Pharmaceutical & Health Care Supply Chain Vertical IntegrationAre you ready for vertical integration to impact your health care?
Consolidation and Vertical Integration in the Health Value Chain is Disrupting the Pharmaceutical and Health Care Industries
In terms of future personal finance and health, year after year, when asked, the major concerns of American consumers include Social Security, Medicare
It does not require a Harvard Business degree to figure out that the health care sector and pharmaceutical industries in the United States are facing a crisis. Financial modeling aside, market prices for health care and prescription drugs seem to be increasing steadily, causing alarm for consumers. The need for health care and affordable drug pricing follows from birth through our lives. Whether we need medical equipment, need access to medical records to register for school, require assistance from diagnostic laboratories, nursing homes or home health care, consumers depend on the U.S. health care system, so it must be accurate, reliable, safe and affordable.
Meeting these essential needs is expensive and the healthcare industry is struggling to accommodate consumers and be more competitive. One way that the healthcare industry is changing to meet those needs is through increased vertical integration.
Let’s take a look at the concept of integration, both horizontal and vertical integration so we know how this works.
Vertical Integration and Horizontal Integration
Over the past twenty to thirty years, the horizontal integration of the supply chain has been the norm. This contrasts with the practice of “owning the value chain”, common 100 years ago. Vertical integration practices decreased during the era of conglomeration in the late 1950s and early ‘70s and in fact, was replaced by vertical disintegration. For example, 100 years ago, Ford owned rubber plantations, coal and iron ore mines and railways, all secured to ensure the production of their vehicles. Today, 75% of the parts that are used to manufacture American cars are sourced from outside the United States. Let’s look at the difference between Vertical Integration and Horizontal Integration before we examine how this is impacting the supply chain and pharmaceutical industry.
What is Horizontal Integration?
Horizontal integration involves the expansion of a business at the same juncture of the supply chain. This may be either within that industry or a different one. Internal expansion fuels this growth. Take, for example a retailer that focuses on dominating sales in a specific category. In horizontal integration, a company that sells shorts for men may then expand to sell pants and shirts to appeal to a wider customer base.
Mergers and Acquisitions
Horizontal integration is also accomplished through external expansion, mergers and acquisitions. By merging with another company or companies at the same phase of production, diversification can be achieved into markets that complement each other but have different products. A merger of competitors occurs when both companies offer similar products and a merger is termed a monopoly when the merger involves all the producers of a particular product or service
Acquisitions, another form of horizontal expansion, involve one company assuming ownership of another.
This requires purchasing a minimum of 51% of the interest in the company to obtain controlling interest. A company that is acquired is absorbed by the company which purchases it.
What is Vertical Integration?
Vertical integration involves business expansion with companies at different stages of the production path. The merger or acquisition of companies at different stages of production or distribution within the same industry is termed vertical integration. If the company acquires or merges with a supplier, this is called
Reasons for Vertical Integration:
- Encourages rapid growth
- Enables direct quality control during every stage of production throughout the entire value chain
- Facilitates control over the customer experience
Real World Examples of Vertical Integration
Seeking to mitigate supply chain risk as well as to have control over the quality of their products, Starbucks has reduced or eliminated the use of industry suppliers. To ensure that they are the suppliers of the core commodities needed to run their business and means of handling distribution, Starbucks owns
- Coffee bean farms and roasting plants
- Warehouses and distribution facilities
- Retail outlets
With its ambitions to be the “go to” for high quality entertainment programming, streaming network Netflix has had to be a bit creative. Producing quality entertainment with big name actors is costly, whether for series or movies. Given its relatively low-cost monthly subscription fees and lack of advertisements during programming, creating content may seem like a costly gamble. Since its launch in 1997, Netflix has proven to be a market disruptor. With aspirations to be a major player in the global entertainment market, Netflix is betting on vertical integration.
Rather than relying exclusively on third party content, Netflix has been executing on its strategy to create original programming which it owns in perpetuity and distribute it internationally. Building a library of entertainment content rather than a schedule of programming creates value for Netflix and contradicts previous methods of measuring value.
Vertical Integration in the Health Care and Pharmaceutical Industry
In the health care industry, vertical integration involves the combination of companies across the health care value chain, such as health insurance companies, PBMs and other entities within the healthcare sector. Reasons for this include enabling more effective strategies for cost containment, availability of health care systems and care delivery and enhanced patient connection and engagement.
American consumers have proven through the experience of Obamacare that what patients want is not so much health insurance as actual health care, meaning medical check-ups, preventative care and monitoring of chronic conditions, etc. Health care and pharmaceutical companies are re-engineering the landscape to cut costs.
Why are PBMs a hot target for vertical integration? Both medical insurers and PBMs design health care plans for clients with the objective of reducing costs. Because of the synergy, these two businesses are a more natural fit than drug wholesalers and manufacturers.
Today, the pharmaceutical and health care industry is experiencing both vertical integration and industry consolidation in the attempt to reduce the cost of health care and drugs for patients. Regulatory agencies in Washington D.C. are paying attention, and are keeping a close on all the mergers and acquisitions activity to reduce future concerns about risk management.
Anthem Acquisition of Aspire Health
Acquisition of Aspire Health, the largest non-hospice community-based palliative care provider in the United States aids in increasing Anthem’s capacity to fulfill cradle-to-grave health care for patients Adding Aspire Health ‘s Predictive Analytics and Comprehensive Care team will boost care management capabilities of Anthem’s current CareMore Health and AIM Specialty Health affiliates. With Aspire Health’s proprietary predictive clinical and claims-based patient algorithms, the organization can identify patients with serious illnesses. This can facilitate the provision of additional layers of support, improve quality services to patients and enhance cost management.
Currently Aspire Health provides contractual health care services with over 20 health plans to consumers in 25 states including 24/7 patient support services such as nurse practitioner home health visits. With an aging population to serve, managed care entities, insurers and others in the home and community sector are finding ways to enable patients to remain in their homes while keeping costs under control.
Why does the second-largest drugstore chain in the United States want to merge with Aetna? CVS includes one of the largest Pharmacy Benefit Managers in the United States. Pairing with insurance company Aetna means stronger control over the combined companies’ medical care provider networks. This could push Aetna health plan members to rely on CVS drugstores for prescriptions, Minute Clinic services that are staffed by nurse practitioners rather than physicians. Merging with CVS would make it easier for Aetna to control costs while getting greater access to CVS customers.
In this example of vertical integration, the consolidation involves insurers acquiring pharmacies to combat high drug prices through formularies. Formularies are the approved lists of medications that are authorized for use in patient care by the insurers. Having control over the use of generic drugs in formularies as well as the brand name drug products that are authorized for use when generics are not available is one way of keeping drug costs under control.
UnitedHealth-Catamaran Corporation (now OptumRx) et.al
To form Optum, a PBM, UnitedHealth concentrated on three primary health care industry trends: consumerism, data analytics and value-based care when combining existing pharmacy and care delivery services within the company in 2011. Since that time, UnitedHealth has been busy acquiring other companies to expand its capabilities and meet tomorrow’s challenges. Competitors have been duplicating this business strategy, increasing the incidence of vertical integration across the health care supply chain and pharmaceutical industry.
Focused on the three main health care industry trends, Optum plans to invest significant resources in artificial intelligence (AI), machine learning and natural language processing. These and other technology advancements and methods will be used to expand care delivery services to help facilitate the company’s strategy to create healthier patient populations.
Designed to integrate pharmacy and medical care benefits, the vertical integration of Cigna and Express Scripts reinforces the vital role that PBMs play in the drug channel. PBMs are now more closely linked to the expensive specialty drugs used for treatment of chronic conditions in smaller patient populations rather than to drugs used in the everyday management of primary care populations. The Express Scripts-Cigna PBM will have increased leverage with both manufacturers and pharmacies.
Buying Express Scripts can give Cigna, a health insurance company a leg up against other insurers by enabling it to compete with larger, more diversified competitors. For Express Scripts, the deal comes at a good time as their largest client Anthem will be bailing out in 2020. When CVS Health/Caremark combines forces with Aetna, Express Scripts would have been left as the largest PBM not owned by a health insurer, risky in an industry stampeding towards vertical integration of pharmacy and medical benefits.
The acquisition of Express Scripts by Cigna is designed to integrate behavioral, pharmacy and medical benefits for patients while reducing drug and health care costs and ensuring clinical quality. The debt financing was committed by Morgan Stanley Senior Funding.
Recently, the healthcare industry has seen a flurry of activity involving vertical integration to create transparent, accountable partnerships that are developed to construct a more efficient, effective healthcare system. Creating vertically integrated businesses that combine healthcare providers with payers can improve the health care sector and marketplace. Because healthcare providers are under threat today, aligning hospitals, health care providers, technology advancements and PBMs can create the architecture for a new type of healthcare system.
To be successful and prevent scenarios which are actually anti-competitive, vertically integrated networks need to align and work together for at least five years to implement the organizational and businesses changes needed to make a significant difference. In the age of the transition to value-based care, shifting away from fee-for-service payments to new models involves the development of intense partnerships with free-flowing information and effective collaboration.
Whether your business involves pharmaceutical manufacturing or packaging or supports the pharmaceutical supply chain, you need an advanced, flexible warehouse management system specifically developed for the pharmaceutical industry.
Here are some of the specialized features of our WMS:
- Documentation and compliance with government regulations
- Serialization with aggregation
- Validation services
- Quality control features
- Pharma sample management
- HDMA labels
- Rules-based, flexible processes
- EDI/integration ready system
Want more information?
Fill out this form and get our free guide: “Making the Case for a Pharma WMS”