Tag Archives: big pharma

3 Ways to Tame Healthcare M&A

The healthcare business is broken for consumers and taxpayers in America. And we can expect to see more mergers, acquisitions and large alliances in the coming months and years, all forming in the name of trying to control rising costs and taking better care of patients.

The question is: Will they?

Unfortunately, the answer usually is generally no. Let’s take a look at two recent headlines, starting with the CVS acquisition of Aetna.

While the CVS acquisition of Aetna makes financial sense for shareholders, the same cannot be said for consumers. CVS and Aetna, which individually represent severe conflicts of interest, together create an even larger systemic problem. American consumers need healthcare intermediaries to clearly represent the interests of either the patient or provider — they can’t do both.

Maybe we’re suffering from amnesia because we’ve forgotten why the Pharmacy Benefit Manager (PBM) industry exists in the first place. Years ago, insurers managed drugs themselves. However, the conflict of interest and the resulting price gouging was so bad that the PBM industry took off in the 1980s and became the de facto broker (intermediary) for the drug industry. Over the next three decades, the PBM industry “evolved,” and, today, the PBM business model looks worse than the insurance industry it once set out to fix. Considering the conflicted business models involved, it seems highly ironic that today’s largest PBM is buying one of the largest health plans. This was a bad idea 30 years ago, and it’s an even worse idea today.

See also: How Amazon Could Disrupt Care (Part 3)  

So why isn’t this going to control costs? Because it really is just a mechanism to switch roles from the “broker function” to that of the supplier. In this case, there is the added benefit that Aetna can get over the 85% Medical Loss Ratio (MLR) limitations by paying themselves as a supplier. All this does is further reduce choice, lock out competition and increase profitability for itself while increasing costs for purchasers.

Planning on larger mergers to control costs is a fool’s errand. Take a look at UnitedHealth Group (UHG), which owns UnitedHealthcare (UNH) and OptumRx. The company’s structure and scale is on par with a combined CVS and Aetna. UHG owns one of the largest health plan providers and one of the largest PBMs, and UHG continues to aggressively acquire other health care services companies.  Many corporate customers will tell you UNH is one of the most difficult insurers to work with because of restricted data sharing and lack of transparency. UNH also makes it nearly impossible to use services other than their own.  This is not a recipe to control costs, and it’s going to get worse because UHG recently announced the purchase of Davita’s Medical Group, which has hundreds of care facilities and about 30,000 affiliated physicians.

Another major issue with this acquisition is that it enables the combined entity to collect even more patient data and constrict its availability and use. CVS CEO Larry Merlo stated, “By integrating data across our enterprise assets and through the use of predictive analytics, we will create targeted interactions with patients to promote healthy behaviors and drive adherence, and this will further improve the quality of care for patients while also resulting in healthier outcomes.”  Mr. Merlo fails to acknowledge that the data the company integrates, uses for its benefit and sells for its profit is their customers’ data — to which the company claims ownership and restricts for others’ use. After the CVS-Aetna deal closes, restrictive data hoarding will stifle potential health benefits and further limit innovation opportunities.

Just a few weeks ago, another headline about an alliance forming to control rising costs captured our attention. Intermountain Healthcare, Ascension, SSM Health and Trinity Health announced they are joining forces to create a new generics drug company.

Again, on paper, the announcement seems like it could help control costs and benefit consumers. But taking a closer look at the match, the marketing value to the hospital chains has already vastly exceeded the cost reduction of the generic drugs in question as well as the pressure this places on big pharma by at least three or four orders of magnitude. Big Pharma isn’t in the generics business.

As egregious as the examples are that we keep talking about with Valeant and Turing, those are rounding errors in aggregate compared to the global sales of just one brand drug, Humira, which brought in $14 billion last year, alone.

Big Pharma is laughing all the way to the bank as the press keeps writing about how big a deal this is and how four hospital chains are going to change the landscape. These large monopolistic systems get the great publicity as they try to lay claim to the moral high ground. More importantly, we have, yet again, given providers of services (a.k.a hospital systems) who already have the reputation for marking up medicine such as Tylenol the power to mark up these new generics they will manufacture.

The most important announcement of the past few days is the one from Amazon, Berkshire-Hathaway and JP Morgan. While there are few concrete details, the message from the top is clear that these companies have decided to take matters into their own hands to control costs as all the intermediaries they have relied on haven’t delivered.

As those who represent consumers, benefits professionals have a crucial role to play as we continue to learn about more mergers, acquisitions and large alliances. As such, there are three things each of us as HR benefits professionals can do to help tame the M&A beast.

First, insist on transparency. This starts by making sure intermediaries (insurers and PBMs) never control supplier performance data. You should have the right to see whatever data you need about your suppliers — just as you would in any other industry. Stop working with intermediaries and suppliers that restrict or refuse to provide data. You should also require intermediaries to provide all supplier contracts they have in place. Trust, but verify.

See also: The PBM vs. the Drug Manufacturer  

Second, require your suppliers to pick a side — yours, or theirs, but not in between. You, not an intermediary, should be able to choose who provides services to you. You should never be penalized for choosing a supplier that isn’t your intermediary’s preferred choice.

Third, demand independence. Intermediaries must represent the company and customer interests. There’s an obvious conflict of interest when an intermediary also represents a seller of goods that constitutes a significant source of the intermediary’s revenue. Stop doing business with intermediaries who have such conflicts.

Congratulations to all the CVS and Aetna stockholders out there; there’s a big payday headed your way. Because one person’s profit is another person’s cost, expect the price of health care to increase in this brave new world.

However, in the long run, the rest of us are going to bet on the new Amazon/Berkshire-Hathaway/JP Morgan model from Bezos, Buffett and Dimon to lead the charge of purchasers taking control of their own destinies.

Why Big Pharma Lawsuits Don’t Work

Truth-stretching claims made by companies about their products are nothing new — we need only think back to old-school infomercials for some prime examples. When the products in question are prescription drugs, however, the repercussions of product misrepresentation become much more complicated. Because there are a number of regulatory departments designed to root out potentially dangerous substances well before they make their way into patient hands, it seems reasonable to assume that the drugs prescribed to us are safe for their intended uses.

Over the last few decades, the FDA has developed a number of programs designed to speed the drug approval process and more quickly deliver promising new medications to suffering patients. The 1997 Food and Drug Administration Modernization Act included a “fast track” program that allowed qualifying drugs to cut approximately a year off the median development timeline. From one point of view, cutting down the time it takes for new medications to make their way to patients in need of treatment has clear benefits. From another, shortening the review and approval process can lead to less rigorous trials with less time to observe potential side effects and interactions.

Faster approval time also means that pharmaceutical companies can start to profit from their innovations more quickly, which provides another motivator for promoting a more streamlined approval process. In some cases, however, an expedited approval process can lead to complications. Pradaxa, sold without a reversal agent for its blood-thinning effects for at least five years, has contributed to severe bleeding incidents and hundreds of deaths. The drug’s manufacturer, Boehringer Ingelheim, has faced thousands of lawsuits due to the internal bleeding side effects and reached a $650 million settlement in 2014 to resolve roughly 4,000 claims.

See also: The True Face of Opioid Addiction  

There are cases to be made both for and against streamlining the FDA drug approval process, but as the aphorism “first, do no harm” urges, safely treating patients should always be at the core of any system. In the first quarter of 2017 alone, the pharmaceutical and health products industry spent a total of $78 million in lobbying, a $10 million increase from the same period in 2016. This massive spending has allowed large pharmaceutical companies to influence policies and laws, and the leverage that Big Pharma gains through lobbying accounts for one of the pathways allowing drugs with potentially life-threatening side effects to reach the market before they’re fully tested.

In 2001, Pfizer, one of the world’s largest pharmaceutical companies, brought a drug called Bextra to market. Bextra belonged to a new class of painkillers called Cox-2 inhibitors — purportedly safer than generics but with a much higher price tag. The FDA approved the drug to treat arthritis or menstrual cramps but rejected the drug for acute surgical pain (which would require a much higher dosage). Pfizer and its marketing partner Pharmacia pitched Bextra to surgeons and anesthesiologists anyway, and at doses up to twice what the FDA had approved as safe.

Promoting a drug for off-label use is in direct contradiction to the Federal Food, Drug, and Cosmetic Act (FDCA) designed to protect the public by ensuring that pharmaceutical drugs are safe and effective for their intended uses. Unlawfully promoting drugs for unapproved uses constitutes healthcare fraud, which in turn excludes pharmaceutical companies from Medicare/Medicaid. The penalty of Medicare/Medicaid exclusion would result in the disruption of necessary prescriptions to patients, loss of jobs and stock losses for shareholders, while virtually guaranteeing financial collapse. Instead of charging Pfizer with the crime, federal prosecutors charged one of Pfizer’s subsidiaries, Pharmacia & Upjohn Co. Inc.

The resolution ensured that workers at Pfizer who hadn’t engaged in illegal activity wouldn’t be affected, but it also reduced the penalty to Pfizer from federal charges to a criminal fine — Pfizer is effectively still able to sell products through federal programs. The size of the fine (nearly $1.2 billion) pales in comparison to Pfizer’s annual revenue, and Mike Loucks, the federal prosecutor who oversaw the Pfizer investigation, worries that the penalty wasn’t steep enough to deter similar behavior in the future.

Contributing to the current situation are four FDA policies that have created accelerated pathways to approval for new, breakthrough pharmaceutical drugs. For example, the 21st Century Cures Act allows companies, under certain conditions, to provide data summaries and “real world evidence” (such as observational studies, insurance claims data, patient input and anecdotal data) rather than full clinical trial results. The policy prioritizes innovation and expedited approval over public safety, resulting in an overcrowded market of nearly identical drugs backed by less comprehensive research.

See also: Big Opioid Pharma = Big Tobacco?  

The importance of research into new solutions to a growing list of healthcare concerns can’t be discounted, but the priorities of current systems seem to have strayed from their original purpose. With the focus behind many pharmaceuticals developed and marketed today being profitability over safety and efficacy, it’s clear that regulations need to change. The industry requires a greater focus on transparency around quality testing and legislation, as well as the elimination of exploitable policies that allow larger companies to stymie generation of quality, affordable generics. Such a shift has the potential to both reverse rising healthcare costs and improve the quality and accessibility of medication to the public.

Flogging the Data Until It Confesses

Did you ever hear the joke where the boss says floggings will continue until morale improves? In healthcare, flogging the data until results improve or the data confesses is not uncommon. Too bad.

Over the course of my career, I’ve worked with companies with more than a hundred thousand covered lives, the claim costs of which could swing widely from year to year, all because of a few extra transplants, big neonatal ICU cases, ventricular assist cases, etc.

Here are just a few of the single case claims I’ve observed in recent years:

  • $3.5 million   one cancer case
  • $6 million        one neonatal intensive care
  • $8 million        one hemophilia case
  • $1.4 million    one organ transplant
  • $1 million        one ventricular assist device

These big numbers aren’t a complaint. After all, health insurance should be about huge, unbudgetable health events. But they raise an important point about the lumpiness of costs and about claims that are made about reducing health expenditures.

All health insurance plans must cover one organ transplant every 10,000 or so life years, which will cost about $1 million over six years. So, a plan with 1,000 covered lives will have such an expense every 10 years, on average. Of course, the company may have none for 15 years and have two in the 16th year. The same timing applies to $500,000-plus ventricular assist device surgeries.

Looking at claims data for small groups is perilous—and is sometimes so for large groups, too. Because of the high cost and relative infrequency of so-called “shock” claims (those of more than $250,000), you need about 100,000 life years for the claims data to be even approximately 75% credible. When a group with 5,000 lives says it did something that cut the claims costs, you can’t really know if the change made a significant difference for a couple of decades.

Here’s an example. A small-ish group with about 3,000 covered lives asked me to help calculate how much its wellness plan was saving. It had all its employees listed in three tiers: active wellness participants, moderate participants and non-participants. I warned the company it didn’t have enough data to be credible, but it proceeded anyway. It expected active users would have the lowest claim costs—and so on. When the data was reviewed, there was perfect reverse correlation. Active wellness users had the highest claim costs, moderate users had the next highest costs and non-participants had the lowest. In the final report—which I had nothing to do with preparing and from which I had recused myself—the company subtracted big claims by the active and moderate users to get the results it wanted. In short, the company flogged the data until it confessed. Alas.

One large company claimed huge reductions in plan costs by adding a wellness program. It turns out, during the period in question, the company also implemented an “early out” incentive. Upon examination, the early-out program resulted in a big reduction in the number of older employees, which more than accounted for the reduction in claims costs.

See Also: 6 Limitations of Big Data in Healthcare

Here is yet another example. I was at a conference a few years ago where a presenter from a small company (about 1,000 covered lives) claimed to have kept its health costs flat for five years through wellness initiatives. While the presenter got a big ovation, his numbers just didn’t add up. I asked him a few questions after his speech about the other changes he made during that period. He said the company lowered its “stop loss” limit from $100,000 to $50,000 a few years earlier. Then he admitted to excluding his stop-loss premium costs, which were skyrocketing, from his presentation. With a bit of mental arithmetic, I added the costs back in, which revealed his company’s total health costs were going up at the same rate as everyone else’s, perhaps even a little faster. Hmmm. I don’t think he deliberately misled the audience; he just didn’t know better.

When you hear boasts of big short-term impacts of wellness programs, beware of confirmation bias.

When a company claims it implemented something that caused its health plan costs to drop 15% or so, ask a few questions:

  1. Did the company adjust for plan design changes—such as raising deductibles and co-pays—that merely shifted costs to employees?
  2. Did the changes really save claim dollars?
  3. Did the company factor in stop-loss premiums?
  4. How many life years of data did the company observe?
  5.  Did the company exclude large or “shock” claims? (This isn’t uncommon, especially among wellness vendors.)
  6. Did the company experience any big changes in demographics, such as through implementation of an early retirement program or layoffs that, particularly, had a large impact on older workers?

When I’ve asked those kinds of questions of a small company, I’ve almost never seen a big claim of cost reductions hold up under scrutiny. And that goes for some big companies, too.

Today, flogging the data to get the desired results is all too common. That’s no surprise. Academics and big pharma kept getting caught doing the same thing.

Skepticism is a good thing.