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The Amazon question: How the online giant could shake up the Rx landscape
Though CVS Health and Aetna have had a working relationship since 2010, and their pending merger had likely been in the works for some time, its timing, experts say, suggests that the merger is as much about staving off the looming threat from Amazon as it is about competing with top health insurers and retailers.
“The merger of CVS and Aetna is likely anticipatory positioning in the face of a looming competitive threat from Amazon, which is expected to enter the prescription drug market after reportedly acquiring pharmacy licenses in at least 12 states,” Deborah Weinswig, managing director of New York City-based retail think tank Fung Global Retail & Technology, said when the merger was announced. “In our view, this merger announcement is likely the first of many to come between pharmacy companies and insurance companies.”
Indeed, Amazon seems to be closing in on some sort of pharmacy entry. The company last March hired Premera Blue Cross veteran Mark Lyons as its senior manager of pharmacy benefits. The company also reportedly acquired wholesale licenses in 12 states, and continues to apply across the country. However, while a November analysis by New York City-based financial services firm Cowen suggested that such moves indicate an interest in distribution — which would put Amazon in competition with such players as AmerisourceBergen, Cardinal Health and McKesson — the company seems to be indicating that its interests lie elsewhere.
“In Massachusetts and Indiana, it’s told regulators it’s not going to ship drugs, it’s not going down that path,” said Dave Raiford, senior director of market access insights at Burlington, Mass.-based healthcare research and consulting company Decision Resources Group. “It’s interested in medical devices, which I think is an easier entry point for them. It’s a little less rigid in terms of the regulatory aspect. They’ve also pulled back in Maine.”
Cowen’s report, “Amazon’s U.S. Pharmacy Opportunity,” suggested another angle of approach that meets Amazon’s needs of avoiding as much regulatory headache as possible — an acquisition of Rite Aid that would bring the online giant into the world of brick-and-mortar retail pharmacy in much the same way its Whole Foods acquisition made it a grocery player.
Cowen noted that the main achievement of a Rite Aid acquisition would be infrastructure that already passes regulatory muster, gaining six distribution centers and roughly 2,500 stores. The distribution centers would offer DEA-compliant storage and distribution of controlled substances, among other licenses that Amazon would need to acquire if it wanted to build out pharmacy offerings in its existing retail footprint.
“If you think about it, going the retail pharmacy route, that would [require] a build out,” DRG’s Raiford said. “Not that Amazon certainly doesn’t have the resources to do that it if wants to. It already owns Whole Foods, so it has a presence where it could add pharmacy. It probably is more likely that if it did go the route of retail pharmacy, an acquisition of Rite Aid, which also has the EnvisionRx component gets it there a little bit faster.”
Like Raiford, Cowen noted that in addition to infrastructure and a retail footprint, Rite Aid would bring Amazon a PBM of its own — opening the doors to small-scale mail-order pharmacy. This possibility is why such analysts as Raiford suggest Express Scripts as another potential acquisition target, though Cowen noted that it would require a more substantial financial commitment. Kantar Retail vice president Brian Owens, who leads the Norwalk. Conn.-based company’s health and wellness and drug channel research, noted that a pharmacy entry would only build on the ways that Amazon already plays in health care — on the retail side, it’s a top seller of health and beauty products, and on its AWS side, it offers technical support to payers and government agencies.
“I want to be clear — the CVS-Aetna deal is not an overreaction to Amazon potentially coming into the pharmacy space in a more meaningful way,” Owens said. Indeed, if Amazon were to acquire Rite Aid, Cowen noted that it would bring Amazon access to reimbursement networks that, alongside its existing capabilities, would make it a true threat to the existing order in retail pharmacy.
“We think RAD’s remaining footprint of 2,575 stores, along with Prime home delivery, Prime Now and pharmacies integrated into existing Whole Foods locations, would essentially provide AMZN with nationwide coverage, positioning it as a viable partner for payers in establishing preferred, narrow pharmacy networks, which we think would be crucial in establishing AMZN as a legitimate player in the retail pharmacy market,” Cowen said.
And while Cowen noted that acquiring Rite Aid would bring it stores that generate roughly 23% less revenue and 79% less EBITDA than CVS Pharmacy stores, the acquisition also could give Amazon the ability to participate in Walgreens Boots Alliance’s generic purchasing consortium.
This means that in this scenario, Walgreens would be partnering with a key competitor in a way that would help it continue to build out distribution capabilities — the company owns a nearly 25% stake in AmerisourceBergen— as a way to influence price. Walgreens Boots Alliance also is continuing to build out its global footprint, adding a 40% stake in Chinese chain GuoDa Drugstores to its ownership of Boots in the United Kingdom and various other international chains.
“[Walgreens is] playing more on the wholesale side, and being able to understand how the flow of prescription drugs is facilitated globally,” Owens said. “If they have a global footprint and the more they’re able to acquire more points of commerce from a pharma standpoint …, it allows them to have the ability to influence how prescription drugs are flown, and potentially the cost of them as well.”
If Walgreens succeeds, it would mean better prices for its partners, which likely could include Amazon. This would be the biggest example of an increasing trend that also could help retailers stay competitive in the face of an Amazon threat, namely, increasing numbers of partnerships among what Owens calls “frenemies.” Such alliances as CVS Caremark’s performance-based network that’s anchored by CVS Pharmacy, Walgreens and independent pharmacies is just the most recent example — and certainly not the last.
Fighting off Amazon will ultimately come down to the retailers’ abilities to leverage its capabilities — even if it means forming a team of rivals to do so. “I think there’s always going to be a place for everyone to play,” Owens said. “It comes down to less about trying to acquire more lives and more about how profitable you can make it with the resources you have and people you service.”
Changing dynamics: The CVS Health-Aetna merger forces the industry to adapt
Another year, another pending merger that promises to shake up the retail pharmacy business as we know it. Only, unlike the scrapped merger between Walgreens and Rite Aid, CVS Health’s proposed acquisition of health insurer Aetna has the potential to upend the whole healthcare landscape, putting it in competition with other retailers on one front and with leading insurers on another.
In light of the trends the retail pharmacy has seen in the past several years, the merger seems like a natural move. The announcement came at the end of a year that saw companies facing a confluence of headwinds. Generic pricing — which Valley Forge, Pa.-based wholesaler AmerisourceBergen projected will continue to decrease by 7% to 9% in fiscal year 2018 — and lower store traffic, with RetailNext reporting that store traffic for November 2017 fell 11.4%, offer a one-two punch of pressure on retailers’ bottom lines. And, with healthcare costs making up 17.9% of the United States’ GDP in 2016, according to the Centers for Medicare and Medicaid Services, companies are under pressure to contain costs eating into profits.
As a result, the past year was rife with efforts from retail pharmacy giants to innovate by being more involved with pharmacy benefits managers and payers to strike deals that would increase their bottom lines. Notably, last April Walgreens created AllianceRx Walgreens Prime, a combined central specialty pharmacy and mail services company it formed with PBM Prime Therapeutics, which is owned by the nation’s 14 leading Blue Cross and Blue Shield Health Plans.
Even before the merger, Woonsocket, R.I.-based CVS Health forged new partnerships — from providing prescription fulfillment, claims processing and other support services to Anthem’s new PBM IngenioRx to creating its own limited performance-based network through its CVS Caremark PBM that included CVS Pharmacy, as well as Walgreens and 10,000 independent pharmacies.
Not even the specialty space has been immune to margin pressures, with leading specialty pharmacy Diplomat moving into a new approach to its business. In November, the Flint, Mich.-based company acquired two PBMs in two weeks, bringing together the claims processing platform from National Pharmaceutical Services and the mail-order, specialty pharmacies and clinical programs of LDI Integrated Pharmacy Solutions
“With 90% of traditional medications now filled as generics, it’s specialty pharmacy costs that are driving pharmacy spend for payers,” Diplomat president Joel Saban said. “To offer real solutions to today’s challenges, a new model with a diverse set of assets is needed. The need for specialty benefit management solutions has never been more urgent.”
The state of health care is an open question — though a repeal of the Affordable Care Act fell flat in August, an as-yet unreconciled tax bill contains a repeal of the ACA’s individual mandate, and CMS has slashed the budget for open-enrollment advertising. The retail pharmacy industry has a big role to play, and it’s one that the CVS Health-Aetna merger seems intent to fill, while expanding its offerings.
Paula Wade, principal analyst for market access insights at global healthcare data and market intelligence firm Decision Resources Group, said that the Aetna merger is as much about fighting retail margin pressures as it is about becoming a competitor to such companies as UnitedHealth — which has been expanding the reach of its Optum business beyond its OptumRx pharmacy benefits manager, including the acquisition of 300 DaVita infusion centers — and Express Scripts, which in October paid $3.6 billion for medical benefits management company eviCore.
“I think just as the insurance industry is chasing UnitedHealth’s very successful diversification model with Optum, on the other end of things the PBM industry is having to chase diversification, as well, so I think it’s both of those pressures coming together,” Wade said.
All this is to say that the state of retail pharmacy is one that is being forced on the offensive from several angles — most acutely the combination of CVS and Aetna, but on a more existential level, the potential impact that Amazon will have when, not if, it moves into the pharmacy space.
Given the plans that CVS Health has for an expanded role of the pharmacy, experts say the industry in the coming years will need to up its game to compete with the enhanced capabilities through the Aetna merger — and the still unknown threat from Amazon.
The new store
As a preamble to the announcement of its proposed Aetna acquisition, CVS Health spent most of 2017 steadily expanding its store footprint and building up its pharmacy services. It acquired 14 Doc’s Drugs stores in Illinois in July, 20 Indiana and Illinois Fagen Pharmacy locations in August and six Ohio ProMedica locations in September. It also revamped its front-end with a massive focus on health-and-wellness offerings across OTC and consumables, and a natural focus in its beauty aisles. It introduced ScriptPath, a new way for patients to visualize their daily medication that put its own twist on medication adherence efforts, and its promised next- and same-day delivery across various nationwide markets, rolling out same-day delivery in Manhattan in early December.
In a conference call that CVS Health president and CEO Larry Merlo conducted with Aetna chairman and CEO Mark Bertolini on Dec. 4, the two made clear that in retrospect, the yearlong buildup of CVS Pharmacy’s offerings was just the beginning.
“Think of an idea where we have 10,000 new front doors to the healthcare system, where people can walk in, they can ask for some help, [and] get guided through the system,” Bertolini told analysts. “We can make the insurance the back room of the operation, we can waive prior authorizations, we can waive copays as people use the system in a way that’s more effective so we can reduce costs. It’s simpler, it’s customized for the individual based on what they need and it’s cheaper.”
The companies plan to make CVS Pharmacy locations into healthcare hubs, where patients can ask questions about their health conditions, health benefits and prescription drug coverage. The pharmacy also will become even more of a resource for patients in need of medication evaluations, home monitoring and durable medical equipment, the companies said, noting that the merger brings the potential to offer remote monitoring to patients with such chronic conditions as diabetes.
[pb]“That is a huge thing from the care perspective, because when you imagine that you have all these people with various types of home diagnostic monitoring equipment and they see a reading that is troubling to them or maybe the equipment isn’t working right, they can call their number and be told you don’t have to go to the hospital, just go to your CVS Pharmacy clinic,” Wade said. “They’ll … solve that problem without that person having to go to the emergency room, which is a much more expensive level of care.
The hub will serve, ultimately, as a way to create more patient engagement and healthy outcomes that will cost the healthcare system — and ideally, patients — less money, with Merlo saying that the company’s biggest opportunity lies in the Medicare and Medicaid populations.
Bertolini sees the potential for stores to offer guidance to Medicare and Medicaid patients. “On the Medicare/Medicaid side, I think people are confused — they’re wandering through the system [with] multiple doctors, multiple medications,” he said. “And the opportunity [is there] to help them navigate that system, put them on a plan and actually make this a place … people want to go.”
DRG’s Wade noted that it’s still unknown what federal regulators might require the companies to divest, if anything, as part of a potential approval, but she pointed to Aetna’s Medicare Part D enrollment as a potential target. However, she sees likely increased traffic to stores from Aetna’s Medicare Advantage patients — for whom CVS Pharmacy is already a preferred provider — as well as big potential for MinuteClinic.
“It would absolutely encourage them to maximize and expand the whole MinuteClinic business to become more of a provider partner with Aetna — and Aetna is very enthusiastic about using telehealth and telemedicine,” she said. “I can see telemedicine suites going into these clinics that would, I think, vastly expand the utility and the range of care services that could be provided there, even with nonphysician providers and staff. That is going to take a while. The downside, I think, for both partners, is just how long it will take to combine those and make all of that happen. That’s not a quick thing to bring up operationally.”
Connected health and beyond
Despite the potential logistical difficulties, DRG principal analyst Matthew Arnold noted that demand is there for more connected health solutions. Arnold said that the company has tracked adoption of virtual consults among patients, and has found that since last year, use of virtual consults has increased from 20% to 24% who have used the technology.
Connected health represents a burgeoning space among pharmacy retailers. Walgreens, in a December partnership with NewYork-Presbyterian, brought virtual health kiosks to its New York City Duane Reade Banner, as well as consults through its website. This builds on the company’s other telehealth efforts, which include a pre-existing partnership with telemedicine provider MDLive.
“We’re already seeing pretty substantial use, and it speaks to the enormous demand for these services,” Arnold said. “The No. 1 reason people give for using virtual consultations right now is to renew a prescription, which fits right into CVS’ [MinuteClinic] business model.
Even if it takes time, Kantar Retail vice president Brian Owens, who spearheads the Norwalk, Conn.-based company’s health and wellness and drug channel research, highlighted the potential for the deal to allow CVS to bring its resources to bear on the entire healthcare continuum.
“If you think about CVS’ focus on the last mile of care, now it has the first mile of care, too,” he said. “Think about the ability to insure people and potentially leverage that last mile of care to influence the first mile.”
This effort complicates efforts for such retailers as Walmart, which Owens noted has put an emphasis on the first mile of care in a similar manner to CVS Pharmacy. But he sees the opportunity for Walmart as laying in a focus on diet and nutrition — particularly given its product assortment.
“They have the real estate, they have the traffic, they have that ability to influence the first mile of care — and I know they want to influence the last mile, too,” he said. ”But I view diet as the biggest challenge, and I think their ability to explain trade-offs in terms of lifestyle and have everything in the store to provide the solution is where Walmart’s focus is, and where it’ll continue to be. … I think their bigger opportunity [is] in providing acute care solutions, as well as education and lifestyle management relevant to all the things they have in the store and the traffic they have in the store.”
Nutrition is an area where grocers also have a chance to shine, according to Owens. Indeed, it is a growing trend among such retailers as Hy-Vee, Tops Markets, ShopRite and Publix, that keep dietitians on staff as a way to build out its offerings and help make an impact on public health. The imperative for these retailers is similar to Walmart’s, which Owens said is building up its Wellness Day health screening service to offer a more wide-ranging resource to more customers.
“The evolution for them is how they create wellness days for their low-income shopper[s], who [are] struggling to understand … how to best spend [their money] so they don’t get sick.”
And retailers might want to get moving, as Owens said that CVS Health could decide to offer health plans directly to patients and tie their premium to their buying habits. “[The company could say] ‘If you shop CVS exclusively, we’ll give you this plan, and if you buy or behave a certain way — whether it’s through the MinuteClinic or healthy buying behavior, your premium goes down in years two, three and four.”
And while he noted the risk that CVS Health could close off Aetna members from frequenting other pharmacy chains, the company seems willing to keep its doors open, even to its competition. It is working with Walgreens and 10,00 independents for CVS Caremark’s new performance-focused network, and Merlo signaled to analysts that ultimately, the question is why its competitors wouldn’t want to partner with it.
“Our ability to build a model that customers want to use because of the value it provides, I think, becomes a key guiding principle of bringing these companies together,” Merlo told analysts. “Our goal is to apply those capabilities broadly across the industry. Think about our other partners in achieving that goal — why wouldn’t they want to participate in those capabilities? Because it’s something their members, the consumer, are going to want to participate in. … I think it’s an important proof point in that guiding principle, that if you’re able to create something of value, people are going to want to engage and participate.”