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Long-Dreaded Threat to Drug Middlemen Draws Closer

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A day that prescription-drug middlemen had long feared finally arrived.

The industry awoke to the news Tuesday that Inc. was joining with Berkshire Hathaway Inc. and JPMorgan Chase & Co. to form a new health care business, in an attempt by three of the world’s best-known companies to contain the spiraling cost of keeping their U.S. workers healthy.

Other groups of big employers have tried to improve worker health care in the past, but none have dethroned the pharmacy-benefit managers who drug companies and some lawmakers claim aren’t transparent about the pricing deals they strike on behalf of health plans, and about how much money they keep for themselves.

The new partnership has the potential to be one of the most ambitious employer efforts to date to control health expenses. While the companies provided few details, their combined clout and expertise in technology and finance could be used to bring drastic changes to the way prescription drugs are paid for, according to analysts.

(Related: Amazon, Berkshire, JPMorgan to Target Health care `Tapeworm’)

“They could completely cut out the middlemen here,” said Pratap Khedkar, a managing principal at the health consulting firm ZS Associates. By doing so, Amazon, Berkshire and JPMorgan could gain more control over their spending and save money pharmacy-benefit managers currently consume, he said.

‘A Bit Arrogant’

Health costs have been an increasing burden for workers and businesses in the U.S., where about half the population gets health insurance through work. On average, 8.3% of total compensation costs for civilian workers went to health care in 2017, up from 7.3% in 2004, according to U.S. government data.

Change is likely to be slow in arriving. The companies outlined few concrete steps in their announcement, and making big changes to the entrenched, inefficient U.S. health system will likely prove more complicated than Jeff Bezos and Warren Buffett imagine, some health experts say.

“It is a bit arrogant to think three big firms are going to come in and kind of re-invent health care,” said Zack Cooper, an economist at Yale School of Public Health. “It is like health care companies saying they don’t like their telephones or computers so they are going to re-invent the IT industry.”

The pact isn’t the first time that corporations have pledged to upend the system. The Health Transformation Alliance, a group of 46 large employers launched two years ago to fix the health care system, negotiated better drug contracts with CVS Health Corp. and UnitedHealth Group Inc.’s OptumRx, two of the largest pharmacy-benefits managers. It says the new contracts should save its members who use them 15% a year in drug costs.

But the new venture unveiled by the trio of corporate titans could have the opportunity to do something far more drastic, such as bargain directly with drugmakers on top-selling drugs, or create an online bidding system to transparently negotiate drug prices, experts said. That could erode an important source of profits for pharmacy-benefits managers.

(Photo: M. Spencer Green/AP)

(Photo: M. Spencer Green/AP)

The prospect of Amazon entering the health care industry has had retailers, drugmakers and insurance companies looking over their shoulders since last fall, when reports emerged that Internet retailer had gathered up pharmacy wholesaler licenses in more than a dozen states.

Shares of pharmacy-benefits managers sank Tuesday, with Express Scripts Holding Co. at one point falling more than 11 percent. CVS and UnitedHealth each ended down more than 4%.

“Everyone wants better solutions to drastically reduce drug prices and force manufacturers to compete on price,” said Linda Cahn, a consultant at Pharmacy Benefit Consultants in Morristown, New Jersey. “This group has enough covered lives to entirely disrupt the marketplace, if they create an entirely different pricing structure.”

Industry Overhaul

For their part, pharmacy-benefits managers have said they save employers billions and that their clients have the ability to do audits to confirm they are getting all the promised drug discounts. The companies say they welcome the efforts of Amazon, Berkshire and JPMorgan.

The announcement “is clear recognition that the healthcare system needs to continue to create and deliver meaningful value,” Express Scripts, which currently manages drug benefits for, said in a statement. CVS, which manages pharmacy benefits for JPMorgan, said in an email that the new organization “seems to share our goal of improving consumer health while reducing costs.”

UnitedHealth Group declined to comment.

In the meantime, the middlemen are trying to remake themselves. With the Amazon threat looming, CVS agreed last year to take over insurance giant Aetna Inc., while Anthem Inc. said it will set up its own pharmacy-benefits manager after the insurer’s relationship with Express Scripts fell apart in a dispute over pricing.

With some big companies increasingly cutting out insurers and contracting directly with health systems, the Amazon initiative is likely to turn a close eye on other parts of the supply chain as well, said Jimmy Lee, a former senior executive at Anthem who now consults with health plans and providers.

“They’re going to look at every area of cost,” he said. “Everybody should be worried to some extent.”

—With assistance from John Tozzi.

—Read Lawyers Say Fed Regulators Will Scrutinize Aetna-CVS Deal on ThinkAdvisor.

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