The companies' proposed merger could be closely scrutinized. Cigna is looking to increase purchasing power, particularly with specialty drugs.
Cigna's plan to merge with pharmacy benefit manager Express Scripts is in line with previous consolidations intended to leverage related books of business, but it comes at a time when the nature of PBMs are being questioned.
That could make it difficult for the two companies to get regulatory approval. Antitrust concerns about the combined power of the health plan and the PBM also could get in the way.
Cigna recently announced the plan—a $52 billion deal that would follow other consolidations and disruptions in the healthcare sector, notably Amazon's announcement in January that it was teaming up with Berkshire Hathaway and JPMorgan Chase to create an innovative health plan.
Cigna probably hopes to achieve multiple objectives with the Express Scripts merger, says Brian Duffant, vice president at BluePath Solutions, a market access and health economics consulting firm.
The health plan most likely is looking to improve purchasing power, which will be enhanced by both the increase in lives under management as well as exposure to differing biopharmaceutical manufacturer rebates across the Express Scripts and Cigna books of business, he says.
Higher rebates on similar products in one book of business versus another can serve as leverage for the plan to negotiate higher rebate levels across a broader book of business, Duffant explains.
"Additional synergies may include combined purchasing power in the specialty drug segment, which is the fastest growing component of drug trend," he says. "The combined distribution and purchasing power of the Accredo and CuraScript specialty lines of Express Script, and Cigna Specialty Pharmacy may allow for the new entity to more effectively manage the specialty drug cost trend."
Misaligned incentives
Express Scripts is the largest of the remaining independent PBMs, notes Christopher J. Kutner, JD, partner in the Rivkin Radler law firm, who previously worked as general counsel for a health plan and dealt directly with PBMs. Folding the PBM into the health plan could address some concern about misaligned incentives, he says.
"They were trying to make a profit, and we as a health plan were trying to make a profit. Having them both work in the industry and with their concerns not entirely aligned, that adds cost to the system," Kutner says. "[The Cigna-Express Scripts merger] makes perfect sense because by bringing the PBM into the confines of the payer, [Cigna] will have access to all of the data of their members' prescription drug history. The drug cost is roughly 25% of the expense for health plans, so bringing the PBM in will help Cigna eliminate a layer of cost."
Express Scripts has established itself in the industry by bargaining with drug companies to lower prescription costs for health plans and employers, competing head on with big pharmaceutical players such as CVS Health, which is merging with Cigna's competitor Aetna.
Express Scripts' biggest customer used to be Anthem, but it broke ties with the health plan after Anthem sued in 2016 on claims it had been overcharged for pharmaceuticals.
Kutner expects consumers to benefit if the Cigna deal goes through.
"The PBMs have the direct line to the manufacturer of the drugs and negotiate the discounts, so having that within the purview of the health plan means the payer will ultimately save on drug costs and hopefully—hopefully—pass that on to the consumer," he says.
Skepticism about savings
That uncertainty about consumer benefits could be a problem. The Cigna deal comes less than a month after a white paper from the White House Council of Economic Advisers (CEA) criticized the PBM industry as middlemen providing dubious assistance on lowering prices while extracting outsized profits for themselves.
On March 7, the U.S. Food & Drug Administration Commissioner Scott Gottlieb, MD, said in a speech that the PBM industry does not necessarily benefit consumers.
"The top three PBMs control more than two-thirds of the market; the top three wholesalers more than 80%; and the top five pharmacies more than 50%. Market concentration may prevent optimal competition. And so the saving may not always be passed along to employers or consumers," Gottlieb said.
"Too often, we see situations where consolidated firms—the PBMs, the distributors, and the drug stores—team up with payors," the commissioner said. "They use their individual market power to effectively split some of the monopoly rents with large manufacturers and other intermediaries rather than passing on the saving garnered from competition to patients and employers."
That view from the Trump administration could lead to regulatory hurdles, Kutner says.
"It will be interesting to see what happens with challenges to the deal. There undoubtedly will be many challenges based on antitrust concerns," he says. "The argument will be that with the health plan controlling the PBM, they will have final say over the costs and there will be no checks and balances. From a business standpoint, I think it makes sense and will save on healthcare costs, but the antitrust concerns could be a significant impediment."
The collaboration is intended to benefit consumers in several ways. The groups also are promoting the move to value-based care.
Two of the biggest players in healthcare are banding together for initiatives that they say will provide consumers with improved access to quality, timely, and affordable health care.
The American Medical Association (AMA) and Anthem, one of the country’s largest health plans, announced they will seek to identify and collaborate on solutions that drive a high-value experience for patients, physicians, other healthcare professionals and health plans.
The AMA and Anthem share a goal for consumers to create a simpler, more affordable, more accessible healthcare system for consumers, says Craig Samitt, MD, executive vice president and CFO of Anthem.
“The collaboration of our two groups is a positive step towards lowering the cost of healthcare while improving quality and accessibility. An important part of our collaboration will focus on how consumers make the most informed health care choices, and for care providers to have easier access to the data needed to guide those choices,” Samitt says. “Anthem and AMA recognize the role they can play in identifying and addressing gaps in care to improve outcomes and reduce costs.”
An appropriate exchange of data between payers and physicians and consumers will be foundational to the shared objectives, Samitt says. This includes benefit information, cost information, quality information and other elements that are necessary to create value for consumers. It will also include streamlining low value prior authorization to help physicians ensure consumers are getting the most appropriate care based on all clinical evidence while balancing the needs of consumers receiving the care, he says.
AMA Chair-elect Jack Resneck Jr., MD, says the collaboration illustrates a new type of dialogue and engagement between physicians and Anthem.
“The AMA and Anthem can work together to find more efficient ways for physicians and health plans to exchange and analyze data to manage and coordinate care for their patient populations, provide targeted interventions, and identify potential savings,” Resneck says. “While the AMA and Anthem have yet to discuss a specific course of action in this area, possible ideas to explore include enhancing data access to support physicians’ success in value-based payment models and the use of clinical registries and other tools to facilitate data availability and analysis.”
Resneck notes that there is growing agreement across the entire health system that prior authorization programs and processes need to be “right-sized.”
“By working together to identify opportunities where the prior authorization process can work more efficiently, we can ensure that patients have access to timely and necessary care and medications, while reducing mutual administrative burdens.,” he says.
The groups plan to collaborate in these areas:
Enhance consumer and patient health care literacy: Physicians and health plans can help enhance patients’ understanding of health plan benefits, treatment selection and choice of care setting.
Develop/enhance and implement value-based payment models for primary and specialty care physicians: Value-based payment models have the potential to improve clinical outcomes, care access and lower total costs, resulting in improved satisfaction for both consumers and health care professionals.
Improve access to timely, actionable data to enhance patient care: Physicians and health plans recognize the importance of leveraging data analytics to address gaps in care, achieve better outcomes and lower costs. Moreover, readily accessible data are critical for successful population health management.
Streamline and/or eliminate low-value prior-authorization requirements: As outlined in the consensus statement issued by the AMA, other health care professional associations and health plan organizations earlier this year, there are many opportunities to improve the prior authorization process by eliminating low-value requirements and implementing policies to minimize delays or disruptions in the continuity of care.
A new study shows that a government program for managing chronic care cuts costs while also improving care for the chronically ill.
A federal program for chronic care management (CCM) slows the increase in Medicare costs, helps keep people out of the hospital, and connects them with community-based resources, according to a recent report from the Center for Medicare and Medicaid Innovation (CMMI).
The program results could be replicated by private health plans.
The Centers for Medicare and Medicaid Services (CMS) established CMMI in 2015 to help provide support for patients with multiple chronic conditions in-between their provider visits and episodes of care, creating a new Medicare benefit. The program helps beneficiaries with two or more chronic conditions by providing new “in-between visit” payments to participating providers.
That revenue encourages healthcare providers to focus more on goal-directed, person-centered care planning, and to provide "aging-in-place" resources such as proactive care management, the report explains.
Over 684,000 beneficiaries received CCM services during the first two years of the new payment policy, the report says. They were generally concentrated in the South and had poorer health status than the general Medicare fee-for-service (FFS) population.
“About 19% percent of beneficiaries only received one month of CCM services; however the majority of beneficiaries received between four and ten months of CCM services, on average. Primary care physicians (PCPs) billed for 68% of CCM claims and 42% of CCM billers were solo practitioners,” the report says. “ Individual providers billed for $105.8 million in CCM fees during the first 24 months of the program and, on average, managed about 47 patients per month.”
The report notes, however, that the median number of patients was 10, indicating that the average was skewed by a small number of providers delivering CCM services to many beneficiaries.
Participation in the CCM program was associated with a lower growth in total costs to Medicare than the comparison group. Patients in the CCM program had lower hospital, emergency department and skilled nursing facility costs., along with a reduced likelihood of hospital admission for the ambulatory care sensitive conditions of diabetes, congestive heart failure, urinary tract infection, and pneumonia.
The CCM program was also associated with increased access to advance care planning, 10% among CCM participants versus 1% in the general Medicare population. The study authors concluded that "CCM is having a positive effect on lowering the growth in Medicare expenditures on those that received CCM services."
Interviews with 71 eligible professionals revealed that providers and care managers perceived several positive outcomes for beneficiaries from CCM. They included improved patient satisfaction and adherence to recommended therapies, improved clinician efficiency, and decreased hospitalizations and emergency department visits.
“Most noted patients’ enhanced access to the practice through the care manager, which enabled telephonic condition monitoring between visits and more time for medication monitoring and reconciliation,” the report says. “While several providers, particularly those caring for numerous complex patients, noted that the CCM payment amount was inadequate for the CCM work required, some providers, small practices in particular, were pleased with the new payment policy, noting that they were finally receiving at least some payment.”
The proposed rule on short-term plans hinges on the issue of renewability.
The Trump administration's new proposal on short-term health plans may open up more affordable options to consumers and new business opportunities for health plans, but much of the impact depends on making the plans renewable to the enrollee.
Easing the renewability rule is what will make short-term plans significantly more attractive, an analyst says.
The proposed rule would allow consumers to purchase health insurance coverage for a period of up to 12 months, a significant change from the Obama-era rule that limited short-term plans to a maximum of three months. That rule had been in effect only briefly, from April 2017.
The rule proposed last week marks the administrative follow-up on an order issued by President Trump in November 2017. That executive order was widely seen as a positive move by those who need or prefer to purchase short-term insurance rather than a standard plan that is compliant with the Affordable Care Act.
Short-term plans offer lower premiums and deductibles, but they are not required to offer the same essential health benefits as an ACA-compliant plan. They are used by consumers who missed the open enrollment period and those with limited or no options on the healthcare exchanges as well as those in the "Medicaid gap" who make less than 100% of the federal poverty level but live in a state that did not expand Medicaid.
Another blow to Obamacare
Trump's move to make short-term plans more available to consumers was welcomed by some health plans that saw it as a way to regain footing in a market that had proven unprofitable for them.
Critics contend, however, that easing the use of short-term plans is one more blow to the ACA, giving consumers a way to opt out of the standard health plan marketplace. That leaves only the sickest and costliest consumers in those plans, they say, and only worsens the existing problem of high premiums and deductibles. The possibility of such a result was why the Obama administration limited the plans in the first place.
That impact may be limited, however, says Christopher Holt, director of healthcare policy with the American Action Forum, and independent think tank in Washington, D.C.
"The price point attractiveness of these plans is going to be limited to people who aren't getting subsidies," Holt says. "Currently we're at about 10.5 million people on the ACA exchanges and about 85% of those people are subsidized. So, it's not a huge population in the exchanges who would find this very attractive."
People paying full freight in the individual market will be more attracted to the short-term plans, and the affordability might draw in people who have avoided buying insurance at all, Holt says. But even then, the effect may be diluted because consumers will be getting less coverage in most cases from short-term plans and may be turned off by an application process that, unlike ACA plans, can result in denial for preexisting conditions.
Rule would allow renewals
The proposed rule, however, would make short-term plans renewable and that could eliminate one of the biggest downsides to these plans, Holt explains.
Currently short-term plans were limited to three months and cannot be simply renewed at the end of that term. Consumers must reapply every three months and any health changes could affect whether the health plan accepts that new application.
"That limits the attractiveness of these plans to a lot of the population," Holt says. "But if you allow them to be renewable at the behest of the enrollee, that provides a little more security and the product becomes a more attractive option."
As consumer interest grows, so will the interest among health insurance companies in offering short-term plans, Holt says. The market used to be significantly larger but some companies discontinued short-term plans when the three-month limitation decreased consumer interest, he says.
"There is interest in selling these. The impact is going to vary depending on the insurer, whether this is a business they have been in in the past and whether they have been longing to get back into it when consumer interest reached an acceptable level," Holt says. "There also could be some who see it as a new opportunity to claim a share of the marketplace they're not reaching."
Holt expects the proposed rule to proceed but he notes that there is still some discussion in Washington as to whether the renewability can be implemented administratively or whether it would require legislation.
"The renewability is key to making this a policy change with significant impact," he says.
Changes in the economy are prompting healthcare CFOs to reconsider long-held financial strategies. Rising interest rates may require a different mix for capital portfolios.
Rising interest rates will dictate how healthcare organizations create efficient everyday capital structures, one analyst says.
CFOs must determine where they think interest rates are going, and then act to position their capital structures for the best performance in the near future, says Henry Grady III, healthcare industry specialist with the commercial and business banking division of SunTrust Bank. He worked to improve the financial standing of Atlanta's Grady Memorial Hospital, named for his great-grandfather, before joining SunTrust.
"I feel like we are emerging from one phase of the economy, where we've been in a declining to flat interest-rate environment literally for the last decade, to one now that feels like we're entering into flat to gradually rising interest rates," Grady says.
"We can discuss statistically how valid that is and how much we can count on that for the future, but as those conversations get validation with the CFO and the finance committee and boards, then we have to talk about how to position yourself organizationally from a cash flow, balance sheet, and access to capital perspective," he says.
For most hospitals and health systems, that will mean shifting from what has been a financial strategy based on a slow or stagnant economy to something more oriented to a dynamic economy and rising rates, he says.
"There are organizations that have been riding the declining interest rates for the past decade and have been absolutely right. They've made a lot of money and saved a lot of money for their organizations," Grady says. "Now that we feel like we're in more of a rising interest-rate environment there is a feeling that we need to be longer out on the curve and fixing our interest rate risk."
There is a growing desire in the healthcare industry to be less exposed to variable rate debt and more exposed to fixed rate debt, Grady says.
Portfolios for the past decade have been weighted to about 75% variable rate debt, but that split is moving now to about evenly divided at 50% variable and 50% fixed rate, he says.
In the near future portfolios will continue moving in that direction and become more heavily weighted to the fixed rate, Grady says. That will put CFOs in a better position to plan and strategize, he says.
"If you're a CFO and you're asked to put together a three- or five-year budget and make it as detailed and organic as possible, you have to start with where your money is coming from and what your debt service has to be," Grady says. "The more sure of that you can be with fixed rate exposure, the better off your organization will be. We're seeing people move out the curve, trying to find ways to have longer maturity to their debt, and they're trying to find more fixed rate exposure than variable rate exposure."
There are challenges and risks with switching gears like this, Grady notes. CFOs have to be confident that any new portfolio mix is supported by market trends, and missing the prediction there could leave an organization too exposed, particularly if it took an aggressive stance with the portfolio strategy.
But Grady says he is confident that the market is trending toward higher interest rates.
"As we see the stock market, commodities market, and the bond market all bouncing up and down, typically that gyration indicates a change and a trend. It feels like we're entering into a different environment where the interest rate cycle is going to be flattish to rising," he says. "You have to roll up your sleeves and look at how you're funded, where your cash is coming from, your receivables, your sources, your payers, and your obligations. We look at that item by item and try to find where we can take risk out of that picture based on the directional belief we have about the cost of capital."
Medicaid and CHIP children with special needs have access to care comparable to those on private insurance. Their care is more affordable, though their families experience other hardships.
Children covered by Medicaid or the Children’s Health Insurance Program (CHIP) have greater healthcare needs than those on private insurance, but they have comparable access to care and that care often is more affordable.
Those are findings from a recent analysis by the Henry J. Kaiser Family Foundation, which also found that the families of these children experience additional stress beyond the cost of healthcare. The families are more likely to have to limit their work hours or stop working as a result of their health and more likely to devote time providing or coordinating their healthcare, the Kaiser report says.
Medicaid is the only source of coverage for many children with special healthcare needs in low and middle income families, but it also fills gaps in private insurance, Kaiser reports. Forty-eight percent of all children with special healthcare needs, about 6.8 million, are covered by Medicaid and CHIP.
“Medicaid/CHIP children with special health care needs experience significantly better access to care on these measures compared with those who are uninsured,” the report says. “Proposals to cap and reduce federal Medicaid funding may pose a particular risk to children with special health care needs because these children use services more intensively, and often incur greater costs, compared to other children.”
These are some other key findings about Medicaid/CHIP children from the report:
They are significantly more likely to live in low income families compared to those with private insurance only. Seventy-eight percent of Medicaid/CHIP-only children with special health care needs, and 57% of those with both Medicaid/CHIP and private insurance, live in families with incomes below 200% of the federal poverty level, compared to less than 17% of those with private insurance only.
The children are significantly more likely to have multiple health conditions and to be in poorer health compared to those with private insurance alone, with children with both Medicaid/CHIP and private insurance having the greatest needs. “For example, children with special health care needs with both Medicaid/CHIP and private insurance are more than twice as likely (55%), and those with Medicaid/CHIP only are nearly twice as likely (43%), to have four or more functional difficulties compared to those with private insurance alone (24%),” the report says.
They are more likely to report that their coverage is affordable compared to those with private insurance alone. “For example, those with Medicaid/CHIP only are more than four times as likely (82%), and those with both Medicaid/CHIP and private insurance are more than twice as likely (43%), to report that their out-of-pocket health care costs are always reasonable compared to those with private insurance alone (19%),” the report says. “Over half (53%) families of Medicaid/CHIP-only children with special health care needs, and over a third (36%) of those with both Medicaid/CHIP and private insurance, find it somewhat or very often hard to cover basic needs like housing or food since their child’s birth compared to a fifth (20%) of those with private insurance only.”
California state regulators are investigating Aetna's coverage decisions and whether physicians properly review claims. The concerns may be overblown, however.
As the California Department of Managed Health Care and the California Department of Insurance investigate Aetna for concerns over how physician reviewers at the health insurer decide claim denials, it lends credence to skeptical health plan members who doubt whether those decisions are based on clinical facts.
The investigation stems from the lawsuit of a California man who is suing Aetna for an alleged improper denial of care. Former Aetna medical director Jay Ken IInuma, MD, stated in a deposition that he did not examine the patient's records before deciding whether to deny or approve care, relying instead on information provided by nurses who reviewed the records.
When that statement was made public, the California Department of Managed Health Care and the California Department of Insurance announced that they are investigating Aetna’s policies and procedures for approving or denying claims.
The investigations may raise hopes of a "gotcha" moment for anyone who doubts that health plans have good intentions for their members, but they may not find much in the end, says Richard Trembowicz, JD, associate principal with ECG Management Consultants in Boston.
The medical director's statement may not be an admission of guilt that it first appears to be, he says.
It is common for health plans to have non-physicians review claims and then require physician reviews for claims that are appealed, Trembowicz notes.
It appears the claim in question in the lawsuit was at the appeal level, and that's why a physician was involved at all, he says.
Trembowicz says the medical director's statement may have been acknowledging that he only looked at the non-physician's notes to confirm the reason for the denial was outdated lab work, a simple and easily remedied issue, and no clinical assessment was needed.
"In a ministerial case like that, the medical director may not review the medical record because there is no need to review medical information and make a clinical assessment," Trembowicz explains.
"It's not clear yet whether the denial was because of the missing blood work or if it was deemed not medically necessary, but that's a big difference. If it was just missing blood work, it's no surprise that the doctor didn't study the medical record. It could be a technical violation of policy, an instance of cutting corners, but it doesn't rise to the level that some people are making this out to be," he says.
That doesn't mean that Aetna has done nothing wrong, Trembowicz says.
The medical director's statement may be sufficient for the state to find fault with how this particular claim was handled, he says, even if there is no problem with Aetna's overall policies and procedures.
"If that is what happened, it's probably a technical violation of Aetna's internal policy and the requirements of most states," Trembowicz says. "I would see this as pretty atypical. Insurance companies keep records of all appeals and decisions, including the physician who signed off on it, and their electronic records indicate whether the physician accessed the relevant documents. I don't think this situation is common at Aetna or with any other insurer."
Trembowicz notes that the media attention to this case plays into the hands of critics who allege health plans deny legitimate claims for financial reasons.
Another insurer, Anthem, has been criticized for its policy in some states denying coverage for emergency department claims when the complaint turns out not to be a true emergency, and the Aetna dispute adds fuel to that fire, he notes.
"None of this is good for Aetna or other health plans. If people are reading the news and seeing that claims are denied and the physician reviewer doesn't even look at the medical record on appeal, that's a terrible impression for Aetna," he says. "But on the facts of this case, it may be far less egregious than it appears at first."
In a February 14 hearing about this lawsuit, Orange County Judge John C. Gastelum said that the accounts in the media presented "clearly a totally one-sided story."
Aetna issued a statement clarifying that "medical records were in fact an integral part of the clinical review process" for the disputed claim and included a sworn statement from the doctor saying, "In addition to reviewing the relevant portions of submitted medical records, it was also generally my practice to review Aetna nurses' summaries, notes, and the applicable Aetna Clinical Policy Bulletins."
A survey of health plan leaders suggests they are realizing what consumers already knew: High deductibles keep people from obtaining needed proper healthcare.
High deductibles are not having the effect that health plan leaders hoped, according to the results of a recent survey of insurance executives. Rather than encouraging members to become more active in their healthcare decisions and using resources wisely to improve their health, high deductibles just make them avoid healthcare altogether.
That includes avoiding preventive healthcare that could save the insurers money in the long run, the survey report says. Health plans are getting the message and only 3.4% of top executives call high deductibles a good way to change consumer behavior, according to the Industry Pulse survey, commissioned by software analytics provider Change Healthcare and the HealthCare Executive Group (HCEG).
“Contrary to popular belief, respondents report high-deductible health plans aren’t the best way to turn passive patients into active healthcare consumers,” the report says. “This bucks the theory about these plans giving patients ‘skin in the game.’ Instead, high-deductible plans may lead to care avoidance rather than fostering shopping and price-comparison behaviors.”
The largest block of survey participants (25.4%) report incentives are the key to encouraging engaged, positive health behavior, the report says, especially those aligned with factors such as diet and exercise, which consumers have far more control over than figuring out the optimal cost of a hospital procedure.
The survey also asked respondents about the alternative payment models currently employed by their organization and which model they believed would be most effective in the next three years. Risk-sharing arrangements, such as accountable care organizations, were the top replies, with 45.6% currently using them and 23.8% predicting they will be the most effective over the next three years.
Pay-for-performance was the next most common response, with 43% of respondents using them and 18.4% predicting optimal efficacy by 2020. The other top responses were full capitation, partial capitation.
Social determinants of health have become a top priority for health plans, with more than 80% of respondents saying they are promoting value-based healthcare by addressing the social needs of their members.
The survey included more than 2,000 healthcare leaders, 52% vice president and above and 27% at the president or C-suite level.
"Healthcare organizations are transitioning from negative to positive incentives to influence consumer behavior much faster than most would expect. Payers are also taking aggressive steps to advance value-based care and crack the code to successful consumer engagement," said David Gallegos, senior vice president for consulting services with Change Healthcare.
The online retailer's plan to enter the hospital supply chain could bring major cost savings for hospitals.
Hospital CFOs are likely to welcome the most recent foray from Amazon into the healthcare market, as it should lead to lower supply costs, second only to labor as a major cost center, an investment banking analyst says.
Distributing medical supplies is so closely aligned with what Amazon already does on a huge scale that this new project is almost certain to threaten existing medical suppliers and distributors, with hospitals and health systems reaping the rewards.
On the heels of announcing a new health plan, Amazon is now looking to become a major supplier of medical products to U.S. hospitals and outpatient clinics, competing directly with suppliers such as McKesson, Cardinal Health, and Owens & Minor, according to a report in The Wall Street Journal.
Amazon invited hospital executives to its headquarters to develop ideas for expanding its business-to-business marketplace, Amazon Business, into a hospital supply chain, the newspaper reports.
Amazon also has been working with a large Midwestern hospital system to test whether it can use the Amazon Business system to supply its 150 outpatient clinics, the article says.
The stock market reacted quickly to the news, with shares of Owens & Minor dropping 4.8% on the news, Cardinal losing 3.4%, and McKesson falling 1.9%.
The company's entrance into the medical supply chain could bring "massive change," says W. Robert Friedman Jr., managing director in the healthcare practice of Dresner Partners Investment Banking.
"Hospitals are under tremendous financial pressure due to the reduction in Medicare rates and Medicaid. The major expense for hospitals is the cost of labor but supply is right behind it as a big percentage of their core operations," Friedman says. "If hospitals can order directly from Amazon, which then ships directly to their distribution outlets, this would be a major transformation in the distribution component of the healthcare industry."
Friedman expects Amazon will begin with commodities in the supply chain, the basic supplies necessary for providing care, but then move on to the more specialized supplies and medical equipment.
CFOs are getting a gift-wrapped opportunity to lower their costs without any real downside, he says, and he expects them to jump at the opportunity when Amazon starts taking orders.
Repeating Whole Foods effect?
Friedman notes the Amazon effect on Whole Foods, which the online retailer bought in June 2017 for just under $14 billion.
Amazon brought its market power and extended business reach to the grocery chain, immediately lowering prices and offering consumers more convenience, even announcing recently that some Amazon Prime customers will be able to order from Whole Foods and receive delivery within two hours.
The level of service isn't likely for hospitals, but Friedman says Amazon probably will offer some level of improved delivery consistent with the standard it has set with online purchases.
Amazon's entry into the supply chain will increase expectations and Amazon is likely to satisfy them, Friedman says.
"It puts a new leverage of competition into the market. Amazon is a major player in business, and if you look at how they reduced prices on their products and in Whole Foods, making it up in volume, that will have an impact on the gross margins of the other national distributors," Friedman says. "It will take time for Amazon to reach out to the supply chain managers of the hospitals and the large purchasing groups, but I expect that's exactly what they are doing right now, starting with the for-profit hospitals. Anything that reduces costs goes right to the bottom line, and earnings-per-shares are critical for the for-profit hospitals."
Any sizable new entrant into the supply chain could shake things up and encourage lower prices through competition, but the fact that it's Amazon stepping in makes the potential impact much larger, Friedman says.
"This is a company that has proven it knows how to distribute different types of product, so there is every reason to think they can step in and create change very quickly," he says. "Even more so than what they're planning to do with a new health plan, getting into the hospital supply plan is very closely aligned with what they do already, what they have done to become the successful company everyone knows."
The Amazon health plan promises to accelerate the disintegration of traditional healthcare silos. Health plans may be facing the same upheaval that Amazon brought to retailers.
Health plans are no longer competing just with each other for subscribers and healthcare provider participants.
They're competing with any business entity that decides to get in the game, led by the bold health plan announced recently by three financial giants—Amazon, JPMorgan Chase, and Berkshire Hathaway.
The announcement of that new plan shook up the healthcare community, with the business giants promising to improve employee healthcare options while lowering costs.
The new plan could change health plans the same way Amazon CEO Jeff Bezos changed how Americans shop, says David Friend, MD, MBA, managing director and chief transformation officer of the Center for Healthcare Excellence & Innovation with the consulting firm BDO. Friend also sits on the board of FallonHealth, a health plan in Massachusetts.
"Healthcare is about to be disrupted by three companies that are not in the healthcare industry. If you are a healthcare company and you thought your competition was the healthcare company across the street, that's no longer true," he says. "This will affect more than just health plans, touching hospitals and health systems as well. This potentially changes the whole field."
Remember Amazon's effect in retail
Health plan CEOs should remember what Amazon did to some of the most established, successful retail operations, he says.
"What was going on in the boardrooms of retail five or six years ago? In a lot of them, nothing, and those guys aren't around anymore. A lot of folks in healthcare are going to have to rethink their business models and how they're going to survive," Friend says "If you look at the carnage in retail, this is a preview of what's coming in healthcare. The smart ones will adapt and the others won't be around in five years because they'll get merged, acquired, or they'll fail."
Healthcare plans have fared well financially in the past five years, Friend says, but this kind of disruption will force them to look at what it takes to keep customers when they have new and innovative options.
Customer service will become a top priority, he says, as consumers gravitate toward companies that provide more user-friendly service and whatever turns out to be the healthcare equivalent of free two-day delivery for your books and other purchases.
"Amazon is probably the most consumer-friendly company on earth, and if you've ever been sick you know healthcare is the least consumer-friendly industry on earth. Amazon can move the ball tremendously in terms of technology," Friend says. "JPMorgan has the ability to finance tens of millions of potential customers with its credit cards, and lots of consumer data. Berkshire has all the balance sheet you need for reinsurance."
Plan will attract millennials
The Amazon plan will have a readymade audience with younger people, says Laura Kalick, JD, LLM, tax director in BDO's national healthcare and nonprofit and education practices.
"They see an offering from Amazon, and that's someone they buy things from nearly every day," Kalick says. "That's somebody they trust. If they come out with a product, they're going to get enormous buy-in from millennials that could just be unbelievable."
Buyer beware?
Kalick points out that the Amazon plan's description of a company "free from profit-making incentives and constraints" may be misleading at first glance.
The health plan would not qualify as a tax-exempt organization, but it could organize as a benefit corporation in which the fiduciary duty would not be to maximize the profits for shareholders but would be to further the mission of the organization and benefit society, she says.
The company could still make profits, but this approach would be a huge distinction from how healthcare is organized at this point, Kalick says. It would jibe with how Bezos has run Amazon, which has not focused on short-term profit.
That could be another big draw for consumers, Friend says.
"If you have one company with profits for its shareholders as its main concern, no matter what they say in the nice brochure to consumers, and [another company] says outright that your health is the first concern and profit is second, who are you going to buy your healthcare from?" Friend says.
Health plans must respond
Friend acknowledges that the Amazon plan is a big undertaking and it's natural for companies established in the industry to say the new partnership may be making promises it can't keep.
But he says the companies involved in the new plan have a tremendous track record for getting things done.
The Amazon health plan plays into the current trends in Washington to promote more consumer choice and regulate business less, Friend says.
He expects disruptions that are not obvious now, beyond simply providing a health plan. That could include everything from leveraging Amazon's Echo technology into the electronic medical record to using the company's delivery expertise to improve the supply chain and its purchasing power to lower the cost of drugs, he says.
"My advice to healthcare boardrooms is to take a very serious look at how things are changing around you. Things have already been changing, but things are accelerating at a fast pace," Friend says. "You cannot sit there and expect business as usual. They're pouring gasoline on the fire, so you better do something."
