Single Payer? How About a Profit-Driven Single Provider?

AP Photo/Mark Lennihan, File

A CVS Pharmacy in Brooklyn, New York

Leftists have long desired a single-payer health-care system. The way concentration is going in the health-care industry, they may just get it, in the worst possible manner.

On Sunday, CVS announced they would purchase Aetna in a $69 billion deal. This doesn’t just join one of the nation’s three largest pharmacies with one of the five big health insurers. CVS also owns Caremark, one of the three giant pharmacy benefit manager (PBM) middlemen that manage prescription drug benefits for health plans.

I see some health economists talking themselves into this deal becoming a positive development for consumers. Don’t bet on it. This gives one company a mountain of inside information on its competition: all of their prescription drug usages, favored methods of delivery, and pricing data. A pharmacy/PBM tie-up, as happened when CVS bought Caremark, already has created an extreme information advantage; integrating an insurer into the mix heightens the potential for abuse, at the expense of rival pharmacies, governments and individual patients.

Consolidation triggered this consolidation. On the pharmacy side, Walgreens just bought a huge chunk of Rite Aid; CVS needed to keep pace. On the insurer side, the government recently blocked two major proposed mergers, leaving jilted companies like Aetna reaching to expand their businesses. UnitedHealth owns Optum, the third-largest PBM, and Anthem recently sought out CVS for a partnership to start its own in-house PBM by 2020. (It’s unclear where that goes now that CVS will have a direct Anthem competitor under its umbrella.)

Another impetus may have been nothing more than idle talk. Amazon’s purchase of a handful of pharmacy licenses in October led to feverish speculation that they would dive into pharmaceutical sales. The licenses actually had nothing to do with prescription drugs, only medical equipment, as the company later admitted. But Amazon makes corporate America crazy; stocks routinely tank whenever Mr. Bezos even thinks about expanding his footprint.

CVS and Aetna already had a business relationship, begging the question of what this merger accomplishes. The answer is lots of money. Pharmacy benefit managers are a gold mine because they sit in the middle of a multi-sided market, between health plans, pharmacies, and drug companies. Only the PBM knows the true price of the medication, and how it gets divvied among the respective players. This lack of transparency leads PBMs to extract more from every drug transaction. High rebates flow from drug companies to PBMs, often without the health plan’s knowledge. PBMs have incentives to force manufacturers to increase drug prices, to raise their cut of the rebate. Half of CVS Caremark’s profits derived directly from its PBM in the most recent quarter.

Some might believe that integrating a PBM and an insurer, one of the ripped-off parties, might tamp down middleman profits and even lower drug prices. But UnitedHealth has controlled Optum since 2011, and acquired PBM rival Catamaran in 2015. This has not exactly moderated drug costs. That’s because there are many other marks in the game besides insurance companies.

The biggest are often other pharmacies. CVS can now steer Aetna’s 22 million patients to its facilities (including Target stores, which CVS purchased the pharmacy side of in 2015) by offering lower prices in its “preferred pharmacy network” or granting exclusivity to its locations. The merged company can continue to use schemes like spread pricing, reimbursing pharmacies less than it charges plan sponsors. It can use direct and indirect remuneration (DIR) fees to clawing back pharmacy reimbursements based on sometimes subjective performance characteristics. And as is not the case with UnitedHealth/Optum, when CVS damages pharmacies, it’s hitting a marketplace rival.

Having Aetna’s massive patient database in hand just makes the domination potential even stronger. CVS stores accept prescriptions from other PBMs, and other insurers besides Aetna. Now one company can see all the information in other deals throughout the industry, using the data to underprice rivals. They will collect exploitable information for negotiations with drug manufacturers, seeking higher profits on what they know to be higher-use treatments. CVS prescription revenue from Caremark plans nearly tripled in the seven years after its 2007 merger. That’s not likely to reverse after acquiring more data.

The government sits uncomfortably inside these deals as well, through Medicare and Medicaid and veterans plans. A more robust, more knowledgeable PBM will surely charge government health plans through the nose.

Individuals could get hurt in several ways. List prices are often used to determine patient co-pays, so the consumer feels the burden. Patients could hit the “donut hole” coverage gap in Medicare Part D faster. As well, Aetna subscribers in remote areas or just far from a CVS could get pushed into CVS’ new next-day drug delivery service. Mail-order pharmacies have a terrible reputation for failing to ensure customer compliance with drug schedules. They also auto-ship drugs before patients run out, piling up waste on chronic prescriptions and pocketing the extra cash.

A more concentrated CVS/Aetna means a more fragile health system. Its formulary, the list of reimbursable drugs on the network, can result in patients getting locked out of medications without an emergency exemption. And the merger makes health care more reliant on one company’s information technology; CVS had a major computer outage just a few weeks ago, cutting off thousands from their medications.

Three PBMs dispense over three-quarters of all prescription medications in the United States. I’m all for eliminating PBMs by re-integrating them into insurers, but this merger actually entrenches them, creating a more powerful, more durable entity. Anthem taking drug benefit operations in-house is a far better model then this unholy alliance of multiple nodes of the pharmaceutical supply chain. Reduced choice for pharmacies will not bring prices down either, and building a behemoth that can easily raise costs on rivals will surely have that effect.

There are certainly efficiencies to be gained from using lower-cost CVS clinics for routine care, or managing the chronically ill in Aetna’s network with high-touch services. But to be clear, the CVS-Caremark merger shouldn’t have been allowed. Adding an insurer on top is less a panacea than a wedging of another shareholder-driven giant between patients and their health care.

The merger is extremely likely to trigger other industry deals, between insurers, drug distributors, retailers, and PBMs. This concentration creep, where everyone scrambles to gain leverage in negotiations with one another, is historically bad for consumers who have to deal with the aftermath. “Government-run” health care provided by these behemoths would merely be an exercise in high-cost corporate welfare. The Justice Department or the Federal Trade Commission, whoever handles this deal, should ask themselves if they want to keep allowing our nation’s well-being to be directed by fewer and fewer self-interested executives. 

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