We Are Rats; If Pharma Could Be Brave … And Other Bullseye POVs You Won’t Hear at Other Events Leave a comment

This year MedCity News launched Bullseye, an invitation-only event for a diverse group of healthcare investors and the inaugural event brought perspectives rarely broadcast loudly in healthcare.

The event brought together investors from different spheres: payers and providers to life sciences and employers, as well as family offices, private equity, and university endowments. Feedback we collected after the conference concluded on July 23 in Chicago showed that attendees found the candid perspective, “honest” “refreshing” and “provocative.”

Below are a few of these perspectives:

If pharma could be brave…

Why is it so hard to know what a medication actually costs?

The question was posed by moderator Jay Rughani, partner, Andreessen Horowitz, on a panel about the evolution of the pharmacy and the answer came fast and furious from AJ Loiacono, CEO of Judi Health, which bills itself as a transparent pharmacy benefit manager.

“Well, I’d say some of that is designed by some of my competitors,” Loiacono shot back. “I often say [one] who loves complexity, who loves opacity, is someone who’s focused on profitability.”

Competitors, of course, is a reference to the legacy PBMs like UnitedHealthcare’s Optum Rx, Cigna’s Express Scripts, CVS Health’s Caremark, all of which are regularly the target of industry ire for their lack of transparency.

But Loiacano didn’t just heap the blame on competitors. He wasn’t loath to point toward the biggest purchaser of drugs in the country: the federal government.

“Our largest ultimate payer is the US government, and they have five different large schedules when it comes to drug pricing,” he declared. “You have 340B, Medicare, Medicaid, DOD, VA. They’re all different. So I often say, ‘if the federal government can’t get one price per drug, what chance does the average employer? What chance does a small employer have, like Doug’s Towing or Patty’s Plumbing?’ They have zero chance and oftentimes they are the ones that are being absolutely abused under this system. And to go further on that point, the people that suffer the most are the elderly and the poor under this model.”

He described the model as being deliberately confusing because “no other country has drug pricing like the United States” because you begin with a “fictitious starting price” then you have discounts against that price and you have rebates for formulary access.

“You have price protection, clinical access fees, performance management fees, and the money is going to 20 different people oftentimes instead of to the patient. The complexity is, I think, a game of tug of war between the manufacturers and the payers by the insurance side. I believe it’s slightly moving back to the middle, but again, it’s just 26 years of people ignoring what was happening right in front of their eyes.”

He also took aim at spread pricing that PBMs only lately under pressure decide to .

“In the 80s and 90s, PBMs didn’t start from a place of spread pricing and making money on drugs spend and taxing employers and their members,” Loiacono explained. “That’s a creation from the 21st century that goes hand in hand with formulary access and vertical integration [of insurers who are now PBMs and retail pharmacies].”

Other than PBMs and the federal government, Loiacono also laid the lack of transparency problem squarely at the feet of pharma manufacturers. Rughani challenged him on it, saying that pharma companies could easily argue that their net prices haven’t increased that much relative to inflation and that its list prices, which are the PBM-driven that are responsible for high drug prices.

“And so is it really so simple that one of the stakeholders in our system is entirely accountable for this transparency test?” Rughani asked Loiacono.

By his answer, Loiacono implied that pharma indeed is.

“I think if pharma was brave enough, they could do it, but they need to abandon the model of formulary access,” he replied. “I just want to be very clear about this, which is, at any one time, if you were to survey 20 brand managers, probably 15 to 16 of them would say they’re winning under the current formulary strategy. And by them winning, unfortunately, it’s creating this very murky, gross-to-net system that punishes, unfortunately, the people that are the most ignorant or the people that have the least amount of what I would say intelligent representation.”

We are rats; we are pawns, not knights

On a panel discussion featuring two nonprofit health plan CEOs, Sachin Jain, CEO of SCAN Health Plan, exhorted the audience to be part of a “moral awakening,” calling for a civil rights movement in healthcare.

“Congress does not have the capacity to overcome special interests,” he declared. “It doesn’t have the capacity to actually weigh in on every single unjust and immoral situation that’s taking place. If we’re going to really rely on that, then we are admitting to ourselves that we’re not knights, but we’re actually pawns.”

He added that participants in the healthcare system are chasing an incentive system that is not beneficial to those who most need it.

“Get rid of whatever your human name is. You have no values. We have no morals. We’re animals and, you know, rats in a maze, and all we’re doing is just following. We’ve kind of committed to being rats, all of us on some level. We’re just like, ‘Oh, here’s where the cheese is. Let’s just go where the cheese is.’ [But] that’s not who we are. We’re all better than that.”

And Jain pointed to an example of a strong moral stance that an American public corporation took that he described as the “single most courageous act” in his lifetime: CVS Health announcing in 2014 that it would no longer sell cigarettes.

“CVS Health, a for-profit organization, publicly traded organization, went out to the market and said, ‘We can’t be CVS Health if we sell cigarettes in our stores,'” he recalled. “What the data has subsequently shown is that there are fewer smokers in America because they made cigarettes less accessible. That’s a for-profit company that shows that the leadership of a Troyen Brennan and a Larry Merlo actually matters.” [Brennan was CVS Health’s chief Medical officer until 2022 and Merlo its CEO until 2021.]

It’s our damn fault, collectively

Too often we hear the lament: Healthcare is broken. Rarely do we ask who broke it. At Bullseye, we did and got refreshingly honest answers.

“It’s our own damn fault collectively, and I think that’s why we’re trying to focus a lot of our energy on the system,” said Paul Markovich, CEO of Ascendiun, the parent company of the nonprofit insurer Blue Shield of California, Blue Shield of California Promise Health Plan as well Altais, a clinical services company and Stellarus, a healthcare platform aiming to connect payers, providers, and members with next-generation tech infrastructure.

He declared that as insurers, “we tend to control” how people get paid and what the administrative burdens are, and that “we have the biggest influence” in changing the healthcare system.

His co-panelist on the panel had an even harsher, though true, sentiment.

“All of us who work inside of healthcare, we’ve normalized the abnormal,” declared Jain, CEO of the nonprofit Medicare Advantage plan SCAN Health. “I think we’ve come to accept things that we would not want for our loved ones when they apply to other people. We’re kind of okay with it because all of us have access to a back door. When any one of us has a challenge or a problem with the healthcare system, we pick up the phone, we call the person that we know might be able to make it work, and then we’re like, ‘Okay, thank God, I know the CEO of this or the president of that.'”

However, most Americans, including many of the members of BlueShield of California and SCAN Health Plan, don’t enjoy this type of access.

So “morally conscious” organizations, the term Markovich used to describe Ascendiun, are attempting to reform the system from the inside. He pointed to the work the company has done in restructuring the prescription drug model, referring to how BlueShield of California tore up the contract it had with a legacy PBM to include other pharmacies and PBMs like Amazon Pharmacy, Abarca Forward and Mark Cuban’s Cost Plus Drugs.

“I was told that ‘The pharmacy benefit managers are so big, they’re so strong, they’re powerful, like you can’t mess with them. This is just the way things work.’ And now I got people saying, ‘That rebate model is dead, right?’ And so it was sort of one of those things where, when you started out as like the impossible task, now it’s sort of assumed,” Markovich declared.

The one time I am not on your side is …

On a panel about how investors can find the right entrepreneur to bet on, panelists talked about all the usual characteristics of an investable founder: checking the ego at the door, having the right team and experience, having investors as advisors to the fledgling company, and so on.

But one investor articulated something not often heard — the dynamic between founder and investor when the relationship is being formalized through a venture capital deal.

“One of the things that I always remind our founders is when you’re negotiating a term sheet with me, it’s one of the only times I’m not on your side,” Anna Fagin, partner at Town Hall Ventures, informed candidly. “So it’s a good chance for us to sort of learn one another and learn how we deal with conflict.”

AI is the chance at revenue growth, not cost reduction

On the panel about how to invest in AI wisely, one panelist pointed to how fundamentally AI has changed the game in the business of healthcare.

“For the last 20 years, the benefit and use case for digitization, information technology, whatever you want to call it, was really cost reduction – we have played that game of cost reduction 20 different ways on the provider side,” explained Jo Natauri, founder and managing partner of private equity firm Invidia Capital Management. “The difference here with AI is revenue. This is the first time you’re seeing revenue and margin opportunity.”  

Many investors don’t know how to evaluate Gen AI

The only non-investor on the panel pointed out that investors are woefully inept at evaluating the true worth of Gen AI startups.

Investors are getting inundated with AI pitches but they are far more experienced at doing due diligence on the healthcare side of things and not the AI side, according to Shubhra Jain, chief business officer at Hippocratic AI, a voice AI firm.

Jain, who was formerly an investor, described her own initial inability:

“I definitely didn’t know how to evaluate a true native AI Gen AI company,” said Jain, who was an investor at San Francisco-area investment firms before joining Hippocratic AI. “The eye-opening thing for me, being on the other side, has been: What does it take to build a true native AI company if you’re not a wrapper company that’s switching models? What does it take to hire and retain and incentivize that talent?”

She added that doing due diligence on the AI side requires fundamentally different skills.

“Diligencing the AI side of things, … is quite frankly [something] many investors just don’t know how to do and don’t have the talent on bench to be able to do, but if you are genuinely investing in a true AI company, that is super, super important. You’re seeing this with the frontier model companies — the capex, it can totally turn the company upside down very very quickly, more so than any other sort of model that you can build for your traditional companies. So it’s a huge risk, but it’s also a huge opportunity if you have the right people and if you know how to optimize it.”

Photo: J Studios, Getty Images

The above were the candid perspectives shared at Bullseye, an invitation-only event for healthcare investors and corporate business development leaders. If you are interested in attending or sponsoring next year’s Bullseye, please write to Arundhati Parmar, [email protected], and Ken Montgomery, [email protected].