“An Amazon/CVS/Aetna combination would bring three very different businesses together in ways that would spur innovation to reduce costs, promote transparency, increase convenience and enhance the consumer and producer experience. It’s time for these three entities to realize and exploit the potential synergies.”
William G. (Bill) Stuart
Director of Strategy and Compliance
January 4, 2018
This is the deal that no one’s talking about – until now.
CVS has made a bid to combine with Aetna in a megamerger (yet to be evaluated by federal antitrust regulators) that would create some fascinating synergies in the delivery and payment of medical care. One reason for the acquisition cited by the two parties’ leaders is to protect their lines of business against Amazon in the event that the Seattle-based online behemoth decides to enter the prescription drug or medical payments business.
These fears aren’t far-fetched. Amazon founder Jeff Bezos has proven during the past two decades that he’s willing to invest in new businesses and markets at the expense of immediate profits. He and his leadership team also have demonstrated a penchant for disrupting markets. Amazon has revolutionized our economy. No longer are we as consumers limited to (1) products offered within our geographic area and (2) pricing information that we can glean only by visiting retail stores. Thanks to Amazon, and other online retailers, though Amazon is the textbook example, we can buy any product that our heart desires, know that we’re paying the most competitive price and expect shipment within two days (or sooner, our choice as the consumer).
Quick true story: As I started writing this blog Dec. 21, my son interrupted me to explain his dilemma. He ordered a Baylor Bears t-shirt for his sister for Christmas. An online company sent a North Dakota State t-shirt with a snorting Bison on it. We logged into my Amazon Prime account and ordered a Baylor shirt that arrived two days later, the last traditional delivery day before Christmas (though Amazon shatters that standard with Sunday delivery). One of my professional contacts in Fargo subsequently received an unexpected gift from me.
What an amazing breakthrough that my kids (ages 20 to 25) and all future generations won’t ever appreciate because they didn’t live in the old retail-only world, nor did they straddle the two worlds as their older cousins (or younger aunts and uncles) did.
The Current Medical Shopping Experience
Now, let’s look at our consumer experience in medical delivery. My family’s insurance plan covers the first $6,000 of medical and prescription drug services subject to a deductible. Readers know what that means, we’re responsible for paying for the first $6,000 of covered expenses. We have a real incentive to shop aggressively for those services, since we are the immediate beneficiaries of any savings that result from our shopping wisely.
Ah, the shopping experience. We have a handful of prescriptions among the six of us. How do we know that we’re getting the best deal on those drugs? We don’t. We can secure a paper prescription from a doctor (though most physicians prescribe electronically today, making this feat difficult) and trudge to CVS, Rite-Aid, Walgreens and Wal-Mart (all within five miles of our house, but probably a two-hour time commitment) with a paper script and insurance card and ask the pharmacy tech at each location to process the prescription in the computer (without filling it) to determine the price at each location. Not a 21st century shopping experience!
Our insurer has a “transparency tool,” which provides information on discrete services like a physical therapy visit, an MRI of the lower back without dye or an INR blood test. That information is useful, since most consumers believe that these services are commodities with little difference in quality (and even if there were a difference in quality, a more experienced MRI reader for example, we wouldn’t know how to identify that benefit from the transparency tool).
This tool has several shortcomings, however. First, it works only as long as we haven’t satisfied our deductible. As soon as we meet the deductible, our out-of-pocket responsibility is zero. The tool reflects our responsibility only, so an MRI from a standalone imaging center and at an academic hospital both show no cost. That’s technically true, but it doesn’t help a consumer with a conscience to manage her employer’s (and thus her own) future premium costs when premiums reflect the employer’s claims experience.
Second, the tool isn’t helpful when we try to research costs for a service that involves a number of discrete (unbundled) activities. Think day surgery. There’s the facility charge, the surgeon’s charge, the anesthesiologist charge, perhaps charges for supplies or pathology or radiology as well. Without knowing the codes under which a provider bills the services, it’s impossible to know how much a procedure or more complicated service will cost.
Amazon purchased Whole Foods Market last year. The deal didn’t make much sense to many observers at first glance. Sure, Amazon is aggressively building an online grocery business. It’s easy (though not inexpensive) to ship nonperishable items like canned and boxed goods from a warehouse to any home in the US, but an online grocery service can’t serve all of most consumers’ needs if it can’t deliver perishables like meats, produce and fruits and vegetables that arrive fresh. Whole Foods can solve that problem, particularly as Amazon develops its own local transportation fleet. Amazon can drop-ship the rest of the order to a local Whole Foods Market, then add the produce and send the entire order on its way in an Amazon flat-panel delivery van.
Whole Foods Market also gives Amazon about 450 mini-warehouses located nationwide, primarily in more affluent areas. These locations give the company additional flexibility; for example, stocking high-volume items and promising two-hour delivery. Even absent these potential benefits that the Seattle folks are undoubtedly planning, Whole Foods consumers appreciate the immediate impact of Amazon on the retail shopping experience: Lower prices on many items. That’s an Amazon trademark that it brings to every venture that it undertakes.
Imagine how an Amazon/CVS/Aetna combination could revolutionize medical delivery and payment. How? Let us count the ways. In no particular order:
Lower-cost prescriptions: CVS owns one of the nation’s Big Three pharmacy benefits managers (PBMs), the middlemen who typically negotiate with insurers, often recommend which drugs are covered by insurers and coordinate supply and demand. The CVS-Aetna deal effectively eliminates CVS as a PBM for other insurers and payers, so it could design programs and pricing that benefit CVS customers and Aetna members without fear that insurance rivals would piggyback on the new pricing. (Note: Antitrust regulators will focus on the loss of independence of a PBM when determining whether to allow the union.)
Absent a merger with CVS/Aetna, Amazon could become a PBM, though partnering with an existing PBM allows it to scale its program faster, focus on true innovation rather than recreating an existing model and benefit on the back end through lower prescription drug costs that keep its insurance subsidiary’s premiums more competitive.
Home delivery of subscription prescriptions: Those of you who have Amazon subscription buttons (we receive 72 K-cups of Green Mountain hazelnut coffee every two months) know the convenience of this auto-ship feature, especially for patients who don’t have access to transportation. The elderly, those who don’t live near a pharmacy and those without a car can all remain compliant with prescription-drug therapy because Amazon delivers prescriptions automatically on a subscription plan.
Amazon can set up this program independent of a CVS/Aetna partnership, but it’s less of a lift to establish the program with a single existing insurer/PBM. It’s also potentially more lucrative, since one entity reaps the medical-cost benefits of more compliant patients and can price its insurance plans more competitively.
Price and quality transparency: Imagine the quantum leap in cost and quality transparency if Amazon deploys a modified version of its information platform for buyers of medical/dental/vision services. The platform could combine clinical quantitative (many of them quantitative measures from Medicare data, Leapfrog, Dartmouth Atlas and other objective sources) and qualitative (patient feedback on professional manner and overall experience) measures. Amazon can build this database without a CVS/Aetna partnership, but it can magnify the financial impact and minimize the cost of launching and maintaining the database by working with one large insurer.
Bundled services: Imagine you need, say, surgery for a torn rotator cuff. Treatment involves a lot of services (operating room, surgeon, surgical staff, supplies, recovery services, nursing, physical therapy) and variables (length of recovery, potential for readmission, response to physical therapy, etc.). Amazon could contract directly with providers in your geographic area (or anywhere else in the US or the world) to provide a single packaged price for the entire course of treatment.
This is no pipe dream. Surgery Center of Oklahoma provides just such pricing (with a guarantee, so that it absorbs the cost of readmissions) and many foreign “medical tourism” facilities (including Health City in the Cayman Islands and facilities in Bangkok and India) offer this pricing model as well.
Rather than picking a surgeon and facility out of a phone book and wondering about the cost and quality, you could look up providers and see quality scores (like number of surgeries performed annually, readmissions, infection rates, mortality rates), customer reviews and professional organization reviews. You research televisions, cars and vacations and purchase airplane tickets, birthday presents and electronics online. Why not medical services? Again, Amazon can enter this space without partnering with CVS/Aetna, but the combined forces don’t require negotiating with myriad insurers and ensures that Amazon/CVS/Aetna achieves a competitive medical-cost advantage.
Dedicated facilities: OK, it may sound far-fetched at first, but consider the benefit of Whole Foods Market’s 450 locations. They’re primarily in strip malls in areas with dense populations and higher-income residents. Imagine Amazon’s opening (either within those locations or in adjoining or nearby storefronts) patient centers to provide high-volume services at near-wholesale prices. It wouldn’t be hard to create high-volume specialized locations that would deliver mammograms, colonoscopies, outpatient therapy, blood work and perhaps behavioral health counseling.
Imagine the advantages to Aetna’s cost structure vis-à-vis its competitors (and the savings that would be generated for patients, employers and employees) if it could offer these services at a price below what other insurers have negotiated. Sure, location is still key, what consumer wants to undergo a colonoscopy in the same store in which she buys fresh meat and vegetables? That problem is solvable.
Without a partnership with CVS/Aetna, Amazon could still use its 450 locations to deliver these services to the broad market, but it would be bogged down in negotiations with other insurers, claims and payment. And don’t forget that CVS purchased Target’s pharmacy business, thus creating a presence in large retail stores. While it’s difficult to expand medical delivery at stand-alone CVS stores, given their small size, the vast expanse of a typical Target store opens new possibilities to provide select cost-effective services with more flexibility at lower real-estate costs.
Steerage products: Imagine an HMO product with two tiers – the “Amazon/CVS/Aetna” tier for many services and the larger network tier. Patients who stayed within the Amazon/CVS/Aetna tier for services offered through that network would face minimal cost-sharing. Patients who access a broader network of providers would face higher costs. Since Aetna in this model has direct control over its dedicated providers’ costs, it could realize a meaningful financial advantage. And by working with a single insurer, the Amazon/CVS/Aetna program wouldn’t be bogged down with negotiations, billing and payment with other insurers.
Patient transportation: Ever notice all those private ambulances without sirens blaring on highways throughout the day? In many cases, they’re transporting patients from long-term care facilities to appointments with physicians and at imaging or inpatient facilities. It’s an expensive form of transportation because insurers pay rates that reflect life-saving equipment on board for stable patients (imagine treating an inner-ear infection at an ER as an example of overhead inconsistent with the patient’s condition). Amazon is developing its own national transportation structure to reduce its last-mile costs, supplanting FedEx, UPS and USPS with white-panel unmarked vehicles (except perhaps with the subtle Amazon arrow smile) as the final delivery service.
Granted, there is a huge difference between transporting a bunch of packages from one facility to many destinations and transporting humans from many locations into a smaller number of facilities. Then again, that’s precisely the type of challenge that translates into cost advantages for Amazon. Imagine the medical costs that an insurer could save if it could more effectively transport stable patients to receive routine care. Amazon has little incentive to develop this market on its own, but the Amazon/CVS/Aetna combined entity with a captive patient audience may create enough volume to justify the investment.
Aggressive steerage from emergency rooms: CVS operates at 9,600 locations in the US. So far, 1,100 of them have Minute Clinics, a figure that continues to grow. Imagine offering access to Aetna members (except for HSA-qualified plan enrollees) with no cost-sharing. CVS can’t justify foregoing the copay revenue for patients today, but it can absorb this cost and still generate insurance cost savings when it steers CVS/Aetna members (for whose claims it is responsible) to retail clinics. CVS/Aetna can achieve these savings on its own, but adding the 450 Amazon Whole Foods locations to the mix, predominantly in higher-income areas, where a service advantage would make this destination more attractive to patients in non-emergent situations, makes the concept available and financially viable in far more geographic markets.
Direct primary care: As doctors grow tired of insurer rules, claims submission and slow payment, an increasing number of primary-care physicians are moving into direct primary care. The concept is simple: Patients pay an annual subscription, typically based on age, with perhaps a surcharge for certain medical conditions. They then have access to medical care through the practice. No copays. No claims. Longer visits. Communication via e-mail, text and Facetime. Targeted patient education programs to manage chronic conditions.
Direct primary care is great for doctors, who can practice medicine more effectively by moving from disease transactions to health interaction. It’s great for patients, who pay a fixed price and have more flexible options (less work time lost!) to connect with their medical professionals. As their doctor becomes more familiar with them and their preferences, doctor and patient can sort through multiple treatment options to determine which is best for the patient.
The Amazon platform allows patients to set up regular purchase and shipment of products (recall my family’s K-cup subscription mentioned earlier). Amazon could easily set up direct primary care subscriptions for monthly billing or set up a Prime-like annual subscription fee.
And we’re just scratching the surface here. There are undoubtedly many other cost-saving and service-enhancing opportunities that would emerge when the innovation teams in Woonsocket, Hartford and Seattle (plus the Amazon mystery city) lock themselves into a room with white boards and generate ideas. Medical finance and delivery are starving for positive disruption that will deliver cost savings that we regularly see in nearly every other aspect of our economy. An Amazon/CVS/Aetna combination would bring three very different businesses together in ways that would spur innovation to reduce costs, promote transparency, increase convenience and enhance the consumer and producer experience. It’s time for these three entities to join forces to realize and exploit the potential synergies.
What We’re Reading
What’s happening with Cost-Sharing Reduction (CSR) payments, now that Congress has passed tax reform without addressing funding the program that reimburses insurers for subsidizing the out-of-pocket costs of consumers who purchase a Silver plan through an ACA marketplace? The Heritage Foundation analyzes the issue here.
One important feature of the ACA that states are likely to exercise (and the Trump administration is likely to support) is the Section 1332 waiver program. This program allows states, with federal permission, to create innovative ways to increase coverage and manage medical costs. The Kaiser Family Foundation summarizes the initiatives that have been approved and are pending in this report.