The power of one

In 2012, DSN presented an in-depth report on CVS Caremark’s integrated pharmacy business model — part big retail pharmacy chain, part big PBM, part big retail clinic operator — and the innovative products and solutions that were coming out of the organization, particularly where the three parts of the business came together, its “integration sweet spots,” as company executives referred to them. It was clear at the time that the company had emerged as a “category of one,” which was the cover theme of that special issue.

Now, a year later, as the company completes its 50th year in business and the country awaits a period of change in health care unlike anything seen in at least that time, CVS Caremark executives are quite confident that its unique hybrid structure and its ability to leverage the three core parts of its business — either individually or together, in varying combinations to serve a multitude of needs — aligns more effectively with the long-term trends in health care and puts the company in a unique position at a singular moment in history.

In an exclusive interview with DSN, CVS Caremark president and CEO Larry Merlo talked about what that means, why it’s important to both public and private payers of all sizes, health plans, patients and providers, as well as how the company is using behavioral economics and predictive analytics to more effectively engage clients and customers and how they are building new clinical capabilities to address the new models of care, new customers and new quality standards that will guide the new payment models that will emerge through health reform.

“We’re going to see more change in the healthcare industry over the next 10 years than we will have seen in the past several decades,” Merlo said.

Call it the New New Math: One plus one plus one equals one. That’s more or less the formula behind CVS Caremark’s channel-agnostic, enterprise-driven growth strategy. That’s the power of one.

Its Maintenance Choice program is a prime example. A traditional standalone PBM with a mail-order business would typically work hard to keep patients bound to mail. But for CVS Caremark, even if the PBM loses some mail-order scripts, it still captures those lives to manage, and CVS/pharmacy gets the scripts; CVS Caremark the enterprise wins. Meanwhile, its PBM customers — and their members — save money and maintain access to retail pharmacy.

In today’s market, with the headwinds currently facing the nation’s healthcare system and the massive changes to come, that’s a powerful message.

It is no newsflash that America is facing a massive shift in health care, changing the way care is delivered, who gets it, how it is paid for and who pays for it as a result of health reform and other forces. With or without the Patient Protection and Affordable Care Act, health care had already been on a trajectory of mass retailization, driven by the economics of consumer-directed health care. This is only expected to intensify under health reform; with the growth that is expected in the individual plan market, millions more people will have a lot more skin in the game. And this will sharply influence the choices they make.

Consider some of the changes that will occur in health care in the years ahead.

America is aging rapidly — 15 million more seniors will enter Medicare by 2020, with Medicare drug spending expected to rise more than 8% in that time. The average senior, ages 65 years to 74 years old takes about 27 prescriptions a year; those 75 years and older average more than 31 prescriptions a year.

Obesity and chronic disease continue to spike out of control. By 2015, it is estimated that 149 million people — roughly half the country — will suffer from one or more chronic conditions. Patients with chronic disease spend five times as much as the average person, with chronic disease accounting for more than 84% of total healthcare costs.

And the $300 billion a year adherence problem continues to leak avoidable costs from the system.

Specialty pharmacy spending continues to climb. By 2016, it is projected that 8-of-the-top-10 branded drugs will be in the specialty class — up from 3-of-10 in 2010. Currently, specialty drugs represent about 20% of the total drug spend, and it is expected to reach more than 30% by 2016, growing at 13% a year.

Health reform will result in newly covered lives, new sources of funding and massive shifts between patient segments that will play out over the next few years. By 2016, it is expected that 17 million of the previously uninsured will enter the healthcare system either through the private exchanges or Medicaid, which is expected to grow 24% in that time, adding 11 million more lives.

It also is expected that a number of employers will begin to shift retirees into Medicare and move current employees into the private exchanges, further contributing to the rise in the Medicare population — expected to grow 18% in the next few years to 52 million — and resulting in a huge spike in the individual payer market, expected to grow 150%, adding 21 million lives by 2016.

New care and payment models already are emerging. More than 4-of-10 physicians believe they will be reimbursed under a pay-for-performance model in the next few years — some of them already are being compensated that way to some degree. Both government and private payers are pushing the development of such new delivery systems as patient-centered medical homes and accountable care organizations. These models also require providers to assume more risk.

In a frank and wide-ranging discussion, Merlo explained why he likes his company’s chances to be able to pivot against each of these challenges, levering and ratcheting up and down its offerings in varying configurations as needed to serve the changing needs of payers and health plans.

“We believe our enterprise model can deliver services and capabilities that would be very difficult for a standalone PBM or standalone retail pharmacy to offer on its own,” Merlo said in late November. “When you think about the new customer groups emerging, ... obviously the government becomes a growing customer segment with the growth in Medicare and the expansion of Medicaid. We’re well positioned. We currently have the No. 1 share in the managed Medicaid space — with about 30% market share — and we expect that segment to grow [about] 40% between now and 2016. We’re in a very good place when you look at the assets that we have to manage the Medicare population; we have our own SilverScript Med D plan, but also we manage the pharmacy benefit for our health plan clients with their respective MAPD businesses.”

And the opportunities that will arise are not exclusive to the PBM business, Merlo explained. “When you think about the emergence of the exchanges, whether it’s public or private exchanges, we will participate in those segments,” he said. “And our participation is not limited to our PBM. It spans across the entire enterprise, including our retail pharmacies and MinuteClinic.”

The exchanges will provide an interesting opportunity for CVS Caremark to again prove its value at the patient level, as an estimated 17 million “active selectors” hit the market in the next two years alone — this group will be voting with their wallets. CVS Caremark plans to participate in the private exchanges both through “a carve-in basis through our health plan clients, as well as on a carve-out basis as a standalone PBM where we have direct prescription b