Are Specialty Pharmacy Accelerators Next Wave of Payers’ Vertical Integration?

By Angela Maas

Some recent deals within specialty pharmacy may highlight the next target within the vertical integration strategy of the Big Three PBMs: specialty pharmacy accelerators. Cigna Group subsidiary Evernorth Health Services conducted the most recent move when it invested in the newly independent Shields Health Solutions. Evernorth also appears to be on the brink of a subsequent investment following an initial one in 2023 that would make it the sole owner of accelerator CarepathRx Health System Solutions.

On Aug. 28, private-equity group Sycamore Partners finalized the acquisition of Walgreens Boots Alliance, Inc. (WBA) and split the company into five independent businesses, including Shields Health Solutions. Sycamore acquired those companies in partnership with WBA executive chairman Stefano Pessina and his family.

In a Sept. 2 press release, Shields revealed that current CEO Michael Ham and the rest of the management team would remain in their roles, with seven-year Shields veteran and former CEO Stephen West returning to the company as executive chairman.

Also known as specialty pharmacy integrators, specialty pharmacy accelerators such as Shields partner with health systems to help them set up and run hospital-owned specialty pharmacy programs, embedding them within hospitals and clinics. This approach, says Winston Wong, Pharm.D., president of the W-Squared Group, helps with care coordination from the inpatient setting to ambulatory care, “enhancing the continuity of care across the treatment journey.” This means that health systems can better manage patients with complex needs from diagnosis to treatment, as well as “allows them to take advantage of their class-of-trade discounts, including 340B.”

“The ability to self-refer legally” makes health system-owned specialty pharmacies very appealing, maintains long-time industry consultant Bill Sullivan. And working with a specialty pharmacy accelerator means that those companies are responsible for “running a business that is foreign to hospitals”: high-cost, high-volume specialty drugs that require patient care management.

Walgreens’ Initial Shields Investment Was in 2019

Shields was founded in 2012, and Walgreens initially invested in the company in July 2019, purchasing a 23% stake, followed by a September 2021 $970 million investment that gave it 71% ownership. In 2022, Walgreens purchased the remaining shares for approximately $1.37 billion.

In early 2021, Shields made a significant move, making it the market-dominant force among accelerators, when it purchased ExceleraRx Corp., a network of specialty pharmacies among its members, which were integrated delivery networks and academic medical centers. Created by Minneapolis-based Fairview Health Services in 2012, ExceleraRx consisted of almost 30 members at the time of the purchase. At the time, the combined company was able to work with more than 60 health systems and academic medical centers with more than 700 hospitals across 43 states.

That’s now grown to more than 80 health system partners with north of 1,000 hospitals and clinics in almost all 50 states.

Only 30 minutes after Shields put out its Sept. 2 press release, Cigna Group subsidiary Evernorth Health Services issued its own release revealing that it had made a $3.5 billion investment in Shields in the form of preferred stock.

According to the release, the investment “allows Evernorth to seek more opportunities to support patients and providers and enhance continuity of care across specialty health care settings.”

“As health systems are growing, and negotiating risk-bearing contracts with insurers, as well as offering comprehensive health services directly to employers, the traditional footprint of the insurer starts to shrink,” Wong tells Payer Perspectives. He compares Evernorth’s PBM Express Scripts and specialty pharmacy Accredo as Shields-type entities for the traditional insured population but says the care they provided was not as effective as Shields’ because the accelerator is “more captive to the health system and not as open as a traditional insured population.”

The move helps Evernorth expand into important care settings where the company does not have a presence, he says. It also broadens the company’s specialty drug footprint at a time when those medications make up more than half of total prescription drug costs and are expected to make additional gains with new drugs for complex and rare conditions — conditions whose patients often are treated within integrated health systems, not by PBMs, says Wong. “In some respects, the third-party specialty pharmacies like Accredo are seen as more of a barrier to care as opposed to managing care. So rather than fight them, partner with them.”

In addition, he says, “buying into a different class of trade allows Evernorth to gain access to the deeper institutional discounts, as well as a stronger access to 340B pricing. Evernorth will gain indirect access to the economics of 340B, including discounted acquisition costs, revenue-sharing with hospitals and increased negotiating leverage with manufacturers.”

And while there could be a class-of-trade conflict, Wong points out that CVS Health and Optum Inc. also have implemented this strategy, “and the conflict scenarios have yet to be played out.”

Longtime industry expert Adam Fein, Ph.D., president of Drug Channels Institute, an HMP Global company, pointed to 340B as the reason behind the transaction in a Sept. 2 LinkedIn post: “Business has been booming for Shields and CarepathRx due to turmoil” occurring in the contract pharmacy space within the 340B program. Fein deemed the Shields deal one that “will further mask the flow” of 340B dollars among PBMs, pharmacies and hospitals.

However, says Wong, while some stakeholders may point to optimizing 340B-driven margin as motivation, these integrated health systems are more and more becoming big drivers of negotiations with third-party insurers. And those negotiations often lead to “relatively lucrative contracts. Through the Shields partnership, the health system could become more care management partner as opposed to a contracting nightmare.”

Deal Will Bring Huge Boost in Specialty Drug Scripts — and Their Revenue

As far as Sullivan’s take on the motivation behind Evernorth’s move?

“MONEY!”

“I’ve been saying for years that Shields is the biggest threat to independent pharmacy since its inception,” he tells Payer Perspectives. “The ability to retain prescriptions within the hospital system is extremely valuable.”

While the company was a Walgreens subsidiary, little public information was available on Shields’ financial impact from its management of hospital-owned specialty pharmacies, says Sullivan, who adds that “the volume that they ‘control’ is exceptionally valuable when contracting with manufacturers. They are now large enough to be the proverbial whale.”

According to Sullivan, assume that each of Shields’ more than 1,000 hospitals employs 25 providers who write 20 prescriptions without refills per day. And assume that Shields’ contracting efficiency lowered their prescription purchase price by $25 per prescription. Based on a Monday through Friday schedule, assume 220 workdays per year.

“Multiply it out and you get $1.4 billion in savings per year, which is a three-to-four-year ROI on the acquisition,” he says. “That’s a win! Evernorth likely shares the savings with Shields for their services. If that share were 50%, that would be upwards of half of a billion dollars in revenue to Shields/Evernorth.” And if refills were included in the calculation, the “margin revenue would increase by several factors.”

Hospitals would be happy with such a deal, contends Sullivan, noting that “Express Scripts has many other non-Evernorth clients that get bundled into the price negotiations. That leverage helps to drive deeper price cuts for their hospital portfolio or, at a minimum, avoid price increases. That also makes Evernorth happy for its Express Scripts business.”

But other industry stakeholders may not be as pleased. Independent specialty pharmacies may face dwindling prescriptions from hospital physicians. “A small number of large specialty pharmacies will survive if only for exclusive or limited-network contracts,” says Sullivan. In addition, “payers are unlikely to see any of the savings Shields generates.”

Evernorth Soon May Purchase Remaining Stake in CarepathRx

In the Evernorth press release, the company says that its Shields investment “provides optionality for additional investment in Shields over time.”

Evernorth now appears to be following through on that exact strategy with another specialty pharmacy accelerator, CarepathRx Health System Solutions. On May 31, 2023, the companies revealed that Evernorth had made a “significant minority investment” in CarepathRx, which at the time worked with more than 25 health systems and 600 hospitals, with more than 1,500 employees nationwide.

Currently, the company works with more than 40 health systems and 1,000 hospitals, with more than 1,200 employees.

For 2022, before the Evernorth investment, Fein ranked CarepathRx the No. 15 pharmacy in the U.S. by total prescription revenues: $2.4 billion, up 20% from 2021.

According to the Oregan Health Authority’s Health Care Market Oversight program — which “reviews proposed health care business deals to make sure they support Oregon’s goals of health equity, lower costs, increased access, and better care” — OHA received a Notice of Material Change Transaction on July 18 from Evernorth. The document notes that in 2023, Evernorth purchased a 49% equity ownership in CarepathRx’s parent company from CPRx Intermediate, LLC, which is majority owned by private-equity firm Nautic Partners, and is now planning to purchase the remaining 51%.

Following the completion of a 30-day preliminary review on Aug. 15, OHA approved the transaction.

Because Shields and CarepathRx have similar business models, Wong deems the CarepathRx investment “synergistic to the Shields investment” and helping “further penetrate the health system space.” Evernorth’s foothold within the space “becomes more solid, as [does]…the ability to penetrate deeper into the management of specialty drugs for complex and rare conditions.”

As far as the other two large PBMs, CVS Health’s Caremark does not appear to have any ownership of a specialty pharmacy accelerator, but Optum Rx’s parent company, UnitedHealth Group, owns at least a couple.

According to a recent Sunlight Report on UnitedHealth Group, among the insurer’s 2,694 subsidiaries and affiliates is integrator Trellis Rx, LLC. Nine companies exist between Trellis and UnitedHealth: Trellis is directly controlled by Specialty Pharmacy Blocker, LLC, which is directly controlled by PPS Holdings, Inc., which is directly controlled by CPS Intermediate Holdings, Inc., and so on. PPS Holdings also directly controls CPS Solutions, LLC, another specialty pharmacy accelerator.

Ultimately, says Wong, it’s unclear at this point whether other independent health systems may have qualms about partnering with Shields if they perceive that its partnership with Evernorth/Cigna would “utilize internal intelligence to drive contract negotiations to the disadvantage of the independent health system or gain competitive intelligence on their utilization or financials.”

And when it comes to pharmacy contracting, with the Cigna connection, might there be similar hesitancy from PBMs/payers about including Shields pharmacies in their networks, he wonders.

While similar partnerships already exist, “only time will tell when others will become comfortable with the indirect link,” Wong says. “For example, when CVS acquired Aetna, health plans who had CVS Caremark as a PBM had to work through evaluating the indirect link with Aetna and evaluate the possible conflict-of-interest threat to their business.

“While it was stated there would be firewalls, there is always the cynic that thinks otherwise.”