Silicon Valley and Healthcare (Part 8)

In our last blog, we ended with a question:

“Can Amazon use its special skills to transform healthcare?”

The answer today is “Certainly, and in a major way!”  This past weekend we were alerted by the headline from the Wall Street Journal “CVS to Buy Aetna for $69 Billion, Combining Major Health-Care Players.”

I believe that this action is in direct response to the reports that Amazon is planning to make major moves in healthcare.  In particular, playing to the strengths I noted in our last blog: “logistics, supply chain management, billing and collections, transparency (or lack thereof) data analytics and now, consumer centric.

We believe that CVS, formerly “Caremark,” a company I once worked for in a previous life, has figured out something critical in healthcare.  If you are NOT the payor in healthcare, you are at the whim of the payor.

That is the food chain in healthcare, and precisely why I frequently state that the center of gravity in a room of healthcare professionals are the payors, the insurance companies.  They have all the power and everyone else works for them; from the local single primary care providers to the large regional hospitals.  They control the cash and they also have ALL the data.  I cannot represent that I believe they handle that data well, or even in a way that maximizes their own benefit.  They even seem to overlook the fact that the claims data that flows to them, while very valuable, is incomplete without the associated clinical data.  They could get the latter however, they would simply have to set up another layer to the relationship, which has not yet been done.  There are exceptions, as there’s always some, and these exceptions are the payors that own (at least partially) their own provider delivery systems.  There are some, the one I know the best is Humana, Inc. however, there are others.

We have always envisioned that, one day soon, the payor will be able to see directly into the EHR of their “member” and be able to view the entire care team process.  Why have they lacked the desire to harness the power of the EHR (also known as the Comprehensive Health Record or CHR)?  At Quantum Innovations, we have always seen the value of this data, and have developed a system to capture and quantify its value. We call it the “Personal Health Record” or “PWeR®” model.  Under the PWeR® system, it will be easy for the payor to see what is going on at the clinical level.  That visualization will have the potential to dramatically reduce healthcare cost, by engaging payors, providers and the consumer.

The CVS/Aetna merger will prove to be either a great opportunity or an incredible challenge.  The reason is that payors have all the power, but they are also highly regulated and highly territorial.  Therefore, in a move to protect what seems to be an inevitable invasion by Amazon into the pharmaceutical production and distribution space, CVS could see their drug store market position change.  The news media is stating that Aetna’s management will “stay in place.”  I see this as the best second good move.  A giant of the insurance industry is not one to be casually “picked up,” nor can it be run by just any seasoned executive.  It is highly specialized and hands-on.  I know from experience in both insurance and managed care, and I am reminded every time I renew my own life and health insurance license.

I would expect to see other insurance companies begin to move away from the PBM (Pharmacy Benefit Managers) and pharmacies owned by CVS, as they will not want a potential competitor to have data on their members.  I would anticipate that could be a boost to other PBMs and other pharmacies.  I suspect that one of the things that could have attracted Aetna to negotiate with Humana recently (a merger opposed by the U.S. Justice Department) was that Humana has their own PBM and material captive and experienced provider network.  Twice in the last 20 years, I personally contracted with Humana to build a provider network.

In my opinion, there are two diverging directions that may be taken by the CVS management in the days ahead.  One path could be to abandon other insurance partners to concentrate on Aetna, which would present a package of challenges, and could trigger a clash of industries.  I am recalling the merger of AOL and Time Warner in the early 2000s.  The trendy culture of AOL was completely incompatible with the sturdy traditional legacy media of Time Warner, and they were never going to work together.  The ill-fated, unbalanced, two-headed giant was up against a phenomenon I refer to as transient advantage; namely when a combination of capabilities that at one point made a firm a leader, erodes and is replaced by the next form of competitive advantage.

A second possible trajectory is that CVS and Aetna successfully combine resources, as CVS has proven it can do, and both integrate resources and technology like no one else has done before.  Could they buy an EHR company to bring it all home?  I would not be surprised at all.

It would be clear that this is going to be a place that Amazon will not likely enter (providing care).  Providing care is a challenge to a behemoth like Amazon, as it would have to deal with HIPAA and patient privacy, the exact opposite of what Amazon has been built on.

I am very hopeful that a combined CVS/Aetna could really fortify our industry.  I am rooting for them however, it would not have happened if Amazon was not there.  More on CVS, Aetna and Amazon in our next blog.

– Noel J. Guillama, President