. “The reason it’s been so hard to make health care and the health-care system work better in the United States is because it’s rare to have patients, providers—especially doctors—payers, and data, all brought together under an organization,” OptumHealth CEO Wyatt Decker told Bloomberg. “That’s the rare combination that we offer. That’s truly a differentiator in the marketplace.” The CEO of UnitedHealth, Andrew Witty, has also expressed the corporation’s goal of “wir[ing] together” all of UnitedHealth’s assets.

Controlling Change Healthcare would get UnitedHealth one step closer to creating their private single-payer system. That’s why UnitedHealth is offering up $13 billion, a 41 percent premium on the public valuation of Change. But here’s why that premium may be worth every penny.

Change Healthcare is Optum’s leading competitor in pre-payment claims integrity; functionally, a middleman service that allows insurers to process provider claims (the receipts from each patient visit) and address any mistakes. To clarify what that looks like in practice, imagine a patient goes to an in-network doctor for an appointment. The doctor performs necessary procedures and uses standardized codes to denote each when filing a claim for reimbursement from the patient’s insurance coverage. The insurer then hires a reviewing service—this is where Change comes in—to check these codes for accuracy. If errors are found in the coded claims, such as accidental duplications or more deliberate up-coding (when a doctor intentionally makes a patient seem sicker than they are), Change will flag them, saving the insurer money.

The most obvious potential outcome of the merger is that the flow of data will allow Optum/UnitedHealth to preference their own entities and physicians above others.

To accurately review the coded claims, Change’s technicians have access to all of their clients’ coverage information, provider claims data, and the negotiated rates that each insurer pays.

Change also provides other services, including handling the actual payments from insurers to physicians, reimbursing for services rendered. In this role, Change has access to all of the data that flows between physicians and insurers and between pharmacies and insurers—both of which give insurers leverage when negotiating contracts. Insurers often send additional suggestions to Change as well; essentially their commercial secrets on how the insurer is uniquely saving money. Acquiring Change could allow Optum to see all of this.

Change’s scale (and its independence from payers) has been a selling point; just in the last few months of 2020, the corporation signed multiple contracts with the largest payers in the country.

Optum is not an independent entity; as mentioned above, it’s owned by the largest insurer in the U.S. So, when insurers are choosing between the only two claims editors that can perform at scale and in real time, there is a clear incentive to use Change, the independent reviewer, over Optum, a direct competitor.

If regulators allow the acquisition to take place, Optum will suddenly have access to some of the most secret data in health care. In other words, if the acquisition proceeds and Change is owned by UnitedHealth, the largest health care corporation in the U.S. will own the ability to peek into the book of business for every insurer in the country.

Although UnitedHealth and Optum claim to be separate entities with firewalls that safeguard against anti-competitive information sharing, the porosity of the firewall is an open question. As the AHA pointed out in their letter to the DOJ, “[UnitedHealth] has never demonstrated that the firewalls are sufficiently robust to prevent sensitive and strategic information sharing.”

In some cases, this “firewall” would mean asking Optum employees to forget their work for UnitedHealth’s competitors when they turn to work on implementing changes for UnitedHealth. It is unlikely to work. And that is almost certainly Optum’s intention.

The most obvious potential outcome of the merger is that the flow of data will allow Optum/UnitedHealth to preference their own entities and physicians above others. This means that doctors (and someday, perhaps, hospitals) owned by the corporation will get better rates, funded by increased premiums on patients. Optum drugs might seem cheaper, Optum care better covered. Meanwhile, health care costs will continue to rise as UnitedHealth fuels executive salaries and stock buybacks.

UnitedHealth has already been accused of self-preferencing. A large group of anesthesiologists filed suit in two states last week, accusing the company of using perks to steer surgeons into using service providers within its networks.

Even if UnitedHealth doesn’t purposely use data to discriminate, the corporation has been unable to correct for racially biased data in the past.

Beyond this obvious risk, the data alterations caused by the Change acquisition could worsen existing discrimination and medical racism. Prior to the acquisition, Change launched a geo-demographic analytics unit. Now, UnitedHealth will have access to that data, even as it sells insurance to different demographic categories and geographic areas.

Even if UnitedHealth doesn’t purposely use data to discriminate, the corporation has been unable to correct for racially biased data in the past, and there’s no reason to expect it to do so in the future. A study published in 2019 found that Optum used a racially biased algorithm that could have led to undertreating Black patients. This is a problem for all algorithms. As data scientist Cathy O’Neil told 52 Insights, “if you have a historically biased data set and you trained a new algorithm to use that data set, it would just pick up the patterns.” But Optum’s size and centrality in American health care would give any racially biased algorithms an outsized impact. And antitrust lawyer Maurice Stucke noted in an interview that using racially biased data could be financially lucrative. “With this data, you can get people to buy things they wouldn’t otherwise purchase at the highest price they are willing to pay … when there are often fewer options in their community, the poor are often charged a higher price.”

The fragmentation of American health care has kept Big Data from being fully harnessed as it is in other industries, like online commerce. But Optum’s acquisition of Change heralds the end of that status quo and the emergence of a new “Big Tech” of health care. With the Change data, Optum/UnitedHealth will own the data, providers, and the network through which people receive care. It’s not a stretch to see an analogy to Amazon, and how that corporation uses data from its platform to undercut third parties while keeping all its consumers in a panopticon of data.

The next step is up to the Department of Justice, which has jurisdiction over the acquisition (through an informal agreement, the DOJ monitors health insurance and other industries, while the FTC handles hospital mergers, pharmaceuticals, and more). The longer the review takes, the more likely it is that the public starts to realize that, as Dartmouth health policy professor Dr. Elliott Fisher said, “the harms are likely to outweigh the benefits.”

There are signs that the DOJ knows that to approve this acquisition is to approve a new era of vertical integration. In a document filed on March 24, Change informed the SEC that the DOJ had requested more information and extended its initial 30-day review period. But the stakes are high. If the acquisition is approved, we face a future in which UnitedHealth/Optum is undoubtedly “the thing that ate American health care.”