Enabling Healthy Decisions

I think several people have talked about this, but I figured I would weigh in. There are several reasons why the people at CVS Caremark should be excited about this deal (recent WSJ story):

1. Distraction – Express Scripts now has both the Walgreens contract and the Medco acquisition and then potentially integration to distract them for the next 18 months.  (Although Express Scripts is very good at integrations once approved.)
2. Validation – The fact that Medco which was once the biggest PBM could suffer multiple losses and end up selling validates that a standalone PBM model faces real long-term challenges.  (Although Express Scripts continues to prove me wrong from a stock perspective.)
3. FTC – IMHO this should decrease pressure on CVS Caremark since the FTC (and retailers) will be focused on this acquisition and if completed, would create a similar size entity to CVS Caremark.
4. Walgreens – As long as there is a contentious relationship between Express Scripts and Walgreens, they need CVS Caremark as a negotiating option.
5. Assets and Talent – Depending on how the acquisition plays out, there might be assets which are sold, and there certainly will be lots of talented people on the market (although some may just take the money and run). 

I guess the key question is whether scale will allow an Express Scripts / Medco combined entity to drive price down dramatically as some think.  I think scale will lower prices, but IMHO I think there is limited savings. The reimbursement rate to retailers can only go so low. The acquisition price from wholesalers and generic manufacturers can only go so low. The rebate dollars from pharma can only go so far before they pursue other options (i.e., copay cards).  [This is the point I made in my whitepaper back in January and in the previous one about commoditization of the industry.]

I think the CEO of Burchfield Group makes some relevant points in this YouTube video:

[Disclosure: I do own CVS Caremark shares that I have bought and held over the past 18 months.]

The covered lives calculation is a little funny since a “life” can be counted by multiple PBMs.  For example, look at the Federal Employee Plan (FEP) contract which until recently was split between Medco and CVS Caremark and therefore counted by both (I assume).  But, it is a measure that is used none the less.  [Another way is based on claims processed.]

So, what I did is take the numbers from this chart on the PBMI website and make the following adjustments:

1. I focused just on the large PBMs that provide a full suite of services (to my knowledge) and were on this original list which excludes some such as Navitus or WelldyneRx.
2. I added the Express Scripts and Medco lives together.
3. I subtracted 10M for the United Healthcare (UHG) contract at Medco and moved those to Prescription Solutions (now called OptumRx).  (acknowledging that this doesn’t happen yet)
4. I subtracted 8M for the FEP loss for Medco recognizing that those don’t show up at CVS Caremark since they would already have been counted there on the retail contract.
5. I added together the CatalystRx and Walgreens lives from their deal earlier this year.
6. I noted that Humana’s lives are counted under the Argus number.

Express Scripts buying Medco – This is still the big topic of discussion (see original comments with links added since I was on vacation last week with no wireless access).  The question of course begins to shift to the FTC approval.  According to one report out, one analyst estimated that the combined entity would have 30-35% of the PBM market in terms of script volume, and they estimated what the Herfindahl-Hirschman Index would say about market concentration post merger – heavily scrutinized but not a big issue.  I would agree from a claims perspective that this probably won’t be an issue.

I’ve only seen one analyst bring up the issue of mail order concentration which Medco has always led in.  I’m not sure this will be a sticking point since mail is still typically optional.  Where I would be interested in seeing the HHI would be in specialty.  Given that 28% of the time only one specialty pharmacy (SP) is contracted with and 57% of the time it’s 1-2 SPs, this seems like a bigger area of focus and potential control.  (per EMD Serono Specialty Digest)  It’s also clearly the future of the pharmacy and PBM market. 

If you use Adam Fein’s estimates from his 2010-11 Economic Report on Retail and Specialty Pharmacies, the combined Curascript and Accredo market share would be somewhere around 52% which would seem high for one entity.  [I’m sure Walgreens or CVS (among others) would be happy to buy some of their specialty assets if that made the deal more likely.]  More to come as I catch up. 

When I was at the U2 concert a few weeks ago in St. Louis, I couldn’t help thinking about their music and other things from growing up.  While it was a great concert, it really made me feel old.  Here’s a few of those things which then got me thinking about what healthcare was like 40 years ago.

• We had record players not digital turntables (or iPad turntable apps).  [I still remember my first 45-single that I bought by Twisted Sister.]
• I still want to call it a Walkman half the time not an iPod.  And, I think my kids were wondering why I had these big “beat boxes” in the basement that I finally gave away.
• I actually remember when apartheid in South Africa was more than history and when Nelson Mandela was freed.  I saw him speak when he first came to the US. 
• When I think of terrorists, I think of the IRA not al Qaeda. 
• I remember that “the Wall” is not just a song.
• I remember hyperinflation in Brazil not them as part of the emerging global marketplace. 
• I remember using my friend’s dad’s car phone and how exciting that was.
• I remember saving files I programmed in basic to a tape player.  Heck, I even remember having a tape player and recording songs off the radio.
• I remember wanting a banana seat for my bike as a kid.
• I remember celebrating the Centennial (200 years of freedom).
• I remember kids played sports for fun not to become the next Tiger Woods.
• I remember when China was “the Orient” and not a superpower looking over our shoulder.
• I remember when people were politically incorrect.
• I remember when seat belts were optional as were car seats for kids and bike helmets.
• I even remember owning a black and white TV.

Anyways, I think you get the point.  Of course, I don’t remember what healthcare was like 40 years ago.  For that, I had to do some research. 

I think this YouTube video with Nixon and Kennedy is a good start.  Nixon is talking about spiraling costs and the need for well care.  (Full text of President Nixon’s speech is here.)

In the video, they talk about costs hitting almost $100B that year (while we’re at well over $2.4T per year in the US today).  And, in a quote that sets up well the ongoing technology struggles the industry has had:

Health Information Systems: Each physician, hospital and clinic today is virtually an information island unto itself. Records and billings are not kept on the same basis everywhere, laboratory tests are often needlessly repeated and vital patient data can get lost. All of these problems have been accentuated because our population is so constantly on the move. The technology exists to end this chaos and improve the quality of care. I have therefore asked the Secretary of Health, Education, and Welfare to plan a series of projects to demonstrate the feasibility of developing integrated and uniform systems of health information.  (source)

Does all of this sound familiar?  Scary!

One question I wondered a few months ago is whether we could offer a retrospective plan to people that was lower cost.  What if you stripped out all the “cool” new developments over the past decade, but gave people a safety net healthcare offering that leveraged generics and traditional treatments.  They would have to buy-up to the newer technologies and solutions that were available.  Could that work?  I doubt consumers would tolerate it, but perhaps it could create a reasonable, low cost offering.