Author: NamanSharma

Pharma Service Providers’ Role in Tempering Pricing Wars | Sherpas in Blue Shirts

Shortly after the U.S. Food & Drug Administration (FDA) approved Novartis’ CAR T-cell drug, Kymriah – which is used for pediatric B-cell Acute Lymphoblastic Leukemia – last month, Novartis announced its price…a whopping $475,000 per patient. This is certainly not the first market instance of highly expensive drugs (see below.)

But it might just be the tipping point for stakeholders – including regulatory bodies, payers, physicians, advocacy groups, and patients – to start having constructive discussions with drug manufacturers on how to make drugs that treat extremely rare diseases more accessible to the very small share of the population that needs them.

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It is certainly time for pharma companies to overhaul their operations in order to mitigate price anger and get such drugs into the hands of those whose lives depend on them.

One way they can do so is by employing pay-for-performance, or outcome-based, contracts, wherein the manufacturer charges for the drug once it proves effective, say one or two months into treatment. Note that this pricing model hasn’t yet really taken off, especially in the United States, where the fragmented multi-payer environment acts as an added roadblock. Indication-based pricing, wherein there are different prices for different conditions, is another model that biopharma companies can use, but the U.S. market does not have mechanisms in place for it, at least as of now.

Other ways of ensuring patients are able to benefit from such critical drugs are through mixes of personalized offline and online marketing campaigns directed specifically to the relevant patient and physician pool, and improved and comprehensive patient support programs to help in solving “last mile connectivity” issues.

But at the end of the day, stakeholder backlash might – and should – force pharma companies to drive down their own costs to make these expensive, personalized medicines more affordable. And this is where outsourcing service providers can help.

The third-party service providers that are already servicing the pharma industry need to prepare or bolster solutions and capabilities around areas including patient and market access, data analytics, omnichannel marketing, IoT, automation, portals, applications, customer support, pricing analytics, infrastructure modernization, and cloud orchestration. Service providers that are struggling to enter the life sciences space should view this as a window of opportunity to get a foot in the door of these companies. Doing so will mean additional business for both these types of vendors; it could also mean reduced pricing pressure for the patients who need such vital treatments.
The future of personalized medicine depends a lot on success of such drugs, and biopharma companies can no longer afford to sit back and operate like they always have. For a detailed discussion and analysis around these solutions, and to learn about other trends in the life sciences market, look out for our soon-to-be-published State of the Market Report.

The Wide-Ranging Impacts of a Single Payer Healthcare System | Sherpas in Blue Shirts

On June 1, 2017, the California state senate passed the “Healthy California Act (HCA.)” The bill (SB 562), which is now in the state assembly for further action, aims to replace all private/government insurance plans in the state with a single, government-run insurance plan.

There are numerous reasons the bill will likely not pass. For example, the California state government would need to spend US$400 billion per year (more than twice the current spend) to fund the proposals in the bill, in turn requiring a massive increase in taxes, including a 15 percent payroll tax increase (source: California Senate Appropriations Committee). There’s limited political support for the bill, even among Democrats. There’s also minimal popular support, per a Pew Research Center poll, which concluded that only 30 percent of California residents prefer having the government be the sole payer. Previous similar attempts at a single, state-run payer system have failed due to the expense involved.

On the other hand, there are voices of support for a single payer system, including Bernie Sanders, the longest serving independent in U.S. congressional history, and Mark Bertolini, Aetna’s CEO, who in May 2017 asked the nation to ponder such an arrangement.

If a single payer system were ever implemented, sweeping changes would impact multiple parties.

How would a single payer system look if it were ever implemented?

Healthcare Payers:

  • If the government was the sole provider of health insurance, commercial payers would get absorbed into the government-run business
  • If the government expanded Medicare coverage to all citizens, commercial payers would die out due to strong competition from government plans
  • If the government sublet to a single commercial payer to handle the insurance market, there would be large-scale consolidation in the payer market

While there are many ways in which this could play out, a move to a single payer system would in most cases be a bane for the payers.

Healthcare Providers:

  • A commercial payer-controlled single payer system would severely undermine providers’ negotiating power. However, a government-controlled single payer system would give them some negotiating leverage
  • They would experience significantly reduced administration costs, as everything would be sponsored by the single payer

Thus, healthcare providers would experience positives as well as negatives in a single payer system.

Outsourcing Service Providers:

A single payer system would bring many opportunities to outsourcing service providers. For example:

  • Payer consolidation would require third-party support across system integration, consulting, process expertise, BPO, and many other areas
  • A government-run consolidation would lead to new areas of investments, similar to the Medicaid Management Information System (MMIS) that the states currently run
  • Integration of everything, including clinical data, under one umbrella payer would enable service providers to develop much more powerful analytics and insights

Single payer system’s governmental requirement for service providers

Of course, not all would be rosy. As a single payer system would require service providers to work with the government instead of commercial entities, they would likely face slower processing, a smaller appetite for innovation, and bureaucratic red tape. Additionally, payer consolidation would lead to outsourcing industry consolidation, likely putting some service providers out of business.

We don’t mean to spook outsourcing service providers with our views. Nor are we encouraging them to start investing in expanding their offerings. But we are recommending they keep an eye on the progress of the HCA and other similar acts around the country. Doing so might just save them from the same fate Nokia suffered at the hands of Google and Apple.

What Pain will You Experience if the AHCA Bill Becomes Law? | Sherpas in Blue Shirts

  • Health insurance lost for 24 million U.S. consumers
  • Billions of dollars of care investment marginalized
  • Providers’ margins eroded by payers
  • And a five-year setback to the healthcare system

These are potential side effects if the U.S. House of Representatives- approved American Health Care Act (AHCA) bill becomes a law. Let’s look at the impact the law would have on the key constituencies.

Healthcare providers

With the most needy (the sick and the elderly) portion of the population left uninsured, the healthcare providers will once again be expected to foot a large part of their healthcare bills due to lack of coverage, non-payments, use of ER services, etc.

Healthcare consumers

With premium increases, credits/subsidies being based on age instead of income level, and states’ ability to change or waive pre-existing health condition coverage, a large percentage of older, lower income, and infirmed consumers would likely opt out of having coverage altogether. Young and healthy people would have less incentive to get insurance coverage.

Healthcare payers

The overall theme of the bill would result in a significant decline in volume of work managed by payers. That said, there would be numerous key operational implications for both private and government payers including:

  • Product development: Payers would end up having state specific plans, leading to increased administrative work around plan design and development activities. This would likely have a cascading effect on downstream processes (policy servicing, network and care management, and claims management) which are expected to become more complex and specialized.
  • Claims: Claims volume would likely dwindle, particularly among the old and ill, as a large percentage would have opted out of coverage.
  • Policy servicing: Payers would likely experience a significant uptick in queries from patients and providers, as uncertainty around topics such as eligibility, verification, and premium collection amplifies. However, demand for certain processes, such as HIX support, would likely be sluggish.
  • Care and network management: Care management programs would likely take a backseat, given their significant cost to enrollees and providers. Additionally, companies that had invested heavily in such programs could see decline in their ROI. Lower patient volumes might drive payers to tighten their provider network, leading to less work around network management activities.
  • Government (Medicaid): Reduced federal spend on Medicaid would likely push states towards a modular approach, and maybe even a shift towards a managed care construct.

With a decline in volume of work, it might not be surprising to see some of the larger payers insource certain processes.

The Healthcare IT and BPO service providers

A lesser volume of work across various value-chain segments would translate into lower revenue for third-party vendors. In fact, even though a law hasn’t yet been enacted, the healthcare business in some of the key players, such as Accenture and Cognizant, is already growing at a slower rate than their overall company growth rate. This impact could extend to the overall outsourcing industry. On the other hand, if states decided to exercise the power granted to them differently, service providers could also expect to see increase in the complexity of work around certain functions such as policy servicing and claims management.

Additionally, the ratified law might just be the impetus that mid-to-large buyers without GICs need to opt for bundled IT and BPO deals, which were traditionally a feature of mid-sized buyers.

Of course, the above-mentioned implications are for the bill in its current form. However, moderate Republican senators might well make massive changes to it, especially after the public outrage over certain parts of the bill.

It is going to be tough time of uncertainty for all stakeholders until a law – in whatever shape and form – is passed. In the meantime, payers and healthcare providers need to work closely with their respective service providers to ensure they stay afloat and come out on the right side of fence when the dust settles.
For a detailed analysis comparing the AHCA and ACA, please see our report titled: Acing Uncertainties in the Payer Market: The Trump Cards.

The Battle over Healthcare: Round One Ends with a Whimper and Uncertainty | Sherpas in Blue Shirts

Healthcare reform has become a political slugfest, casting a spell of ambiguity as the world’s largest healthcare economy attempts to fundamentally transform itself.

Consequently, the global services industry is waiting with baited breath to see how this upheaval pans out. For context, healthcare has been a saving grace, growing at three times the rate of the overall IT-BPO market, which is facing challenging times of its own.

On March 6, Republicans unveiled their plan to repeal the Affordable Care Act, or ACA, popularly known as Obamacare. The ACA, which was signed in March 2010 and came into effect during latter half of 2013, was the most significant regulatory overhaul to expand coverage since the passage of Medicare and Medicaid (Social Security Amendments) in 1965. One of the key highlights of President Trump’s campaign was to repeal and replace the ACA, which he dubbed “broken.” Soon after he took over the Oval Office, he realized that complete overhaul of the law would be a lengthy and complex process, contrary to his promise of quickly instituting a completely new health law. Despite the significant advantage of Republicans controlling both House and Senate, President Trump’s bid to replace the ACA with the American Health Care Act, or AHCA, (essentially a variant of Speaker of the House Paul Ryan’s health plan), failed to see the light of day, with Ryan conceding defeat on March 24.

What went wrong with the American Health Care Act

The principal problem with the AHCA was that it was nowhere close to the promised repeal and replacement of the ACA, but essentially a stop gap plan. It was a contentious bill, which lacked widespread appeal. Key stakeholders and their objections included:

  • Almost all the large payers (except Anthem) were opposed to this law, as it would significantly reduce their enrollment base and, in turn, impact their top-line
  • Healthcare provider associations (such as the AHA, AMA, and American Nurses Association) also opposed AHCA, as it would put extra pressure on providers who are already reeling with bottom-line and revenue problems
  • Various consumer groups, including the American Association of Retired Persons (AARP), expressed concerns as the bill was not in favor of the sick and older populations that require healthcare services the most
  • Conservative Republican lawmakers (i.e., The Freedom Caucus) dubbed it Obamacare-lite.

The uncertain future for healthcare payers, providers, consumers, and IT-BPO service providers

The currently regulatory limbo has a cascading impact on each stakeholder group.

Healthcare payers

Health insurance companies are left with little clarity on their participation in the healthcare exchanges, which have become value-dilutive, and appear even shakier given the current administration’s disdain of the ACA. Large payers, including such as Aetna, Anthem, Cigna, Humana, and UnitedHealth have threatened to pull out of the exchange markets if the uncertainty is not resolved soon. There are theories that the executive branch could act independently of Congress to improve functionality of the individual insurance exchanges.

Healthcare providers

Failure of passage of the AHCA resulted in an increase in some of the leading hospital networks’ stock prices. This was primarily driven by the fact that the decline in enrollment, especially around Medicaid patients, has been delayed. Most of these hospitals improved their bad debt when their respective states expanded Medicaid, as hospitals became eligible for payments for patients who could not afford healthcare. While providers are relieved right now, uncertainty remains. They have struggled with high operating costs, thin margins, and talent issues, and these are only going to intensify.

Healthcare consumers

With the June deadline for submittal of initial rates for exchange plan fast approaching, some consumers may be left with limited health plan options, as some of large payers are hedging on exchange participation. At the same time, ACA plans have witnessed a resurgence in popularity.

Healthcare IT-BPO service providers

Service providers will have to deal with spending decision delays from both payers and providers as they look towards the new healthcare bill. We have already seen leading vendors face revenue headwinds. For example, Cognizant’s healthcare revenue grew by just a mid-single digit in CY2016 after a stellar performance in CY2015. Any new decisions around outsourcing will most certainly be deferred for now, whereas existing keeping-the-lights-on spend is expected to continue. Deal renewals are expected to be for shorter duration as buyers (both payers and providers) wait for veil of uncertainty to be lifted.

The road ahead for healthcare and global services

After this initial bruising, the Republicans are unlikely to give up without a fight. Speaker Paul Ryan recently mentioned that House Republicans will resume work on healthcare reform, but offered no timeline. This will be easier said than done, as GOP leaders need to overcome the deep divisions that ultimately led to the failure of the bill.

Healthcare policy requires hard work, and rushing through a half-baked plan such as the AHCA just won’t cut it. Obama spent over a year on garnering support for the ACA, and the new administration’s heavy handed attempt reiterates that there are no real shortcuts to the process. The GOP should regroup and take a fresh look at the problem statement.

The outcomes might have even greater implications on the global services market. Until then, buyers are likely to twiddle their thumbs and delay key decisions amidst the tremendous uncertainty.

Break-ups are Painful, Difficult, and Costly; The Current Insurance Payer Merger Saga | Sherpas in Blue Shirts

In July 2015, two mammoth players in the U.S. health insurance market decided it was time to form even bigger entities, similar in size to UnitedHealth Group (which held 17 percent of the market.) First it was Aetna deciding to merge with Humana, primarily consolidating the Medicare Advantage market. A few days later, Anthem and Cigna, with a relatively more complementary membership base, decided to merge.

By the end of 2015, shareholders of all four insurers had approved the deals. However, the Department of Justice and several states (mostly Democratic ones) opposed and appealed against the mergers. In early February 2017, the federal court ruled both anti-competitive and blocked them, citing increased concentration.

Had the mergers been approved, Anthem-Cigna would have led the market with highest share of the entire insured population, followed by UnitedHealth and Aetna-Humana. In Medicare Advantage (MA), Aetna-Humana would have surpassed UnitedHealth to become the market leader.

Insurance payer mergers

Let’s take a look at what transpired in both cases.

Aetna and Humana
On February 14, 2017, the two companies mutually decided to end the merger agreement, rather than appeal the antitrust decision. Due to a contractual clause intended to ensure both parties remained encouraged by the merger prospect, Aetna will have to pay Humana a break-up fee to the tune of US$1 billion. This massive financial hit does not include various other expenses Aetna had to incur in order to prepare for the deal, including legal and accounting fees, bonds issuance fees, interest to be paid while repurchasing the bonds, and the premium it has decided to pay for bond repurchases. All told, the total cost of the merger that didn’t happen will be around US$2 billion for Aetna. This is a relatively straightforward scenario, albeit very costly for Aetna.

Cigna and Anthem
This is a much more complicated situation. Since the merger was first announced, a lot of animosity has grown between these two insurers. Cigna has gradually changed its stance from being pro-merger to anti-merger. In fact, Cigna has gone to the length of filing a lawsuit against Anthem, and asking for $13 billion in damages. This does not include $1.85 billion that Anthem owes to Cigna as a termination fee. Anthem, however, appealed this, claiming that the merger deal timeline is valid until April 30 – and it is still hopeful for merger activity.

Unless Anthem and Cigna accept the ruling without appeal and carry on with business as usual, I see two possible scenarios here:

  • Convince the new administration that the deal will have a positive impact on consumers, and get it approved with the help of the new head of the Justice Department
  • Accept the ruling, and use the money (planned or already raised) to fund acquisitions of smaller payers without triggering the antitrust regulations

The first option seems less likely. However, since the new U.S. president’s swearing in ceremony, we have seen that extreme events cannot be explicitly ruled out with the new administration. Additionally, Trump’s and Republicans’ plans to repeal and replace Obamacare will require support from the industry…and who better to support this than two of the top three publically-listed payers? Another key element in favor of these mergers being approved is that the new administration is more lenient when it comes to antitrust matters than the previous administration, as evidenced by the possible approval of the Bayer and Monsanto deal.

The second option would result in Anthem paying a hefty amount for failure to be able to complete the deal.

The high termination fees for these deals gone bad will likely negatively impact Aetna and Anthem (if indeed the Anthem/Cigna merger doesn’t happen.) For example, per the latest filings, Aetna’s net margin has declined from ~5.9 percent in 2011 to 3.6 percent in 2016, while Anthem’s was 2.9 percent in 2016, down from ~4.4 percent in 2011. As a result of the lawsuit filed by Cigna, Anthem will end up shelling out even more than Aetna, as even if we the decision is in favor of Anthem, it will still have to pay litigation expenses.

Insurance payer mergersThe road ahead for these payers is filled with uncertainty, especially for Anthem and Cigna, since they are embroiled in a legal battle. Yet one thing we can be certain of is that Aetna and Humana are watching from sidelines, potentially resuming merger talks if the Anthem-Cigna deal is approved. While it remains to be seen how the new administration reacts, things should get clearer in the coming months.

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