Senate Finance Committee Issues Testimony From University of Pennsylvania-Wharton School Professor Burns (Part 2 of 2)

WASHINGTON, June 1 -- The Senate Finance Committee issued the following testimony by Lawton Robert Burns, a James Joo-Jin Kim professor of health Care management at the University of Pennsylvania's Wharton School, involving a hearing on March 30, 2023, entitled "Pharmacy Benefit Managers and the Prescription Drug Supply Chain: Impact on Patients and Taxpayers":

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(Continued from Part 1 of 2)

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Adversarial Relationships

The historical lesson here is that the relationships between PBMs and health plans can vary. It is also important to note that the relationships between PBMs and their health plan clients are 17 not always cordial and productive but could instead be unwieldy and rather adversarial. They can both wind and unwind.

Anthem - Express Scripts Litigation

In 2009, Express Scripts entered a 10-year contract with Anthem to provide exclusive pharmacy benefits. In 2016, Anthem filed a lawsuit arguing that its contract with Express Scripts guaranteed it competitive prices for prescription drugs. Anthem or a third-party consultant it retained would conduct a market analysis every three years to determine how competitive the PBM's pricing was; if the pricing was not competitive, then Anthem could renegotiate pricing terms with its PBM. In 2011-2012, Anthem commenced the first round of these renegotiations, which lasted for nearly one year and strained the relationship between the two parties, before they reached an agreement. However, Anthem concluded it was overcharged $3 Billion a year for several years. Anthem began a second round of renegotiations in 2014 by demanding $15 Billion in price concessions from its PBM, and then notified it of breach of contract. Express Scripts countered that the insurer was responsible to produce a market analysis of drug prices that would serve as the basis of negotiations. It also stated that it earned well below than $3 Billion annually from the PBM agreement and thus could not meet Anthem's demand.

In 2017, Anthem announced it would not new its contract with Express Scripts. This meant a loss of 20% of the PBM's revenue. In early 2018, a U.S. District Court Judge dismissed Anthem's suit, stating that its contract did not explicitly state that its PBM would ensure competitive pricing; Express Scripts' only obligation was to negotiate based on data the insurer provided.

Downstream Effects of the Litigation The litigation had several downstream effects - - for both insurers and PBMs. First, Anthem had to replace its big-three PBM. In October 2017, Anthem announced its plan to launch its own inhouse PBM, IngenioRx, in collaboration with CVS Health; the latter would provide Anthem with claims processing, point-of-sale engagement, and prescription fulfillment services. In 2019, Anthem launched IngenioRx, which reportedly accounted for one-fifth of Anthem's revenue, and served as the insurer's PBM vehicle to target self-insured employers.

Second, Express Scripts faced the loss of its largest health plan client (Anthem) and questions about its future as a stand-alone PBM in an era of consolidation. In April 2017, Express Scripts reported in its quarterly earnings announcement that it did not expect Anthem to renew its contract; indeed, in January 2019, Anthem terminated the contract a year earlier than scheduled. Express Scripts was soon courted by another insurer, Cigna. Cigna was rebounding from its failed horizontal merger with Anthem: on February 8th of 2017, the District Court for the District of Columbia sided with the Department of Justice in blocking the horizontal merger 18 of Cigna and Anthem. In March of 2018, Cigna announced its plan to acquire Express Scripts for $67 Billion and pursue a vertical merger instead. The deal closed in early December.

The February 2017 District Court ruling also blocked the proposed merger of Aetna and Humana. Within months of the decision, Aetna likewise pursued a vertical merger with CVS Health. CVS Health executives presented the merger to investors as a strategy to develop health hubs for Aetna enrollees at CVS drugstores.

Historical Rationales for Vertical Integration

The combinations of (1) Cigna with Express Scripts and (2) Aetna with CVS Health meant that all three major PBMs now had health plan partners. UnitedHealth had previously formed Optum in 2011 by combining its existing pharmacy benefit and care delivery services within the company. Its PBM operations stemmed from its 2005 acquisition of PacifiCare, a health plan which had a pharmacy benefit manager.

Indeed, there have been many rationales for such vertical integration offered over the past decade. These rationales reflect the period's Zeitgeist (spirit of the times): care coordination, manage the continuum of care, disease management and chronic disease management, use big data and data analytics to (a) stratify enrollees by their risk level and then (b) identify and intervene for those at high risk. Providers have offered similar rationales for the vertical integration mergers they have undertaken.

Vertical integration has also been partly motivated by the growth in spending on specialty drugs. Such spending is split between the pharmacy benefit and the medical benefit. Patients taking specialty medications tend to have more expensive conditions that health plans need to manage. Health plans have argued that spending under both benefits is large and roughly equal in level, thus requiring close management of both. While there is some overlap, specialty drug spend for different disease categories tends to dominate one benefit over the other (e.g., multiple sclerosis on the pharmaceutical benefit side, oncology on the medical benefit side).

The vertical integration strategies were also partly motivated by Department of Justice's move to block Aetna's and Cigna's prior horizontal merger efforts (with Humana and Anthem, respectively). The latter observation suggests that, at least initially, one underlying rationale for vertical integration was simply growth, not necessarily the specific merger partner.

Current Rationales for Vertical Integration

Adam Fein (at Drug Channels) and Eric Percher (at Nephron Research) have done perhaps the best job of articulating the current vertical integration movement in the pharmaceutical supply 19 chain. As noted above, Fein suggests that the issue may be control over the drug channel: "vertically-integrated payers/PBMs/providers are poised to restructure U.S. drug channels by exerting greater control over patient access, sites of care/dispensing, and pricing. If they can effectively coordinate their sprawling business operations, they will pose a substantial threat of disruption to the existing commercial strategies of pharma companies."60 Such control could result from (1) channeling of enrollees to the specialty pharmacies and providers inside these vertical firms, (2) rewarding providers for formulary compliance, and (3) greater management and utilization control over provider-administered drugs and the buy-and-bill practices of inhouse physicians.61

In his 2022 Report,62 Fein summarized some additional specific goals of vertical integration that are mentioned by Percher:63

* Because healthcare services (e.g., pharmacy) are not subject to the same risk-based capital requirements or profitability regulations as insurers, integration can allow them to retain a greater share of revenues.

* Patients who are on expensive specialty medications have high overall medical spending which can benefit from the combined pharmacy and medical benefit.

* Vertical integration enables insurers to tap into the growing market for specialty pharmaceuticals and perhaps control downstream pharmacy assets.

Challenges to Vertical Integration

In his 2022 and 2023 reports, Fein is also careful to point out the challenges facing the strategy of vertical integrating insurers with PBMs and pharmacies.

* There is no guarantee that an insurer which owns its own PBM and pharmacy operations is assured that prescribing physicians are aware of any pharmacy network restrictions and can direct their drug dispensing.

* Employers may be skeptical about whether the savings from combining the pharmaceutical and medical benefit will accrue to them. This may slow down their adoption of such plans. Not all health plan sponsors seem to be beating a path to such integrated offerings. According to Drug Channels, 77% of small employers (< 1,000 workers) contracted with a combined health plan/PBM in 2021. By contrast, only 53% of mid-sized employers (1,000 - 5,000 workers) and only 33% of large employers (> 5,000 workers) did so; the latter two categories were more likely to carve out the PBM.64 20

* Hospitals have been entering the specialty pharmaceutical business and acquiring oncologist practices. The market for physician-administered drugs is thus shifting from physician offices to hospital outpatient departments. Alternate sites of care such as home infusion account for a portion of the medical benefit spend as well as Medicare Part B spend. Hospitals may enjoy a competitive advantage over integrated insurers in this fragmented market.

* Some prior insurer/PBM/pharmacy/provider joint ventures (e.g., those involving Humana, Prime Therapeutics, Centene) and prior insurer-PBM acquisitions (UnitedHealth and DPS) have unwound.65 Humana has retrenched to focus on its core Medicare business. In 2021, it began sourcing formulary rebates for its commercial health plans via Cigna's Ascent Health Services business; in 2022, it announced it would divest its majority interest in Kindred at Home and Personal Care Divisions. Prime Therapeutics sold its 49% stake in the AllianceRx Walgreens Prime pharmacy; it also outsourced significant portions of its PBM operations to Cigna's Evernorth, including retail pharmacy network contracting, formulary rebates, and mail and specialty pharmacy dispensing. Centene announced plans to outsource PBM operations to Express Scripts and has already sold other businesses (e.g., Magellan Rx PBM, Rare specialty pharmacy). These vertical integration formations are thus quite fluid.

The overall goal of vertical integration may be the magic word, "synergy". Like Helen of Troy, synergy may be the strategy that launched a thousand mergers.66 Synergy results when the whole is greater than the sum of the parts (i.e., 1 + 1 = 3). There are two types of synergies: cost synergies and revenue synergies. Following Fein and Percher, revenue synergies seem to be front of mind in combining the component parts depicted in the Figure above,. All of this is speculative and theoretical at the moment. We have yet to see whether these combinations can figure out how to coordinate the various parts they acquire. Success will largely hinge on getting physicians and patients to follow directives and "do the right thing": e.g., use in-house pharmacies and providers (stay in network) when they are part of different organizations. Success may be challenged by having to rely on those outside, non-contracted organizations to attract needed volume. As a result, each vertical integration combination may need business from other similar combinations, who are their competitors.

Consequences of Vertical Integration

Vertical integration may have important, positive consequences for competition. According to analysts, one outcome of this vertical integration will be more aggressive price competition among health plans and PBMs.67 This could come about by the merging parties' bundling of 21 medical and pharmacy benefits, which would entail a diminution of carve-out contracts between employers and PBMs for just the pharmacy benefit. This would put pressure on the margins of the freestanding PBMs, because vertically integrated insurers would discount their in-house PBM's services to win the combined business. Any stand-alone PBM contracts would need to lower prices to remain competitive.

Such integration might also reduce heterogeneity in health plans' approaches to strategic alignment with PBMs (which used to vary along an outsourcing-insourcing continuum). Greater homogeneity in strategic alignment across dyads of health plans and PBMs would increase their competitive rivalry since downstream buyers discern fewer distinctive features of one vertical integration combination.

Such integration also potentially signals that PBMs may focus increasingly more on the specialty pharmacy business for their profitability and, conversely, focus increasingly less on retained rebates. PBMs have passed along a much greater share of these rebates to health plan sponsors over the past decade, from 75% in 2013 to 90% in 2018. According to some PBM industry presentations, rebates apply to 70% of their branded pharmacy scripts, which in turn account for only 10% of total scripts. Rebates have also diminished in importance due to Medicare's growing share of retail prescription drug spending (from 18% in 2006 to 30% in 2017) and the low amount of rebates retained by PBMs in Part D PDPs.

Finally, growing vertical integration between health plans and PBMs will likely reduce the transparency of freestanding PBMs' financial results.68 We have already confronted the opacity issue in trying to assess the performance of vertical integration efforts by hospitals to develop physician and health plan divisions.69

Vertical Integration: Ride into the Danger Zone?

Vertical integration has become a popular strategy in the healthcare ecosystem. Many of the recent vertical integration efforts depicted in the Figure above include providers (e.g., physicians, ambulatory surgery centers or ASCs, retail clinics) as well as insurers, pharmacies, and PBMs. A prominent illustration is UnitedHealth Group which includes the insurer UnitedHealth, its in-house PBM (OptumRx), and its Optum Health division, which employs or contracts with roughly 70,000 physicians and owns a chain of ASCs and urgent care centers. Another is CVS Health, which encompasses Aetna, CVS pharmacies, and their retail clinics. Such provider markets are typically more fragmented than the core pharmacy and PBM businesses, offer another possible revenue stream, and can involve the key prescriber.

The healthcare sector is in the midst of its second or third iteration of vertical integration involving hospitals, physicians, insurers, and alternate care sites. The historical evidence among 22 this different set of players has already been published, weighed in the balance, and found wanting.70 It is not a pretty picture. Most of the vertical combinations fall into one of three categories - - physicians with insurers, hospitals with insurers, physicians with hospitals. They have all suffered from disappointing financial performance and, sometimes, huge losses. There are an estimated fifty different reasons why combinations of providers with insurers do not work; worse yet, it may only take one of those reasons to sink the deal.71

How should one evaluate vertical integration between firms in adjacent stages in the healthcare value chain? According to strategy researchers, vertical integration (insourcing) makes more sense than using the market (outsourcing) when the following general conditions hold:

* There are few firms in the adjacent stage

* There is need to make transaction-specific investment in an upstream/downstream firm

* The integration ensures access to needed inputs

* There is a need for coordination between the firms in the adjacent stages

* The adjacent stages are similar in their optimal scale

* The two stages are strategically similar

* There is high certainty in market demand

* There is low risk in the reliability of the trading partner

* There is low need to continually upgrade capabilities

Moreover, the following specific conditions must also be met if the vertical integration is to confer competitive advantage over rivals:

* The integration achieves coordination & collaboration not open to other firms

* The integration improves the joint performance of value chain activities under one roof

* The integration leverages resources and capabilities across the combined firm

* Ownership is needed to capture all of this value

* Culture clashes between the two firms can be avoided

* Executives can get the two firms to work together

The bar is pretty high. Many firms may be challenged to clear it. It is unclear whether executives consider the general market and specific firm conditions needed to make vertical integration succeed. Vertical integration is a specific type of corporate diversification. The evidence base for the performance of diversified firms is not much better than that for vertically-integrated firms. Related diversification outperforms unrelated diversification; but, focus may outperform related diversification. The key question is how big is the overlap between the value chains of the firms that are integrating; the secondary question is whether the overlap occurs in the most important stages of their value chains. This requires a comparison of the health plan's value chain and the PBM's value chain.72 Another key issue is that such an analysis needs to be conducted for each pair of components in the vertical chain. A final issue which most strategists fail to consider is this: given the popularity of vertical integration and the large number of firms adopting this strategy, just where is the competitive advantage?

Conclusion Regarding Vertical Integration

In sum, vertical integration is not a guaranteed success. When pursued by hospitals and physicians, there has been a lot of red ink and unwinding of the combinations. This is all documented evidence. At the same time, hospitals have utilized vertical integration with physicians to increase the prices they charge insurers in local markets; this serves to increase their costs and total spending. This, too, is well documented. Regulators need to closely monitor what effects the combinations depicted in the Figure above exert on pricing and costs. At this point, we simply do not know.

1 Lawton Robert Burns. The U.S. Healthcare Ecosystem (New York: McGraw-Hill, 2021).

2 Lawton Robert Burns. The Health Care Value Chain (San Francisco, CA: Jossey-Bass, 2002).

3 Lawton Robert Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

4 Act III, Scene 2. Just to be clear, we are not talking here about Mark Anthony, J Lo's third husband. Their last names are spelled differently. My students always get them confused.

5 This section draws on Chapter 14 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022). It also draws on an article I recently wrote in The Hill, "What History Tells Us About Your Prescription Costs and the New 'Bad Boys' of Health Care," (March 22, 2023).

6 'Whipping Boys' is not a derogatory term. It refers to the use of stand-ins who were punished for the wrongdoings of the princes that were heir to the throne of the Tudor and Stuart kings of England. It was bad optics to whip the heirs, so childhood friends who were educated alongside them served as the substitutes. A synonym for whipping boy is scapegoat.

7 Lawton Robert Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

8 For a positive view of Kaiser today, see: Donald Berwick, Thomas Nolan, and John Whittington. "The Triple Aim: Care, Health, and Cost," Health Affairs 27(3) (2008): 759-769. Less than 100 years ago, however, Kaiser and other prepaid health plans were viewed as "dangerous deviations from accepted forms of practice". See Patricia Spain Ward. "United States versus American Medical Association et al.: The Medical Antitrust Case of 1938-1943," American Studies 30(2) (1989): 123-153.

9 Lawton Robert Burns. The U.S. Healthcare Ecosystem (New York: McGraw-Hill, 2021): Chapter 2.

10 David Dranove and Lawton R. Burns. Big Med: Megaproviders and the High Cost of Health Care in America. (Chicago, IL: University of Chicago Press, 2021).

11 Lawton Robert Burns and Mark V. Pauly. "Big Med's Spread," Milbank Quarterly (Spring 2023, forthcoming).

12 Colleen Cunningham, Florian Ederer, and Song Ma. "Killer Acquisitions," Journal of Political Economy 129(3) (2021): 649-702.

13 Government Accountability Office. Drug Industry: Profits, Research and Development Spending, and Merger and Acquisition Deals GAO-18-40 (Washington, D.C.: GAO, November 2017).

14 Richard Thakor and Andrew Lo. "Competition and R&D Financing: Evidence from the Biopharmaceutical Industry," Journal of Financial and Quantitative Analysis (2021).

15 However, the threat is not always due to supplier mergers. M&A activity among large pharmaceutical manufacturers has not resulted in a more concentrated sector. In 2006, the top ten firms accounted for 46% of total sales; ten years later they accounted for only 41% of sales.15 Instead, in recent years, the threat has sometimes come from generic drugs where either market demand is too small to support more than one firm and/or all other suppliers have withdrawn for various reasons. The result is a monopoly and egregious pricing behavior. Two prominent examples are Turing Pharmaceuticals and its drug Daraprim, and Mylan Pharmaceuticals and its EpiPen - firms which continually hiked their prices because they could.

16 This section draws on Chapter 9 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

17 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.9.

18 IQVIA Institute. The Use of Medicines in the U.S. 2022. Available online at: https://www.iqvia.com/-/media/iqvia/pdfs/institute-reports/the-use-of-medicines-in-the-us-2022/iqvia-institute-the-use-of-medicines-inthe-us-2022.pdf. Accessed on July 12, 2022.

19 Gerard Anderson. Remarks to "Understanding the Role of Rebates in Presciption Drug Pricing," Conference sponsored by Alliance for Health Policy (December 28, 2018). Available online at: https://www.allhealthpolicy.org/11282018-publicbriefing-transcript/. Accesssed on July 12, 2022.

20 Adam Fein. "Drug Channels News Roundup," Drug Channels (June 2022). Available online at: https://www.drugchannels.net/2022/06/drug-channels-news-roundup-june-2022.html. Accessed on July 12, 2022.

21 Mike Gaal, Paul Houchens, Dave Liner et al. 2022 Milliman Medical Index. Available online at: https://www.milliman.com/-/media/milliman/pdfs/2022-articles/2022-milliman-medical-index.ashx. Accessed on July 12, 2022.

22 Andrew Ross Sorkin and Michael J. de la Merced. "Drug Benefit Unit in $4.7 Billion Deal "(April 13, 2009). Available online at: https://www.nytimes.com/2009/04/14/business/14deal.html. Accessed on February 3, 2020.

23 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.10.

24 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.11.

25 Drug Channels. The 2018 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. Exhibit 85: 127.

26 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.12.

27 Gerard Vondeling, Qi Cao, Maarten Postma et al. "The Impact of Patent Expiry on Drug Prices: A Systematic Literature Review," Applied Health Economics and Health Policy 16 (2018): 653-660.

28 The 2022 Annual Report of The Boards of Trustees of The Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds. June 2022. Table IV.B8.

29 Jack Hoadley. Remarks to "Understanding the Role of Rebates in Presciption Drug Pricing," Conference sponsored by Alliance for Health Policy (December 28, 2018). Available online at: https://www.allhealthpolicy.org/11282018-publicbriefing-transcript/. Accesssed on July 12, 2022.

30 Nicholas Johnson, Charles Mill, and Matthew Kidgen. Prescription Drug Rebates and Part D Drug Costs. Milliman Research Report (July 16,2018).

31 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Chapter 11.

32 William Feldman, Benjamin Rome, Veronique Raimond et al. 'Estimating Rebates and Other Discounts Revieved by Medicare Part D," JAMA Health Forum 2(6) (2021): e210626.

33 Mariana Socal, Ge Bai, and Gerard Anderson. "Favorable Formulary Placement of Branded Drugs in Medicare Prescription Drug Plans When Generics Are Available," JAMA Internal Medicine 179(6) (2019): 832-833.

34 Stacie Dusetzina, Juliette Cubanski, Leonce Nshuti et al. "Medicare Part D Plans Rarely Cover Brand-Name Drugs When Generics Are Available," Health Affairs 39(8) (2020): 1326-1333.

35 I am not sure which side is right and which is wrong. Maybe I have missed something. My colleagues are welcome to point out the error in my ways. As Jalen Hurts, the quarterback of the Philadelphia Eagles said after losing this year's Super Bowl, "you either win or you learn". Wise words to live by.

36 Visante. No Correlation Between Increasing Drug Prices and Manufacturer Rebates in Major Drug Categories (2017). Available online at: https://www.pcmanet.org/wp-content/uploads/2017/04/Visante-Study-on-Prices-vs.-Rebates-By-Category-FINAL.pdf. Accessed on March 24, 2023.

37 Ge Bai, Aditi Sen, and Gerard Anderson. "Pharmacy Benefit Managers, Brand Name Drug Prices, and Patient Cost Sharing," Annals of Internal Medicine 168(6) (2018): 436-437. A similar admission regarding the circumstantial evidence for causality is stated by Christine Buttorff, Yifan Xu, and Geoffrey Joyce. "Variation in Generic Dispensing Rates in Medicare Part D," American Journal of Managed Care 26(11) (2020): e355-361.

38 Ge Bai, Aditi Sen, and Gerard Anderson. "Pharmacy Benefit Managers, Brand-Name Drug Prices, and Patient Cost-Sharing," Annals of Internal Medicine 168(6) (2018): 436-437.

39 Erin Trish. Drug Rebates in Medicare Part D (Los Angeles: University of Southern California, Leonard D. Schaeffer Center for Health Policy and Economics, July 27, 2021).

40 Erin Trish. Drug Rebates in Medicare Part D (Los Angeles: University of Southern California, Leonard D. Schaeffer Center for Health Policy and Economics, July 27, 2021). 41 Congressional Budget Office. Prescription Drugs: Spending, Use, and Prices (Washington, D.C.: CBO, January 2022).

42 Available online at: https://library.osu.edu/site/40stories/2020/01/05/we-have-met-the-enemy/. Accessed on March 24, 2023.

43 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.13.

44 Neeraj Sood, Tiffany Shih, Karen Van Nuys et al. The Flow of Money Through the Pharmaceutical Distribution System (Los Angeles: University of Southern California, Leonard D. Schaeffer Center for Health Policy and Economics, 2017).

45 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.15.

46 Burns. The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs, 2022: Figure 9.16.

47 Linda Etemad. Presentation to Understanding the Role of Rebates in Presciption Drug Pricing Conference. Sponsored by Alliance for Health Policy (December 28, 2018).

48 Pharmacy Benefit Management Institute. 2017 Trends in Drug Benefit Design (Plano TX: PBMI, 2017).

49 Drug Channels. Employers are Getting More Rebates Than Ever - But Sharing Little With Their Employees (January 18, 2018). Available online at: https://www.drugchannels.net/2018/01/employers-are-getting-morerebates-than.html. Accessed on February 1, 2020.

50 IQVIA. "Patient Affordability Part One" (May 18, 2018). Available online at: https://www.iqvia.com/locations/united-states/library/case-studies/patient-affordability-part-one. Accessed August 4, 2020.

51 Burns, 2022: Figures 9.17, 9.18, 9.19, and 9.20

52 Drug Channels. Employers Slowly Warm to Point-of-Sale Rebates - - But Most Move Faster for Insulin (rerun) (September 19, 2019). Available online at: https://www.drugchannels.net/2019/09/employers-slowly-warm-topoint-of-sale.html. Accessed on February 1, 2020.

53 The section draws on Chapter 13 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

54 Zarek Brot-Goldberg, Catherine Che, and Benjamin Handel. "Pharmacy Benefit Managers and Vertical Relationships in Drug Supply: State of Current Research," NBER Working Paper Series (April 2022).

55 Drug Channels. The 2023 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers (Philadelphia, PA: Drug Channels Institute): p. 366.

56 David Dranove and Lawton R. Burns. Big Med: Megaproviders and the High Cost of Health Care in America (University of Chicago Press, 2021): Chapter 10.

57 This is covered in Chapter 9 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

58 This is covered in Chapter 10 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

59 The historical M&A trend among PBMs is depicted in Chapter 11 of The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs (Palgrave Macmillan, 2022).

60 Adam Fein. "Insurers + PBMs + Specialty Pharmacies + Providers: Will Vertical Consolidation Disrupt Drug Channels in 2020?" Drug Channels (December 12, 2019).

61 Here is what Adam Fein has to say. With regard to buy-and-bill utilization management: Ownership of clinics enables much greater control over provider-administered drugs--including opportunities to tighten utilization management, negotiate greater rebates from manufacturers, and drive greater biosimilar adoption. For example, Optum's MedExpress clinics currently offer infusion therapy in select Florida and Indiana locations for people with UnitedHealthcare or Humana insurance...commercial health plans try to move infusions to lower-cost sites of care. This is typically achieved with utilization management strategies that guide patients to lower-cost and/or better-performing sites of care. But employed physicians and in-house clinics make site-of-care management much easier. With regard to buy-and-bill channel management, A physician office or clinic that is owned by a vertically integrated organization can be required to obtain provider-administered specialty pharmaceuticals from the company's own specialty pharmacy. This practice is called white bagging. It has displaced buy-and-bill for a significant share of provider-administered drugs in commercial health plans. By owning the infusion site, the insurer bypasses the challenge of getting hospitals to accept white bagging. Adam Fein. "Insurers + PBMs + Specialty Pharmacies + Providers: Will Vertical Consolidation Disrupt Drug Channels in 2020?" Drug Channels (December 12, 2019).

62 Drug Channels Institute. The 2022 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. Section 12.3.

63 Eric Percher. Optum Launches 'Emisar' Contracting Entity; Navitus Aligns with Ascent via Prime (Nephron Research, July 26, 2021). Eric Percher. A Closer Look: Cigna/ESI Makes Waves with Ascent Contracting & Econdisc Sourcing GPOs (Nephron Research, January 23, 2020).

64 Drug Channels Institute. The 2022 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. Exhibit 80.

65 This section is taken from Drug Channels. The 2023 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers (Philadelphia, PA: Drug Channels Institute): pp. 367-368.

66 In his play, The Tragical History of the Life and Death of Doctor Faustus, the sixteenth century English playwright Christopher Marlowe refers to Helen of Troy as "the face that launched a thousand ships". Helen was the queen of Sparta and the wife of the king, Menelaus. When Paris, son of the king of Troy, abducts Helen, Menelaus enlists the help of his older brother Agamemnon, King of Athens, to launch the Greek fleet (the 1,000 ships) to attack Troy. This is the start of the Trojan Wat as depicted in Homer's The Iliad. I have to explain all of this to my Penn students who (somehow, somewhere) neither read the book nor took a course on Greek history. They do not know what face launched a thousand ships, let alone who Menelaeus and Agamemnon were. When, in disbelief, I push further to ask them what they know about the Trojan War, I continue to get blank faces. Out of a class of 55 students one year, only one raised his hand, answering in a questioning voice, "Brad Pitt?". Our educational system is in trouble.

67 Drug Channels Institute. The 2022 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

68 Growing vertical integration between health plans and PBMs will likely reduce the transparency of freestanding PBMs' financial results. Consider UnitedHealth Group, which had revenues of $226.2 Billion in 2018. For 2018, revenues at its OptumRx subsidiary were $69.5 Billion. Interpreting the OptumRx figure is challenging, because: (1) it includes a combination of prescription revenues from its own mail/specialty pharmacies plus external retail network pharmacies, (2) it is reported net of rebates, (3) it excludes the value of members' out-of-pocket payments from revenues from retail network dispensed prescriptions, but includes the value of these member payments from prescriptions dispensed by its in-house pharmacies, and (4) it includes revenues of $39.4 Billion (57%) from services provided to other subsidiaries, e.g. UnitedHealthcare. Drug Channels Institute. The 2022 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers. United's 10-K statement from 2021 includes a depiction of the conglomerate's total revenues. The data indicate huge growth between 2018 and 2021 in the revenues of OptumRx (from $69.5 Billion to $91.3 Billion) and Optum Health (from $24.1 Billion to $54.0 Billion); they appear to be the growth drivers in UnitedHealth's total revenues (from $226.2 Billion to $287.6 Billion). United's biggest revenue source (60%) is the company's Medical and Retirement insurance segment. OptumRx may become increasingly more or less dependent on enrollees outside the parent company. It is difficult to determine the sources of United's profits coming from internal versus external sources given the conglomerate structure and the mix of customers.

69 Jeff Goldsmith, Lawton R. Burns, Aditi Sen, and Trevor Goldsmith. Integrated Delivery Networks: In Search of Benefits and Market Effects. (Washington, D.C.: National Academy of Social Insurance, 2015).

70 David Dranove and Lawton R. Burns. Big Med: Megaproviders and the High Cost of Healthcare in America. (Chicago, IL: University of Chicago Press, 2021). Jeff Goldsmith, Lawton R. Burns, Aditi Sen, and Trevor Goldsmith. Integrated Delivery Networks: In Search of Benefits and Market Effects. (Washington, D.C.: National Academy of Social Insurance, 2015). Lawton R. Burns, David Asch, and Ralph Muller. "Vertical Integration of Physicians and Hospitals: Three Decades of Futility?" in Mark V. Pauly (Ed.), Seemed Like a Good Idea: Alchemy versus Evidence-Based Approaches to Healthcare Management Innovation (Cambridge, UK: Cambridge University Press, 2022). Lawton R. Burns and Darrell P. Thorpe. "Why Provider-Sponsored Health Plans Don't Work." Healthcare Financial Management: 2001 Resource Guide: 12-16. 2001.

71 Lawton R. Burns and Darrell P. Thorpe. "Why Provider-Sponsored Health Plans Don't Work." Healthcare Financial Management: 2001 Resource Guide: 12-16. 2001.

72 Compare Figures 11.14 and 13.5 in The Healthcare Value Chain: Demystifying the Roles of GPOs and PBMs.

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Original text here: https://www.finance.senate.gov/imo/media/doc/Lawton%20Robert%20Burns.Senate%20Testimony.March%202023[1].pdf