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.
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 . . .
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.
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.”
Large health insurers no longer just provide coverage, but are instead repositioning themselves as vertically integrated healthcare organizations that span the care continuum.
The graphic above shows five-year total revenue growth by segment for the top five health insurance companies.
Some, like Anthem and Humana, are still in the early stages of revenue diversification, leveraging partnerships and investments to fill service gaps—in Humana’s case, these are mainly centered on the Medicare Advantage population.
On the other hand, the insurance revenue of Cigna and CVS Health is already dwarfed by pharmacy benefit management (PBM) revenue (as well as retail clinic revenue for CVS).
UnitedHealth Group (UHG) is clearly leading the pack, with a robust revenue diversification and vertical integration strategy.
Its Optum subsidiary grew 62 percent over the last five years, nearly double the rate of its UnitedHealthcare insurance business. Already the largest employer of physicians in the country, Optum recently announced plans to acquire Massachusetts-based 715-physician group, Atrius Health. It also announced its intent to acquire Change Healthcare, one of the largest providers of revenue and payment cycle management solutions.
Given the outsized role of the Optum division in driving UHG’s growth and profitability, it may soon face a dilemma that other publicly traded, diversified companies have had to confront: shareholder demands to unlock value by spinning off the business into a separate company.
Central to fending off that kind of activism by shareholders: demonstrable steps to integrate the myriad businesses the company has acquired into a functional whole. Just as Amazon’s hugely profitable Web Services business has become a target of spin-off demands, so too, eventually, may UHG’s Optum.
Ohio Attorney General Dave Yost has filed suit against Centene and several of its subsidiaries, alleging that they schemed to misrepresent pharmacy costs and gain overpayments from the state’s Medicaid program.
According to the lawsuit, Centene subsidiary Buckeye Health Plan used sister companies Envolve Health Solutions and Health Net Pharmacy Solutions to administer its pharmacy benefit. Yost’s office said it began to investigate their business practices as the arrangement “raised questions.”
In a statement, Yost’s office said the investigation, which was conducted by outside counsel, found that the companies filed reimbursement requests for amounts that had already been paid by third parties, and failed to accurately represent costs to the Ohio Department of Medicaid.
In addition, the scheme led to artificially inflated dispensing fees, the AG’s office said.
“Corporate greed has led Centene and its wholly-owned subsidiaries to fleece taxpayers out of millions. This conspiracy to obtain Medicaid payments through deceptive means stops now,” Yost said in a statement. “My office has worked tirelessly to untangle this complex scheme, and we are confident that Centene and its affiliates have materially breached their obligations both to the Department of Medicaid and the state of Ohio.”
Yost has openly declared war on PBMs and has made investigating their business practices a critical initiative within his office. In March 2019, the AG filed suit against Optum, seeking to reclaim $16 million in what he says are drug overcharges.
In a statement, Centene called the claims in the lawsuit “unfounded” and said it will “aggressively defend” against the allegations.
“Envolve’s pharmacy contracts with the State are reviewed and pre-approved by state agencies before they ever go into effect. Furthermore, these services saved millions of tax-payer dollars for Ohioans from market-based pharmaceutical pricing,” Centene said.
“We look forward to answering any of the Attorney General’s questions. Our company is committed to the highest levels of quality and transparency,” the insurer said.
COVID-19 accelerated a number of trends already brewing in the healthcare industry, and that’s not likely to change this year, according to a new report from CVS Health.
The healthcare giant released its annual Health Trends Report on Tuesday, and the analysis projects several industry trends that are likely to define 2021 in healthcare, ranging from technology to behavioral health to affordability.
“We are facing a challenging time, but also one of great hope and promise,” CVS CEO Karen Lynch said in the report. “As the pandemic eventually passes, its lessons will serve to make our health system more agile and more responsive to the needs of consumers.”
Here’s a look at four of CVS’ predictions:
1. A looming mental health crisis
Behavioral health needs were a significant challenge in healthcare prior to COVID-19, but the number of people reporting declining mental health jumped under the pandemic.
Cara McNulty, president of Aetna Behavioral Health, said in a video attached to the report that it will be critical to “continue the conversation around mental health and well-being” as we emerge from the pandemic and to reduce stigma so people who need help seek it out.
“We’re normalizing that it’s important to take care of our mental well-being,” she said.
Data released in December by GoodRx found that prescription fills for depression and anxiety medications hit an all-time high in 2020. GoodRx researchers polled 1,000 people with behavioral health conditions on how they were navigating the pandemic, and 63% said their depression and/or anxiety symptoms worsened.
McNulty said symptoms to look for when assessing whether someone is struggling with declining mental health include whether they’re withdrawn or agitated or if there’s a notable difference in their self-care routine.
2. Pharmacists take center stage
CVS dubbed 2021 “the year of the pharmacist” in its report.
The company expects pharmacists to be a key player in a number of areas, especially in vaccine distribution as that process inches toward broader access. They also offer a key touchpoint to counsel patients about their care and direct them to appropriate services, CVS said.
CVS executives said in the report that they see a significant opportunity for pharmacists to have a positive impact on the social determinants of health.
“We’ve found people are not only open and willing to share social needs with their pharmacists but in many cases, they listen to and act on the advice and recommendations of pharmacists,” Peter Simmons, vice president of transformation, pharmacy delivery and innovation at CVS Health, said in the report.
3. Finding ways to mitigate the cost of high-price therapies
Revolutionary drugs and therapies are coming to market with eye-popping price tags; it’s not uncommon to see new pharmaceuticals priced at $1 million or more. For pharmacy benefit managers, this poses a major cost challenge.
To address those prices, CVS expects value-based contracting to take off in a big way. And drugmakers are comfortable with the idea, according to the report. Novartis, for example, is offering insurers a five-year payment plan for its $2 million gene therapy Zolgensma, with refunds available if the drug doesn’t achieve desired results.
CVS said the potential for these therapies is clear, but many payers want to see some type of results before they fork over hundreds of thousands.
“Though the drug may promise to cure these patients for life, these are early days in their use,” said Joanne Armstrong, M.D., enterprise head of women’s health and genomics at CVS Health, in the report. “What we’re saying is, show us the clinical value proposition first.”
CVS said it’s also offering a stop-loss program for gene therapy to self-funded employers contracted with Aetna and/or Caremark to assist them in capping the expenses associated with these drugs.
4. Getting into the community to address diabetes
Diabetes risk is higher among vulnerable populations, such as Black patients, and addressing it will require local and community-based solutions, CVS executives said in the report. Groups at the highest risk for the disease are less likely to live in areas with easy access to a supermarket, for example, which boosts their risk of unhealthy eating, according to the report.
The two key hurdles to addressing this issue are access and affordability. The rise in retail clinics and ambulatory care centers can get at the access issue, as they can offer a way to better meet patients where they are.
At CVS’ MinuteClinics, patients can walk in and receive a number of services to assist them in managing diabetes, including screenings, consultations with providers and connections to diabetes educators who can assist with lifestyle changes.
Retail locations can also assist with medication costs, creating a one-stop-shop experience that’s easier for many diabetes patients to slot into their daily lives, CVS said.
“Diabetes is a case study in how a more connected experience can translate to simpler, affordable and more accessible care for underserved communities,” said Dan Finke, executive vice president of CVS Health and president of its healthcare benefits division.
The owner of two pharmacies and a management company in Florida pleaded guilty Jan. 25 to his role in a $931 million healthcare fraud scheme. He is the seventh defendant to plead guilty in the scheme, according to the U.S. Justice Department.
Larry Smith pleaded guilty to conspiracy to commit healthcare fraud, and his sentencing is set for Oct. 25. In his written plea agreement, Mr. Smith admitted to conspiring with others to defraud pharmacy benefit managers into paying for fraudulent prescriptions. As part of the plea agreement, Mr. Smith agreed to pay restitution of $24.9 million and forfeit approximately $3.1 million.
An indictment charged Mr. Smith and others with a nationwide conspiracy to defraud pharmacy benefit managers by submitting $931.4 million in bills for fraudulent prescriptions purchased from a telemarketing company. After improperly soliciting patient information, the marketing companies received approvals through telemedicine prescribers then sold the prescriptions to pharmacies in exchange for kickbacks, said Derrick Jackson, special agent in charge at HHS’ Office of Inspector General in Atlanta.
In September 2018, HealthRight, a telemedicine company, and its CEO Scott Roix pleaded guilty to conspiracy to commit healthcare fraud for their roles in the scheme. They agreed to pay $5 million in restitution. Mr. Roix’s sentencing is scheduled for Oct. 25.
Mihir Taneja, Arun Kapoor, Maikel Bolos and Sterling-Knight Pharmaceuticals also pleaded guilty in December 2020, according to the Justice Department.
Sitting in the dark before 6 am in my Los Angeles house with my face lit up by yet another Zoom screen, wearing a stylish combination of sweatpants, dress shirt and last year’s JPM conference badge dangling around my neck for old times’ sake, I wonder at the fact that it’s J.P. Morgan Annual Healthcare Conference week again and we are where we are. Quite a year for all of us – the pandemic, the healthcare system’s response to the public health emergency, the ongoing fight for racial justice, the elections, the storming of the Capital – and the subject of healthcare winds its way through all of it – public health, our healthcare system’s stability, strengths and weaknesses, the highly noticeable healthcare inequities, the Affordable Care Act, Medicaid and vaccines, healthcare politics and what the new administration will bring as healthcare initiatives.
I will miss seeing you all in person this year at the J.P. Morgan Annual Healthcare Conference and our annual Sheppard Mullin reception – previously referred to as “standing room only” events and now as “possible superspreader events.” What a difference a year makes. I admit that I will miss the feeling of excitement in the rooms and hallways of the Westin St. Francis and all of the many hotel lobbies and meeting rooms surrounding it. Somehow the virtual conference this year lacks that je ne sais quoi of being stampeded by rushing New York-style street traffic while in an antiquated San Francisco hotel hallway and watching the words spoken on stage transform immediately into sharp stock price increases and drops. There also is the excitement of sitting in the room listening to paradigm shifting ideas (teaser – read the last paragraph of this post for something truly fascinating). Perhaps next year, depending on the vaccine…
So, let’s start there. Today was vaccine day at the JPM Conference, with BioNTech, Moderna, Novovax and Johnson & Johnson all presenting. Lots of progress reported by all of the companies working on vaccines, but the best news of the day was the comment from BioNTech that the UK and South Africa coronavirus variants likely are still covered by the BioNTech/Pfizer vaccine. BioNTech’s CEO, Prof. Uğur Şahin, M.D., promised more data and analysis to be published shortly on that.
We also saw continued excitement for mRNA vaccines, not only for COVID-19 but also for other diseases. There is a growing focus (following COVID-19 of course) on vaccines for cancer through use of neoantigen targets, and for a long list of infectious disease targets.For cancer, though, there continues to be a growing debate over whether the best focus is on “personalized” vaccines or “off the shelf” vaccines – personalized vaccines can take longer to make and have much, much higher costs and infrastructure requirements. We expect, however, to see very exciting news on the use of mRNA and other novel technologies in the next year or two that, when approved and put into commercialization, could radically change the game, not only as to mortality, but also by eliminating or significantly reducing the cost of care with chronic conditions (which some cancers have become, thanks to technological advancement). We are fortunate to be in that gap now between “care” and “cure,” where we have been able with modern medical advances to convert many more disease states into manageable chronic care conditions. Together with today’s longer lifespans, that, however, carries a much higher price tag for our healthcare system. Now, with some of these recent announcements, we look forward to moving from “care” to “cure” and substantially dropping the cost of care to our healthcare system.
Continuing consolidation also was a steady drumbeat underlying the multiple presentations today on the healthcare services side of the conference – health plans, health systems, physician organizations, home health. The drive to scale continues, as we have seen from the accelerated pace of mergers and acquisitions in the second half of 2020, which continues unabated in January 2021. There was today’s announcement of the acquisition by Amerisource Bergen of Walgreens Boots Alliance’s Alliance Healthcare wholesale business (making Walgreens Boots Alliance the largest single shareholder of Amerisource Bergen at nearly 30% ownership), following the announcement last week of Centene’s acquisition of Magellan Health (coming fast on the heels of Molina Healthcare’s purchase of Magellan’s Complete Care line of business).
On the mental health side – a core focus area for Magellan Health – Centene’s Chief Executive Officer, Michael Neidorff, expressed the common theme that we have been seeing in the past year that mental health care should be integrated and coordinated with primary and specialty care. He also saw value in Magellan’s strong provider network, as access to mental health providers can be a challenge in some markets and populations. The behavioral/mental health sector likely will see increased attention and consolidation in the coming year, especially given its critical role during the COVID-19 crisis and also with the growing Medicaid and Medicare populations.There are not a lot of large assets left independent in the mental health sector (aside from inpatient providers, autism/developmental disorder treatment programs, and substance abuse residential and outpatient centers), so we may see more roll-up focus (such as we have seen recently with the autism/ABA therapy sector) and technology-focused solutions (text-based or virtual therapy).
There was strong agreement among the presenting health plans and capitated providers (Humana, Centene, Oak Street and multiple health systems) today that we will continue to see movement toward value-based care (VBC) and risk-based reimbursement systems, such as Medicare Advantage, Medicare direct contracting and other CMS Innovation Center (CMMI) programs and managed Medicaid. Humana’s Chief Executive Officer, Bruce Broussard, said that the size of the MA program has grown so much since 2010 that it now represents an important voting bloc and one of the few ways in which the federal government currently is addressing healthcare inequities – e.g., through Over-the-Counter (OTC) pharmacy benefits, benefits focused on social determinants of health (SDOH), and healthcare quality improvements driven by the STARS rating program. Broussard also didn’t think Medicare Advantage would be a negative target for the Biden administration and expected more foreseeable and ordinary-course regulatory adjustments, rather than wholesale legislative change for Medicare Advantage.
There also was agreement on the exciting possibility of direct contracting for Medicare lives at risk under the CMMI direct contracting initiative. Humana expressed possible interest in both this year’s DCE program models and in the GEO regional risk-based Medicare program model that will be rolling out in the next year. Humana sees this as both a learning experience and as a way to apply their chronic care management skills and proprietary groups and systems to a broader range of applicable populations and markets. There is, however, a need for greater clarity and transparency from CMMI on program details which can substantially affect success and profitability of these initiatives.
Humana, Centene and Oak Street all sang the praises of capitated medical groups for Medicare Advantage and, per Michael Neidorff, the possibility of utilizing traditional capitated provider models for Medicaid membership as well. The problem, as noted by the speakers, is that there is a scarcity of independent capitated medical groups and a lack of physician familiarity and training. We may see a more committed effort by health plans to move their network provider groups more effectively into VBC and risk, much like we have seen Optum do with their acquired fee for service groups. Privia Health also presented today and noted that, while the market focus and high valuations today are accorded to Medicare lives, attention needs to be paid to the “age in” pipeline, as commercial patients who enroll in original Medicare and Medicare Advantage still would like to keep their doctors who saw them under commercial insurance. Privia’s thesis in part is to align with patients early on and retain them and their physicians, so as to create a “farm system” for accelerated Medicare population growth. Privia’s Chief Executive Officer, Shawn Morris, also touted Privia’s rapid growth, in part attributable to partnering with health systems.
As written in our notes from prior JPM healthcare conferences, health systems are continuing to look outside to third parties to gain knowledge base, infrastructure and management skills for physician VBC and risk arrangements. Privia cited their recent opening of their Central Florida market in partnership with Health First and rapid growth in providers by more than 25% in their first year of operations.
That being said, the real market sizzle remains with Medicare Advantage and capitation, percent of premium arrangements and global risk. The problem for many buyers, though, is that there are very few assets of size in this line of business. The HealthCare Partners/DaVita Medical Group acquisition by Optum removed that from the market, creating a high level of strategic and private equity demand and a low level of supply for physician organizations with that expertise. That created a focus on groups growing rapidly in this risk paradigm and afforded them strong valuation, like with Oak Street Health this past year as it completed its August 2020 initial public offering. Oak Street takes on both professional and institutional (hospital) risk and receives a percent of premium from its contracting health plans. As Oak Street’s CEO Mike Pykosz noted, only about 3% of Medicare dollars are spent on primary care, while approximately two-thirds are spent on hospital services. If more intensive management occurs at the primary care level and, as a result, hospitalizations can be prevented or reduced, that’s an easy win that’s good for the patient and the entire healthcare system (other than a fee for service based hospital).Pykosz touted his model of building out new centers from scratch as allowing greater conformity, control and efficacy than buying existing groups and trying to conform them both physically and through practice approaches to the Oak Street model. He doesn’t rule out some acquisitions, but he noted as an example that Oak Street was able to swiftly role out COVID-19 protocols rapidly and effectively throughout his centers because they all have the same physical configuration, the same staffing ratio and the same staffing profiles. Think of it as a “franchise” model where each Subway store, for example, will have generally the same look, feel, size and staffing. He also noted that while telehealth was very helpful during the COVID-19 crisis in 2020 and will continue as long as the doctors and patients wish, Oak Street believes that an in-person care management model is much more effective and telehealth is better for quick follow-ups or when in-person visits can’t occur.
Oak Street also spoke to the topic of Medicare Advantage member acquisition, which has been one of the more difficult areas to master for many health plans and groups, resulting in many cases with mergers and acquisitions becoming a favored growth vehicle due to the difficulties of organic membership growth. Interestingly, both Oak Street and Humana reported improvements in membership acquisition during the COVID-19 crisis. Oak Street credited digital marketing and direct response television, among other factors. Humana found that online direct-to-consumer brokers became an effective pathway during the COVID-19 crisis and focused its energy on enhancing those relationships and improving hand-offs during the membership enrollment process. Humana also noted the importance of brand in Medicare Advantage membership marketing.
Staying with Medicare Advantage, there is an expectation of a decrease in Medicare risk adjustment revenue in 2021, in large part due to the lower healthcare utilization during the COVID crisis and the lesser number of in-person visits during which HCC-RAF Medicare risk adjustment coding typically occurs. That revenue drop however likely will not significantly decrease Medicare Advantage profitability though, given the concomitant drop in healthcare expenses due to lower utilization, and per conference reports, is supposed to return to normal trend in 2022 (unless we see utilization numbers fall back below 90% again). Other interesting economic notes from several presentations, when taken together, suggest that while many health systems have lost out on elective surgery revenue in 2020, their case mix index (CMI) in many cases has been much higher due to the COVID patient cases. We also saw a number of health systems with much lower cash days on hand numbers than other larger health systems (both in gross and after adjusting for federal one-time stimulus cash payments), as a direct result of COVID. This supports the thesis we are hearing that, with the second wave of COVID being higher than expected, in the absence of further federal government financial support to hospitals, we likely will see an acceleration of partnering and acquisition transactions in the hospital sector.
Zoetis, one of the largest animal health companies, gave an interesting presentation today on its products and service lines. In addition to some exciting developments re: monoclonal antibody treatments coming on line for dogs with pain from arthritis, Zoetis also discussed its growing laboratory and diagnostics line of business. The animal health market, sometime overshadowed by the human healthcare market, is seeing some interesting developments as new revenue opportunities and chronic care management paradigms (such as for renal care) are shifting in the animal health sector. This is definitely a sector worth watching.
We also saw continuing interest, even in the face of Congressional focus this past year, on growing pharmacy benefit management (PBM) companies, which are designed to help manage the pharmacy spend. Humana listed growth of its PBM and specialty pharmacy lines of business as a focus for 2021, along with at-home care. In its presentation today, SSM Health, a health system in Wisconsin, Oklahoma, Illinois, and Missouri, spotlighted Navitus, its PBM, which services 7 million covered lives in 50 states.
One of the most different, interesting and unexpected presentations of the day came from Paul Markovich, Chief Executive Officer of Blue Shield of California. He put forth the thesis that we need to address the flat or negative productivity in healthcare today in order to both reduce total cost of care, improve outcomes and to help physicians, as well as to rescue the United States from the overbearing economic burden of the current healthcare spending. Likening the transformation in healthcare to that which occurred in the last two decades with financial services (remember before ATMs and banking apps, there were banker’s hours and travelers cheques – remember those?), he described exciting pilot projects that reimagine healthcare today. One project is a real-time claims adjudication and payment program that uses smart watches to record physician/patient interactions, natural language processing (NLP) to populate the electronic medical record, transform the information concurrently into a claim, adjudicate it and authorize payment. That would massively speed up cash flow to physician practices, reduce paperwork and many hours of physician EMR and billing time and reduce the billing and collection overhead and burden. It also could substantially reduce healthcare fraud.
Paul Markovich also spoke to the need for real-time quality information that can result in real-time feedback and incentivization to physicians and other providers, rather than the costly and slow HEDIS pursuits we see today. One health plan noted that it spends about $500 million a year going into physician offices looking at medical records for HEDIS pursuits, but the information is totally “in the rearview mirror” as it is too old when finally received and digested to allow for real-time treatment changes, improvement or planning. Markovich suggested four initiatives (including the above, pay for value and shared decision making through better, more open data access) that he thought could save $100 billion per year for the country.Markovich stressed that all of these four initiatives required a digital ecosystem and asked for help and partnership in creating one. He also noted that the State of California is close to creating a digital mandate and statewide health information exchange that could be the launching point for this exciting vision of data sharing and a digital ecosystem where the electronic health record is the beginning, but not the end of the healthcare data journey.
Centene has entered into a definitive agreement to acquire Phoenix, Arizona-based Magellan Health for $2.2 billion, or $95 per share, the payer said Monday. Magellan will operate independently under the Centene umbrella.
Executives said the combination will result in one of the nation’s largest behavioral health platforms as the two will provide behavioral services to about 41 million members in the U.S.
The deal also boosts Centene’s already established footprint in government sponsored health plans with the addition of 5.5 million lives and another 2.2 million to add to its pharmacy benefit management platform.
The deal is designed to boost Centene’s ability to market a “whole health” approach for its members. The COVID-19 pandemic has underscored the need to care for more than just a member’s physical health by also caring for their mental health, the company said Monday.
“This has become even more evident in light of the pandemic which has driven a dramatic rise in behavioral health needs,” Centene CEO Michael Neidorff said in statement. Both boards unanimously approved the deal.
Magellan Health provides managed care and pharmacy services for an array of clients that include health plans, unions and third-party administrators. Centene has been a client of Magellan’s in years past.
Magellan leans on analytics and other technologies in an attempt to improve health outcomes and lower costs. In addition to behavioral health, Magellan focuses on high-cost or complex patients for its clients. In its presentation to investors on Monday, Centene said 71% of total healthcare costs in the U.S. are spent on complex patients, illustrating the need for the deal.
For its healthcare management services, Magellan typically enters into risk-based contracts with its clients where it assumes all or a substantial portion of the risk in exchange for a per member, per month fee. Or, Magellan will enter into an administrative services only agreement in which it reviews utilization and claims administration and manages provider networks, according to its latest 10-Q filing.
The deal is expected to close in the second half of the year pending regulatory approvals. CEO Ken Fasola and other Magellan executives will continue their leadership roles.
Last year, Centene completed its blockbuster acquisition of rival WellCare, a $17 billion deal that catapulted the company to the fourth-largest insurer by membership when including Aetna, which is now part of CVS Health. The deal also doubled Centene’s Medicare Advantage footprint. Centene’s core business is Medicaid managed care and it is the largest insurer on the Affordable Care Act exchanges.
A report by PricewaterhouseCoopers said employer spending on healthcare could increase anywhere from 4% to 10% next year. The report highlighted three potential scenarios depending on what happens with the Covid-19 pandemic.
As the Covid-19 pandemic and resulting economic slowdown strain company budgets, employers are trying to calculate how much they will spend on healthcare next year. Soon, they will be picking health plans for 2021, and the pandemic will certainly go into that calculus.
A new report by PricewaterhouseCoopers attempts to forecast healthcare costs for next year. But there are still lots of unknowns. According to the report, the medical cost trend could increase between 4% and 10% in 2021.
Researchers with PwC’s Health Research Institute interviewed health plan actuaries from 12 national and regional payers over the past three months. The consensus? They were still unsure about the pandemic’s effect on spending now and what it will mean for 2021.
PwC considered three potential scenarios:
If healthcare spending remains down in 2021, PwC expects a 4% medical cost trend
If spending continues to grow at the same rate that it has from 2014 to 2019, PwC forecasts a 6% medical cost trend
If spending increases significantly next year in part due to pent-up demand from delayed care during the pandemic, PwC forecasts a 10% medical cost trend.
Employers are already considering measures to reduce their costs next year. For instance, a growing number are looking at narrow-network plans as a way of negotiating down prices.
“As the pandemic continues and the economic pressures increase, the shift towards narrow network will likely continue and accelerate,” PwC Health Research Institute Leader Ben Isgur wrote in an email.
In particular, large companies with more than 5,000 employees are more likely to consider this strategy, with 25% offering narrow-network plans, according to a 2019 survey by PwC.
Walmart is a recent example. The company began offering “curated physician networks” in Arkansas, Florida and Texas in 2020. In March, the company indicated it would expand on its network strategies.
More companies are also expanding their telehealth services, in part a direct result of the pandemic. While this may not save them money in the short-term — most insurers are currently reimbursing the same for telehealth visits as in-office visits — in the long term, it is expected to reduce costs.
“Employers understand the benefits of telehealth including lower costs, easier access, less time away from work and a good consumer experience,” Isgur wrote. “89 percent of employers surveyed by PwC in spring 2019 offered telemedicine either through their medical vendor or a carve-out vendor, up from 56 percent in 2016. Over the past few months, we have seen telehealth accelerate even faster.”
A couple of ongoing factors could increase spending next year. Employers are adding mental health services to their health plans, and have seen increased demand for those services, especially in light of the pandemic. According to a recent survey by the Health Research Institute, 12% of individuals on employer plans said they had sought mental health services, and another 18% planned to do so.
Specialty drug spending is also expected to drive up costs, as the majority of pharmaceuticals planned for release next year are specialty drugs. This is not a new trend; of companies’ total drug spending, specialty drugs grew from 21% of the total in 2010 to 58% in 2017.
Many patients have delayed care as a result of the pandemic. Even as medical offices begin to offer in-person visits again, volumes are still down. It’s still too early to tell whether that will lead to a surge in spending next year due to postponed — but needed — procedures.
According to PwC, 22% of patients with employer-sponsored insurance have delayed care since March.
“We could see the population risk increase for 2021 if members with chronic conditions are not able to manage their health as effectively in 2020 due to Covid-19,” Amy Yao, senior vice president and chief actuary at Blue Shield of California, told PwC’s Health Research Institute.