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CVS, Aetna boast of 'synergies,' but that's just corporate speak

CVS, Aetna boast of 'synergies,' but that's just corporate speak
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CVS and Aetna herald their merger as supplying a new model for the financing and delivery of medical care and prescription drugs.

Their claim is two-fold: Combining insurance coverage for drugs and other medical services within a single firm will be a novel benefit offered to the under-65 private insurance market; and Combining an insurer and its physician networks with a national pharmacy chain will be a novel model of integrated care whose nucleus is the drugstore-retail clinic combination. Such a combination can deliver a new model of access to better care at lower cost.

What is the logic and empirical evidence to evaluate these claims?

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With regard to the first claim, the combination of insurance for prescription drugs (through CVS/Caremark’s pharmacy benefit manager, or PBM) and medical care (through Aetna) seems logical because it can support rather than discourage “coordinated care.”

 

Proponents of the combination argue it will permit a single insurer to take account of both the cost of drugs and the possible offsets from some initially costly drugs in terms of reducing the cost of other (usually more expensive) medical goods and services, such as specialist procedures and hospitalizations.

At present, roughly half of large employers offering employee health benefits (which is the majority share of the non-elderly private insurance market) carve out pharmacy benefits coverage to a PBM, while payment of other medical benefits for doctor, hospital, lab and drug infusion services are administered by a conventional insurer (like Aetna).

There is some evidence for substitution effects (use more drugs to offset more expensive providers), but economists are not all in agreement here on how large or common such offsets can be. The deal will also allow for “big data” from both firms to facilitate customer analytics (e.g., profiling, identification, determining where offsets occur and targeting of high-risk patients). 

With regard to the second claim, the proposed acquisition allows delivery of prescription drugs, pharmacists’ advice to patients and some ambulatory medical services (e.g., retail clinics staffed by nurse practitioners) “in-house” by an owned chain of drugstores.

CVS/Aetna may augment these offerings with wellness visits, health counseling, nutrition, vision and hearing services and deliver them as a coordinated package (“integrated care”) in a local, community setting, with the drugstore as the nucleus of care delivery and financing.

There is a lot going on here. Embedded in these claims are several goals sought by the health-care industry for years. These include care coordination, chronic disease management, patient engagement, consumer-centric health care and managing the continuum of care.

Not much in the past 20 years has helped us forward on these goals. In the 1990s, hospitals merged with one another and acquired physician practices to develop “integrated delivery networks” (IDNs) to purportedly do many of these same things — though improvements in quality or cost containment never materialized. Indeed, both cost and quality may have deteriorated.

Research evidence and admissions from IDN executives revealed the IDN mergers were designed to gain market power and leverage insurers for higher reimbursement rates. Moreover, public announcements about the new acquisition by CVS also include promises of “synergies,” enhanced “consumer experience,” “empowerment” and “new platforms” — usually signs of corporate speak rather than critical thinking. 

The search for higher quality, lower-cost and coordinated health care has continued into the new millennium using “Accountable Care Organizations” (ACOs) that combine hospitals, physicians and other providers to carry the holy water.

To date, these organizations have not only failed to deliver savings net of bonuses paid to providers, but have also had trouble delivering on both cost and quality goals simultaneously. Indeed, ACOs based on simpler, physician-only models may be more effective than the rest.

Are there any reasons to think that a drugstore will work better than an IDN or an ACO to improve quality, lower cost and coordinate care? It is possible, though by no means guaranteed, that relocating the nucleus of coordination to the place and organization from which people obtain drugs and simple care for moderate needs might work wonders.

Of course, we have been down this road before. Proponents of “disruption” claimed that retail clinics alone (like those found in pharmacies) would transform the delivery system and lead toward these goals. Instead, the clinics merely added another (albeit convenient) option for consumers, increased total utilization and led to higher aggregate costs.

The pharmacies offer lower-end, lower-cost services in the wider value chain of health care. It is not clear they will supplant utilization of the higher-end services that add to costs. It is also not clear that consumers will “beat a path” to the pharmacies in search of the latter’s enhanced offerings that will save their insurer’s money. Analysts should ask themselves, “Just how much fun is it to visit your pharmacy?”

All of this raises the question about the true motives for this deal. We are not mind-readers, but some other explanations come to mind that may be more plausible than the corporate speak.

For example, similar to the IDN formations of the 1990s, the CVS-Aetna deal may be an exercise in market power and competitive positioning. The PBM landscape has three major players that control roughly three-quarters of the market: Express Scripts (ESI), Caremark and OptumRx (part of United Healthcare).

While CVS/Caremark had already struck a 12-year agreement with Aetna to manage the pharmacy benefits for 9.7 million of its enrollees, the new deal would permit access to perhaps another 15 million customers.

This would serve to increase Caremark’s footprint to be closer to ESI in a sector that is all about “land grabs” for covered lives and the purported ability to use the threat of diverting a higher market share of customers to force drug manufacturers to offer rebates to the PBMs.

Another, related explanation is that the CVS-Aetna deal helps the two firms more closely resemble OptumRx — in effect, a large, diversified PBM-insurer combination with a lot of insured lives on the medical side.

A third, related explanation is that between 2011-2015 ESI and OptumRx outgrew Caremark via big acquisitions (Medco and Catamaran, respectively); the Aetna deal allows Caremark the opportunity to grow.

Overall, the decision to carve-in versus carve-out pharmacy benefits has played out among insurers for decades, with a roughly 50-50 split. Indeed, the choice reflects the classic business decision of “make versus buy."

The former relies on organizational hierarchies that foster coordination within (now) diversified firms using the visible hand of management. The latter relies on market exchanges that allow for specialization and scale economies among independent firms using the invisible hand of the market.

So far as we know, there is no “one best way” to decide this split.

Lawton R. Burns, Ph.D., and Mark Pauly, Ph.D., are both professors for the Department of Health Care Management at The Wharton School at the University of Pennsylvania.