Halloween came a little early to the pharmaceutical industry today. The New York Times has an article called Confident Democrats Draft Broad Health Care Agenda. Check out this statement regarding the Medicare law’s prohibition on direction negotiations with drug makers: “Representative Nancy Pelosi of California, the House Democratic leader, said that if Democrats were in control, they would try to repeal that ban in the first 100 hours after the House convenes.” Boo!
The always-provocative Peter Pitts at the DrugWonks blog summarizes Pelosi’s plan very succinctly as The 100 Hour Reign of Terror. (Great title, Peter!)
Back in July, I warned about the risks facing pharmaceutical manufacturer and the drug channel (wholesalers, retailers, and PBMs) were the government allowed to negotiate directly with drug makers as part of Medicare. See The Part D direct negotiations movement. (Check out the “uncomfortable questions,” which have turned out to be good discussion-starters in planning sessions.)
I’m not sure that direct negotiations could actually come to pass within the next 2 years given the prospect of a Presidential veto. But the post-2008 environment is certainly up for grabs, so let’s think through how direct negotiations would work.
A single-negotiator model would most likely lead to price-plus pharmacy reimbursement for Medicare Part D. In other words, reimbursement would be equal to the CMS’ negotiated “best price” or perhaps some variant of Average Manufacturer Price. PDPs would still be free to differentiate based on plan design and retail network breadth, maintaining elements of today’s market-driven plan approach.
This reimbursement model would cap the total revenue to be split among all channel players. In other words, price-plus reimbursement effectively caps the total compensation that can be earned by PDPs, retail pharmacy, wholesalers, PBMs, providers, and anyone else handling the product after it leaves the manufacturer’s factory.
Does Wal-Mart win?
The Part D winners in this scenario will be the low-cost channels providing a total dispensing and benefit management solution. For example, mail order fulfillment's relative efficiency versus retail dispensing helps PBMs sustain their value in the drug channel.
Ironically, the Democrat’s plan may also end up benefiting one of their current enemies -- Wal-Mart. Wal-Mart’s famed supply chain efficiency becomes a powerful weapon, especially if it is combined with a solid plan design. Imagine a Wal-Mart PDP, and all of sudden Wal-Mart’s recent attempts to build foot traffic in their pharmacy start to look much more strategic ... and certainly not the outcome that Nancy Pelosi expects.