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Transform Care March 19, 2018

Wharton Podcast: When Pharma Chains and Retail Collide

Key Takeaway
If #Amazon brings drugs to healthcare and links #WholeFoods along the way, it could be a force in the industry - #OWHealth

Tom Robinson, Partner, Health & Life Sciences, Oliver Wyman, and Mark Pauly, Bendheim Professor in the Department of Health Care Management at The Wharton School, discussed everything healthcare during a recent Wharton Business Radio podcast on Sirius XM. The chat on what mega mergers mean for healthcare consumers and how consolidation is helping advance the industry was held only a few weeks prior to the recent announcement from Amazon, JPMorgan Chase, and Berkshire Hathaway to launch their own independent, not-for-profit healthcare company. Here are highlights from the discussion.

Healthcare mega mergers stole the spotlight in 2017, which led Tom and Mark to begin by discussing proposed million-dollar pharmacy chain collaborations. Said Mark on the significance of retail pharmacists purchasing health insurers, as opposed to health insurers purchasing providers, the days of consumers getting hospital care from one organization, their physician care from another, and their drugs from yet another may be a thing of the past.

“If we are to achieve the objective of higher quality at lower cost, things need to be more coordinated. That’s easy to say, but so far, no one’s figured out the magic formula for doing it,” Mark said.

Most care coordination attempts up until now, he said, were driven by either a healthcare hospital system or a large physician group. And the more obvious approaches to mergers & acquisitions (M&A) have not yet been proven effective.

“Either hospitals are trying to run the show, or doctors are trying to run the show,” he stated. “Maybe the drug store or pharmacist ought to run the show.”

Mark predicted the industry will experience a continuation of experimentation, which originated from Medicare redesign. This experimentation, he adds, will likely get more impetus from the private sector than the government.

Merger Success Depends on Both Big and Small Scale

Industry-disruptive mergers, including recently proposed plans from leading pharmacies and healthcare companies, materialize when a health plan can simultaneously take on both national scale and local density, said Tom.

“Your administrative cost structure is going to be determined by national scale. Your medical cost structure is going to be determined by local density,” Tom explained. “You either need enough doctors in a network to be important locally, or you need enough patients sent to those doctors so you have necessary scale. It’s a game on both sides, where providers recognize payers are trying to build up their patient volume so there’s sufficient negotiation leverage, and providers are trying to build up their networks so they have sufficient coverage so they in turn can negotiate hard.”

Prices charged to health insurers – which are then passed onto consumers, or directly to employers – therefore tend to increase.

“When these mergers often happen, it starts to look like a diseconomy of scale. We see economies of scale on the operational side, but we don’t see economies of scale on the rate side,” Tom added.

Do Retail Pharmacies or Large Health Insurers Benefit More?

The healthcare industry is now putting much greater weight on the intersection of drugs and retail, said Tom. It is a reality that health insurance plan providers spend more on drugs for their commercial members than on hospitals.

“You think healthcare performance is going to be increasingly about controlling drug costs, and insurers are pretty poorly positioned to control their drug costs. They have historically outsourced all of that to pharmacy benefit managers [PBMs],” said Tom.

A pharmacy chain, he added, is essentially an independently functioning powerhouse, with a full team of trusted pharmacists, thousands of 24-hour sites of care, data, and analytics – essentially all the negotiation power it will ever need.

But although the focus of such deals tends to focus solely on the retail nature of healthcare, mergers are a very powerful means of controlling pharmaceutical costs, he added.

For instance, he noted that the nation’s largest employer of physicians is a health insurer. But buying up physicians goes above and beyond merely recognizing primary care’s tremendous revenue opportunity.

“It’s just an alternative version of how to build local density. And now it gives them a credible threat with hospital systems,” he said. “And it’s not just a threat. They’re building the capability to direct care to the highest value area – best outcomes, lowest cost, best experience.”

Where There’s a Will, There Isn’t Always a Way

But pulling off such a massive deal is another story. Factors like size, cultural differences, and personality conflicts are only a few complicating factors, agreed Tom and Mark. Although merging companies may appear to have similar philosophies around retail’s role in healthcare, whether or not they can successfully come together remains to be seen.

It is perhaps a bit of a bizarre concept to imagine a massive insurance company more than a century old suddenly being acquired by a drugstore chain, Mark pointed out. But mergers happen when newer companies decide to evolve with the times.

The role of the traditional pharmacy is changing, as drugstore chains begin evolving into health companies. Pharmacies have tried – and sometimes succeeded – in rebranding themselves as health companies instead of as drugstore chains. In the meantime, older – less visionary – companies will suddenly be left behind, he implied.

“In recent years, the management of CVS has proven quite visionary in terms of how they have restructured the roles of pharmacies and implemented policies like banning cigarettes,” Mark explained. “They’ve tried, and in some cases succeeded, in fashioning themselves as a health company rather than a drugstore chain. I still go to CVS to buy Christmas lights for my house, but I also spend many hours waiting in line at the pharmacy counter.” Pharmacies may also play a key role in keeping more consumers out of the physician’s office.

“Eighty percent of Americans live within 10 miles of a CVS. It’s just tremendous coverage. Think about the power of that,” said Tom. “Imagine you’re standing in line at that pharmacy counter, and something pops up on the pharmacist’s screen that says, ‘Ask the customer about whether they’ve had their blood pressure checked.’ That’s tremendously powerful in helping prevent future problems to keep people out of emergency rooms.”

Healthcare’s Greater Retail Success Still on the Horizon

So far, the greater industry's attempts to set up retail clinics have only been moderately successful.

“Their standard brick-and-mortar business was threatened, not only by the rise of mail-order pharmacies, but also by the [expectation] that Amazon might enter that particular line of business,” Mark commented.

“The dispensing of drugs has moved substantially toward mail order rather than having to stand in line at the drugstore every time you need a prescription, or renewal of a prescription. And Amazon is a par excellence entity for delivering things to people’s homes,” he said.

“They’ve been very aggressive in trying to think of how to use a delivery platform to put more things on it. Delivering things like reminders, but also more information for consumers to help them understand why they’re taking this drug, and what the side effects are,” Mark added.

But despite a customer experience unlike any other, Amazon still has hurdles to climb over, such as incorporating a drug insurance or health insurance company into its greater business model.

“The main barrier to entry is not so much setting up a company that can take in premiums and pay claims, but whether you have a local and a national presence that can actually change the process of care that goes along with those claims,” he added.

“[Amazon has] such a wonderful consumer experience in everything they do, and if they bring that through to drugs and healthcare, and perhaps link in their acquisition of Whole Foods along the way, they can help people in wellness and preventative medicine,” Tom said. “It could be a phenomenal force in the industry.”

Click here to listen to the full podcast on Wharton Business Radio.

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