The lines are blurring between U.S. healthcare payers and providers. What does this payer/provider consolidation mean for pharma?
Nothing less than a total shift in the way it does business.
If the CVS-Aetna and ESI-Cigna mergers goes through, we will enter a world in which three PBMs manage 72% of all pharmacy benefit claims. We will also see increased concentration in the Medicare Part D marketplace. In fact, just four payers—United Health Care, Humana, and the new ESI-Cigna and CVS-Aetna entity—would manage over 70% of Medicare Part D beneficiaries.
Increased healthcare market consolidation, both vertical and horizontal, should not come as a surprise. It follows a wave of provider consolidation, as seen in the earlier part of the decade, first with medical practices and more recently with hospitals and hospital systems (e.g., Adventist Health and St. Joseph Health).
Whether by merger or through collaborative arrangements, these partnerships are being pursued both to capture economies of scale and for strategic reasons: gaining the ability to participate in value-based healthcare, for example, or gaining access to new markets.
Consolidated payer/provider models also enable other elements of the healthcare delivery value chain, such as specialty pharmacies, to participate in the burgeoning growth of specialty pharmaceuticals. The CVS merger would give Aetna’s 22 million members access to CVS’s 1,100 MinuteClinics. It would also open up many avenues for the new entity to enhance that offering—not a bad defensive play given Amazon’s impending foray into healthcare.
These vertical mergers portend a more complex—and perhaps challenging—environment for pharma. To generate near-term value, newly combined entities will synchronize pharma rebates, starting with the best terms across each organization. Here are four more broad implications that pharma can expect:
- Higher stakes on every contract, given the increased concentration and market presence of each player
- Greater complexity in payer org structures, leading to more opacity in understanding incentives and decision-making
- Changes in front-line relationships between pharma and payers
- Attempts to exercise greater influence on provider decision-making through innovative payment models and tools that help calculate the benefit/cost trade-offs between therapies
Biopharma companies are paying more in rebates than they have in the past, with total spend eclipsing even R&D costs. This makes it even more critical that their interactions and relationships with payers are well thought out and executed.
Responding to the mega-payers
Each mega-payer is unique, with distinctive business models, revenue sources, geographies, strategic priorities, and primary customer segments. Pharma must respond to mega-payers with individualized strategies that address specific opportunities and challenges. This requires pharma executives to:
1. Understand the impact of mergers on payer economics
Each payer/PBM entity generates income through different lines of business. For example, ESI generates around 40% of its gross margin from its specialty pharmacy, Accredo. Fail to consider this when you evaluate the contracting and economics landscape and you overlook a key opportunity. Similarly, with fewer payers to negotiate with, you should expect each deal to have a greater swing-factor on forecasts and margins. Individual wins and losses can have a material impact on volume and net price. Pharma players should consider doing bottoms-up forecasts that take mega-payers’ volume and pricing into account.
2. Evolve more detailed and customer specific contracting abilities
Deal analytics should consider competitor postures and positions as well as likely payer economics from these competitors. You’ll need to understand positions in other therapeutic areas with this payer and estimate potential gross-to-nets to determine their rebate levels. This will determine the value each competitor brings to the payer and the likelihood of them altering formulary positions if other revenue is at risk.
3. Invest in the capabilities to participate in new payment models
Value-based healthcare continues to expand from experimentation to implementation. More plans will participate in these new payment models, and pharma will need to develop the capabilities to successfully engage in them. This will require considerable effort and investment, including outcomes and contract performance, data infrastructure, and government price reporting capabilities. Yet technological advances, such as smart contracts that are facilitated through blockchain technology, have the potential to lower the barriers to entry in value-based arrangements. Though blockchain implementation in this vertical is several years out, health plans are investing in understanding its potential in simplifying the execution of these arrangements.
Delays in treatment for patients who are tightly managed by payers directly hit pharma’s bottom line and put patient care at risk.
4. Position account management to address the needs of larger, more complex customers
Mega-payers will present a more complex landscape for account managers to navigate. Some concerns include:
- How will the new organization make formulary decisions?
- What are their near-term and long-term priorities?
- Who will be the new organization’s formal and informal influencers?
- How quickly will the organization adopt its new structure and strategy?
To address these concerns, conduct an honest appraisal of both your commercial and research interactions with the new payer organization. This, in turn, will help you develop an integrated and coordinated engagement strategy with the new entity—and a coherent and unified voice with each interaction. There are plenty of examples where lack of consistency in message has inadvertently undermined hard fought for positions with influential payer decision-makers.
5. Help providers and patients navigate the reimbursement complexities
Providers may have more uncertainty about product coverage and reimbursement. First, economics is playing a more significant role in payer coverage decisions. Second, newly merged payers may be transitioning systems and decision-making processes, raising questions on which policy positions will be adopted.
For patients, coverage may be delayed. This is more critical for patients on specialty drugs, who represent two percent of prescriptions but comprise 35% of drug costs. Delays in treatment with these patients, who are tightly managed by payers, directly hit pharma’s bottom line and put patient care at risk. By understanding patient economics at the segment level—especially as we enter a world of high deductible health plans and rebates being passed through to patients—pharma can allay patient concerns by helping them navigate reimbursement.
6. Reexamine R&D priorities to ensure they are relevant in the new access environment
Greater consolidation will only lead to a greater need for value and evidence. Pharma players should examine their assets in development through the lens of the new access environment. Will reimbursement be more challenging? If so, what are the implications? What additional data or supporting evidence would be required to secure access in this new environment? A similar consideration in the due diligence process holds true for business development functions.
Whether these specific vertical mergers go through or a new set of partners engage in potential collaborations, the trend is clear: consolidation will continue. Pharma players should prepare their organizations to be ready for potential changes.
This post first appeared on Asif’s blog.
Asif Velani is a healthcare consultant and executive who helps clients launch pricing, payer/provider contracting, market access, distribution strategy, and engagement plans. A clinical pharmacist and MBA, he bridges both clinical and business, operational and strategic challenges.