S&P: Hospitals vulnerable to recession as healthcare sector stays defensive
The healthcare sector remains defensive but has become increasingly vulnerable to an economic downturn because of deteriorating ratings, comparatively higher leverage and greater industry disruption, analysts at S&P Global Ratings said in a new report.
Healthcare companies’ issuer credit ratings are becoming more vulnerable to a cyclical downturn in comparison to prior recessions, according to the rating agency, which also said that proposals from the U.S. government are threatening the sector’s creditworthiness.
Credit quality has fallen considerably since the last recession in the healthcare sector — where products and services continue to show a largely inelastic demand — with 66% of healthcare companies carrying B ratings, according to the April 29 analysis.
Ratings estimates that about 20% of for-profit healthcare companies have investment-grade issuer credit ratings, in comparison to 54% in 2005. The rating agency believes this transition shows an increase in smaller and mainly private equity-owned healthcare issuers.
Hospitals among subsectors most vulnerable to economic slowdown
The subsectors most vulnerable to an economic downturn are hospitals, healthcare service providers and hospital staffing services, based on leverage metrics and relatively higher disruption in comparison to other subsectors, the rating agency added.
Ratings analysts said companies like Tenet Healthcare Corp., Prospect Medical Holdings Inc. and HCA Healthcare Inc. would be affected by a potential rise in uncompensated care — with patients opting for lower cost options — since insurance coverage tends to decline as unemployment rates increase during a recession. In addition, healthcare companies such as Acadia Healthcare Co. Inc. and WP CityMD Bidco LLC would be highly exposed to reimbursement rates based on Medicaid and Medicare plans.
The healthcare segment at highest risk in an economic downturn is temporary nurse staffing, which is highly sensitive to cyclicality, more so than part-time physician staffing and full-time employment.
Pharmacy benefit managers, often called the drug middlemen or PBMs, such as CVS Health Corp. and Aetna Health Holdings LLC, which are responsible for negotiating drug prices between drug companies and insurers are also at risk of exposure to a downturn.
The Trump administration wants to end the safe harbor protections, which permit PBMs to collect rebates, by Jan. 1, 2020, and move the U.S. to a fixed-fee discount model.
Ratings analysts believe healthcare companies with a portfolio of research and development, medical devices, pharmaceuticals and biologics manufacturing will be more insulated and can expect steady demand during a recession, which will help achieve astrong revenue base.
Companies like Pfizer Inc., Amgen Inc. and Teva Pharmaceutical Industries Ltd. may be at the receiving end of a slight shift in the sector, which will see customers increasingly preferring lower-cost generic and biosimilar alternatives. In addition, increased usage of high-deductible insurance plans will bolster switches to lower-cost options.
Life sciences companies like Danaher Corp., Thermo Fisher Scientific Inc. and PerkinElmer Inc. mostly see repeat sales of their products, and since there is an increase in the use of diagnostic tests, the life sciences subsector would be more resilient in an economic downturn.
Medical devices companies Baxter International Inc., Abbott Laboratories, Becton Dickinson and Co. and Hologic Inc. should expect consistent demand though there is some exposure to patient and hospital admission volumes.
However, Ratings analysts believe the medical devices subsector “does not have a large target on its back, in terms of cost control, versus the pharmaceutical industry.”
Given the mostly inelastic demand in the healthcare sector, McKesson Corp., Cardinal Health Inc., Owens & Minor Inc. and other such companies in the drugs and medical products’ distribution segment will be largely insulated from the economic downturn, Ratings analysts added.
Colleen Lindholz, president of Kroger Health, spoke about the grocery store’s plans to expand further into healthcare.
Kroger is look to assist customers who have issues with the accessibility and affordability of prescription drugs.
To that end, the Cincinnati-based grocery store giant launched a pharmacy savings club in partnership with GoodRx last December.
Lindholz also impressed the need to incorporate ‘food as medicine’ into the company’s healthcare plans.
Cincinnati-based grocery and retail giant Kroger Co. has ambitions to continue its healthcare expansion mission, according to Colleen Lindholz, president of Kroger Health.
Kroger is one of the largest grocery stores and retail companies in the country, with about 2,300 pharmacies and 221 retail clinics, offering it a sizable footprint to compete in healthcare. Lindholz has been with the company for more than two decades and has helped craft its business strategy focused on health and wellness.
“Our vision is to help people live healthier lives, and our mission statement states that we’re going to simplify healthcare by creating solutions that combine health, wellness, and nutrition to connect with people on a personal level,” Lindholz told HealthLeaders.
From Lindholz’s perspective, there are several opportunities for Kroger to grow in healthcare, most notably through improving prescription drug delivery in a way that benefits consumers and focuses on promoting ‘food as medicine.’ However, she also spoke to the lingering challenges Kroger faces, including industry consolidation, difficult negotiations with pharmacy benefit managers (PBM), and rising direct and indirect remuneration (DIR) fees.
Below are some takeaways from Lindholz on what lies ahead for Kroger in the healthcare sphere.
MANEUVERING PBMS AND DIR FEES
Lindholz said that Kroger, like other healthcare players, is subject to the pressures produced by widespread vertical integration and consolidation. Kroger’s strategy to drive prescriptions into its stores has been affected by the fact that it contracts with multiple PBMs, the major ones being owned by large health plans.
“We’re seeing a lot of pressure as far as reimbursements are concerned and DIR fees, which are escalating out of control,” Lindholz said. “I know there’s some activity going on in Washington right now with a call for DIR reform and where should most of the cost reduction be.”
Lindholz added that Kroger remains a supporter of the concept of DIR fees, citing the purpose for their initial creation as a way to provide a higher quality of care for patients.
“However, we are getting hit with DIR fees that are 300% ahead of where we were in 2016,” Lindholz said.
PBMs also compound the problem for Kroger, according to Lindholz, since they act as a negotiator with the drugmakers but ultimately set the standards for how rebates are passed through to pharmacies.
“The way that they measure us and the way that we compete to get those rebates back, where 2,300 pharmacies are compared to an independent that has five pharmacies, is crazy,” Lindholz said. “I think the way that they’re measuring it is all for their gain, not necessarily for the patient’s gain. We want the lowest cost to be at the point of sale where the patient actually is.”
‘FOOD AS MEDICINE’
A key component to addressing chronic disease is addressing what people eat, Lindholz said. Kroger introduced its free “OptUp” app in an attempt to correct some of the root problems that contribute to chronic disease.
In 2017, Kroger conducted a study to analyze A1Cs, the average blood sugar over 90 days, and blood pressure in diabetic employees and leverage nutritional science to assist them in making food purchasing decisions.
Kroger was so encouraged by the results of the study that it had nutrition and technology experts at the company design an app driven by the Kroger loyalty card as a way to “simplify Kroger customers’ ability to shop for healthier foods.”
“The results were so statistically significant that we decided to bring the app to the market because we believe that over time it can sustain behavior change,” Lindholz said. “What we’re trying to do is be in the prevention space, specifically around diabetes, where we’re helping our diabetics make those food choices that they critically need in order to keep from progressing with their disease and going from two oral medications onto insulin.”
A spokesperson from Kroger said the company will soon be rolling out an update to the app to allow customers the ability to shop for healthier foods, even if they do not shop at Kroger.
Lindholz also commented that healthcare is a fragmented industry, citing the lack of communication between different electronic medical records (EMR) systems.
Lindholz said the company sought to create a solution to foster a better line of communication with systems that run on Epic and Cerner.
“We’re building a platform that we’re going to be able to see across all of our pharmacies and will connect with the top 17 EMRs in the country,” Lindholz said. “It’s important in our quest to go after the triple aim and to decrease some of this fragmentation while closing gaps in care.”
“One of the unique pieces of that new platform is that it will be the first time that anyone’s ever included a food score. We’re going to test in Cincinnati with a cardiologist and an endocrinologist around getting to look at how customers eat, if we can help change their behavior, and will their overall outcomes be better over time?”
TACKLING PRESCRIPTION DRUG PRICES
Given Lindholz’s background as a pharmacist, it should come as no surprise that one of her major initiatives at Kroger is improving the availability and affordability of prescription drugs for customers. To that end, Lindholz noted that Kroger currently has three central prescription fill facilities around the country that fill prescriptions overnight so Kroger can have the lowest cost to fill.
“This allows us to spend more time with the patients that are in the store and deliver the highest quality of care that we can at the lowest cost,” Lindholz said. “We’re doing a lot more one-on-one counseling with customers, both at the counter and also through a center of excellence that we have. We’re up 320% in clinical interventions versus a year ago and that is due to us putting a system in place that queued up pharmacists at the time either when they’re with patients at the store or through our call center.”
Kroger also launched a pharmacy savings club in partnership with GoodRx last December to assist customers dealing with high prices and limited access to prescription drugs.
“What that club does is it brings transparency and pricing directly to the customer. It costs $36 for an individual, $72 for a family, and we are delivering a significant amount of savings to the consumer,” Lindholz said. “What we’re doing with the savings club is cutting out the middleman. We’re taking all the rebates that we would get from the manufacturers and passing them directly down to our customers, which is saving them a whole lot of money.”
Congressional Democrats have quickly lined up to oppose the Trump Administration’s proposal to eliminate regulations that make it illegal for drug companies to reduce – or eliminate – what Medicare consumers pay for prescriptions under the Part D program.
Instead, they are pushing plans to give health insurers and the pharmacy benefit management (PBM) companies they run and own even more control over what medicine consumers can choose and how much they cost. In doing so, Democrats are backing a government-sanctioned drug pricing cartel that extorts nearly a quarter of trillion dollars a year from prescription drug rebates, discounts, and patients (in the form of out-of-pocket costs), and shares a pittance with the patients who need medicines the most. Eighty percent of drug benefits are managed by the 3 largest PBMs, which in turn are owned by or in part by the 3 largest insurance companies.
Current Medicare regulations makes it illegal for any firm other than PBMs to handle drug prices and distribution. Specifically, PBMs are given free rein to determine what medicines patients can and can’t use. This power allows them to reduce the list price of drugs by obtaining rebates in exchange for encouraging the use of some treatments while discouraging the use of other medicines. PBMs either require patients to try drugs that generate the most rebates first or force people to pay part or all of the list price of medicines that don’t generate much money.
As a result, of $140 billion Medicare Part D spent on medicines, $64 billion was pocketed by PBMs and health plans. And of the $460 billion all Americans spent on drugs in 2018 nearly $166 billion went to discounts and rebates.
Parroting the PBM/insurer talking points, Nancy Pelosi’s health policy advisor, Wendell Primus, said prices – not rebates – are the cause of high drug costs, and savings from rebates negotiated by pharmacy benefit managers go toward reducing insurance premiums.
In fact, PBMs keep Part D premiums artificially low by collecting rebates and other fees at the retail counter. Because Medicare starts paying for 80 percent of drug costs after seniors shell out over $4500 at the pharmacy, plumping up the retail price with rebates means PBMs and insurers reduce premiums by shifting more cost to the government and ultimately by forcing seniors to pay more for medicines.
Moreover, PBMs are using rebates extracted from the medicines the most seriously ill patient uses to subsidize the drug spending and premiums of everyone else. People with cancer, HIV, Parkinson’s, autoimmune diseases are only 2 percent of the population. But in 2017 the drugs they use generated $53 billion, or 32 percent of all rebates and discounts.
In 2017, 2 percent of the most vulnerable consumers paid PBMs and health plans $16 billion in out-of-pocket costs. Soaking the sick to make the rich even richer. The quickest way to cut the cost of medicines to what they are in Europe is to eliminate the PBM protection racket and give drug companies the freedom to dramatically reduce the out-of-pocket cost for the most expensive medicines. To be sure, a growing number of drug firms and insurers are working together to eliminate out-of-pocket costs as part of programs to improve health by reducing barriers to access. Indeed, because PhRMA and BIO have stated that consumers should pay less, the Trump proposal is truly a ‘put up or shut up’ moment for the industry.
Under the current rules, it doesn’t pay for PBMs and insurers to choose a drug with lower out-of-pocket costs, and drug companies have no incentive to tie out-of-pocket costs to better care. Under current rules, patients are unable to afford the medicines that keep them alive. The Trump proposal would change all that. It’s up to Democrats to explain why, instead of cutting drug costs dramatically and directly, they want to line the pockets of big corporations with money from the sickest patients.
As we wrote last week, the recent dust-up between CVS’s pharmacy benefit management (PBM) subsidiary Caremark and Walmart, during which the retail giant threatened to sever its relationship with CVS over a dispute regarding reimbursement levels before finally coming to a settlement, is a harbinger of things to come as the healthcare landscape becomes dominated by massive, vertically-integrated competitors.
A new investigative piece from The Columbus Dispatch this week seems to confirm this view. Examining previously-undisclosed data about CVS’s drug plan pricing practices as part of Ohio’s Medicaid program, the article reveals that CVS paid its own retail pharmacies much higher reimbursement rates than it offered to key competitors Walmart and Kroger to provide generic drugs to Medicaid beneficiaries. According to the article, CVS would have had to pay Walmart pharmacies 46 percent more, and Kroger pharmacies 25 percent more, to match the levels of reimbursement it paid its own retail pharmacies, data that are cited in a state report on the Medicaid pharmacy program that CVS is engaged in a court battle to keep secret. The reimbursement differential is “startling information”, according to a former Justice Department antitrust official quoted in the article. A spokesman for CVS maintained that the PBM’s payment rates are “competitive” and influenced by a complex range of factors. Underscoring the opaque and complicated methodology drug plans use to determine payments to retail pharmacies, independent pharmacy operators were paid more than CVS stores, as were Walgreens stores. A separate analysis of PBM pricing behavior in New York uncovered similar evidence, according to Bloomberg.
The Ohio and New York pharmacy stories are yet more evidence that, as healthcare companies continue to expand their control over greater segments of the “value chain”—combining, for example, insurance, distribution, and care delivery—they are able to flex their market power in ways that look increasingly anti-competitive. Hospitals that “own” their referral sources, insurers that “own” the delivery of care, and pharmacies that “own” drug benefit managers all edge closer to creating closed, proprietary platforms that can lock out competitors in any one segment.
That’s a feature, not a bug—indeed, much of the logic of population health is predicated on “network integrity”: keeping consumers inside a fully-controlled ecosystem of care to enable better coordination and reduce duplication and inefficiencies. Yet as giant healthcare corporations turn themselves into Amazon-style “everything stores”, we need to keep a watchful eye on competition.
Red flags to watch for: using the courts to maintain secret agreements or block the free flow of talent or information, “vertical tying” behavior that requires all-or-nothing contracting, and pricing strategies that leverage market power in one segment to raise prices in another.
The biggest flaw in using “market competition” to lower the cost of care: most companies hate actually competing in the marketplace—a problem made even more vexing by vertical integration.
Growth in UnitedHealth Group’s health services business Optum helped the health insurance company beat Wall Street estimates for the fourth quarter ended Dec. 31, according to Reuters.
Five things to know:
1. Revenues for Optum, which is UnitedHealth’s fastest-growing unit and includes an in-house pharmacy benefits manager, topped $100 billion for the first time in the year ended Dec. 31. Optum grew revenues by 11.1 percent year over year to $101.3 billion, the company said Jan. 15.
2. While Optum may face heightened competition this year after Aetna and Cigna scored deals with large benefit managers, Piper Jaffray analyst Sarah James told Reuters: “We view [the Optum results] as a positive sign given the increasingly competitive nature of the pharmacy benefits management market. We believe 2019 could be a big year at OptumHealth … and see potential for specialty [drugs] to double earnings by 2021.”
3. For the fourth quarter, the country’s largest health insurer posted $27.56 billion in revenues from its Optum unit, up 13 percent year over year.
4. Still, UnitedHealth’s medical care ratio — or the amount of premiums used to cover medical expenses compared to overhead costs — fell short of expectations at 82.2 percent, according to Reuters. Higher costs in UnitedHealth’s government-sponsored Medicaid business were partially to blame, analysts told the publication.
5. UnitedHealth’s insurance business, UnitedHealthcare, increased sales by 11.1 percent in the fourth quarter, for a total of $46.2 billion. Net earnings to shareholders fell 16 percent to $3 billion in the fourth quarter, compared to $3.6 billion a year prior.
As part of the Bipartisan Budget Act of 2018 (BBA), Congress made changes to the Medicare prescription drug benefit program, or Part D, to lower spending for both beneficiaries and the federal government. Specifically, the BBA increased the size of the discount on brand-name drugs that manufacturers are required to offer beneficiaries who are in the Part D coverage gap, or “donut hole,” from 50 percent to 70 percent. (The donut hole, in which Medicare beneficiaries who have spent over a certain amount on prescription drugs must pay all drug costs out of pocket, was designed to help contain federal costs.) By increasing the size of the manufacturer discount, Congress was able to shrink the share of spending in the donut hole covered by Part D plan sponsors and beneficiaries.
Pharmaceutical manufacturers have continued to put pressure on Congress to make two changes: 1) roll back the discount from manufacturers from 70 percent to 63 percent (and increase Part D plan-sponsor liability) and 2) block an increase in the total amount beneficiaries must spend out of pocket on their prescription drugs before catastrophic coverage kicks in.
According to our analysis, these proposals would financially benefit drug manufacturers more than Medicare beneficiaries: while beneficiaries’ spending in the coverage gap would be slightly reduced, manufacturers’ spending would be reduced far more. Moreover, Medicare spending under Part D would increase to cover the savings to beneficiaries and manufacturers.
Key Definitions Under Part D
Donut Hole: The third phase of Medicare Part D coverage in which beneficiaries pay all drug costs out of pocket.
TrOOP (True Out-of-Pocket) Threshold: The total amount beneficiaries need to spend out of pocket before reaching catastrophic coverage.
Part D Plan Sponsors: Typically insurance companies and pharmacy benefit managers
Part D Coverage Gap Discount: A program established by the ACA that requires drug manufacturers and Part D plan sponsors to give beneficiaries price discounts on brand-name drugs when beneficiaries reach the coverage gap. It also reduces the share of spending that Part D plan sponsors cover.
Original Medicare Part D Design
When the Medicare Part D program was created in 2003, Congress required all Part D plan sponsors — typically insurance companies and pharmacy benefit managers — to establish a standard benefit package with four phases of coverage that beneficiaries move through depending on their drug spending. In the first phase, the federal government covers 100 percent of cost-sharing until beneficiaries reach their deductible. In the second phase, the federal government covers 25 percent of cost-sharing. In the third phase, known as the coverage gap or donut hole, beneficiaries pay all drug costs out of pocket. In the final phase, catastrophic coverage is reached and beneficiaries cover just 5 percent of cost-sharing.
The amount beneficiaries need to spend out of pocket before reaching catastrophic coverage is called the TrOOP (“True Out-of-Pocket) threshold; it was $5,000 in 2018. The TrOOP threshold increases each year to account for growth in Medicare per-beneficiary spending under Part D, which includes prescription drug prices.
Filling the Part D “Donut Hole”
As part of the Affordable Care Act (ACA), Congress included two changes to Part D to help fill the donut hole. First, Congress established the Part D Coverage Gap Discount Program that requires participating drug manufacturers and Part D plan sponsors give beneficiaries price discounts on brand-name drugs when beneficiaries reach the coverage gap. Between 2011 and 2020, this program reduces beneficiary cost-sharing in the gap from 100 percent to 25 percent. The discounts were phased in and scheduled to fill the coverage gap by 2020.
Second, Congress slowed the annual update to the TrOOP threshold through 2019 by basing the update on the consumer price index (CPI) plus 2 percentage points rather than drug spending growth. The purpose was to give certainty to the size of the donut hole during the phase-in of the manufacturer discount program. Because the CPI has grown far less rapidly than drug prices under Part D, this change has kept the size of the donut hole smaller, enabling beneficiaries to reach the catastrophic benefit sooner than they would have under the original Part D benefit. This also helps manufacturers, who don’t have to offer as many discounts when people are in the coverage gap for a shorter period of time. And once the federal government is covering more costs under catastrophic coverage, manufacturers no longer have to provide discounts at all.
While Congress slowed growth in the TrOOP threshold through 2019, under the ACA, the threshold amount reverts back to the pre-ACA calculation in 2020. When the threshold is based on drug price spending growth again, the amount a beneficiary must spend in the coverage gap will jump from $5,100 to $6,350. (If manufacturer price growth had been at or close to CPI growth in recent years, there would be no increase in 2020.) But if Congress wants to block the spike in the TrOOP amount, it must take action no later than June 2019, the deadline for Part D plans bidding to offer coverage in 2020.
Effect of the Bipartisan Budget Act of 2018 on the Coverage Gap
In February 2018, the BBA made changes to the Part D Coverage Gap Discount Program to help fill the donut hole in 2019 (a year earlier than the ACA provision) by increasing the manufacturer discount for beneficiaries from 50 percent to 70 percent and reducing the share that Part D plan sponsors cover. This change will require manufacturers to offer a larger discount and reduce beneficiaries’ out-of-pocket drug costs in the donut hole. By reducing the share that insurance companies or pharmacy benefit managers are responsible for, Congress intended to lower premiums, which in turn will save the federal government on premiums subsidies.
The Financial Impact of the New Proposals
While Congress established the Part D Coverage Gap Discount Program at the same time it slowed growth in the TrOOP threshold — and both relate to the donut hole — the two policies function independently and need not be conflated in terms of making changes to them in statute.
Moreover, the financial implications of proposals to change these components differ markedly. Beneficiaries spend an average of $1,321 on cost-sharing in the coverage gap today and would spend $1,156 in 2020 — or $165 less — if Congress amends the BBA and blocks the TrOOP increase as proposed by the pharmaceutical industry.
However, manufacturers would save even more under these proposed policies. Brand-name manufacturer discounts in the donut hole would fall from $3,698 per beneficiary today to roughly $2,998 — a reduction of $785 per beneficiary. Part D plan sponsors would spend $555 per beneficiary in the coverage gap or $291 more if both policies were addressed.
Understanding the implications of these proposals beyond their impact on Medicare spending and the federal budget is important. Even if Congress were only to block the increase in the TrOOP threshold — and not undo the increase in manufacturer discounts — beneficiary spending would be slightly lower (as a lower limit on TrOOP spending would enable beneficiaries to get out of the donut hole and into the most generous level of federal coverage more quickly) but manufacturers would still come out far ahead of both Part D plan sponsors and beneficiaries. Given the financial implications of these two policies, Congress may want to consider broader changes to Part D that would lower drug prices, provide more cost savings to beneficiaries, and avoid higher spending under the Medicare program.
Two massive megamergers in CVS-Aetna and Cigna-Express Scripts dominated the conversation around mergers and acquisitions in healthcare.
Whether you think the mergers will help or hurt consumers, both deals have sparked a distinct shift across the industry as competitors search for ways to keep pace. It also frames 2019 as the year in which five big vertically integrated insurers in CVS, UnitedHealth, Cigna, Anthem and Humana begin to take shape.
Combined, the mergers totaled nearly $140 billion.
Both CVS and Cigna closed their transactions in the fourth quarter with promises that their new combined companies would “transform” the industry. Unquestionably, it’s already triggered some response from other players. Whether those companies can make good on their promises to improve care for consumers remains to be seen, and the payoff may not come for several years, as 2019 is likely to be a year of initial integration.
While CVS and Cigna hogged most of the spotlight, several other notable transactions across the payer sector could have smaller but similarly important consequences going forward.
But the transaction also thrust WellCare back onto the ACA exchanges. Meridian has 6,000 marketplace members in Michigan.
Importantly, the acquisition gave WellCare a new pharmacy benefit manager in Meridian Rx. CEO Kenneth Burdick said it would provide “additional insight into changing pharmacy costs and improving quality through the integration of pharmacy and medical care.”
WellCare also makes out on CVS-Aetna transaction
WellCare was also a beneficiary of the CVS-Aetna deal after the Department of Justice required Aetna to sell off its Part D business in order to complete its merger.
2018 was the year of post-acute care acquisitions for Humana. The insurer partnered with two private equity firms to buy Kindred Healthcare for $4.1 billion in a deal that was first announced last year. It used a similar purchase arrangement to invest in hospice provider Curo Health Service in a $1.4 billion deal.
UnitedHealth keeps quietly buying up providers, pharmacies
With ample reserves, UnitedHealth is always in the mix when it comes to acquisitions. This year was no different. The insurance giant snapped up several provider organizations to add to its OptumHealth arm. In June, it was one of two buyers of hospital staffing company Sound Inpatient Physicians Holdingsfor $2.2 billion. It also bought out Seattle-based Polyclinic for an undisclosed sum. The physician practice has remained staunchly independent for more than a century.
Most notably, UnitedHealth is still in the process of closing its acquisition of DaVita Medical Group. DaVita recently dropped the price of that deal from $4.9 billion to $4.3 billion in an effort to speed up Federal Trade Commission approval.
The Minnesota-based insurer is also clearly interested in specialty pharmacies to supplement its PBM OptumRx. UnitedHealth bought Genoa Healthcare in September, adding 435 new pharmacies under its umbrella. Shortly after, it bought up Avella Specialty Pharmacy, a specialty pharmacy that also offers telepsychiatry services and medication management for behavioral health patients.
Vertical integration is all the rage in healthcare these days, with Aetna, Cigna and Humana making notable plays.
If the proposed CVS-Aetna, Cigna-Express Scripts and Humana-Kindred deals are cleared by regulators, the tie-ups will have to immediately face UnitedHealth Group’s Optum, which has been ahead of the curve for years and built out a robust pharmacy benefit manager (PBM) business already along with a care services unit, employing about 30,000 physicians and counting.
UnitedHealth formed Optum by combining existing pharmacy and care delivery services within the company in 2011. Michael Weissel, Group EVP at Optum, told Healthcare Dive the company began by focusing on three core trends in the industry: data analytics, value-based care and consumerism.
Since then, the company has been on an acquisition spree to position itself as a leader in integrated services.
“For the longest time, the market assumed that they were building the Optum business [to spin it out] and what is interesting in the evolution of the industry is that that combination has now set a trend,” Dave Windley, managing director at Jefferies, told Healthcare Dive.
“United has now set the industry standard or trend … to be more vertically integrated and it seems less likely now that United would spin this out … because many of their competitors are now mimicking their strategy by trying to buy into some of the same capabilities,” he said.
Weissel said Optum will continue to push on the three identified trends in the next three to five years, with plans to invest heavily in machine learning, AI and natural language processing.
The question will be whether and how the company can keep its edge.
What Optum is
Optum is a company within UnitedHealth Group, a parent of UnitedHealthcare. Optum’s sister company UnitedHealthcare is perhaps more well known within the industry and with consumers.
However, Optum, a venture that encompasses data analytics, a PBM and doctors,has been gradually building its clout at UnitedHealth Group.
In 2017, the unit accounted for 44% of UnitedHealth Group’s profits.
In 2011, UnitedHealth Group brought together three existing service lines under one master brand. Services are delivered through three main businesses within a business within a business:
OptumHealth – the care delivery and ambulatory care capabilities of OptumCare, as well as the care management, behavioral health, and consumer offerings of Optum;
OptumInsight – the data and analytics, technology services and health care operations business; and
OptumRx – its pharmacy benefit service.
The company focuses on five core capabilities, including data and analytics, pharmacy care services, population health, healthcare delivery and healthcare operations. Services include but are certainly not limited to OptumLabs (research), OptumIQ (data analytics), Optum360 (revenue cycle management), OptumBank (health savings account) and OptumCare (care delivery services).
The Eden Prairie, MN-headquartered company has recently expanded its care delivery services, with much of the growth coming from acquisitions. The past two years have seen Optum expand its footprint into surgical care (Surgical Care Affiliates), urgent care (MedExpress) and primary care (DaVita Medical Group).
It’s a wide pool, but the strategy affords UnitedHealth the opportunity to grab more revenue by expanding its market presence. For example, the DaVita acquisition, which is still pending, allows OptumCare to operate in 35 of 75 local care delivery markets the company has targeted for development, Andrew Hayek, OptumHealth CEO, said on an earnings call in January.
Optum’s strategy of meeting patients where they are and deploying more ambulatory, preventative care services works in concert with its sister company UnitedHealthcare’s goal of reducing high-cost, unnecessary care services, when applicable. If Optum succeeds in creating healthier populations that use lower levels of care more often, that benefits the parent company UnitedHealth Group as UnitedHealthcare spends less money and time on claims processing/payout.
The strategy has been paying off so far.
Three charts that show UnitedHealth’s financial health as it relates to Optum
Optum’s presence has grown as it has steadily increased its percentage of profits for UnitedHealth Group.
In 2011, the first year Optum was configured as it looks today, the company contributed 14.8% of total earnings through operations to UnitedHealth Group with $1.26 billion. That’s about 29 percentage points lower than in 2017, when Optum brought in $6.7 billion in profits on $83.6 billion in revenue.
Broken down, it’s clear that pharmacy services make up the lion’s share of the company’s revenue. In 2017, OptumRx earned $63.8 billion in revenue, fulfilling 1.3 billion prescriptions. OptumRx’s contributions to the company took off in 2015 when Optum acquired pharmacy benefit manager Catamaran.
In recent years, OptumHealth has grown due to expansion in care delivery services, including consumer engagement and behavioral and population health management. The care delivery arm served 91 million people last year, up from 60 million in 2011.
OptumInsight has grown largely due to an increase in revenue cycle management and operations services in recent years.
On Wall Street, UnitedHealth Group is performing well and has seen healthy growth since 2008. The stock peaked in January and took a dive when Amazon, J.P. Morgan and Berkshire Hathaway — industry outsiders yet financial giants — announced they would create a healthcare company.
While these charts suggest a dominant force, the stock activity shows that investors believe there’s still more room for competition, if the new entrants play their cards right.
Where Optum could lock out and rivals could cut in on competition
UnitedHealth started down this strategic path many years ago and the rest of the industry just now seems to be catching up.
“Optum’s been the leader in showing how a managed care organization with an ambulatory care delivery platform and a pharmacy benefit manager all in house can lower or maintain and bend cost trend and then drive better market share gains in their health insurance business,” Ana Gupte, managing director of healthcare services at Leerink, told Healthcare Dive. “I think they have been the impetus in the large space for the Aetna-CVS deal.”
Because the company is multi-dimensional, Optum’s competition will be varied. If all the mergers making news — including the Walmart’s rumored buyout of Humana — close, here’s what competition could look like:
Perhaps oddly, its largest revenue contributor, OptumRx, seems to have the largest vulnerability for competition in the coming years.
Optum’s competitive advantage in the PBM space is driven largely by already realized integration. Merging data across IT systems is no easy task, and Optum has spent years harmonizing pharmacy data across platforms to assist care managers in OptumCare to see medical records for United members.
Anyone with experience implementing EHR systems can tell you such integration doesn’t happen over night.
If the Cigna-Express Scripts deal closes, the equity can compete with OptumRx, but the technology investment needed to harmonize data and embed Cigna’s service and pharmacy information into Express Scripts servers will take time, Windley said. Optum, on the other hand, has invested in the effort and integration for years.
Gupte says the encroaching organizations in the PBM space have the ability to realize the efficiencies and savings and the integrated medical that Optum has been realizing across OptumRx and the managed care organization.
Optum’s leg up in PBM space could last two to three years over the competition, she said.
On the care delivery side, OptumHealth has been purchasing large physician groups for a variety of services. There are only so many large physician groups putting themselves on the market, and Optum has been making bids for them.
There’s still a bit of white space to fill in its 75 target markets, but analysts note Optum may have the competition on lock in this space
Even if CVS-Aetna closes, OptumCare is a $12 billion business with many urgent and surgery care access points. If CVS-Aetna is finalized, the company will have about 1,100 MinuteClinics capable of realizing efficiencies with Aetna, but, as Windley notes, they likely won’t have primary care or surgery care elements.
There’s also a lot of time and capital needed for building out and retrofitting retail space to medical areas.
On the surgical care services, “I don’t see either Cigna, Aetna or Humana getting into that business,” Gupte said. “That will be one element of their footprint on care delivery that will be unique and differentiated for them.”
Urgent care has the potential for outsider competition, she added. However, Optum is using its MedExpress business to treat higher acuity conditions and have an ER doctor on staff in each center. Compared to the typical types of conditions treated in retail clinics or those that would be feasible over time, Gupte believes services that could be seen in CVS or Walmart would be lower acuity, chronic care management services.
“[Optum has] been so proactive and so strategic I don’t think there’s going to be a lot of reactive catchup they have to do,” Gupte said. “I think it’s going to be hard for the other entities to play catch up, outside of the PBM.”
One potential issue will be harmonizing the disparate businesses so patients can be effectively managed across the various organizations, Trevor Price, founder and CEO of Oxean Partners, told Healthcare Dive.
“I think the biggest challenge for Optum is operationalizing the combined platform,” Price said. “The biggest question is do they continue to operate as individual businesses or do they merge into one.”
Optum will continue to explore ground in the three core trends it has identified.
Out of the three, consumerism has the longest path to maturity in healthcare, Weissel said, adding he believes consumerism is going to change healthcare more than any other trend over the next decade.
“There is a wave coming, and this expectation that we will move there,” he said. “Increasingly, this aging of people who become very comfortable in a different modality is going to tip the balance with how people will want to interact with healthcare. I know there’s pent up demand already.”
That means the company is putting bets into the marketplace around consumer building and segmentation models as well as thinking about how to connect data to allow patients to schedule appointments, view health records, sign up for insurance, search for providers or renew prescriptions online.
Consumer-centric projects currently underway include digital weight loss programs — including streaming fitness classes — and maternity programs to track pregnancy. The company is also experimenting with remote patient monitoring to understand the impacts on those with heart disease or asthma and to search for service opportunities.
Optum will pursue investments as well as acquisitions to push into the consumer space.
“When it comes to acquisitions to Optum overall, we’re always in the marketplace looking to extend our capabilities, to extend our reach in the care management space to fill in holes or gaps that we have,” Weissel said. “That’s a constant process in our enterprise.”
The merger would increase market concentration in the PBM space and put other insurers at a competitive disadvantage, Dave Jones says.
The proposed $69 billion merger between CVS Health and Aetna hit a snag on Wednesday when the California insurance commissioner urged the Department of Justice to block the deal.
California Insurance Commissioner Dave Jones said the proposed merger would have significant anti-competitive impacts on consumers and health insurance markets and would also pose a concern in the Medicare Part D market.
Nationally, Aetna has a 9 percent market share among Part D plans while CVS Health has a 24 percent market share, with even greater overlap in some geographic markets. Economic evidence suggests that increasing the market concentration and reducing competition for Part D plans will likely result in higher premiums, Jones said.
California is the largest insurance market in the U.S., according to Jones. Insurers collect $310 billion annually in premiums from individuals and businesses in the state.
“Mergers which decrease competition are not in the interest of Californians,” Jones said in the August 1 letter to Attorney General Jeff Sessions and Assistant Attorney General Makan Delrahim.
In 2016, Jones also vetoed the proposed Anthem/Cigna and Aetna/ Humana mergers that were both blocked by federal regulators.
Jones did approve of Centene’s plan to acquire Health Net, a deal that also received federal approval.
Those mergers would have combined competitors in the same industry, while CVS has dominant market power as a supplier.
Post merger, CVS would have less incentive to keep down the cost of prescription drugs for insurers competing with Aetna, Jones said. Insurers would have difficulty using CVS’s pharmacy benefit manager, CVS-Caremark.
CVS currently provides PBM services to 94 million plan beneficiaries nationally, of which 22 million are Aetna subscribers.
The merger would increase market concentration in the PBM market, eliminate Aetna as a potential entrant in that market and put other insurers at a competitive disadvantage, he said.
Many of the largest PBM competitors are also owned by health insurers, such as OptumRx, which is part of UnitedHealthcare, and Cigna, which has initiated a merger with Express Scripts.
“The PBM market’s lack of competition and the merger of CVS-Aetna is likely to put other insurers that do not own a PBM at a disadvantage,” Jones said.
The merger would not benefit consumers and it would also harm independent pharmacies, he said.
The California Department of Insurance does not have direct approval authority over the proposed acquisition because the transaction does not involve a California insurance company. It does involve Aetna subsidiary, Aetna Life Insurance Company, which is licensed by the state.
The proposed merger was announced in December. The deal has been going through the regulatory process.
Customers pay a monthly service fee, which is often covered by insurance companies and Medicare Part D plans.
Amazon announced today it is buying PillPack, giving the online giant the ability to ship prescription drugs around the country.
Walmart was reportedly in talks to buy PillPack, but Amazon stepped in with a $1 billion offer. The deal is expected to close during the second half of 2018.
The deal follows Amazon’s offer of a Prime membership to Medicaid beneficiaries in a move seen as direct competition to Walmart.
Shares of CVS Health, which is going through the regulatory process to merge with Aetna, fell after Thursday’s announcement, as did shares of Walgreens Boots Alliance and Rite Aid, according to CNBC.
PillPack is an online pharmacy that offers pre-sorted doses of medications and home delivery in all states except for Hawaii, according to the company.
It is in-network with all major pharmacy benefit managers, including CVS Caremark, Express Scripts, Optum Rx, Prime Therapeutics, Humana Pharmacy Solutions, Cigna, Aetna, MedImpact, EnvisionRx and CastiaRX.
PillPack is a pharmacy designed for people who take multiple daily prescriptions, delivering them in pre-sorted dose packaging, coordinates refills and renewals.
Originally founded in 2013, the company has raised around $100 million in funding. Customers using the platform pay a monthly service fee, which is often covered by insurance companies including Medicare Part D.
“PillPack’s visionary team has a combination of deep pharmacy experience and a focus on technology,” said Jeff Wilke, Amazon Worldwide Consumer CEO. “PillPack is meaningfully improving its customers’ lives, and we want to help them continue making it easy for people to save time, simplify their lives, and feel healthier. We’re excited to see what we can do together on behalf of customers over time.”
PillPack’s primary pharmacy is located in Manchester, New Hampshire, with its engineering, design, business operations and marketing teams located in in Somerville, Massachusetts and its advisory center and other corporate functions in Salt Lake City, Utah.