PBM industry's impending Amazon threat.

November 27, 2017

 

Recently, CVS Health made a $66B offer to buy Aetna. CVS Health and Anthem also announced a partnership to create a new PBM (Pharmacy Benefit Manager), IngenioRx.  In 2017, there were 30+ large mergers, acquisitions and joint ventures within the healthcare space signaling a clear trend of vertical integrations. It is evident that the major players want to take full ownership of customer’s health journey across multiple touchpoints. They want to understand what their customers are doing, their health needs, healthcare habits and take a larger share of customer’s wallet in the healthcare space.

Healthcare has been a lucrative & a growing market. It is expected to be roughly around $3 trillions by 2025, and the healthcare spending is expected to reach close to 20% of the US GDP. The prescription benefit spending is expected to cross $610 billion by 2021 and growing - especially given the aging US population. As a result, new players want to get into the highly lucrative prescription drug market. There have been credible rumors about Amazon’s entry in the prescription drug market as well.

Amazon’s entry is being looked as a disruption to the market by either creating a network of pharmacy or becoming a full fledge Prescription Benefit Managers(PBM). It will squeeze bottom lines of existing players even more threaten established players like CVS Caremark, OptumRx, and ExpressScript. These organizations are already engaged in creating proactive competitive response strategy to counter Amazon’s entry in the market. Recently CVS has announced next day or even same day prescription delivery in select markets is one of such counter strategy example.

Overall the industry is set for some of the interesting evolutions and business model changes. We hope that consumer will be ultimately benefited through these disruptions. Let’s take a deep dive to understand this in more detail.

 

What is PBM?

Pharmacy Benefit Managers are the gate-keeping middlemen in the prescription drug delivery to the patients. PBMs administer prescription benefit plans for insurance companies and employers. They manage benefits, process and adjudicate the prescription claims, provide clinical feedback, negotiate drug prices with the wholesalers and drug manufacturers, manage and maintain the relationship with a network of pharmacies to provide hassle-free services for the drug consumers and payors/insurance companies.

 

 

The more organizations a PBM services, the greater number of patients (or lives, in insurance lingo) under its umbrella. With more lives comes more leverage when a PBM negotiates with pharmaceutical manufacturers for drug prices. Hence, the industry profit incentives are designed to drive consolidations. Hence it is no surprise that roughly 70% of the prescription benefit market is consolidated among top 3 players namely Express Scripts, OptumRx and CVS Caremark after serious or mergers and acquisitions.

Let’s understand how these big players are structured.

 

 

Currently, top 4 players cover almost 75% of the total PBM market.

Almost half of the OptumRx revenue comes from their UHG own UnitedHealth Care health plan. This gives UHC control on the drug prices negotiation. Similarly, Prime Therapeutics is owned by 21 blue plans which give the plan visibility of the negotiated drug prices. CVS Caremark has the support of its own largest network of retail pharmacies across the nation. However, they do not have a health plan/payor as part of their own group. Hence CVS Health offers to Aetna is can be looked as strive to gain the control over the payor market as well and have a complete vertical integration in the prescription drug delivery value chain. In this mix, Express Script is a standalone PBM, not having its own payor or retail pharmacy footprint. With looming loss of their largest customer/payor Anthem by 2020, they would be under severe profit as well as revenue pressure.  This might have resulted in the Express Script acquisition of Evicore Healthcare, as a diversification strategy.

 

What is in it for Amazon

Amazon has a long-standing interest in prescription drugs, an industry with multiple middlemen, long supply chains, and opaque pricing. In the 1990s, it invested in startup Drugstore.com before being acquired by Walgreens. Last November, Amazon began a partnership with Seattle-based pharmacy Bartell Drugs to deliver over-the-counter drugs from its stores to shoppers through Amazon’s delivery service Prime Now.  Amazon.com already selling the OTC drugs throughout the nation.

 

Amazon’s Strengths

Amazon would bring in solid expertise in managing supply chain and prescription delivery. With the rapid growth of Prime and Prime Now Amazon can deliver the prescriptions to most of the urban US population within 2 hours to next day.

Apart from the prescription delivery capability, Amazon can bring in price transparency to the prescription drugs. Currently, the final drug prices are secretly negotiated between drugs manufacturers and PBMs. The insurance companies and Employers in case of the fully funded plan are looking for the drug price transparencies. Amazon can partner with the drug manufacturers and  payors to create more transparent  21st-century business model for PBM

With the network of newly acquired Whole Foods stores, Amazon can create retail pharmacy inside the Whole Foods and couple with online mail order pharmacy. Thus can provide a complete drug delivery experience similar to CVS and Walgreens

Amazon’s customer base may be young, averaging 35 years old, but they are aging and in the midst of the child-rearing cycle, which requires frequent trips to the pharmacy. Amazon’s customers will need more prescriptions for themselves and for their children. This customer base is used to getting everything online and would prefer to order prescriptions as well through the same prime account.

 

Barriers to Entry

There are several barriers in the pharmacy. The key barrier could be establishing the PBM value chain, establishing the complete back office operation for claim processing, clinical processes, and interventions, specialty drug management.  Another strong barrier could be existing vertical integration of payors and the PBMs like in case of UHC and OptumRx.

 

Possible Strategy

Hence one of the possible strategy that Amazon may employ is acquiring an existing mid-sized benefit manager and use it to create a more transparent pricing based PBM model and attract independent payors like Cigna, Humana etc. Several Bloomberg and Forbes analysts are also pointing to the similar possibilities.

The possible acquisition targets could be Prime Therapeutics – currently serving not for profit blue plans, RxAdvance – a cloud-based PBM provider, or Medimpact – midsize privately owned PBM. Through this acquisition Amazon can quickly get the access to skills and core back-office capabilities of a PBM.

Considering current competitive and market pressure, Amazon may pursue a partnership or another big bang acquisition of the Express Script and given the current situation, Express Script could be more than willing to come to the negotiation table.

 

Conclusion

There is an interesting time ahead in healthcare and specifically in the PBM industry. Martin Gaynor, an economist at Carnegie Mellon University, said that “That's what can happen when you get a fairly mature and staid industry where no one is innovating and everything is done a certain way, and an upstart threatens to come in.” The mere threat of Amazon competition is likely to be good for consumers.

 

 

 

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