![\"\"](\"https:\/\/d3.harvard.edu\/platform-rctom\/wp-content\/uploads\/sites\/4\/2017\/11\/Revenues-picture.png\")
<\/a><\/p>\nSource: The Economist [a]<\/p>\n
Across the health care sector, health care costs and insurance premium increases have perennially outstripped economic growth, including an expected increase in 2018 of 6.5%.[1]<\/a> Many employers, governments, and insurers have used pharmacy benefit managers (PBMs), which \u201corganize the sale and reimbursement of prescription drugs between producers, pharmacists, and private and public health plans,\u201d to hold down costs. [2]<\/a> \u00a0The largest PBM in the United States, CVS Health, had combined 2016 revenues of over $177B after massive investments over the preceding ten years in the vertical integration of its supply distribution chain. Indeed, the CVS Health CEO, Larry Merlo, believes that CVS\u2019 key competitive advantage has been \u201cour ability, largely through technology, to integrate pharmacy care from the payor to the provider to the patient\u201d across benefit managers, 1,100 walk-in health care clinics, and 9,700 retail pharmacies.[3]<\/a> Recently, however, PBMs have come under increasing fire for a lack of transparency in pricing and order accuracy.[4]<\/a> \u00a0Analysts argue that greater pricing transparency within the supply chain will cause PBMs (and CVS) to \u201close market power and profits,\u201d but could ultimately benefit consumers by removing \u201crent-seeking middlemen\u201d and offering better choice at lower prices.[5]<\/a> Additionally, Amazon has gained regulatory approval this year to become a wholesale pharmacy distributor in at least 12 states, further compounding the pressure on CVS to maximize the efficiency of its supply chain.[6]<\/a><\/p>\n As it seeks to address these challenges, CVS Health is rolling out same day delivery of prescription drugs in selected major markets and next day delivery across the entire United States within the next year.[7]<\/a> The company has also reportedly made a $66B offer this month for the fifth-largest American insurance company,\u00a0Aetna, as a further effort to more tightly integrate its supply chain for delivery of healthcare to consumers at the largest scale ever tried.[8]<\/a> Additionally, CVS has announced a partnership with its biggest rival across retail pharmacies, Walgreens Boots Alliance, to align with additional independent pharmacies to serve as a 30,000 store retail pharmacy network. With this combination of improved \u201clast mile\u201d delivery efficiency, tighter supply chain integration, and significantly increased points of sale, CVS is clearly attempting to maintain its historic advantage over industry competitors and potentially forestall new entrants (i.e. Amazon) to the market. Over the medium term, these current initiatives are supplemented by a five year plan to optimize delivery platforms, rationalize the retail store footprint, and gain efficiencies in shared services functions while ultimately saving approximately $3B.[9]<\/a> Simultaneously, CVS is expanding services into higher margin specialty prescriptions (the drug industry\u2019s fastest growing segment).<\/p>\n In addition to these steps, CVS should maximize its ability to fully integrate health care systems through comparison of digitized medical files, pharmacy records, and patient outcomes. If the merger with Aetna is approved, the unique positioning of CVS Health as manufacturer\/distributor (of medication), care provider (through walk-in Minute Clinics), and payer could revolutionize the ability to deliver better care at lower cost across the industry. This will require further refinements to their current capability to process digitized records and gather, analyze, and interpret outcome data. Properly executed, this analysis could help CVS develop new health care operating and business models by improving the efficacy and productivity of processes and treatment protocols.[10]<\/a> CVS should also increase transparency in its PBM pricing model by publishing cost data to directly address concerns that it is profiting from consumer and health care payer ignorance.<\/p>\n Is CVS effectively positioned to address Amazon\u2019s potential entry into the health care market? Will CVS Health\u2019s attempt at tighter vertical integration and control of the distributor\/provider\/payer mechanisms for health care delivery improve quality of care and cost for the consumer?<\/p>\n (Total: 782 words)<\/p>\n [a] \u201cThe Right Dose?\u201d November 10,2017, The Economist, https:\/\/www.economist.com\/news\/business\/21730906-vertical-integration-could-put-brake-americas-unsustainably-soaring-health-care-costs<\/a>, accessed November 2017<\/p>\n [1]<\/a> Medical Cost Trends: Behind the Numbers \u2013 2018<\/em>, by the Health Research Institute (PwC), https:\/\/www.pwc.com\/us\/en\/health-industries\/health-research-institute\/behind-the-numbers\/reports\/hri-behind-the-numbers-2018.pdf<\/a>, accessed November 2017.<\/p>\n [2]<\/a> Ralf Boscheck, ‘Pharmacy Benefit Managers: Fixing Healthcare Market Failures or Straining Regulatory Logics!?’ (2017) 40 World Competition<\/em>, Issue 3, pp. 459\u2013469<\/p>\n [3]<\/a> CVS Health, \u201c2016 Annual Report,\u201d http:\/\/investors.cvshealth.com\/~\/media\/Files\/C\/CVS-IR-v3\/reports\/annual-report-2016.pdf<\/a>, accessed November 2017<\/p>\n [4]<\/a> Thomas A Hemphill, \u201cThe \u201cTroubles\u201d With Pharmacy Benefit Managers,\u201d Regulation<\/em>, Spring 2017, Vol 40 Issue 1, pp14-17.<\/p>\n [5]<\/a> \u201cThe Right Dose?\u201d November 10,2017, The Economist, https:\/\/www.economist.com\/news\/business\/21730906-vertical-integration-could-put-brake-americas-unsustainably-soaring-health-care-costs<\/a>, accessed November 2017<\/p>\n [6]<\/a> \u201cAmazon Gains Wholesale Pharmacy Licenses in Multiple States,\u201d October 27, 2017, St Louis Post-Dispatch, http:\/\/www.stltoday.com\/business\/local\/amazon-gains-wholesale-pharmacy-licenses-in-multiple-states\/article_4e77a39f-e644-5c22-b5e6-e613a9ed2512.html<\/a>, accessed November 2017<\/p>\n [7]<\/a> \u201cCVS Is Rolling Out Free Same Day Delivery,\u201d November 6, 2017, Fortune, http:\/\/fortune.com\/2017\/11\/06\/cvs-free-same-day-prescription-delivery\/<\/a>, accessed November 2017<\/p>\n [8]<\/a> The Economist, op. cit.<\/p>\n