Unraveling PBM Complexity: The Consequences of Vertical Integration

Pharmacy Benefit Managers (PBMs) were initially established to make our lives easier by mediating interactions among insurers, pharmacies, and consumers. Today, the current healthcare landscape paints a different picture: instead of just mediating, many PBMs have become directly involved in pharmacy operations and have formed close ties with insurance companies. These arrangements, known as vertical integrations, have significantly reshaped the healthcare market– and not for the better. 

Let’s take a closer look. 

Example of Vertical Integration: CVS 

We’re all familiar with CVS Health. In addition to owning one of the largest chain retail pharmacies in the United States, the company encompasses a wide range of services:

Pharmacy Benefits Managers: As the owner of CVS Caremark, a major PBM, CVS has significant influence over prescription drug plans. 

Group Purchasing Organization (GPO): In pharmaceuticals, a GPO is like a big shopping club for medications. By ordering together and in bulk, lower prices can be negotiated– basically like a group discount. CVS has a couple GPOs under its belt: 

• Red Oak Sourcing:  A joint venture between CVS Health and Cardinal Health, focusing primarily on purchasing generic drugs in bulk. 
• Averon: Based on a recent mark filing, Averon appears to be a new GPO– what for has yet to be seen, but our best guess is that it’s specifically for specialty meds. 

Rebate Group Purchasing Organization (GPO):  To help muddy the water they also created an organization to negotiate with drug manufacturers and called it a GPO. 

• Zinc: This GPO is specifically for CVS’s PBM sector, and its job is to negotiate and contract with manufacturers for rebates. 

Health Insurance: With the acquisition of Aetna, a major health insurance provider, CVS has the ability to favor its own pharmacies and services within health plans. Meritain, a third-party administrator (TPA) and subsidiary of Aetna, also falls under this umbrella. Their PBM offering is called Meritain Health Pharmacy solutions (MPS). 

Specialty and mail-order pharmacies: CVS owns both specialty and mail-order pharmacies, like CVS Specialty, which is part of CVS Caremark. 

This list isn’t exhaustive (see their full list of subsidiaries here); CVS Health's reach extends even further into various sectors like long-term care facilities, wellness programs, and healthcare technology, among others. In each case, the result is the same: more power for CVS. 

This position certainly cements CVS’s status as a giant in the industry, but it also raises a critical question: with ownership encompassing so many aspects of healthcare, whose interests are truly being prioritized? 

Understanding the Ripple Effect of Monopolies 

Conglomerates are nothing new; CVS is just one example of insatiable corporate appetites. But when this structure is applied to the healthcare system, it does have repercussions that need careful consideration. The consolidation of services under a single corporate umbrella fundamentally alters market dynamics, leading to shifts in competitive balance, pricing, and accessibility of services. 

For consumers, it affects everything from the cost of healthcare to the quality and range of services available. As we delve into the implications of these integrations, it becomes essential to understand their far-reaching impact on the healthcare landscape and the everyday lives of those it serves.

Internal cost allocation: This is a big one. Under a consolidated structure, the company can internally allocate costs and revenues among its different divisions. While this might streamline operations, it can obscure the true cost and value of services, as money is essentially being transferred from place to place within the same organization. 

Market power and pricing control: Another big one. Owning multiple facets of the healthcare system gives the company considerable market power. This can lead to increased control over pricing, leading to higher profits for the company but not necessarily resulting in lower costs for consumers. 

Glaring conflicts of interest: When a company owns the entities that manage, insure, and provide healthcare services, there's huge potential for conflicts of interest. For example, a PBM owned by a health insurer might favor its parent company's insurance plans, or a pharmacy chain might prioritize prescriptions from its own PBM. Or, a PBM that owns a specialty pharmacy may be more inclined to approve specialty drugs through the prior authorization process to increase volume at its owned pharmacy. 

Influence on healthcare choices: Such a company could have significant influence over healthcare choices and accessibility. It could direct consumers to its own network of pharmacies and services, potentially limiting options for patients. For example, patients may be forced to receive their prescriptions through a PBM owned mail-order or specialty pharmacy. 

Quality of care: While integrated services promise streamlined care, their one-size-fits-all approach might not always meet the unique needs of each patient. Additionally, the sheer size of these companies can create a gap between the perception of integration and its practical implementation, often resulting in a lack of true coordination across the different branches of the org. 

Vertical Integrations Paint a Bleak Picture 

In a vertically integrated system, giant healthcare conglomerates  have unparalleled control over every step of the pharmaceutical supply chain. This consolidation of roles would effectively allow them to set prices at their discretion. With no separation between the manufacturer, PBM, health plan, and pharmacy, the checks and balances that typically come from having multiple independent players in the market are lost.

This lack of competition and oversight leads to inflated drug prices, as the vertically integrated entities manipulate costs at each stage to maximize their own profits. Consumers, employers, and health plan members are at a significant disadvantage, potentially facing higher medication costs without viable alternatives or transparency in pricing. This scenario drastically limits the choice and bargaining power of those who pay for medications, forcing them to accept whatever prices and terms are set by these vertically integrated entities.

This is why SmithRx exists. We strive to counterbalance the challenges posed by conglomerate practices, such as vertical integration, providing both consumers and employers with more transparent, affordable medication options. By advocating for clearer pricing and alternative choices, SmithRx strives to restore bargaining power and choice to those who actually pay for medications, ensuring that healthcare remains accessible and equitable for all.

Learn more about how we do it, or get in touch with us directly by sending a message to info@smithrx.com