With CVS-Aetna and ESI-Cigna potentially merging, we could be entering a world where three PBMs would manage 72 percent of all pharmacy benefit claims. Greater market consolidation, both vertical and horizontal, should not be unexpected. This follows a trend for scale in 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 to gain economy of scale and for strategic reasons. For example, to gain the capabilities to participate in value-based health care, or to access to new markets. Also, worth noting this would lead to a highly concentrated Medicare Part D marketplace. Four payers, United Health Care, Humana, ESI-Cigna and CVS-Aetna would manage over 70% of Medicare Part D beneficiaries.
Payer/provider models also include 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 with the potential to enhance that specific offering. It may be a defensive play vis-à-vis the entry of Amazon into healthcare in whatever form that may take.
These vertical mergers portend a more complex—and perhaps challenging—environment for pharma players to prepare for. To generate near-term value from the deals, the newly combined organizations will synchronize pharma rebates starting with the best terms across both organizations. Additionally, pharma can expect four more broad implications:
- Higher stakes with every contract, given the increased concentration and market presence of each player;
- Greater complexity in payer structure reduces transparency in lines of business and creates more opacity in understanding incentives and payer decision-making;
- Changes in front-line relationships between pharma and payers;
- More sophisticated payers will exercise greater influence on provider decision-making, through innovate payment models, and by employing more tools to handle benefit/cost trade-offs between therapies.
Biopharma companies are paying more in rebates than they have in the past and the amounts they spend has eclipsed what they even spent on research and development. This makes it even more critical that their interactions and relationships with payers are well thought out and executed.
Each mega-payer payer is unique. This includes their business models, revenue sources, geography, strategic priorities, and primary customer segments. Strategies for each should be individualized to highlight unique opportunities and challenges for a pharma player. In doing so, pharma must:
Understand the impact of mergers on payer economics
Each payer/PBM entity will have sources of income generated through different lines of business. For example, ESI generates around 40 percent of their gross margin from Accredo, its specialty pharmacy. Not considering this when evaluating the contracting and economics landscape may overlook a key consideration and opportunity with ESI. Similarly, with fewer payers to negotiate with, each deal will 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 consider these mega-payers’ volume and pricing.
Evolve contracting abilities to be more detailed and customer specific
Similarly, deal analytics should consider competitor postures and positions and likely payer economics from these competitors. This included understanding positions in other therapeutic areas with this payer and estimating 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.
Invest in the capabilities needed to participate in new payment models
With more plans participating in new payment models, they will look to engage with pharma in these areas. Value-based healthcare continues to expand from experimentation to implementation. This means that pharma will need to develop the capabilities needed to successfully engage in these models. Participating in value-based models is an endeavor that will require considerable effort and investment, including outcomes and contract performance, data infrastructure, and government price reporting capabilities. For example, smart contracts 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.
Position account management to address the needs of larger, more complex customers
These mega-payers will present a more complex landscape 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?
Pharma companies will first need to conduct an honest appraisal of both their commercial and research interactions with the new payer organization. Then develop an integrated and coordinated engagement strategy with the new entity. This will lead to a coherent and unified voice with each interaction. There are plenty of examples where lack of consistency in message has inadvertently led to undermining hard fought for positions with influential payer decision-makers.
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 address allay patient concerns by helping them navigate reimbursement.
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 assets in development through the lens of the new access environment. Would reimbursement be more challenging? And if so, what would the implications be? 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.