A Conversation with George Barrett, Cardinal Health

Pharmaceutical CommercePharmaceutical Commerce - November/December 2015

Cardinal Health, founded in 1971 originally as a food wholesaler, grew during the 1980s and beyond as a leading drug distributor. Cardinal Health is not only one of the Big Three distributors serving the entire US, as well as Canada, Mexico, the Dominican Republic, Puerto Rico, Malta, Thailand and China; it is also a major manufacturer and distributor of medical products, and provides healthcare and logistics services globally. The company grossed $103 billion in FY2015, and employs more than 35,000 people. Robert Walter, the founder, retired as chairman of the company in 2008, and the reins passed to George Barrett, now chairman and CEO.

In recent years, Cardinal Health has made strategic moves in healthcare: it divested several businesses, such as CareFusion in 2009; and between 2010 and 2014 it made more than a dozen acquisitions, including smaller US drug distributors and a major distributor in China. In 2014, it announced a partnership with CVS Health, Red Oak Sourcing, now the largest generic drug-sourcing business in the US. This year, it acquired the Cordis Div. of Johnson & Johnson, a manufacturer of cardiology and vascular devices. Today, the company delivers healthcare products to more than 100,000 locations, handling products from more than 5,000 pharmaceutical and medical suppliers.

Pharmaceutical Commerce sat down with Mr. Barrett to find out where Cardinal is going, and what his perspectives are on US healthcare. Here’s what he had to say.

1. Let’s start with pharmaceutical distribution, which remains the biggest part of the increasingly diverse Cardinal Health. For most of this century, the Healthcare Distribution Management Assn., among others, has charted a continual decrease in the cost of delivering life sciences products nationally. Will this efficiency drive continue, and is Cardinal Health finding new places to drive down costs?

I’d start by saying the following: I think the US pharmaceutical distribution and supply-chain system is the most efficient and secure in the world. Our people at Cardinal Health will continue to be focused on ensuring efficiency, security and safety for a system undergoing tremendous pressures from demographic and public health issues.

For Cardinal Health, the push for efficiency and operational excellence is always a core priority and is part of our DNA. But we also believe that the system needs ongoing innovation not just in terms of the products, but in terms of the service models in healthcare. We’ve invested heavily in innovative solutions for a system going through change.

In the US healthcare system, there’s a greater demand for coordination, multichannel distribution and services that make the patient the center of our healthcare universe. I’m not sure there’s a healthcare company that has a broader reach across the industry than Cardinal Health. We touch every part of the system, which gives us greater line of sight to, and great insight into, this evolving healthcare system.

2. In the past year, Cardinal has made its venture with CVS/Caremark, Red Oak Sourcing, operational. How is this changing healthcare distribution?

As a starting point, it’s important to recognize that 85% of all prescriptions in the US today are filled with generic pharmaceuticals. This is a very complex system with thousands of products and hundreds of global suppliers. Our innovative approach, bringing together the know-how and scale of Cardinal Health and CVS Health to form Red Oak Sourcing, provides tremendous support to our customers who want to bring a world-class generics offering to their patients.

3. Pharmaceutical distribution is an international business, and Cardinal Health has put a substantial stake in the ground with, among other ventures, the acquisition of Zuellig Pharma in China (now Cardinal Health China). How does Cardinal find the international healthcare industry relative to the US’s, and what implications does this internationalization have for life sciences manufacturers?

Pharmaceutical distribution is an international/global business for sure. However, where we might see in a product business, a product globalized across all markets, service businesses can be different. Service businesses must account for local behaviors, regulatory requirements, statutory limitations, etc. This can mean that what happens in one market doesn’t translate perfectly to another. This is why we’ve used great discipline in deciding in which markets we will compete. Our commitment is to make absolutely sure that what we do ultimately serve patients well.

Our decision to enter China is a good example. China had a set of conditions that made it a very attractive market for us. First, it is an enormous market at a unique stage in the evolutions of its healthcare system. Second, the government has been very clear in its commitment to accelerating the availability of healthcare for its people. Third, this is a market going through a period of consolidation, a process with which we are very familiar. Fourth, we saw an entry point through a very attractive acquisition whose leadership and business practices we knew. And to touch on the last part of your question, China is a market that was, and remains, very important to our global life sciences product partners. China was a $1 billion business for us when we acquired it in 2010, and today it’s a $3 billion business for us.

4. Back in the US now, Cardinal, like other major wholesalers, has built up a substantial specialty distribution business. Where is specialty distribution going, and how does Cardinal differentiate itself from its competitors?

The specialty healthcare market continues to grow rapidly, with greater demand for therapies to treat complex diseases and conditions with small patient populations. If you look at the recent product launches and pipelines of research-based pharmaceutical companies, it’s not hard to understand why specialty distribution and services are an important part of our strategy. In the broad sense, advances in our collective understanding of human biology combined with the tools of big data are forming a powerful engine for innovation, allowing us to understand the very nature of disease.

At Cardinal Health Specialty Solutions, we are a partner for specialty pharmaceutical manufacturers and providers. We draw on our expertise, insight and real-world evidence as we listen and respond to their unique challenges. From supporting manufacturers on the path to successful product approval, commercialization and optimization, to delivering the products providers need, with the efficiencies they want, we’re able to use our experience and expertise to improve specialty care.

5. While the Affordable Care Act mostly gets attention for bringing the uninsured into a healthcare setting, equally profound changes are occurring in hospital and health-system operations as a result of this law. For its part, Cardinal has a substantial business in serving hospitals and health systems. From your perspective, what are the major challenges facing those clients today and how is Cardinal meeting them?

Clearly, the early stages of the Affordable Care Act have been focused primarily on the issue of access. Recent data would suggest that around nine million Americans who did not have access to health insurance now have coverage.

There are other changes happening in the system, not just in response to the ACA, but also in relation to the challenges presented by demographic and public health issues and the corresponding economic pressures this creates. As I mentioned earlier, this is likely to result in changing sites of care, higher levels of coordination, more accountability for the patient post-discharge, a greater emphasis on quality metrics, and of course, an ongoing need for efficiency. Delivering the right care at the right time in the right setting and by the right caregiver is, in our view, central to this.

There are also pressures to consider alternate models of payments moving away from fee for service to one more heavily focused on outcomes.

How might we help a health system address these changes? Our physician preference item strategy addresses the need for efficiency and standardization, combining products and innovative services and technologies to help eliminate waste and improve outcomes. It’s not just about the cost of the product itself, but the efficiency of the supply chain, the elimination of waste in unused product, the use of technology to tag and track product—all with the intent of improving safety and efficiency.

Our recent acquisition of naviHealth also addresses value-based reimbursement models. naviHealth is a first-mover and market leader in post-acute care coordination and management of bundled payment programs. Partners who can “serve the bundle” will be increasingly valuable. For Cardinal Health, our ability to serve the Medicare bundled payment requirement with products and innovative services, across multiple therapeutic areas, is a key differentiator and value creator for the company.

6. An interesting area of concentration for Cardinal is medical supplies to the patient’s home—sort of a distribution version of “personalized care.” Overall, how will home-based care evolve?

It’s been frequently cited that there are roughly 10,000 people a day reaching Medicare eligibility age, but it’s also worth noting that we have 11 million people today in the United States over the age of 80, and that number will double by the middle of the next decade. This population has unique needs and presents unique challenges for our healthcare system. It’s clear to us that many of these patients are best cared for, and will want to be cared for, in their own homes.

This is one of the reasons we acquired AssuraMed, now Cardinal Health at Home, to provide medical supplies directly to patients in their homes; and is also part of the underlying strategy of our acquisition of naviHealth, which helps the system identify the best setting for post-acute care for each patient.

7. Cardinal has been one of the leaders in establishing compliance with the Drug Supply Chain Security Act, which, among other things, will set up a US system of tracking pharma products by unit from the manufacturer to the patient. How is Cardinal planning to take advantage of this capability? What will it imply for manufacturers going forward? And—again because of Cardinal’s emphasis on medical supplies—how closely will its operations in pharma distribution align with the Universal Device Identifier (UDI) mandate among medical device suppliers?

Keeping the pharmaceutical supply chain safe is of utmost importance to us. We have adopted strict procedures and guidelines to ensure that we are compliant with DSCSA, and we’ve prepared solutions for our customers and partners included in the regulation.

We work with manufacturers to ensure the accurate exchange of drug transaction data. We’ve adopted a standard systematic approach for accepting transaction data—information, history, statement—from manufacturers.

Cardinal Health also offers solutions so customers can stay focused on their number one priority of serving their patients. Transaction data for the eligible prescription drugs purchased from Cardinal Health is available online. Our customers may also enter into an agreement for Cardinal Health to maintain the transaction data on their behalf. Our suite of solutions for customers adheres to the strict government guidelines for accepting ownership and keeping records of those products, including the maintaining of transaction data for six years. Cardinal Health is also implementing systems to enable pharmaceutical distribution to fully comply with all applicable Universal Device Identifier (UDI) regulations for those medical devices that are distributed via these distribution channels.

8. Let’s talk about pharmacies, who are, after all, one of Cardinal’s main constituencies. Cardinal both operates a franchise system (Medicine Shoppe) and serves a large number of independent pharmacies. Has the partnership with CVS/Caremark affected these relationships? What does Cardinal see in the future for community pharmacy?

Community pharmacies continue to play an important role in our healthcare system. Our ability to provide scaled solutions to them, including the strength of Red Oak Sourcing, enables them to compete more effectively in their markets. Remember, we are able to aggregate the demand among thousands of pharmacies, allowing these customers to derive the benefit of that scale that we coordinate.

In addition, we provide access to innovative tools, technologies, specialized services and solutions, including network inclusion. We now have nearly 6,000 customers in our Pharmacy Services Administrative organization, where we contract on their behalf for network inclusion.

This all enables these community pharmacists to not only dispense product but also to deliver preventive care and wellness services, medication therapy management, and patient counsel.

9. In many different ways, US healthcare is moving toward an outcomes-based model, implying changes in how healthcare is delivered, and how consumers interact with healthcare providers. At the same time, there are aspects of medicine (such as oncology) where the current business practices are believed to be unsustainable. Do you have a vision for healthcare’s future state?

It’s important to recognize that a health system that represents a sixth of our economy doesn’t change easily, but we do believe that we’re a better, more secure country when Americans have access to healthcare. Having said this, there will be tremendous demand on our healthcare system coming from the demographic forces I mentioned earlier. Devoting 18—20% of our GDP to healthcare could undermine our nation’s ability to fund other critical priorities. So there is good reason to believe that healthcare will continue to go through changes.

As a starting point, as individuals we need to do a better job of keeping ourselves healthy. I think we’re seeing signs that Americans are taking this more seriously. At Cardinal Health, we’ve created programs encouraging wellness for our people.

A system that pays for value, or as you describe it—outcomes, is one of the ways to encourage us to be more focused on both quality and cost. This is easier said than done. It will require greater coordination, greater efficiency, a system in which all healthcare professionals can work at the highest level of their training, continued innovation, and the increasingly important use of technology.

Cardinal Health has devoted the last seven years to making sure we’re on the right side of all of these trends. We’ve increased scale where we believe it adds efficiency. We’ve focused on operational excellence to improve cost effectiveness and quality. We’ve invested in a physician preference item strategy that helps hospitals standardize around products and procedures. We’ve built tools to help oncology practices use their own data to standardize around clinical pathways. We’ve built relationships and made strategic moves to better serve patients in alternate settings, including the home. All of these things will ensure we continue to enable the system to serve patients at every point of care in the coming years.

10. Finally, what’s your personal stake in healthcare—why is leading a major healthcare company the place where you want to be?

I’ve been in healthcare for my entire business career, more than 30 years. It’s important for our organization to operate with a sense of purpose. We are fortune to be in healthcare—it’s a privilege but it also comes with a responsibility. I frequently remind our organization that there is a patient at the end of every activity that we do. All of us have experienced the healthcare system—perhaps as a patient; perhaps as a family member—this makes it all very personal, but it also helps inspire our organization to do our part in helping patients.

On a personal level, I’ve been active along many dimensions in healthcare including serving on the board of directors and chairing the quality committee at Nationwide Children’s Hospital here in Columbus, Ohio. I also serve on the board of directors of Children’s Hospitals’ Solutions for Patient Safety.

I also want to recognize our organization and their personal connection to our work. The Cardinal Health Foundation invests millions of dollars annually into programs designed to drive better patient outcomes, reduce the misuse of prescription medication and build healthier communities. Each year, thousands of Cardinal Health employees work in conjunction with community partners to serve our communities.

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