CVS Health: Transforming Healthcare
The company I am choosing as a model of effectiveness is CVS Health. I believe CVS demonstrates an example of effectiveness as evidenced by the sustained outperformance of its stock relative to competitors, but also the S&P500, and this performance is particularly remarkable in light of the competitive and challenging industry environment it operates in:
- Competitive pressure and commoditization of prescriptions: Industry is fairly concentrated with the two largest competitors (CVS and Walgreens incl. Rite Aid acquisition) represent 75%+ of market share(1). Significant excess capacity exists as several large pharmacies / retailers (e.g. Walgreens, Walmart) have a national footprint and pharmacies located within close geographical proximity. Competitive pressures have resulted in downward trend in prescription pricing, margins and commoditization in the eyes of payors.
- Health reform and cost pressures from PBM industry consolidation: Heath reform is changing the way providers are reimbursed (shift from FFS to FFV) and pharmacies face a critical challenge in adapting to this changed environment. Consolidation in the PBM industry (e.g. ExpressScripts – Medco) and significant market concentration / negotiating power is resulting in magnified cost pressure on the pharmacy industry.
From a business model standpoint, CVS has to navigate the diverse needs of several stakeholders and at a high level there are three key stakeholders: (1) Patients (and caregivers): Key needs are convenience and speed / ease of picking up / filling medications, safety / accuracy of medications, lower out-of-pocket costs. (2) Payors (including Medicare / Medicaid): Key needs are for lower medication costs, lower overall health costs, as well as improved quality of care delivered. Payors are also interested in sharing of information that enables them to better understand their insured population, as well as their health status. (3) Providers: As a result of health reform, providers are a key stakeholder as they are increasingly being asked, and incented, to manage care of patients to lower costs and improve health outcomes. In light of this, key needs for providers are support / partnership in managing care of patients.
In order to deliver on the needs of these stakeholders, CVS’s business model is geared delivering on the following objectives: (1) Convenience and improved access to medications, (2) Lowering cost of care (especially total health costs), (3) Improving health outcomes and medication safety.
To meet these business model objectives, CVS’s operating model configures, integrates and aligns several different operational elements. I’ve highlighted two given space constraints:
(1) Operational and Management Processes: To deliver on its promise of convenience / access, safety and improved health outcomes. CVS has developed industry leading processes that integrate labor, technology and physical assets in an efficient and effective manner across a breadth of settings / domains. To take one example, CVS developed a transformative pharmacy workflow model (called the Pharmacy Services Initiative) that addressed key challenges to filling medications in a quick and efficient manner by understanding areas that represented bottlenecks / poor patient experience and then restructuring these processes in order to eliminate observed problems. CVS then reoriented its technology and labor workflow models to align with this operational approach to ensure that the process worked seamlessly. Improvements to the process did not stop there, and there was continued optimization and incremental value generation from this workflow model. For example, improved automation of processes that freed up labor time, the use of existing technology and POS systems within stores, along with the information / data and processing capabilities within the organization were used to deliver patient care messages / alerts that resulted in improved medication adherence and health outcomes. This workflow model was thus continuously optimized and adapted to improve the ability of CVS to meet its business model objectives.
(2) Technology and Data / Information: CVS developed proprietary capabilities, in not only being able to track a large volume of value added and actionable data, but also to be able to process it to extract differentiated insights which were then leveraged using technology platforms to deploy and deliver value to stakeholders. A great example is the use of patient prescription fill data, along with complex pharmacological algorithms to effectively ‘predict’ when a patient is at risk of being non-adherent and then pairing this information with data gained through experience of series of AB-testing like experiments to determine the appropriate timing and mechanism / mode for addressing patient non adherence. These identified insights / ‘opportunities’ are then paired with the appropriate platform from a multitude of technological platforms to deliver these opportunities in a coordinated and effective fashion.
Sources:
- http://www.wsj.com/articles/walgreens-boots-alliance-nears-deal-to-buy-rite-aid-1445964090
- Work experience at CVS Health
Nice post… love the detail and insights. Thank you.
Great insights, Shaharyar. One interesting use case for the data they collect is how they use that data to prevent people from using over the counter drugs to create massive amounts illegal drugs. I know there are certain companies working with CVS Health to prevent these large purchases across various stores, and wonder how much of that mission CVS Health can bring in house and potentially advertise this social mission.
That’s a great point Andrew and yes that is exactly right that there is great potential to use the data they have to monitor drug purchases / volumes by patients that seem ‘suspect’. Indeed a major area of focus for CVS is the prevention of drug abuse. It’s a significant opportunity, not just socially, but also economically as it costs the healthcare system a lot (reimbursement by payors for these drugs, ER / hospitalizations for drug abusers, mortality etc.). I actually wasn’t aware that CVS Health was partnering with companies to do this so that’s a great callout! I definitely agree that CVS should (and probably will) use this to communicate their transition from a pharmacy / retail to a health company.
Thank you once again!
Shaharyar