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The Power—or Threat—of Vertical Integration in Healthcare

Posted by | Fuld & Company

Vertical Integration in Healthcare | CVS Health Strategy

How Trends in Vertical Integration in Healthcare combined with CVS Health’s Performance-Based Pharmacy Network Demonstrates its Competitive Strategy

In March 2018, CVS Health has introduced a ‘performance based pharmacy network,’ comprised of 30,000 CVS and Walgreens and approximately 10,000 other retail pharmacies nationwide. Mirroring the value-based model to incentivize pharmacies to help patients adhere to prescription regimens, the new network has the potential to control costs and improve the quality of care through increased access and convenience. In addition to addressing some of healthcare’s most pressing challenges, CVS Heath’s activities highlight how vertical integration is securing its market position and demonstrates how this strategy could be threatening to payers.

Aetna Acquisition will Increase Access to Members and Improve Cost Savings

In June of 2017 – several months prior to the public announcement of CVS Health’s plans to acquire Aetna – Fuld & Company published a post on its blog entitled “Six Reasons Why CVS Health Should Acquire Aetna…Soon.” Among those six reasons was “Adding a health plan to its asset portfolio will provide a strategic advantage to CVS.” CVS is not just a retailer, a PBM and a soon-to-be insurer—it is also a provider. There are 1,100 Minute Clinics in CVS and Target locations across 33 states. If or when the Aetna acquisition closes, a major organization with strong payer attributes will own a retail provider network that is less expensive and easier to access than traditional primary care providers.

Effects of the Pharmacy Benefit Manager and Payer Relationship

Assuming CVS Health’s performance-based pharmacy network strategy is well executed, it will measurably improve outcomes and bring down the cost of care. Other insurers can then benefit by working with CVS Caremark to reduce medical loss through better management of medications for members with chronic conditions. CVS Health, on the other hand, will benefit far more broadly: as an insurer it will benefit from reduced costs, as a PBM it will be seen as an attractive partner for other insurers, which could increase its scale and profitability.

How this Integration Influences CVS Health’s Strategy

If CVS Health fully leverages the company’s vertical integration, retail will benefit as well. As an insurer CVS Health-Aetna can reward members for undertaking health and wellness-related activities, many of which could be administered via the Minute Clinic network, such as flu shots and blood pressure monitoring. And while Caremark works with other retailers, CVS Health-Aetna could drive members specifically to Minute Clinics for the legitimate reason that the insurer component of the integrated company has direct knowledge of and input into the clinic network’s standard protocols and performance. This would pull members to CVS locations and bolster its retail business.

The Threat of Non-Provider Organizations Competing on Value

Vertical integration is clearly the emerging model for national health corporations – for example, UnitedHealth Group and its Optum business unit operate PBM and provider businesses. If Walmart is able to close on the intended Humana acquisition, the integrated company will have retail sales roughly two and a half times CVS Health’s with several thousand grocery stores. Perhaps at some point Humana members will be rewarded for purchasing healthful foods. Anthem is planning on building its own PBM with help from CVS Health and earlier this month Cigna announced plans to purchase Express Scripts.

Without the ability to leverage customer analytics to determine other segments of the healthcare sector to improve outcomes and lower medical losses, the national insurance carriers—as they stand now—are not able to compete. Even at the regional level, leaders must ask themselves if their deep market footprint is enough to defend their position against integrated organizations that can engage consumers with a broad range of products and services. CVS Health’s performance-based network is a good example of how vertical integration opens opportunities to give insurers more leverage. It also underscores how diversification is critical to compete in today’s healthcare environment.


Looking for more?

Read our case study to learn more about how other insurers are planning to navigate the disrupted healthcare marketplace based on the outputs of a scenario planning workshop. 


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