The pharmacy benefit manager and private equity firm will see you now

The #1 cause of personal bankruptcy in the United States is medical debt and healthcare is officially the largest employer in the United States of America. When anyone with a heartbeat can take on a mortgage or apply for a college loan, bubbles happen. Similar to the principles that underlie The Giving Pledge trying to stem the tide of inequality, it is going to take that kind of power to change the entrenched interests of an industry like healthcare. In this article we will explore those challenges in-depth and more optimistically in part II of this series, shed light on the delivery reform and cost containment measures that are offering hope.

U.S. healthcare is marching towards $4 Trillion (with a T) in annual spend. The market forces at play are unique to only healthcare. In 1966 (the year of Medicare’s inception) every Medicare beneficiary was supported by roughly 4.6 workers. By 2030 that number will be roughly 2.3 workers per beneficiary. To boot, 10,000 baby boomers are coming onto Medicare’s bankroll every day for the next decade or so. On one side we have the second largest generation of American patients (baby boomers) retiring at an unprecedented clip and living longer than ever. On the other side, pharmacy benefit managers, private equity firms, health insurance companies, and even healthcare delivery systems are catalyzing healthcare spending growth. This is happening through ambiguous pricing structures and kickbacks for everything from medications to out-of-network service coverage.

The aforementioned pharmacy benefit managers (PBMs) are significant players in a big cost bucket of healthcare expenditures, medication formularies. PBMs act as intermediaries between drug manufacturers, health insurance plans, and employers. Imagine an employer having to understand not only the patent schedules of particular compounds but also the dosing and utilization of those compounds within your employee/patient populations in order to negotiate your prescription costs. To be sure, not every PBM acts like Bernie Madoff. In theory, they provide leverage to employers during negotiations with manufacturers by using their knowledge of patent and utilization data to negotiate better drug formularies.

Because of the ambiguity of the above process, check out this website and this recent NY Times article for some moral hazard. As with any oligopoly, the heart of the issue is around the system that has evolved and incentives being in the wrong places.

At the same time, private equity firms are scooping up healthcare providers and vendors alike. Three of the physician practice marketplaces largest EHR software providers (GE Centricity, Athena Health, and Greenway Health) are now owned by private equity firms. Starboard Value forced its way into one of the largest hospital medical records providers board room this past April, Cerner. Within the healthcare delivery space, 3 private-equity firms own 2/3 of all emergency airlift helicopters in the United States. It’s one thing to create efficiencies and another to control the supply chain of life-saving transportation options. This issue is like the aforementioned drug manufacturers who corner the market on specialty drugs for rare diseases. Supply and demand, baby!

To compete, healthcare systems are consolidating patients’ options for care delivery. One key metric that epitomizes this consolidation is the rise of hospital discharges attributed to individual health systems in small and medium metropolitan areas. There has been an aggressive uptick with a select few organizations managing the bulk of discharges in defined geographies over the past 20-30 years with no indication of those trends slowing. Further, it is not only horizontal but also vertical consolidation that is taking place. Vertical consolidation allows health systems to realign their revenue streams throughout the healthcare supply chain as patient preference for place of service shifts along with technical capabilities to outpatient settings. Outpatient settings generally provide more affordable care across a number of procedures and with hospital margins where they are, new revenue streams are critical to long-term viability.

The final cost bucket covered here are the health insurance plans and brokers that mediate insurance between employers and health plans. Health plans as a result of the Affordable Care Act have to get creative to increase revenue in order to operate within the Medical Loss Ratio. Health insurance brokers operate as middlemen between the health plans and employers. They act as advisers to employers shopping for health insurance for their employees. This system has created an environment where price gouging by both parties ultimately lands at the feet of insurance premiums. With 50% of health insurance coverage in the U.S. being employer-based and employer premiums rising 5% like clock-work, we will cover how these aspects of the system can be disrupted in a future post.

These broad systems are creating the confounding factors playing into the steady march of healthcare towards 20% of U.S. GDP. Always start with the bad news first. In a previous post, we posited the impact the Medicare Advantage model is having on the health and well-being of patients within the Medicare system. In part II of this series, we will unpack the viability of fully capitated payment models and also how organizations such as ChenMed, Oak Street Health, and Iora Health are using those models to deliver effective care.

Finally, blaming the people who operate within the systems that have evolved is a fool’s errand when you are trying to create change. Challenging the systems and incentives that are in place that allow for capitalism to run free in a system that is built upon the mantra “First Do No Harm” is a much better approach. The amount of information that’s come online in the healthcare space in the past 15-20 years has created an enormous opportunity not only to manage disease better but also identify areas of waste, a la 46Brooklyn. A parting thought, when the largest retailer in our country finally stands-up and calls people to the mat on gun control, it’s amazing how people start to listen. Who is going to take that stand in the healthcare space?

P.S., The Price We Pay is set to hit the shelves in about a week and does an Unshakeable like job of educating people on where healthcare originate and the models of care that are providing optimism for affordable and quality care. That book, this podcast, and my current occupation are the foundation for the content of this post. Lastly, if you are a small to medium-sized business trying to manage how to find quality and affordable healthcare for your employees, check out Health Rosetta to find an independent insurance broker.

Published by Miers Q.

This website is a testament to the importance of our healthcare system and the importance our choices have on that system. I have worked in the health information technology software space since hanging up my baseball cleats. Hopefully this information can offer some unique perspective in a notoriously ambiguous industry.

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