Cost Reduction

A New Approach to Curtailing Pharmacy Costs

October 24, 2018 11:04 am

In an effort to improve the availability and value of treatments, major health systems and other stakeholders have banded together to form a new not-for-profit that will produce generic drugs.

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 Foundation—as the initial governing members of the new company, which began operating in September.

Affordability and Availability

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 start-up.

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

Seeking a Fair Process

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 manufacturing environment, 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.

Expected Benefits

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,” Fierens says. 

“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 manufactured drugs.

Feeling the Urgency

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 we know the clock is ticking. Every day you walk into our pharmacies and you see white boards that list shortage drugs r
ight 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 substantially.”

Feedback and the Future

Initial feedback to the start-up from colleagues and the industry in general has been overwhelmingly positive, say these governing members.

“Industry CFOs 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 says.

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 pricing.”

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:


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