Will Health Plan Mega-Mergers Upend Pharma?


For over a year, surveys have shown that Americans are fed up with high drug prices. Now, presidential candidates are talking about solutions on the campaign trail.  A new administration is likely to “do something” on reducing the cost of drugs. Politicians have readied their arrows, but could another group create an additional battlefront for Pharma?

Health insurers get little love in the United States.  And that’s a fact.  According to the American Consumer Satisfaction Index, health insurers ranked as the third most hated consumer service industry in the country in 2015, after pay-TV providers and Internet service providers.

So when major insurers announce plans to merge, as is the case with Aetna-Humana and Cigna-Anthem, there is plenty of willingness to scrutinize.  Both of these mergers are now in the hands of the Department of Justice, which is expected to reach a decision on the merger proposals by late 2016.

Physicians and hospitals have argued about the detrimental impact of mergers on their businesses. However, there has been much less discussion about the impact of payer consolidation on formularies and drug costs.

In the past, we have typically seen health plan mergers that involve a larger shark swallowing a smaller minnow, such as UnitedHealth buying Pacificare. In those instances, the formulary of the larger plan tends to prevail post-merger. Larger plans tend to cater to more beneficiaries and therefore have more generous prescription drug coverage. That is, greater access to additional branded therapeutics at a lower out-of-pocket cost.

In the situation we are currently facing, two mega-mergers are being evaluated. So, sharks eating sharks. What formulary philosophy will prevail post-merger, if the deals are indeed approved?

Large health plans already have quite a bit of negotiating power with drug manufacturers. Additional rebates may be extracted in commercial and government lines of business for more favorable formulary placement.

Going from 5 to 3 major US health insurers adds up to plans having even more leverage to negotiate prescription prices downward, using their mammoth populations of covered lives as leverage and using value-based frameworks on pricing (such as ICER) for cover.

There is another potential curveball: the pharmacy benefit manager (PBM) role.

PBMs are simply managed care providers for drugs. Aetna uses CVS, Humana has its own in-house PBM, Cigna uses Catamaran, and Anthem uses Express Scripts. Catamaran was itself merged with UnitedHealth’s OptumRx in 2015.

Different PBMs have different coverage policies for different therapeutic categories, and in recent years we are seeing exclusionary formularies that block certain types of drugs.

It’s unclear which PBM contracts and philosophies would prevail post-merger, which represents a big unknown. One biotech executive noted recently that Cigna and Anthem have about equal policies for biopharmaceutical coverage; while there is bigger delta between Aetna and Humana policies. Aetna is known as having a more generous formulary overall.

The leaders of Cigna and Anthem point to population health, integrated care and value-based arrangements as key drivers of their future practices. With the movement in our healthcare system to paying for value vs. volume, we are seeing providers – like hospitals and physicians — having to do more patient-focused care with less cost.

From the Rx manufacturer viewpoint, if you provide a therapy that treats an unmet need, the mergers should have limited bearing on the coverage of your product. If, however, you are in a more crowded class then formulary placement and coverage may be less beneficial.

Some argue that expensive immuno-oncology products – with price tags of $100,000 and higher – are the ones that will see the most pressure from insurers. Since hospitals and clinics typically administer these injectable products, the health plan has the ability to “bundle” services and drug costs into a fixed fee.

However, it seems that therapies that are expensive and have competition (think diabetes or RA) would be the ones at most risk of increased pricing pressure.

Paying for performance, like the recent Eli Lilly-Anthem agreement suggests, means that insurers and PBMs are starting to pay for drugs based on efficacy.  PBMs are using indication-based pricing, which means paying more for cancers that respond to a treatment vs. cancers that do not respond to a therapy.

Could single-source drugs fare better?

For drugs with no competition, some would argue that mergers will increase drug prices.  How can a plan with so many covered lives walk away from important single source drugs? With less competition, a manufacturer may have more leverage with the health plan.

Regardless of the potential reimbursement pressures for more crowded classes, it’s likely not the end of the world for drug makers in a post-merger world. Pricing headwinds have been expected for some time.

Most prescriptions will not be denied outright. There may be additional utilization management such as “fail first” and prior authorization policies. Higher co-pays and out-of-pocket spending may be the result of these mergers, as plans seek pharmacy efficiencies.

Morning Consult