New Marketplace

Amazon and CVS: Short-Lived Unicorns in Health Care, or Healers of the “Tapeworm”?

Interview · April 20, 2018

Bob Galvin and Leemore Dafny head shots health care consolidation new venture interview

Leemore Dafny, PhD, interviews Bob Galvin, MD, MBA, Chief Executive Officer for Equity Healthcare.


Leemore Dafny: This is Leemore Dafny from NEJM Catalyst, and today I’m speaking with Dr. Bob Galvin. Bob is the CEO for Equity Healthcare and an operating partner at Blackstone, an investment firm. He’s a physician who has been on the purchasing side of health care for years, first as Chief Medical Officer with GE and now in his current role. He’s responsible for purchasing health care services on behalf of tens of thousands of employees for about 50 midsized companies that Blackstone invests in. So he’s pretty familiar with the role of employers in the purchasing space and has published quite a bit in this area. That’s the perspective I’m tapping today for this interview on “next-generation” consolidation. Bob, thanks for taking my call today.

Bob Galvin:  Terrific, Leemore.

Dafny:  I wanted to kick it off by asking about one of the biggest, most exciting next-generation consolidation/entry announcements we’ve heard about, and that’s Amazon, Berkshire Hathaway, and JP Morgan. They say they’re going to team up and do something great. What are they going to do?

Galvin:  That’s the question, isn’t it? Of all the press announcements I have seen over the past several years, this was one that took a lot of reading and rereading to try to figure out what they were saying. In the end, I’m not sure they know yet. I have seen a lot of these efforts, Leemore. As I think back over the past 25 years, I have seen, at least 10 times now, distinguished employers understandably get frustrated with the value of the health care dollar they’re getting for their employees, talking together and saying, “We have now had it, enough is enough, we’re going to take this on.” It has been very, very difficult to see much success from any of those efforts, for several reasons. [The current trio] are very impressive leaders. I get their frustration and I like their commitment to change. But I have to tell you, right now it feels a lot like Groundhog Day.

Dafny:  I hear you on that; some choice words from Warren Buffet are that he wants to do something about this hungry tapeworm on the American economy. So that’s a lot of frustration. But frustration is not a solution. Let me ask you, if you were these three folks, do you have ideas on what you would do?

Galvin:  I do have some ideas. The first thing I would do if I were them is look back and see why so many similar efforts have not worked. I can enumerate them all the way back from the Big Four in Cincinnati, when employers were dominant in that specific location, to a couple that I’ve tried, Massachusetts Healthcare Purchasing Group being one. The most salient and common reason for why they haven’t worked is that the leaders of the companies have not had the staying power to see through changes. When these leaders face health care management, as good as they are at their commercial businesses, they are going to be facing a different and more difficult beast than they have seen before. Measures are murky; it’s hard to know if you’re actually saving money or just avoiding costs. The people who make decisions inside companies, benefit managers, frequently don’t have the support of senior management to make decisions that make some employees unhappy. Finally, employees as consumers don’t act rationally. They don’t seem to pursue quality data. And, on the supplier side, it takes a lot of skill and patience to identify the providers that deliver the most value and then do the hard work of steering employees to them.

What those leaders need to do is to stay in charge of the initiative. They can give it to a lieutenant, but they cannot let it regress to the mean of going back into the benefits department. They have to stay at the helm because in every case before them — all of which have failed — that really hasn’t happened, honestly, other than the business I run, Equity Healthcare, where Steve Schwarzman, the CEO of Blackstone, has been a steadfast supporter of the group purchasing that we do and [is] I think responsible for the results we’ve had. But you have to have that leadership, and they cannot underestimate how long it’s going to take or the fact that they’re going to see different dynamics than they’ve ever seen in their business careers before.

Dafny:  This is not the business that they’re in, but they decided to — in the economists’ vernacular — forward integrate into more active purchasing of health care, which most companies outsource. Because you are playing in that same space, if you had to give them some specific guidance beyond commitment of the leadership on top, what should their team look at first?

Galvin:  Here’s what I would do if I were them: The first step is to realize that as big as they are, they don’t have the volume to actually do anything in almost any market that they are in. Health care is still a very local game, and even where they have their biggest collection of employees they’re not going to be big enough to really impact either the insurers or the providers given all the consolidation out there. They’re going to have to focus on a multiplier effect.

I think the reason that I find this particular effort so interesting is Amazon and Jeff Bezos. If I were them I would basically get in a room and I would look to Jeff Bezos and his strategy team and say, “We have an opportunity for you, Amazon, to disrupt health care in a way that could make a difference, because if we do this volume purchasing play the way employers have always done it, why are we going to have a different outcome than any of them have had before?” The wild card is Amazon’s commercial interest and their appetite and willingness to get in there and really try to disrupt health care.

Dafny:  That makes sense to me; that’s how this effort could potentially be different. We’ve heard a bit about Amazon entering the pharmacy business — I want to set that aside. On the service side, is there something that you think is ripe for an Amazon-type disruption?

Galvin:  I have thought a lot about this. I think everyone is trying to think this through. Try this on — I don’t know if it’s an idea or a fantasy — what Amazon has that no organization has had before in health care is access to consumers and the trust of consumers. Imagine I am on Amazon looking to buy a book or whatever it is I’m going to buy, and they know that I have looked previously at something related to back pain. I had either looked for back braces or something like that before, and now something pops up on the side of my screen the way that things pop up, and it’s an advertisement from a group of providers who specialize in low back pain and they’re willing to offer me, oh, I don’t know, a free brace, a free massage, but they want to talk to me.

Maybe, behind the scenes, this provider group has worked out a deal with my TPA or insurer to take financial risk for back pain as many provider groups are trying to do, but what you have with Amazon for the first time is getting to the consumer in a trusted way. Today, those provider organizations are trying to reach patients but are crowded out by the very large insurers and the very large other provider organizations.

I’m imagining a way that Amazon, which has gotten very good at knowing what it is I want to buy even when I’m there to buy something else, can tap into the parts of health care where people spend money — I am not talking about the incidental worried well, I’m talking about the people with diabetes, the people who end up getting spine surgery, etc. — and be a conduit to provider organizations that are willing to take risk, which we think has some opportunity to improve quality and decrease cost. Maybe this is a way that you could disrupt the system.

Dafny:  Your fantasies are kind of complicated. Let me break it apart and just ask you about a subset of it. Are you imagining a world where one could shop for episodes of care on Amazon? If I’ve been told I need a knee replacement, I can type that in, and I’m going to see all the ratings of all the people who are verified buyers of knee replacement episodes in my area. Would that be part of your vision?

Galvin:  No, actually not. It would be the opposite, because people have demonstrated that they are not interested in seeking out that kind of information. This would be health care in which you get consumers interested in health care incidentally. I’m on Amazon shopping for a book, but Amazon knows that I have a back issue because I bought a back brace. I don’t go on to shop for episodes but I get a pop-up about some organization that is in the business of treating back pain, and now I’m induced to do something about it. If it’s a diabetic company, maybe they’re giving away a free glucometer. They want to get my interest. It isn’t going on Amazon to compare prices; that hasn’t worked with any site. This is, I’m doing something else, they know I have this other issue, I trust them because I’ve bought so much stuff through Amazon, and I’m now facing something I wouldn’t have otherwise faced before.

Dafny:  I know that you’re concerned about total health care spending for the health that we actually achieve. Can you explain to me the piece of your fantasy that prevents these organizations from just trying to get people to have their employers and insurers spend money on them, and therefore the providers can make money off this? It’s not that we don’t want them to make money . . .

Galvin:  Absolutely. If I’m Amazon and I am creating this type of access because I want to rationalize my employee health care costs, then I’m going to have a benefit design so that the organizations that are going to make these offers are going to be nested in my payer in a way that they’re going to take risk on the cost.

Dafny:  And Amazon is going to be smart enough to target me based on who my insurer is.

Galvin:  As I said, it’s a fantasy, Leemore.

Dafny:  I don’t know. I mean, they can figure out what brand I like to buy for socks, so I don’t know how unrealistic that is, to be honest.

Galvin:  What dissuades me about it is that it isn’t traditionally what Amazon has done. What Amazon has done is dealt with the existing supplier community and made it easier for consumers to find them, and the market works because it’s been done with some form of retail product. It would be a lot of extra work on Amazon’s part to get into the health care delivery system. This isn’t just better access to the existing bench of suppliers. This idea is access to suppliers that are not dominant. It is a very heavy lift, so in the end, I’m not optimistic. I am weighted against this happening, but I’m trying to find a pony here.

Dafny:  Moving away from frustration and potential unicorns, let’s move to talking about another kind of consolidation that we’ve been seeing, which is health insurance companies buying up health care delivery organizations. A big one recently is United proposing to acquire the big medical group that DaVita had bought a few years prior. That’s just one example, and you can pick any you want to talk about, but what is your thinking on whether and how that’s going to transform the U.S. health care system?

Galvin:  There’s almost nothing about that that makes me as an employer purchaser feel happy.

Dafny:  Are you indifferent, or are you unhappy?

Galvin:  I’m worried. I’m trying to see how these moves are going to translate into better value for me as the employer, which you know is ultimately the employee. I’m trying to figure out how company A, an insurer, which is representing my interests and trying to control costs, buys company B, which needs to make more money every year because that’s what will make company A’s acquisition make financial sense, and making more money means doing more services — how one plus one here doesn’t equal 100.

Dafny:  Or at least something bigger than two.

Galvin:  How about 11?

Dafny:  All right.

Galvin:  However, there could be a positive spin. What I’m hearing in the market is that Optum has developed a way to help provider groups, whether it be the surgical group they bought, or some of the medical groups they’ve already bought, be better organized in terms of how much they’re spending, and has made them more efficient organizations through better scheduling and better billing. I’ve spoken with some of the physicians who are now owned by Optum, who say their offices work better and they are able to give the same amount of services for lower cost because of some of the backroom support that they’ve gotten from Optum. That’s a positive. Now, I haven’t seen any evidence on that. I haven’t seen any pricing going down in any of the markets where these provider groups have been bought, but if there’s a positive it could be that.

Dafny:  Let me throw a potential positive at you, and I want to hear your reaction as to whether we’re likely as employees to see the benefits of this. United bought Surgical Care Affiliates, these ambulatory surgery centers, some 200 of them, and those are lower-cost sites of care for certain treatments and procedures. If United, now that it owns these affiliates, tries to steer its patients toward them in place of more expensive sites of care because they have two reasons to do it — one is to contain cost at least for its fully insured enrollees, and the second is to earn margins on that business — then couldn’t total costs go down?

Galvin:  Yes. I like that as a onetime impact, but it is a onetime impact. Then you have Surgical Care Affiliates (SCA) continuing to generate double-digit increases in their income every year, and I’m concerned about how that’s going to happen. But I think you’re absolutely right that moving to a lower-cost source of service does give you a savings, and that part I like.

Dafny:  Why couldn’t United just do a JV [joint venture] with SCA to achieve that?

Galvin:  I’m not sure. Remember, I believe that some of the deals going on between insurance companies and provider groups are defensive. I think that these companies are looking market by market, and if there is a market where they feel like they’re going to get disadvantaged because the hospitals and provider systems become too powerful, they’ll use their cash to make a purchase like this. Sometimes it’s strategic, and other times it’s defensive.

Dafny:  Does it diminish the bargaining power of a dominant provider system if you buy some ancillary services in that local market?

Galvin:  I think what it leads to is more and more consolidation. We’re off and running with the biggest arms race, the biggest over-consolidation race, that I’ve seen in my career, and I think these kinds of acquisitions on one side just create more on the other side.

Dafny:  I have many more questions, but I’m going to pick just one more for the couple of minutes that we have left. There is an exotic animal pending, and that is the deal between CVS and Aetna. Now we’re talking retail clinics, pharmacies, pharmacy benefit managers (PBMs), health insurance — all under one roof. What do you think is going to happen as a result of that deal, assuming it goes through? What are you, as a purchaser of health care services, expecting?

Galvin:  I’m trying to find a ray of sunshine to give you in this conversation, but I have to admit this one is a head-scratcher for me. I guess the best case scenario is that CVS is a place that people go [to] and trust, so it’s almost like [how] Amazon is on the Internet side, a place where consumers who are sometimes patients go and trust it. People go to their drugstore. If you can imagine that that pharmacy becomes a health hub and takes capitation, and becomes a non-hospital-focused system, you could see a transformation in the delivery system to a much lower cost basis.

However, the difficulty of that transformation, the cost of that transformation, the IT integration cost of that transformation, just seems overwhelming to me. If you don’t have that vision, if you don’t have Minute Clinics becoming health hubs that take capitation from Aetna, I think what you then have is a whole complicated set of relationships between a retail drugstore, a PBM, and a health insurer. It just becomes a very complicated merger.

Dafny:  I absolutely agree that that’s a pretty complicated proposition. Your two fantasies, the capitated health hub of CVS versus Amazon as portal for integrated care, if you had to pick one, what seems likelier?

Galvin:  I’ll put it to you this way: If I had to as an investor go long or go short, I’d short them both, because I don’t have a lot of confidence that either one of them will work. Both of these are going to take such commitment. Let me go back to the employer side, because I know it so well. The three CEOs who got together at the Alfalfa Club and decided that they wanted to reform health care — and Warren Buffet’s metaphor was great — these are people that could change the health care system, so I am praying that they have the perseverance to stay involved and not send it down to lower parts of their organization. I know that they have the capacity, and I know that they have the resources. The question is, do they have the tenacity? Honestly, I don’t know which is more or less of a long shot, but right now I wouldn’t go long on either of them.

Dafny:  Bob, I will pray alongside you, and I expect our listeners will as well. Thank you very much for your provocative ideas today. Always interesting and engaging. We appreciate it.

Galvin:  Thank you, Leemore.

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