Weekly Health Tech Reads | 10/6/24

CVS explores strategic alternatives, MA Star chaos, obesity declines, and more!

Author

Kevin O'Leary
October 06, 2024

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VERTICAL DISINTEGRATION

CVS explores strategic alternatives

On Sunday evening, a Wall Street Journal report shared that CVS leadership met this week with a potential activist shareholder, Glenview Capital. According to the article, Glenview was pushing for “ways to energize the company, but not to break up the company.” The WSJ noted that Glenview has previously taken activist positions elsewhere, notably suggesting that Tenet replace four board directors, ultimately resulting in the CEO’s resignation.

On Monday, the WSJ reported that the CVS Board had already hired bankers weeks ago to conduct a strategic review of the business, including discussing options to break up CVS. Then on Tuesday, the WSJ followed up diving into the challenges associated with the various paths forward for CVS. The below quote from a Wall Street analyst I think sums up the challenge facing CVS’s executives and Board well:

“Investors have lost faith in management’s ability to hit their forecasts,” said Raymond James analyst John Ransom. “The strategy of putting all this stuff together can work, they just haven’t managed to pull it off.” 

✍️ Going Deeper

For folks interested in healthcare strategy — and I’d imagine that’s virtually everyone reading this sentence — I think this news provides for a fascinating thought exercise:

Imagine yourself in the shoes of a CVS Board member — what questions are you asking yourself in determining whether it is time to break up CVS?

At this point, it goes without saying that the vertically integrated strategy CVS has taken the last several years has not gone to plan. Going all the way back to at least the Aetna acquisition in 2018, CVS has faced challenges in deploying its vertically integrated strategy. From a failed rollout of HealthHUBs to a PBM that has been losing major clients to a broken retail pharmacy business to losing a bidding war for One Medical to acquiring Oak Street a month before v28 was announced to mispricing Aetna’s MA book, it has been one issue after another for the business.

Yet the theory of it remains strategy is quite appealing — look no further than the 2023 Investor Day to see CVS leadership talk about the increase in lifetime value CVS should expect to see from customers when you integrate the four assets CVS has across the retail pharmacy, PBM, insurance, and care delivery. Logically, the argument made in these slides seems like it should hold true:

Yet, if you’re the Board, you now have to reconcile the logical appeal of this strategy with the lack of execution against it that has led to CVS revising 2024 estimates downwards on three separate occasions in 2024. The fact that Wall Street analysts are saying in the WSJ that investors have lost confidence in management says everything here — if you’re the CVS Board, it is time to act. The WSJ reporting indicates that they’ve recognized that.

The question is whether that action is a leadership change or the more drastic step of breaking apart CVS, effectively acknowledging that the vertically integrated experiment hasn’t worked. I imagine the input CVS’s outside advisors are providing at the moment is determining whether the whole of CVS is currently worth less than the sum of its parts and whether it would maximize shareholder value to break it up into those parts. What those parts would be broken up into is an interesting question in itself — given the headwinds facing each of the four assets CVS has, it doesn’t seem like there is an easy path forward here.

The most straightforward path seems to me like it’d be hitting the reset button and spinning out Aetna, returning to a pre-2018 merger structure (CVS = CVS Caremark + CVS Pharmacy, Aetna = Aetna insurance + Health Care Delivery). It’d have its challenges to be sure, but it would allow both organizations to reset their strategic narrative for Wall Street moving forward. That said, none of the potential routes forward seem like a clear dominant solution, which is why I think it makes for such an interesting strategic question.

MA STARS

Preliminary 2025 stars scores come out; chaos ensues

This week, CMS released preliminary Stars scores for Medicare Advantage insurers for 2025. This Modern Healthcare article did a nice job summarizing the situation — cut points will be increasing across the board, making it harder for insurers to hit a 4+ star rating for 2025 and impacting the quality bonuses from CMS that will be paid out in 2026.

This is a huge deal for MA insurers — in 2024, CMS spent $11.8 billion on quality bonuses for MA plans that achieved 4+ stars, so this drop for 2025 will have a meaningful impact on plan revenue. Not surprisingly, we saw a swift public reaction from Humana and UnitedHealthcare this week, two plans that together received over half the $11.8 billion in 2024 quality bonus payments. Lets look at each:

  • Humana released an 8-K based on these preliminary Stars scores, sharing that only 25% of its members will be enrolled in 4+ star plans in 2025, down from 94% in 2024. Humana’s biggest MA plan contract (H5216), which contains 45% of Humana’s MA membership, including 90+% of its Group MA membership, will decrease to a 3.5 star rating in 2025, down from 4.5 stars in 2024. Notably, Humana shared that this will put its ability to recover to a 3% margin by 2027 at risk.

  • UnitedHealth filed a lawsuit against CMS over a miscalculation related to call centers, similar to the lawsuit that Elevance filed months ago and subsequently won (UHC notes this in its case multiple times). The UHC / CMS dispute centers around a single call where a UHC call center representative did not hear a CMS test caller ask a question. Instead, they only heard “faint rustling, and breathing sounds". The call went over the allowed eight minutes, and as a result UHC’s rating fell from 5 stars to 4 stars for this metric. UHC says this will impact the overall score for a number of plans. This case has ended up in court after months of back and forth between UHC and CMS on this call and a few others that UHC thought CMS incorrectly included in its scores.

It will be interesting to see which plans emerge as winners from this news — presumably, some insurers will have most/all their membership in 4+ Star plans and can use that as a sign of meaningful differentiation to members, brokers, investors, etc. On the whole, though, it seems like another hit to insurers that have already watched margins dwindle in 2024. Humana's sharing with Wall Street that this news puts into question whether they can hit a 3% margin on MA by 2027 underscores how big the headwinds are here.

OBESITY

Obesity rates on the decline

A Financial Times post highlighted data showing that the obesity rate in the US fell by ~2% between 2020 and 2023. The article suggests that GLP-1s are the driving force of this change. The chart below is a striking image shorting the reversal after decades of steady increases.

DRUG PRICES

Blue Shield of California Negotiates a Deal on Humira

This Bloomberg article provided a helpful look into how Blue Shield of California (BSC) has bypassed the PBM to negotiate a contract directly with Fresensius for a Humira biosimilar. BSC reports seeing meaningful savings due to the move, paying $525 versus $2,100 for the drug. Blue Shield of California reports spending more on Humira annually than any other drug, with 41,000 prescriptions annually.

The deal between BSC and Fresenius was orchestrated by Evio Pharmacy Solutions, an entity owned by various Blues plans that BSC pays to negotiate drug prices on its behalf for a flat fee (if you’re reading that sentence and scratching your head at the benefit of replacing one conflicted middleman with another, join me).

✍️ Going Deeper

The topic of drug prices is endlessly confusing to me. Beyond the fact that a single drug can generate $14 billion in sales annually (compare that to, say, Epic, which generates $4.9 billion in sales annually), the discussion around rebates and list prices and what not makes my head hurt. Let’s look at the math related to how BSC is calculating savings in this instance:

  • Humira’s “market reported net price” is $2,100; BSC has negotiated to pay a price of $525 (BSC press release), BSC noted it is paying a quarter of what it did previously for Humira (Bloomberg)

  • BSC is getting a 90% discount off Humira’s list price (Bloomberg)

  • BSC currently spends $100+ million on the drug annually across 41,000 prescriptions (Bloomberg)

  • BSC expects to generate $20 million of savings on Humira over three years by avoiding PBMs, which BSC noted this might be a low estimate (Bloomberg)

Doing some quick math on those numbers, something seems off: BSC’s spend today should be $2,100 × 41,000 = $86.1 million (not $100+ million). By reducing the drug price to $525, it should be spending only ~$22 million a year on it ($525 × 41,000 = $21.5 million). That means BSC should see annual savings of $64 million, and over a three year period it should save $192 million.

10/7 Update: I updated and removed commentary regarding the strategy of BSC / Fresenius about the logic for this partnership that was based on a misunderstanding of who manufactures Humira — it is AbbVie, not Fresenius.

Other Top Headlines

  • Omada Health has joined Hinge in initiating its IPO process by confidentially filing its S-1, according to Business Insider. As the article notes, it feels like 2025 is shaping up to see a lot of pent up IPO activity.

  • Private equity firm TPG is buying a majority stake in the e-prescribing platform Surescripts after a two-year process evaluating strategic options for the business. In an interview with Fierce Healthcare, Surescripts CEO shared that all existing investors will remain minority investors. The capital infusion from TPG will allow Surescripts “to do so much more and so much faster,” which will include both organic and M&A growth opportunities. M&A opportunities include prior auths and data analytics. Surescripts handled almost 24 billion healthcare transactions in 2023, which I’d imagine makes it a really interesting platform opportunity for a private equity firm to build on top of.

  • The FDA announced on Wednesday that there is no longer a shortage of Eli Lilly’s GLP-1 drugs, Zepbound and Mounjaro. This news is expected to cause issues for telehealth companies that are using compounded versions of GLP-1s, evidenced by Hims & Hers stock price dropping by 10% on Thursday. That said, Hims & Hers stock bounced back on Friday and only ended the week down only 1%, which is a bit surprising to me given the seeming magnitude of this news.

  • SCAN Health Plan announced its latest culturally tailored MA plan design, SCAN Allied, which is designed to meet the needs of the Asian community. SCAN is launching this plan in partnership with Astrana Health. The plan will launch in 2025 in Los Angeles and San Francisco.

  • If you’re interested in reading about Epic’s corporate culture and general structure, this Forbes article by Katie Jennings is a great read. It details the general structure that will ensure Epic remains private and cannot be sold. As an aside, it remains fascinating to me that a company that is so often villainized as the largest impediment to innovation in healthcare does only $4.9 billion of revenue a year. Yes, it’s a large number, but it’s also less than the annual revenue of many of Epic’s health system customers.

  • In the Medicare Advantage brokerage market, Connie Health acquired Keen, as part of a broader expansion for Connie — the article notes Connie has also quietly raised an additional $29 million (by my math at least, the article says they’ve now raised $45 million, and as of their Series A they had raised $16 million total). Keen, which was incubated at Redesign Health, has an interesting model that focuses on supporting VBC primary care providers.

  • Wellinks, a virtual clinical model for COPD / CHF, has acquired remote monitoring platform Spire Health.

  • Reimagine Care and Moffitt Cancer Center partnered to provide Reimagine’s virtual care platform to Moffitt’s patients.

Funding Announcements

  • Nym, an autonomous coding platform, raised $47 million.

  • VieCare, an AI-enabled community oncology care platform, raised $45 million.

  • StrataPT, a platform for PT, OT, and SLP practices, raised $25 million.

  • Rippl, a virtual dementia care platform, raised $23 million. The capital will support Rippl in expanding its geographic footprint, move into VBC, and build out its tech platform.

  • Rezilient Health, a multi-specialty clinical model selling to employers, raised $10 million. Rezilient has physical location they put at employers that is staffed with a nurse and connects with virtual primary care and specialty providers. Rezilient just signed Oklahoma State University as a client

  • Empathy Health Technologies, maker of the digital health app Sober Sidekick, raised $2.8 million.

Reads From Around the Community

2024 Trends Shaping the Health Economy Report by Sanjula Jain
An excellent set of data and insights around key themes in healthcare in 2024. Read more.

More weird issues in value-based care by Nikhil Krishnan & others
This is a good read highlighting some perspectives from folks around the industry about implementing value-based care. Most of which discuss the many practical challenges implementing VBC (cherrypicking patients, attribution, risk adjustment, workload for PCPs, FFS incentives aren’t that bad, so on and so forth). My main takeaway: people are understandably very cynical about the potential for VBC to drive meaningful change in the industry given all the challenges they’ve seen implementing it over the last decade. It seems we’re well into the “trough of disillusionment” phase of the Garner Hype Cycle for the recent VBC innovation wave. Read more.

The hidden reason why therapy isn’t working by Alex Katz
This is an interesting perspective arguing that increasing access to therapy isn’t enough; we need to figure out how to increase access to quality therapy. It gives some good examples of how consumers are increasingly having negative experiences with therapy, including the TikTok hashtag #betterhelptherapyisascam. A good reminder for folks thinking about increasing access to care and the tradeoffs with the quality of care. Read more.

Authentication for the era of bots & AI agents by Ayokunle Omojola
A interesting read on how AI bots are struggling with use cases that require multi-factor authentication. Read more.

Director, Market Strategy & Operations at Tia, a hybrid women’s health provider. Learn more.
Hybrid (NYC)

Sr. Director, Behavioral Health Operations Oversight at Blue Shield of California, a California-based managed care company. Learn more.
$198k — $296k | Hybrid (CA)

VP, Growth (Virtual Healthcare - Medicare) at Rippl, a a virtual dementia care company. Learn more.
$180k — $210k | Remote

Senior Product Manager - Adoption at Virta Health, a virtual clinical model for diabetes, prediabetes, and weight loss. Learn more.
$156k — $200k | Remote

Director of Business Operations at Givers, a platform that helps caregivers access payment and support. Learn more.
On-site (NYC)

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