United States national health care expenditures have increased from 12.5% of gross domestic product (GDP) in 1990 to almost 18% of GDP today.1 This drastic increase is causing health care organizations of all types to work to reduce spending and bend the cost curve. 

In order to achieve this spending reduction, health care companies are working to improve efficiencies and create economies of scale. Therefore, consolidation of all kinds is increasing within the health care sector. This includes mergers and acquisitions, joint ventures, and company affiliations—leading to a more organized way to deliver care among coordinated health care entities.

However, the question still remains: will consolidation lead to higher quality of care and reduced costs? There is a concern that mergers and acquisitions will lead to decreased competition and loose agreements between companies that will not drive significant outcomes.1

Related Coverage: Top Trends for 2018 in Specialty

Pharmacy is also no stranger to this trend as consolidation has occurred in the specialty space as well as in the retail space. Although specialty pharmacy represents a smaller volume of distribution compared with retail, specialty profit margins remain much greater in an environment of shrinking margins. Therefore, specialty pharmacy mergers and acquisitions are growing.2

The merits of consolidation
There has been much talk today about a shift from volume-based health care to value-based health care. One of the pioneers of this approach is the Centers for Medicare and Medicaid Services (CMS), however, many other payers are also recognizing the importance of value-based care. 

These value-based programs are intended to boost quality in 3 key areas: better care for individuals, better health for populations, and lower cost. In order to meet these demands, companies are investing into technology that will reduce waste and improve patient care.3

The ability to access and manage patient health throughout many levels of health care is a key component for managing the health of a patient population. Therefore, health systems and health care companies are examining their offerings and looking to expand capabilities.

In a 2017 survey conducted by HealthLeaders Media, 159 health care executives from health systems, hospitals, and physician practices were asked about upcoming mergers, acquisitions, or partnerships. 

Of the 159 professionals, 87% responded that their organizations will explore or complete deals of that nature within 12 to 18 months—while 13% stated that there was no plan for this.4

Providers, clinicians, and payers are recognizing the benefit of jointly managing a wider patient population base. And with a uniform continuum of care, patients can also provide more effective feedback to help improve care.

One set of providers identifying this benefit is the pharmacy industry. Consolidation within pharmacy is continually placing more power into the hands of fewer organizations. The top 4 pharmacy companies in 2015 earned two-thirds of all pharmacy-dispensed specialty drug revenue,2 and these mergers and partnerships continue today.

As previously stated, this consolidation provides a benefit to organizational operations and systems. Fewer organizations may lead to easier business-to-business transactions and business-to-consumer relationships, as well as enterprise system optimization and streamlining. These benefits can produce lower costs, more organizational stability, and better patient care.

Nevertheless, there is a drawback to consolidations. Smaller, independent specialty pharmacies who are left out of the consolidation action may find it more difficult to compete in the space. 

Smaller independent pharmacies may lack the power to be included in certain payer or distribution networks, lack the buying power to purchase drugs for a fair price, lack the ability to meet value-based care requirements, or simply lack the relationships and resources to stay competitive.2 This, in turn, forces further consolidation.

Types of consolidation
Therefore, the reasons to consolidate remain—increase economy of scale, achieve financial strength, streamline the process for the patient, and improve overall patient care through integrating care delivery networks. This desire is strong among health care companies as costs for health delivery are rising and value-based care models are becoming more popular. 

The right model of consolidation is dependent on the business and can range from mergers and acquisitions to partnerships like affiliations or joint-operating procedures.

Mergers and acquisitions
When a merger or acquisition happens, integration occurs to tighten the operations and streamline services. This vertical or horizontal integration will provide access to capital, and help to increase market share, achieve a larger economy of scale, extend product categories, acquire new talent, and geographically expand.1 The intent is to bend down the cost curve while improving patient care and population health.

This trend is seen all over the pharmacy industry, whether it be CVS Health acquiring OmniCare, Diplomat acquiring the third largest independent specialty pharmacy (TNH Advanced Specialty Pharmacy), Walgreens attempting to acquire Rite Aid, CVS Health acquiring and integrating into Target Pharmacy, or many other missed examples.

Partnerships: Affiliations and joint-operating agreements
In lieu of an acquisition or merger, sometimes a partnership is created to maintain the independence of each organization. The hope is that the value of care will be enhanced through this partnership, but the business offerings of each business can remain separate and intact.

Depending on the level of partnership, there may be loose contractual relationships or more detailed financial alignments known as joint-operating agreements.1 For example, in 2011, the Mayo Clinic partnered with member organizations to lend their significant expertise for use in telehealth technology.

This service, called Mayo Clinic Care Network, established a contractual relationship to provide members with patient care services—including telehealth with clinical experts and consultations with other providers within the network.1 The Mayo Clinic Care Network is able to provide technology to members and providers without an increased financial burden to patients or provider organizations.
On the other hand, a joint-operating agreement has a strong financial component. In 2013 CVS Health and Cardinal Health announced a joint venture for generic medication sourcing. 

This partnership includes an agreement for Cardinal Health to pay CVS Health a disclosed quarterly payment. The joint venture is to then collaborate with generic medication manufacturers and develop innovative supply chain and purchasing strategies. 

This venture is intended to drive value to customers and shareholders.5

The effect on the patient
The question of whether this trend will benefit patients remains of paramount interest.  The idea that economies of scale can reduce costs while simultaneously improving patient care works in theory. However, for example, mergers involving providers and health plans have not always resulted in a lower price to the consumer.

Furthermore, there is concern that consolidation may decrease competition within health care. Decreased competition may result in higher costs to the patient. One concern in particular is the lack of health plan competition—this could lead to higher consumer premiums and lower provider reimbursements.1

Nevertheless, in some instances consolidation does provide the technology, the economies of scale, the process streamlining, and overall better patient management that leads to a higher quality of care. It is important for companies to evaluate the benefit that consolidation has for their business, and ultimately, the benefit to the end user. 

These situations should be case by case, and the jury is out. Nevertheless, the patient experience will play a role in present and future integrations and partnerships.

The future of consolidation
With the amount of consolidations taking place, most health care companies will need to eventually collaborate on some level. Furthermore, as health care costs continue to rise, organizations will continue to rework their business models, look for opportunities to save and to serve their customers in new and innovative ways.

As these consolidations proliferate and older agreements mature to produce results, it is important for the organizations involved to demonstrate the value that they have created. But as the consumer is becoming more powerful and beginning to demand greater price transparency and higher attentiveness to feedback, the goal to improve care while keeping costs down is difficult to achieve.

For example, pharmacies will need to work to demonstrate the value of consolidation. A large specialty pharmacy that is taking over the business of a small independent needs to demonstrate the capability to provide the elevated level of patient care that is provided by a smaller business. 

Payers, manufacturers, and patients alike are each interested in pharmacies maintaining quality care. Therefore, in addition to gaining access to new patient lives, integrating systems and capabilities, and expanding market share or product offerings,  pharmacies need to demonstrate the value of consolidation while keeping the patient at the forefront.

  1. http://www.hfma.org/Leadership/E-Bulletins/2017/April/How_Consolidation_Is_Reshaping_Health_Care/
  2. http://therigy.com/specialty-pharmacy-consolidation-a-trend-that-continues-to-grow/
  3. https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/Value-Based-Programs/Value-Based-Programs.html
  4. http://www.healthleadersmedia.com/leadership/healthcare%E2%80%99s-consolidation-landscape
  5. http://ir.cardinalhealth.com/news/press-release-details/2013/CVS-Caremark-And-Cardinal-Health-Announce-Creation-Of-Largest-Generic-Sourcing-Entity-In-US/default.aspx
About the Author
Alex Toman attended Duquesne University, earning his Doctor of Pharmacy degree in 2011. Alex worked as a retail pharmacist until 2015, at which time he transitioned into a clinical pharmacist role within the specialty pharmacy industry. In 2017, he received his Masters of Science in Pharmacy Business Administration (MSPBA) degree at the University of Pittsburgh, a 12-month, executive-style graduate education program designed for working professionals striving to be tomorrow’s leaders in the business of medicines.