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Drug manufacturers may have a duty to their shareholders to
maximize profits, but hospitals and health systems have an obligation to
patients to provide optimal care. Meeting that obligation can be a challenge
when medications aren’t available because of unaffordable prices and shortages that
may arise from the business strategies of pharmaceutical companies.
These divergent missions explain the rationale behind Civica
Rx, a not-for-profit generic drug company started by some of the largest health
systems in the country, including Catholic Health Initiatives, HCA Healthcare,
Intermountain Healthcare, Mayo Clinic, Providence St. Joseph Health, SSM
Health, and Trinity Health. These seven systems, which include about 500
hospitals, have joined three philanthropic organizations—the Laura and John Arnold
Foundation, the Peterson Center on Healthcare, and the Gary and Mary West
the initial governing members of the new company, which began operating in
Offended by unreasonable spikes in prices for commonly used
drugs, Dan Liljenquist (pictured at right), senior vice president and chief strategy officer at
Salt Lake City-based Intermountain Healthcare, initiated the idea of a company
that could offer these drugs to healthcare organizations at affordable prices.
“That was the genesis behind Civica, to potentially have a
non-profit company enter this space to make sure that these essential generic
medications, whose formulas are owned by society, remain in the public domain
available and affordable to everyone,” Liljenquist says.
Civica is constructed to produce enough profit only to recapitalize
and maintain the business, not pay dividends to shareholders, says Liljenquist,
board chair for the new company. This approach represents a way for hospitals
and health systems to combat efforts by some drug manufacturers to exert unfair
control over drugs and spike prices, he says.
“Essentially, this is a social asset designed to police
against bad behavior,” he says.
In keeping with this mission, Martin VanTrieste, an industry
veteran with more than 34 years of experience in pharmaceuticals and formerly
the chief quality officer for pharmaceutical company Amgen, agreed to lead Civica
as CEO without compensation.
In addition to the 10 original groups, as of late October two
more organizations were in the final stages of becoming governing members and
15 organizations were scheduled to become additional founding members.
Governing members, including the three philanthropies, have
the power to appoint the board of directors. Both governing and founding
members can appoint members of the drug selection advisory and medical trends
advisory committees. Governing members have committed $10 million each in the
The bulk of participation in Civica will be composed of
partnering members, which can be hospitals and health systems of all sizes. Partner
members are required to contribute a onetime fee of $300 per licensed bed. So
far, leaders from 120 hospital and health systems have expressed interest in membership.
Exhibit: National Drug Spending, 2007-16
The company will operate under four guiding principles
designed to create a fair, unbiased process for acquiring medications,
Liljenquist says: “Nobody owns the business, everybody is going to get their
fair share [of medications], everybody’s going to get the same price per unit
regardless of the volume they commit to, and finally everybody will get the
exact same contracting terms.
“We thought of every which way that this organization could
benefit one group of members or subset of members or member over anybody else
and tried to control for that.”
Key elements of the business model are pricing transparency
and a pre-contract purchase commitment. Drug prices will be the same for all
Civica members, regardless of the volume purchased, while members will contract
with Civica to buy the drugs for a specific duration. These two conditions will
provide hospitals with more predictable pricing and drug manufacturers with
more stable production numbers, Liljenquist says. Civica will contract with manufacturers to make the drugs at the outset, with the company initially focusing on 14 hospital-administered generic drugs that will be FDA-approved.
“Capacity exists to make these drugs in the current
so we don’t need to start from scratch building
our own manufacturing plants,” says Ben Carter (pictured at right), CFO of Trinity Health, based in Livonia, Mich.
For competitive reasons, Civica is not disclosing which
drugs will be made, but among the criteria are inclusion on the World Health
Organization’s list of essential medicines, issues with shortages, and price
increases of at least 50 percent.
Production of the first drugs is estimated to begin in early
2019, with the products available for distribution at some point during the year.
Although the company has not released information on how
much the venture will yield in overall annual cost savings, reductions on
individual drug costs may be as much as half. “In
some cases, we think the savings to hospitals could be greater than 50 percent; in
other cases, the drug cost savings
may be minimal, but with the
problem of availability solved, many systems
will save in other ways,” says Lou Fierens (pictured at right), executive vice president for administrative
services with Trinity Health.
For hospitals and health systems, the greater affordability and
accessibility will mean not only direct cost savings in drug purchasing but also
savings on operational costs, Fierens says.
“The kind of decisions that our caregivers are having to
make about revising treatment protocols, substituting
one medication for another, all of these
things cost—not directly, in terms
of the acquisition cost of the medication, but in the
time we have available to provide care,”
“There are a lot of ways to define cost apart from acquisition cost. It takes caregivers offline,
trying to work on things they shouldn’t have to be working on that aren’t
really involved in directly providing care for the patient.”
Because the drugs available through Civica will be embedded
in other hospital charges, patients mostly likely will not see individual
pricing for the drugs on their statements, Liljenquist says, meaning the impact on patients
may not be so noticeable. However, patients can become more informed about the
price of drugs because pricing will be accessible to the public on the Civica
website. The company is in discussions with payers about coverage terms for the
Creation of the start-up was announced in January. Since
then, work has been ongoing to validate the business model and explore opportunities
with drug manufacturers, pharmaceutical ingredient suppliers, and other supply
chain partners, Liljenquist says. Much of this preliminary work has also
involved creating bylaws and articles of incorporation.
“Getting the organization up, funded, and
incorporated quickly has
been the most challenging
piece of this effort so far," Fierens
says. “And the pressure is on to
complete all of these structural tasks quickly because
the clock is ticking. Every day you walk into our pharmacies and you see white
boards that list shortage
drugs right down to the
specific number of remaining dosages. There is urgency around creating
this solution, and
we are trying
to get through that part of it as
quickly as we can.”
The task now, Liljenquist says, is getting enough members
who will make a commitment to purchase a certain amount of drugs. Committed
buyers will make it easier to build a supply chain. “The real value we are
locking is the commitment to buy,” he says. “We think we’ll have a good chunk
of the market to move, and that will help us de-risk this venture
Initial feedback to the start-up from colleagues and the
industry in general has been overwhelmingly positive, say these governing
are more than enthusiastically embracing this disruptor,”
says Trinity Health’s Carter. “It’s being
set up to help solve a problem that has plagued the industry for
the last several years.”
The initiative itself speaks to
the ability of diverse organizations to unite around mutual
need and interest and to collaborate
successfully, he says. “It’s a positive reflection on the industry that so many competitors could
really come together on this and stick together to create something that
will be extremely beneficial to society,” he says.
“It’s part of our DNA to solve
problems,” Fierens says. “By creating a kind of a public asset around
generic medications, we think we
have created the right solution for the time. Based on the
response we’re getting nationally, I would suggest we’re on the right track.”
Carter Dredge (pictured at right), chief transformation officer for St.
Louis-based SSM Health, says most of the comments he has received have been
questions about the membership models and the process to join Civica. The
barriers to participation are intentionally low because of the common need;
hospitals of all sizes are affected by the issue and should have access to
lower-priced drugs, Dredge says.
“A lot of our pharmacy staff have to spend some considerable
time and effort trying to access these drugs. It’s just a big pain point,” Dredge
Dredge says the governing
members, including SSM Health, that have contributed start-up funding are taking
risks, especially while other organizations can become partner members without
the capital input yet receive the same pricing as founding members.
“We say, ‘True,’ but
someone’s got to step up and make it happen,” he says. “When we looked at this
problem we realized that absent a major public policy change, which was
unlikely to occur, there needed to be a private-sector solution. If it was going
to be a private-sector solution, we needed to have critical enough mass to
enter big and enter over a longer time period to avoid things like predatory
Although the new initiative will
not completely resolve the pharmaceutical cost problem, Dredge says, the Civica
business model should stand as an example of how issues in the healthcare
industry can be addressed.
“It’s an example where innovation,
collaboration, overall compassion, and philanthropic
intent come together in a unique way. I don’t think it’s insignificant,”
Dredge says. ”As we continue to flesh out this type of a business model, I
think there are many applications in the future that could use it as well.”
Sidebar: Additional Strategies for Managing the Drug Cost Problem
Karen Wagner is a freelance healthcare
writer based in Forest Lake, Ill.
Interviewed for this article: Ben Carter, CFO, Trinity Health,
Livonia, Mich.; Carter Dredge, chief transformation officer, SSM Health, St.
Louis; Lou Fierens executive vice president, administrative services, Trinity
Health, Livonia, Mich.; Dan Liljenquist, senior vice president and chief
strategy officer, Intermountain Healthcare, Salt Lake City.
For questions about Civica Rx, go to: https://civicarx.org/contact.
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