By Amanda Frost, PhD
Vice President, Research, PCMA

Concerns about high health care costs are prevalent and appropriate, but can be often focused on the wrong place. Vertical integration (VI) is one area that is receiving attention from state and federal policymakers, with a focus on health insurers, pharmacy benefit managers (PBMs), and pharmacies. But the rhetoric around VI’s costs is increasingly disconnected from the data. 

Evidence of this has come in a new report from the Department of Health and Human Services (HHS) Office of the Inspector General (OIG) comparing vertically integrated Medicare Part D plans to non-vertically integrated ones. It simply did not find what VI hawks squawk about.

For example, while critics are quick to accuse PBMs of reimbursing their own affiliated pharmacies at higher rates than other pharmacies or driving up the net cost of drugs, OIG does not find either of these to be true.

With no evidence that PBM-related integration is a cost driver, where is the rhetorical disconnect coming from?

The answer is a lesson in how you cannot so easily equate findings across different industries – particularly those on the opposite sides of supply and demand.

Most of what we think we know on horizontal and vertical integration comes from research within the hospital market. However, the incentive structures built into the supply-side of health care (e.g., hospitals) are not the same as the incentives on the demand-side (e.g., insurers and PBMs).

The Hospital Incentive

Research has found a story of increasing prices from vertical integration (i.e., mergers) between hospitals and provider groups. It should come as little surprise that the resulting larger hospital system has an incentive to raise its prices: those prices determine their main revenue stream after all.

Given these pricing dynamics and their impact on patients, anger at other players in the system makes sense. Recent rage has been directed at health insurers and PBMs, which as an industry also experiencing VI, makes an obvious target. But as noted Yale health economist Zack Cooper argued recently in the New York Times, the insurers that pay the high-priced bills are not the ones that are driving up those prices.

To VI or Not-VI?

Insurers and PBMs are not hospitals. The research showing that supply-side hospital VI drives up prices does not apply directly to the insurer and PBM demand-side. A hospital merging with multiple provider groups in an area limits the available competition and increases the bargaining leverage when negotiating reimbursement rates, which research shows raises prices. A health insurer merging with a PBM does not create fewer competitors in either market, and both still maintain the same goal of delivering low costs for employers and patients. If an employer is dissatisfied with the cost or performance of their integrated insurer-PBM, they can find non-integrated options. If the employer is dissatisfied with the high prices charged by the integrated hospital system, there may be no other choice for care in their area.

While OIG states they do not yet have enough data to fully investigate the differences between vertically integrated and non-vertically integrated Part D plans, the evidence they present at least gives us reason to believe that the rising prices dynamic present in the hospital market does not translate to the insurance market.