Whether a coalition of large health systems that plans to get into the generic drug business can actually do something about shortages or escalating prices remains to be seen.
But from a purely business standpoint, the formation of a new nonprofit drug company by five large health systems — including Michigan-based Trinity Health, the owner of Mercy Health in Michigan — makes sense in the ever-changing world of health care where new models and partnerships are emerging, said Tony Colarossi, a health care consulting partner at Plante Moran PLLC.
He describes the new model as “kind of brilliant.”
“If the drug manufacturers were responding appropriately to make sure there was appropriate access to these drugs and they were moving to reducing costs over a period of time like any other company does and becoming more efficient, I don’t think the health systems would be looking to go in this direction,” Colarossi told MiBiz when asked for a perspective on the health systems’ move. “There is no alternative to controlling costs in the long term.”
Other examples of the coming disruption include the proposed merger of retail pharmacy CVS Health Corp. and insurer Aetna Inc., as well as the moves by private equity investors into the health care industry.
Bottom line: The fledgling generic drug company is part of a wave of change that will occur in health care over the next decade in response to rising costs and changing payment models.
“It’s an indication of where we’re going in the future as utilization becomes more of a focus and more (attention is put on) population health,” Colarossi said. “As we’re trying to manage health care outside of the most expensive areas, we’re seeing new and interesting mergers occur.”
Colarossi is most intrigued by the potential for the participating health systems involved in the generic drug company that formed last month to create a new revenue stream for themselves in an age of falling inpatient volumes as more care moves to outpatient settings. The company also could sell the generic drugs it produces to other health systems.
“I thought that was fairly brilliant,” he said.
Salt Lake City, Utah-based Intermountain Healthcare led the formation of the new company. Partners currently include Trinity Health, St. Louis, Mo.-based SSM Health and Ascension Health, also based in St. Louis and the owner of Borgess Health in Kalamazoo. Collectively, the nonprofit health systems own about 10 percent of all hospitals in the U.S. The group also is open to bringing more health systems on board for the drug company.
“If the only way to provide our communities with affordable drugs is to produce them ourselves, then that is what we will do,” Trinity Health CEO Richard Gilfillan said in a statement.
The rising cost of pharmaceuticals — especially highly expensive specialty drugs to treat complex diseases — has been a major issue for hospitals and employers, who feel “kind of trapped,” Colarossi said. Prices have climbed for generic drugs as well.
As drug prices spike, employers have to wrangle with figuring out what to do with their pharmacy benefits in a tight labor market that gives them little room for making major changes.
“When you have low unemployment, the leverage from an employer perspective is really limited,” Colarossi said. “I think the employers will re-enter the conversation in a much more aggressive fashion during the next recession or slowdown.”
Legal authorities around the country, including Michigan Attorney General Bill Schuette, already have entered the conversation. Schuette and attorneys general in 44 other states last fall expanded an earlier lawsuit that alleges price-fixing by 18 companies for 15 medications.
The rising costs that are at issue in the lawsuit, combined with the shortages of generic drugs, have been a growing problem for hospitals, Colarossi said.
“It is a pain in the rear, and it ends up costing them a lot more money because they’re moving from one manufacturer to their secondary manufacturers. Sometimes they have to go to an alternative treatment type,” he said. “It’s an ongoing issue and it does cause disruption to not only the patient but cost control within the health system.”