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. Bubbles happen when anyone with a heartbeat can take on a mortgage or apply for a college loan. Similar to the principles that underlie The Giving Pledge trying to stem the tide of inequality, it will take that kind of power to change the entrenched interests of an industry like healthcare. This article will explore those challenges in-depth and more optimistically in part II of this series. We will highlight the delivery reform and cost-containment measures that offer hope.

U.S. healthcare is marching towards $4 Trillion (with a T) in annual spending. 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 approximately 2.3 workers per beneficiary. 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. Conversely, pharmacy benefit managers, private equity firms, health insurance companies, and healthcare delivery systems catalyze healthcare spending growth. This happens through ambiguous pricing structures and kickbacks for everything from medications to the out-of-network service coverage.

Pharmacy benefit managers (PBMs) are significant players in an enormous cost bucket of healthcare expenditures and medication formularies. PBMs are 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 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 patent and utilization data knowledge 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 hazards. 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. 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 Cerner’s board room this past April. 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 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 few select organizations managing the bulk of shots 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. The vertical merger allows health systems to realign their revenue streams throughout the healthcare supply chain as patient preference for the location of service shifts and technical capabilities to outpatient settings. Outpatient settings generally provide more affordable care across several 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 have to get creative to increase revenue to operate within the Medical Loss Ratio. Health insurance brokers serve as middlemen between health plans and employers. They are advisers to employers shopping for health insurance for their employees. This system has created an environment where price gouging ultimately lands at the feet of employees through insurance premiums. With 50% of health insurance coverage in the U.S. being employer-based and employer premiums rising 5% like clockwork, we will cover how these aspects of the system can be disrupted in a future post.

These broad systems are creating confounding factors playing into the steady march of healthcare toward 20% of the U.S. GDP. Always start with the bad news first. In a previous post, we posited the impact of the Medicare Advantage model 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 how organizations such as ChenMed, Oak Street Health, and Iora Health use those models to deliver effective care.

Finally, blaming the people operating within the evolved systems is a fool’s errand whentrying to create change. Challenging the systems and incentives that are in place that allow 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 to manage the disease better and 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 job of educating people on where healthcare originates 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 a 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.