As it is, the healthcare system is bloated with cost, bureaucracy, and middlemen. It’s ripe for the picking for disruption.
Lately, there has been a lot of talk that Amazon will soon enter the prescription drug market. This would be major blow to traditional brick-and-mortar retail pharmacies, and it would also threaten Pharmacy Benefit Managers (PBMs).
To ward off this threat from Amazon, CVS and Aetna are preparing to merge. This attempt at vertical integration (upstream and downstream) will, most likely, provide the new CVS-Aetna company tremendous market power.
First of all, it builds a moat around CVS.
- CVS owns Caremark, a PBM business, and Minute Clinic, a provider of clinical services, as well as several other retail pharmacies. CVS owns every step of the prescription drug supply chain process, except for the pharmaceutical companies that actually make the drugs.
- The new CVS-Aetna company would be able to create healthcare plans with incentives for members to utilize the CVS Minute Clinics, with disincentives for more expensive visits to physicians' offices. The merged company would be able to leverage the vast amounts of consumer data it owns to gain better insight and improve their managed care outcomes. This would also significantly help with the company’s revenue cycle management.
On top of these factors, by bringing Aetna’s members into CVS retail pharmacies, the combined company can cross-sell CVS’s high-margin groceries to Aetna’s customers, further driving revenue.
Current Healthcare Ecosystem
Let’s take a step back and look at the overall healthcare ecosystem.
- Pay monthly premiums to health payers.
- Pay co-pays to providers and pharmacies.
Pharmacy Benefit Managers (PBMs)
- Negotiate prices with drug manufacturers and places drugs on a health plan’s formulary (the list of drugs that are preferred by a health plan).
- Receive rebates from drug manufacturers, sharing some percentage of this rebate with health payers.
- Reimburse pharmacies for drug prescriptions.
- Receive claims from healthcare providers.
- Reimburse providers for care and PBMs for drug prescriptions.
Let's talk about the middlemen that add cost and complexity to the ecosystem.
Pharmacy Benefit Managers. Currently, there are three large PBMs: Express Scripts, CVS Caremark, and OptumRx. They hold enormous leverage in negotiating with clients. The PBM’s role is to negotiate drug prices with manufacturers and pass on the savings (rebates) to the health plans. Ideally, this should lead to lower drug prices for the end customer. However, in reality, the PBMs tend to pocket a larger portion on the rebates from the drug manufacturers, and the drug costs remain high.
Pharmacies (Retail and Specialty). The major PBMs use their own mail-order, specialty, and retail pharmacies. This is a problem, because instead of negotiating the lowest-cost method of drug distribution, the PBMs are more incentivized to increase their profitability through their own pharmacies. The end result is that consumers have to pay higher prices for drugs.
There is a significant need for transparency between PBMs, specialty pharmacies, hospitals, physicians, health plans, and the healthcare ecosystem at large.
Healthcare Blockchain: Smart Contracts Remove Middlemen
The blockchain model stands to upend the entire healthcare industry, and has the capability to significantly cut costs for the end customer.
As a rule of thumb, if a business can satisfy the checklist below, then it has a good use case for blockchain:
- Multiple parties need to be able to view, and possibly edit, the same data.
- There is a lack of trust between parties that trying to conduct transactions.
- Several of the transactions are sequential, and all the parties conducting the transactions need to know the interdependencies of those transactions.
- Middlemen are in the ecosystem mainly because of the lack of trust amongst the parties in the ecosystem that need to conduct transactions.
- Parties in the ecosystem gain financially if transaction times can be reduced.
There are some really good articles explaining the patient identifier blockchain use case. However, there is another use case which might also be a good blockchain candidate—smart contracts between payers, providers, and drug manufacturers.
Here is a simplistic understanding of smart contracts:
- They are pre-written computer code (a complex set of “if-then-else” statements).
- Smart contracts are deployed, replicated, and then executed on a distributed network of computers (blockchain).
- Smart contracts have the ability to execute updates to the shared ledger, and may be authorized to make payments (cryptocurrency).
Consider the following scenario:
- Health payers and drug manufacturers agree upon pricing for prescription drugs and a list of preferred drugs for the formulary. Then they write up these contracts and enter them into the blockchain. The blockchain platform ensures that these contracts are encrypted, and that only authenticated and authorized users can access these entries.
- The health payer reimburses the drug manufacturer when patients order a prescription drug that is included in the health plan’s formulary. This payment is triggered by the smart contract when certain conditions are met. Also, the contract between the consumer and the drug manufacturer ensures that a certain amount of co-pay is transferred from the consumer to the drug manufacturer.
- The providers have contracts set up with payers so that every time a patient receives care (a doctor’s visit, a medical procedure, etc.), an entry is made in the blockchain. The contract executes claims reimbursements from the payer to the provider, and also transfers a certain amount of co-pay from the patient to the provider.
A healthcare blockchain would significantly reduce inefficiency and waste in the healthcare ecosystem. Currently, miscommunication and mistrust among all stakeholders makes it very difficult to transition to value-based care. A lot of the time, health payers end up paying claims, and then retrospectively work on identifying inaccurate payments and reconciling over- and under-payments.
The shared ledger capability of a healthcare blockchain can provide complete transparency to all parties. This would allow payers and providers to negotiate complex bundle claims that are tied to value and move away from the fee-for-service model. Also, the smart contracts would make the claims adjudication process seamless.
Prolifics is working with our customers to help them build blockchain capabilities. Here are a few concrete steps that organizations can take.
- The group responsible for incubating new technologies should identify the current market leader blockchain platform offerings, and assess their levels of openness, security, consensus mechanisms, interoperability, tokenization, and security.
- Identify the business opportunity and specific use case while setting clear expectations of outcome. While most current blockchain platform offerings are too immature for enterprise-grade production work, and will remain that way for the next couple of years, business can stand to benefit by embracing an emerging technology that stands to shape the future.
About the Author
Prithvi collaborates with clients to help them craft transformative enterprise strategies. He has led large and complex solution deployments for multiple customers across the financial services, banking, healthcare life sciences, retail and insurance industries.