In April our CEO, Christopher Kerns, kicked off our series on vertical integration with a post on the state of healthcare consolidation—what it looks like today, the promise and perils heralded by supporters and detractors, and a reality check. A major focus of that piece—and of today’s consolidation landscape—is the accumulation of providers. We touched on the usual suspects: health plans, health systems, those hybrid payviders, and even tech companies. But a bit under the radar, drug distributors are also dipping their toes into the provider alignment pool. But while conducting research on the drug ecosystem, a surprising pattern caught our attention.
The silent giants
Drug distributors (the largest of which are also wholesalers) are intermediaries that sit smackdab in the middle of the pharmaceutical value chain. Unlike PBMs, who negotiate drug prices on behalf of insurers and purchasers, distributors actually purchase drugs directly from manufacturers. They then turn around and sell those medications to providers, hospitals, and pharmacies. Beyond acting as a clearinghouse for generic and brand name medications, distributors show up across the entire drug lifecycle, from R&D support and inventory management to shipping logistics and packaging disposal.
Despite being virtually omnipresent, even seasoned healthcare executives often don’t fully appreciate just how large these businesses are. The two largest—McKesson and AmerisourceBergen (changing its name to Cencora this year)—move billions in revenue each year thanks to their diverse and lucrative business lines. And they are, respectively, the ninth and eleventh largest companies in the U.S. by revenue; only UnitedHealth Group (fifth) and CVS Health (sixth) land higher on the Fortune 500 list.
Squeezing into the provider space
In April of this year, it was announced that AmerisourceBergen and the private equity firm TPG were acquiring OneOncology, a network of 15 independent oncology practices and nearly a thousand providers. Although the initial purchase grants AmerisourceBergen only 35% ownership of the network, the contract outlines a clear path for complete acquisition of OneOncology in three to five years (the typical time frame for private equity). This deal follows more than a decade after a very similar purchase, when McKesson acquired US Oncology, a network of about 2,000 providers, in 2010. Groups like U.S. Oncology and OneOncology offer support services to independent providers, such as capital, practice management tools, drug and inventory sourcing, hiring, and more.
Commenting on the purchase, AmerisourceBergen noted that the deal would allow them to “deepen our relationships with community oncologists and expand on our solutions in specialty.” This language echoes pretty closely the aspirations outlined by other acquirers when they pick up a provider asset. And on the surface, these deals do have some things in common: beyond the simple addition of a revenue stream, the buyer gets a captured customer-base to test out products or services, with deeper insight into the end-user experience. For health plans that can mean piloting new incentive models, for tech firms and vendors that can mean beta-testing software, and for distributors that can mean learning about physician pain points to inform their new and existing support tools.
But there’s another reason that distributors might be investing in oncology practices in particular: in the words of OneOncology CEO Dr. Jeff Patton “a big part of oncology is buying and billing chemotherapy.” Ah yes. Buy and bill.
What’s the deal with buy-and-bill?
For those of us less steeped in pharmacy jargon, 'buy-and-bill' refers to providers purchasing provider-administered drugs from distributors, treating a patient with the drug, then billing the patient’s insurance for both the administration and the drug itself. Any guess what drug category makes up the largest share of buy-and-bill spending for both public and private insurers? If you said oncology drugs and related products, then you’re perhaps starting to realize what McKesson and AmerisourceBergen already have.
As Patton indicated, buy-and-bill can be an important revenue source for oncology practices, generating a profit on the difference between what they paid to the distributor and what they charged the health plan. But it’s also a complicated business that’s not without risk. Because practices have to buy the drugs before knowing what the reimbursement will look like, and often before even knowing what drugs they’ll need and in what quantities, there’s a danger of getting saddled with unused product or uncompensated care. To avoid these challenges altogether, many providers opt for (or in some cases are required by payers to use) alternatives known as “white-bagging” or “brown-bagging.” Both involve a specialty pharmacy buying the drug instead of the provider and sending it to the care site for administration. This system reduces provider exposure and complexity, but also closes the door on a lucrative revenue stream.
Enter: drug distributors. Decades of experience in inventory management and revenue cycle analytics can take some of the uncertainty out of the buying process, while the strong underlying business provides a financial buffer should a few high-cost purchases not work out. It’s a win-win: network practices get support for a profitable but complex service, while distributors get a second bite at the apple by owning a piece of the business getting reimbursed for the drugs by the end-payer.
Shaking up the march toward massive consolidation
While the specifics of this probable new revenue stream are important context, they’re not the reason these acquisitions stood out to us. Rather, we’re much more interested in the way the purchases create friction for other players on the vertical integration path.
As we alluded to earlier, a lot of plans are not enthusiastic about buy-and-bill. That is in part because plans will claim that providers mark up the cost of the drug to an unreasonable degree. It can’t be ignored thought that many insurers have acquired or launched their own specialty pharmacies, who are competing providers for the purchase of the drugs. Allow me to refer to one of our more popular and frequently requested graphics:
Every major plan has a specialty pharmacy, and they’d very much prefer patients pick up their high-cost medicines from the plan’s in-house pharmacists. In the past, the plans had complexity on their side, making the bagging services attractive to risk-averse providers. But with distributors in their corner, groups like OneOncology and U.S. Oncology have a strong case for keeping purchasing in-house. And that’s bad news for insurers and their pharmacy units.
And it’s not only the pharmaceutical ambitions of health plans that this style of integration could disrupt—it’s also the drive to pick up more physician assets, which everyone in the industry has some sort of stake in. After all, networks like OneOncology and U.S. Oncology exist for the purpose of maintaining physician independence. They provide the scale and resources that docs could get from a health system or health plan, while preserving practice ownership. Meanwhile, drug distributers have expanded their business from straightforward wholesale to comprehensive pharmaceutical solutioning for everyone from manufacturers to health systems. They are perhaps uniquely positioned to understand the needs of provider organizations. If distributors can uncover compelling synergies by owning these provider networks, they may be motivated to create more opportunities for providers to remain independent (while maintaining close ties to the distributor’s offerings, of course). Or maybe, like so many other powerful players have, they’ll decide that direct ownership is an even more attractive option and become yet another competitor for physician talent.
Parting thoughts
In the shadow of acquisitive juggernauts like Optum and flashy entrants like Amazon, distributors have managed to (mostly) stay out of the limelight. But the business development decisions of these massive distributors—who are plugged into almost every facet of the industry—can teach us a lot about where dollars are flowing, where investment interest is high, and what vertical integration really looks like on the ground level.
As we continue to share insights into the healthcare consolidation landscape, we want to hear from you. If you have questions or want to chat with an expert, email us at info@unionhealthcareinsight.com.
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