Vertical Integration saves money. And CVS and its competitors use that to line their pockets, not provide healthcare

I have several times referred to the concept of “vertical integration” in the health care/health insurance/pharmaceutical industry, most recently on March 28, 2026, Everything is becoming more unaffordable, but health care may lead this list!. These posts often reference the posts of former insurance executive-turned-whistleblower Wendell Potter on his substack “Health Care Un-Covered”, including “With CVS’s Vertical Empire Under Threat in Tennessee, the Company Threatens to Leave”, which discusses the fact that CVS, most widely known as large pharmacy chain, also owns the Pharmaceutical Benefit Manager (PBM) Caremark. PBMs are add-on middlemen that negotiate better rates for insurance companies with pharmacies. CVS owns pharmacies, a lot of them. This may seem like conflict of interest (COI), but that is apparently a quaintly outdated concept in this era of mega-corporations.

Actually, the PBM-pharmacy COI is only a part of the CVS megalopoly. They also own one of the nation’s largest health insurers, Aetna, so they have both ends and the middleman! And, to round it out, they own a large primary care provider group (Oak St. Health) and long-term care company (Signify Health) and urgent care provider (Minute Clinic). Just read the AI summary if you Google “Companies CVS owns”, but if you want it, the comprehensive list by the SEC is here. This is what vertical integration is; you buy from yourself, and sell to yourself, set the prices (usually in a way that minimizes tax liability), and make a lot of money. The structure is not hard to understand, but it maximizes the conflict of interest. (For a discussion of why this is conflict of interest and not “potential” conflict of interest, see this blog post from August 20 2010, The AAFP, Coca-Cola, and Ethics: Serving the public interest? . In brief, COI exists when a decider has interests in both parties, and a decision one way would help their other interest. The conflict exists whatever the decision is actually made. A judge hearing a case in which one party is a company in which they own a great deal of stock has a conflict of interest; it doesn’t require waiting to see how they rule.)

To be clear, CVS is far from the only major player in the “healthcare industry” (quotes on purpose, and emphasis on “industry”) that is vertically integrated. The largest health insurance company in the US, UnitedHealth, also owns a PBM, (OptumRx), a primary care group (Optum) and a whole host of other companies (SEC listing here). So does CIGNA (their PBM is ExpressScripts). So, there is competition within the “healthcare” sector; it is an oligopoly (few companies) not a complete monopoly. But oligopolies don’t really compete in the way classic capitalist theory would have it; rather, they tend to set prices and divide up the market so they all do well (although they would prefer the other companies to go out of business, the existence of a few tends to forestall any governmental intervention that might occur with a true monopoly).

Is vertical integration bad? A major argument in favor of it is that it can, and often does, increase efficiency. If you own everything, from insurer to care delivery system to pharmacy, and all the other players in between, you can minimize the obstruction from a piece that is owned by someone else. Things can move more smoothly. Costs can be reduced significantly. These are the arguments most commonly put forward, to the public, by vertically integrated corporations that control a huge market sector, oligopolies as well as monopolies.

It is also the argument put forward to stockholders, particularly large stockholders like private equity firms. Especially the “reduced costs” part. This is very attractive to stockholders. It could also be attractive to those ostensibly served by the “healthcare” industry, those people needing – healthcare. After all, they are heavily burdened by the cost of their healthcare, which constantly goes up. This includes the portion that they are responsible for in the form of premiums, deductibles, copayments and “cost sharing” (meaning insurance only pays a part of the bill and you’re on the hook for the rest). Another recent Potter piece, The Bill That Never Ends, summarizes the situation and addresses the fact that deductibles reset every year, so people are constantly behind the 8-ball and can never pay it off. It reminds me of the compound interest that keeps former students in debt for decades even though they may have paid off far more than the original loan! It is an example of how our laws are set up to benefit large businesses, not regular people.

Which, of course, brings us to the issue of efficiency, and lower costs. To what use is this efficiency, this lower cost, put? Cui bono? There is an argument that such efficiency could decrease the overall cost of health care to the nation, as well as to the individuals who require care, which has actually been promulgated for decades by academics and others. There are fewer of them these days, as it has been demonstrated repeatedly that such an idea is frightfully naïve. Yes, money is saved, but it is all used for greater salaries and bonuses for management and greater profits for shareholders. If it were being used to lower premiums, decrease deductibles, lower the cost of drugs, or increase the availability and affordability of health care, we would have seen it. We have not. Too bad.

A weak, but possibly useful, analogy is to a family. The adults (usually) generate the income, and certainly choose how to spend it. This can be mainly to provide food and housing, education for children, health care (to the extent that it is available) and other benefits for the family. Or it could be spent on relatively transient pleasure for the adults – alcohol, tobacco and other drugs, gambling, etc. Most of us feel that the first is better, a “good” thing, and the second is not good, is selfish, and even reprehensible. Apparently, such moral judgement is not applied to corporations, certainly not, in this case, those involved in “healthcare”.

I keep putting “healthcare” in quotes when applied to the industry. This is because it is not an industry that is at any significant level dedicated to providing healthcare to our people; when it does, this is a byproduct. It is an industry that is dedicated to extracting the most dollars possible from the rest of the economy and putting them in their own pockets. While this is, of course, the goal of most of our industries, it seems worse that “healthcare”, perhaps because of the veneer that come from ostensibly doing something good, seems to be particularly effective at it.

A single payer health insurance system only addresses coverage. A national health service, such as in Britain, is a more comprehensive manifestation of vertical integration. It doesn’t always work well, mostly because it is starved of funds as a political act to demonstrate that the public sector does not run efficiently or effectively, thus an argument to privatize it, which has to some degree been done in the UK. And, like almost all efforts to privatize formerly public services, the cost goes way up, the service does not improve or gets worse, and the money that could have been used to benefit the people is lining the pockets of ganevem. This does not seem like a good use of benefits of efficiency and decreased cost arising from vertical integration to me.

Maybe we can do something about it! Imagine if the phrase “healthcare” industry didn’t have to be in quotes!

 

For more (or maybe just more terse):

“The health insurance company gets a cut, the pharmacy benefit manager gets a cut, the drug manufacturer gets a cut, and the patient…gets screwed!” Rep Alexandria Ocasio-Cortez, interviewing CVSHealth CEO David Joyner at a congressional hearing.

Also “Federal rules require the insurer to spend a certain percent on care. But, when you own the care, when the insurer owns the pharmacy, owns the PBM, owns the drug manufacturer, you also own the health care cost.”

The whole clip is not that long and makes the point about vertical integration very clear, including 1000% markups on some drugs! Thank you, AOC!  If you have time to do nothing else, watch this video!

https://ocasio-cortez.house.gov/media/press-releases/icymi-ocasio-cortez-calls-out-cvs-healths-corporate-strategy-monopolize 

Good enough for government work: Quality, Cost, and Gaming the System (Part 4 of 4)

This is the fourth and final part of the 23rd Charles Odegaard Lecture, "Good enough for government work:Quality, cost and gaming the system. I will put the entire talk up as an attachment soon.

Is this really true? Aren’t some of our costs “our fault”, or at least “their fault”, that is other people? What about those folks who are “gaming the system”, by holding out on buying insurance until they get sick? Aren’t they driving up costs? Insurers like Aetna and Anthem make the accusation that people are misusing Special Enrollment Periods (SEPs) for this purpose. This is debunked by the evidence, cited by Michael Hiltzik of the Los Angeles Times, but even if they were, they’re poor people trying to get by! Wondering if they can put off buying health insurance so that they can pay the rent! Who is really in a position to develop and implement strategies to “game the system”? 

Unsurprisingly, as Hiltzik also reports, it is the insurance companies (as well as big health system providers) who are masters of these strategies. Besides, if we have concern about “buying to use” behavior, the best answer is to get rid of the jumble of insurance companies and enrollment periods and have one national health insurance plan that has, in the words of the recently deceased Quentin Young, “everybody in, nobody out”.

The most amazing thing about all of this, the way in which the system is gamed, is the way it transfers public money intended to provide healthcare for people into private pockets far in excess of the cost of providing that care. Himmelstein and Woolhandler provide us with data that shows that we already pay for a national health system, with over 50% of “health” costs being borne by government, far over 60% if we count the loss of revenue from employer contributions to insurance being tax deductible, but we still don’t come close to covering everyone, because our system is so inefficient, and so much boodle is being raked off.

Nowadays, when we hear the phrase “good enough for government work”, we tend to think of something that is poor quality, or only just meets the minimum standards set by government. The Urban Dictionary defines the phrase as “Probably not the best, but what the hell, at least we got the job done to minimally acceptable standards.” And, yet, when this phrase first came about it was a compliment; it meant that the government set minimum standards of quality that had to be met, and if you had someone (say a contractor) doing work that was “good enough for the government” it meant that it met those standards of quality, that they weren’t ripping you off by doing shoddy work. What we have now is our publicly-funded health system being cannibalized by profiteers, and enabled by a government that often seems to care more about cost than quality.

Charles Odegaard, the medieval historian and former University of Washington president after whom this lectureship is named was, and I quote from the Coastal Research website, “an impassioned proponent of the idea that every school within a university should be engaged in the advancement of society in the communities and regions that surrounded it. As a result of Dr Odegaard’s leadership, UW became a leader in the decentralization of medical education, including the unprecedented commitment to training physicians from and in the surrounding states of Alaska, Montana, Idaho and Wyoming.” [1]

There are great positives to decentralization, whether for education of doctors or for administration of social programs. It can decrease the cost of large, unresponsive central bureaucracies, and put control in local areas that are more knowledgeable about and responsive to the needs of their populations. There are, also, risks. Sometimes control at the local level is more about maintaining the power of one sector of the community at the expense of others; one just has to look at localities and states in the South in the Civil Rights era defying integration (or, perhaps, many states and localities more recently). More to the point of this talk, there is the risk that smaller, more decentralized activities can be more easily underfunded. Think about the deinstitutionalization of people with severe and persistent mental illness toward the end of the 20^th century. When I was in medical school, I was taught that 1 in 3 hospital beds was occupied by someone with schizophrenia. That is certainly not true today, because of deinstitutionalization. And so we do not have the horror of people with mental illness warehoused in enormous facilities, but we also do not have anywhere near the degree of community-based mental health services that would allow them to live successfully in the community. We have people with mental illness living on heating grates and under bridges and, according to a June 2015 article by Matt Ford in The Atlantic, our nation’s largest mental hospital is a jail (absolutely believable to anyone who has ever worked in one).[2]. It is only ok to decentralize when we can assure that necessary programs will be maintained and will be well funded. We have long since privatized the health care in most prisons, and there is a (to me) disturbing movement to privatizing prisons altogether. Cost, again, trumps quality. Especially, of course, if the prisoners are mostly “not us”. Seeing a trend?

So…is it possible to have quality and still reduce costs? Of course. Our system is not only financially inefficient, and the victim of massive skimming by the private companies, but it is one which is geared to care for individual patients rather than populations; where there is not rational allocation of resources to the areas where they will do the most good, but rather decisions made for each individual, often where the provider has a financial incentive to do more. Oregon’s CCOs, a kind of state-sponsored but decentralized (there are 15 in the state) ACO designed only for Medicaid patients, have provided some movement in this direction, but they are limited because they are, in fact, only for Medicaid patients. This permits skimming, as we see in recent data that shows that the places long touted for their efficiency and low cost for Medicare, like Grand Junction CO and Rochester MN, are among the most expensive for private insurance. The same characteristics, integrated health systems which control most of the care in a community, that allow them to be efficient with fixed Medicare funds, also allow them to raise the rates for private insurance. Gaming the system.

We could have a good health care system. It needs to be built upon quality, and quality has to be based on consensus, and has to apply to everyone, rich and poor, young or old. It cannot be segmented into different versions of quality for privately insured, Medicare, Medicaid, and uninsured people. The “how-to” is not hard; other countries have shown us how. The money is not hard, we are already spending excessive amounts. What we need is the will. 

 http://coastalresearch.org/2015/08/joshua-freeman-md-to-be-charles-odegaard-lecturer-at-27th-national-conference/

[2] (http://www.theatlantic.com/politics/archive/2015/06/americas-largest-mental-hospital-is-a-jail/395012/

Corporate mergers, retail clinics, and monopoly capital

Two huge mergers have recently been announced in the health insurance sector. First, Aetna announced its intention to acquire Humana for $35 billion, creating a behemoth. Not to be outdone, Anthem (the enormous group of formerly non-profit Blue Cross/Blue Shields that have gone for-profit) announced it will buy Cigna for $47 billion. Consolidation in the industry is moving fast, and soon there will be oligopoly. Robert Reich, in his July 5, 2015 article The Choice Ahead: A Private Health-Insurance Monopoly or a Single Payer discusses these mergers, observing that

Executives say these combinations will make their companies more efficient, allowing them to gain economies of scale and squeeze waste out of the system. This is what big companies always say when they acquire rivals.

Yes, indeed. They always say it, and while sometimes they achieve efficiencies-- this usually involves firing people -- it almost never benefits the consumer; prices almost always go up. Remember airline mergers? Bought a ticket lately? Despite the rhetoric of capitalism about competition, virtually all companies would prefer to be monopolies, control the industry, and set prices, guaranteeing huge profit. If they cannot, the next best thing is oligopoly, control by a few companies, with collusion so that they all make huge profits. Competition is their bugbear. Yes, we have federal regulators, but the result of their regulation has been those airline mergers. And telecommunications mergers. And financial services mergers. And banks too big to fail. So don’t count on them.

Health insurance companies are not the only mega-corporations profiting from “health care” by siphoning off money that could actually be spent improving health, or at least providing medical care. Obviously, there are drug companies (as I recently discussed in Chemotherapy, Quality of Life, and Corporate Profit on July 26, 2015), but also big pharmacy chains (like CVS, Rite Aid, and Walgreens) as well as other retailers that usually have a pharmacy (like Walmart, Kroger and Target) that have now branched out into providing health care, through what are known as “retail clinics”.

In the New England Journal of Medicine on July 15, 2015, John Iglehart writes about “The expansion of retail clinics—corporate titans vs. organized medicine”.[1] Here the case against the corporations is less clear, or at least the case in favor of organized medicine is. Iglehart points out that the opposition from organizations like the AMA, the American Academy of Family Physicians (AAFP), and American Academy of Pediatrics (AAP) have focused on the lack of continuity of care and “disruption of the patient-physician” relationship. Recently, opposition has softened (I guess folks know when they’ve lost) except from the AAP. It seems to me that these clinics provide a menu of services that primarily is focused on acute care for relatively minor infections and injuries, immunizations, and monitoring of chronic diseases like high blood pressure, and are pretty popular with the people who use them. They are conveniently located (for the people who use them), generally have little or no wait, and are staffed by professionals (usually nurse practitioners) who know what they are doing.

The problems with such retail clinics fall into two broad categories. First, when people use them inappropriately, not for acute or minor conditions, but as their usual source of care. For healthy younger people, this may be all they need. For older folks and others with chronic conditions such as high blood pressure, diabetes, hyperlipidemia, chronic lung disease, heart disease, etc., they are not sufficient. The danger is when people only seek care when they have symptoms, such as (particularly) pain, whether to such a retail clinic, traditional physician’s office, or emergency room, and ignore prevention and management of their chronic conditions. I do not fault the providers in these settings; there is evidence that they urge people with such needs to follow up with their primary provider. But, once the acute symptoms are gone, they may not. Some of this, sadly, may be financial.

The other problem is more interesting, and gets back to the financial issue. Providers and the organizations representing them (“organized medicine”) has real concerns because such retail clinics “cherry pick”, or skim the easy cases that pay for (or more than pay for) themselves, leaving physicians with the care of patients with diseases that take more time and are reimbursed less per hour (or minute) of work; this destroys the business model of primary care practice. As long as we depend upon a fee-for-service, reimbursed-for-care-provided, private medical model, this puts a real burden on physician practices which, while looking bigger than the small retail clinics, are usually tiny compared to the corporations that own those clinics.

Another medical area in which there is a clearer case of fear of competition disguising itself as virtue is in the shrill hostility of US-based medical schools, represented by the Association of American Medical Colleges (AAMC) to off-shore (mainly Caribbean-based) medical schools, as described by Robert Goldberg in Discrimination against foreign medical schools is bad for your health in the online publication “The Hill”. The argument against such schools from the AAMC is in part that the students are “lower quality”, the ones rejected by US medical schools. The flaw here is that there are many highly-qualified students who do not get into US medical schools, demonstrated by the recent dramatic expansion of the number of US schools and the class size of existing schools. Are there Caribbean schools of poor quality? Yes. Is the academic preparation of students in Caribbean schools, on average, lower than those in US schools? Probably. Is this a reason to try to put them out of business, by both bad-mouthing and trying to limit the access that their students have to educational loans? I don’t think so.

Our US medical schools get talented students, and then put them through a process that ends up producing doctors underrepresented in the primary care specialties and overrepresented in urban – and especially suburban – areas. As I have often pointed out, we produce the wrong mix of doctors who practice in the wrong mix of places. If (and it is, of course, an if) graduates of off-shore medical schools are likely to fill the medical needs not being met by graduates of US medical schools, then the title of Goldberg’s piece is correct. The same might be said for retail clinics, if indeed they were mostly present in underserved communities, but, based on the business models of their owners, they are generally not.

So, then, we see a spectrum of corporate involvement in health care ranging from the off-shore, for-profit medical school, to the acute care clinics run by large retailers, to the consolidation into oligopoly of health insurance companies, to the large pharmaceutical manufacturers. We also see a response of tepid regulation of the latter two, and protectionism by organized medicine and organized medical schools to the first two. None of these are good for our health. What would be good for our health would be the rational use of health care dollars to provide health care, for everyone, of the right kind in the right setting.

Reich ends his article with

If we continue in the direction we’re headed we’ll soon have a health insurance system dominated by two or three mammoth for-profit corporations capable of squeezing employees and consumers for all they’re worth – and handing over the profits to their shareholders and executives. The alternative is a government-run single payer system – such as is in place in almost every other advanced economy – dedicated to lower premiums and better care.

Which do you prefer?

I feel like raising my hand and waving it in the air saying “I know, I know!”

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[1] Iglehart JK, The expansion of retail clinics—corporate titans vs. organized medicine, NEJM 15 Jul 2015;373(4):301-303