The Drug Channels blog delivers timely analysis and provocative opinions on pharmaceutical economics and the drug distribution system. It is written by Adam J. Fein, Ph.D., one of the country's foremost experts on pharmaceutical economics and channel strategy. Learn more...

Wednesday, December 19, 2007

Text of the AMP Injunction Order

At long last, we can finally see the Order granting the injunction against CMS’ implementation of the Average Manufacture Price (AMP) Final Rule.

Order in Civil Action No. 1:07cv02017 (I’m pretty confident that this is the final version because it says “Signed by Royce C. Lamberth, United States District Judge, on December 19, 2007.”)

Fans of legal wrangling will enjoy the back and forth between CMS and NACDS/NCPA over the wording of the final version. See these documents on the NCPA site. (The final version above was not on NCPA's site as of 8:30 PM EST on Wednesday night.)

The Order is two pages and contains only a few provisions. Here’s my plain English translation:

CMS can not use AMP Final Rule to compute retail pharmacy reimbursements under Medicaid. Obviously, this was the primary goal of the lawsuit.

CMS can continue to require drug manufacturers to make AMP and best price calculations under the AMP Final Rule. As I speculated on Monday, manufacturers faced the prospect of maintaining dual AMP calculations until the lawsuit got resolved. PhRMA explained this reality to the court in its letter on Tuesday. The Order clears up the uncertainty.

No AMP data can be disclosed on a public web site or to any individuals or states. NACDS and NCPA fought for this provision because of a recent survey indicating that nine states were considering AMP as the basis for brand reimbursement. (See page 5 of 2007 State Perspectives Medicaid Pharmacy Policies and Practices.)

Well, I hope this post satisfies the AMP fanatics. Now I've got to go back to packing for my vacation!

Drug Channels: 2007 Year in Review

Believe it or not, it’s time for my final post for 2007.

In the spirit of the season, I want to highlight the major themes of 2007 along with my good calls and near misses. I also want to give you some insights about the Drug Channels blog and its future.

There were 114 posts on Drug Channels in 2007, so this is a very long post. However, you will be rewarded with a hilarious video from now-bankrupt drug wholesaler FoxMeyer if you make it to the bottom.

Shining Light on Pharmacy Economics and the Pharmaceutical Supply Chain

My philosophy in writing this blog can be summed up with a quote from the late Senator Patrick Moniyhan: “Everyone is entitled to his own opinion, but not his own facts.” In my own way, I want to bring facts and balance to subjects that don't get sufficient or accurate coverage from traditional media outlets.

I was proud to break the story about CVS’ lawsuit with Prasco over generic pricing in CVS' Channel Power. Following coverage on Drug Channels, the story was picked up by Pharmalot, Drug Topics, The Pink Sheet, and a few Wall Street analysts. This was my big scoop of the year, even though information about the lawsuit was already in the public domain.

Retail pharmacy proved to be extremely effective at defining the legislative agenda and terms of debate, as I pointed out in Retail Pharmacy's New Power and correctly predicted in January's Lobbying for Pharmacy Profits. While an unprecedented number of pro-pharmacy bills were introduced in Congress, none of the major bills passed despite a Last Ditch Effort for the Senate’s AMP bill S.1951.

I also made some new enemies this year by analyzing how research results were misrepresented to score political points in A Misleading Study on Pharmacy Reimbursement and Hype vs. Research. See the comments beneath each post for a taste of the vitriol. I added insult to injury by pointing out how Part D is proving the value of consumer-directed healthcare.

Drug Channels was also one of the few places to read about the real economics and impact of Wal-Mart’s $4 generics program in Wal-Mart's Gain is not Walgreen's Pain and Wal-Mart adds some $4 generics (yawn).

I also tried to write about channel management from the manufacturer’s perspective. We should never forget there would be no pharmacy or pharmaceutical supply chain without the innovative therapeutics developed by pharmaceutical manufacturers. For example, I followed Pfizer’s new UK distribution model throughout 2007. Pfizer beat back the legal challenges, but then faced an investigation by the Office of Fair Trading (OFT). I overestimated the likelihood of an unfavorable OFT report in Pfizer's UK Plan in Trouble, but hopefully redeemed myself by going Behind the Scenes of Pfizer UK and then explaining what the OFT’s toothless report could mean for the U.S. marketplace.

Average Manufacturer Price (not)

Average Manufacturer Price (AMP) was one of the most popular topics on Drug Channels. We will undoubtedly be hearing much more about AMP, despite the recent injunction covered in No AMP for You!

I worked hard to give you an independent, non-partisan perspective on the impact of AMP. I provided my Comments on the AMP Final Rule just two (weekend) days after it was released and followed up a few days later by analyzing Reactions to AMP from the pharmacy industry. (They didn’t like it.) I explained Why AMP will not be Independents' day, calculated AMP's Impact on Pharmacy Profits, described why PBMs are not worried about AMP, and told you why AMP is Unloved and Unwanted (sniff) by manufacturers. I correctly predicted in May that CMS would exclude PBM rebates from the Final Rule (AMP will exclude PBM Rebates).

I also used Drug Channels to balance the doomsday visions put forth by certain pharmacy in Heretical Questions about the AMP War. Alas, this post did not win me friends at retail pharmacy trade associations, although the many comments from pharmacists indicate a grudging respect and even occasional agreement among actual pharmacists. The Illinois Pharmacist Association even conceded that Drug Channels is “thoughtful and in a lot of ways hard to argue with.”

I even managed to slip in some AMP humor in Death by AMP – an especially popular post in 2007!

The post-AWP Future

Anyone interested in the future of pharmacy reimbursement had plenty to read on Drug Channels this year.

I reviewed the Judge’s original ruling in the Average Wholesale Price (AWP) litigation last June in Comments on the AWP Decision and then followed it up by looking at the damages ruling and Judge Saris’ comments on fictitious AWPs. In my opinion, these decisions will effectively end the consideration of alternate "list price" pharmacy reimbursement models as replacements for current AWP minus models.

As I noted in ASP History Lessons, the introduction of Average Sales Price (ASP) reimbursement for Medicare Part B did not signal disaster for community oncologists or their patients. In fact, The ASP Future is Here because private health plans are already using Medicare’s ASP data for reimbursement, making me think that AMP (if ever published) will become the new pricing benchmark for retail scripts.

On January 1, 2008, CMS will pay for most Part B outpatient drugs at ASP+5%, which is a 1 percentage point drop from the current ASP+6%. It’s one more reason for pharmacies and providers to be anxious about the post-AWP future.

Counterfeiting and Security

Supply chain security was another hot topic at Drug Channels.

California’s looming 2009 e-pedigree deadline has manufacturers, wholesalers, and pharmacies scrambling to comply while also lobbying for a full or partial extension. In one particularly well-clicked post, I highlighted Virginia Herold’s trial balloon regarding a CA e-pedigree delay to 2011. Of course, she quickly backtracked from these comments, but I think a two-year delay or a phased implementation (per California Dreamin') is still very likely.

I generated some controversy by exploring the facts and myths behind much-hyped RFID solutions in RFID Un-Hype and More RFID Un-Hype. Check out the comments to those posts for some intriguing back-and-forth with DC readers.

I also attempted to present a unique supply chain spin on a few big media stories. PDUFA & Supply-Chain Security was one of very few resources to highlight the serialization requirements buried inside the Food and Drug Administration Amendments Act of 2007 (FDAAA). I even wrote about Presidential candidate John Edwards’ surprising embrace of track-and-trace technology in John Edwards and ... Pedigree?

Importation and Diversion

I am convinced that importation (a.k.a. legalized diversion) is risky due to my knowledge and experience about pharmacy supply methods. Unfortunately, mainstream media coverage does a poor job of connecting pharmacy and consumer behaviors to the patient safety dangers posed by importation. That’s why I explained the channel impacts behind importation and the fact that importation won’t really save much money.

My snarky posts about Senator Byron Dorgan – especially Consistent Inconsistency – generated fan mail from Washington, DC. (Sorry, only via private e-mail.)

I rounded out my coverage by writing about the fallacy of safe Canadian sourcing (Canadian Dreamin' and Diversion from Canada via China), how and why internet pharmacies Import Chinese Counterfeits, and why you should not buy Fosamax from Tony Soprano. Hey, never say that I don’t provide real-world tips!

Unfortunately, two of the three big drug wholesalers (AmerisourceBergen (ABC) and Cardinal Health (CAH)) faced DEA suspensions for supplying controlled substances to diverting pharmacies. Cardinal has now had suspensions at facilities in Washington, Florida, and New Jersey despite its December 2006 agreement to monitor pharmacies more carefully. I’m sure we’ll learn much more about this story in 2008.

And now a word from your host

I make Drug Channels freely available as part of my mission to educate, inform, and challenge people. I feel fortunate to have been similarly educated in many private emails and conversations that were sparked by the blog. So please keep emailing me with topics, questions, or news articles. I respond personally to all emails.

I am also gratified that readership of Drug Channels soared in 2007. Each week, there are a few thousand visitors on the site compared to only a few hundred in January. Drug Channels is frequently cited by many bloggers and reporters.

Your Reward: FoxMeyer Nostalgia

Congratulations for making it to the bottom of my 2007 review!

Enjoy this jaw dropping clip of a “motivational” meeting led by the senior executives from once-mighty FoxMeyer, which was acquired by McKesson through bankruptcy court proceedings in 1996. The hilarity starts at 1:23. Ah yes, the glory days when top execs would lip sync and dance on stage. I particularly enjoyed “Tim Beauchamp, Distribution Man” at 4:03, although he was a bit pitchy.



Hat tip to On Pharma.
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I'll be back during the week of January 8. Until then, I wish you a healthly and happy new year!

All the best,
Adam

Monday, December 17, 2007

No AMP for You!

Well, pierce my ears, and call me drafty!

On Friday, U.S. District Court Judge Royce Lamberth granted an injunction that will prevent CMS from adopting the AMP-based reimbursement formula for generic prescriptions in Medicaid until he has reportedly “had an opportunity to fully review the new payment plan.” CMS will also not be permitted to post Average Manufacturer Price (AMP) data on the Internet as planned.

The injunction stemmed from a lawsuit brought by NACDS and NCPA against CMS. (See the NCPA’s Legal Proceedings page for links to the case documents.) In Analysis of AMP Lawsuit Odds last month, I incorrectly predicted that the injunction would not be granted. (Thanks a lot, Arnie Becker!) Naturally, I will be happy to refund your subscription fee to Drug Channels.

Here are some initial reactions to the injunction:

CMS was over confident. One interesting revelation from this lawsuit was the fact that CMS intended to publish the AMP data in “mid-December.” The comment period for a related portion of the AMP rule closes on January 2, 2008, leaving very limited time for detailed challenges or data analyses. Last week, I attended a conference in which one speaker (a DC lawyer) said: “CMS feels very strongly that what they’ve done is correct.” Their Memorandum of Opposition did not even bother to rebut the marketplace impacts outlined in the expert report submitted by NACDS and NCPA.

Pharmacy lobbyists won the PR battle. NACDS and (especially) NCPA repeatedly claimed that AMP was only about “access for low-income patients.” They currently claim that the DRA (by itself) will lead to the closure of 10,000 to 12,000 pharmacies. These claims have been asserted and repeated without evidence even when objective reality provides factual reasons to doubt the claims. It helps that AMP is unloved and unwanted by almost everyone. I honestly wonder whether pharmacy advocates genuinely believe their own claims. There’s a useful lesson in doublethink propaganda here.

Pharmacies get a (small) profit reprieve. The larger chains, such as CVS and Walgreens (WAG), have not publicly quantified the impact of AMP, although the effect would not have been very large. Keep in mind that the DRA will only reduce retail pharmacy revenue by half of one percent annually – hardly the difference between poverty and riches (and hardly enough to sink 12,000 pharmacies).

Manufacturers will incur higher short term costs. Based on the latest timeline, manufacturers have already reported October 2007 AMPs using the new definition. If so, then manufacturers may need to run two parallel systems (Old AMP and Final Rule AMP) until the lawsuit is resolved. Manufacturers may even need to recalculate and resubmit their recent AMP data based on the old calculations.

The post-AWP future looks hazier. Average Wholesale Price (AWP) is still the primary benchmark for determining pharmacy reimbursement despite its well-known shortcomings and the short lifespan. I have previously suggested that AMP seemed to be a likely candidate for a replacement benchmark, especially for Part D plans. Payers and PBMs will be keeping a close eye on this case.

The government gets beaten (again). Last December, the FDA was successfully blocked from implementing the pedigree requirements of the Prescription Drug Marketing Act. (See No PDMA for you!) I wonder if these successes will increase the chances of a December 2008 injunction against the California Board of Pharmacy regarding e-pedigree.

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I'll post again after I've digested the Injunction. In the meantime, I now need to revise my 2007 Year in Review!

Friday, December 14, 2007

And Swedesboro makes three...

Sometimes I don't like making accurate predictions.

In More Monkey Business From Cardinal, I joked about Cardinal Health's (CAH) DEA suspensions by saying "Two down; 26 warehouses to go."

Unfortunately, Swedesboro, NJ, now makes three down. You can read Cardinal's letter to its customers for yourself.

According to a story in the Columbus Dispatch, Cardinal did not make a formal announcement about the latest license suspension because it is part of the same investigation as the other two centers. I suppose that makes sense, especially if there are more to come.

An anonymous Dec. 12 Drug Channels blog comment from someone claiming to be "from one of the big three" wholesalers purports to provide an insider's perspective on this situation. (Page down to see the comment.) It's anonymous, so you'll have to evaluate the comment for yourself.
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Stay tuned next week for my 2007 Year in Review post, which will wrap up the year.

Wednesday, December 12, 2007

U.S. Lessons from Pfizer UK

The UK Office of Fair Trading (OFT) just released its report on the new direct-to-pharmacy (DTP) distribution model being used by Pfizer and Alliance Unichem.

Their bottom line: Control of distribution could allow Pfizer to profit at the expense of the UK government, which might end up paying “hundreds of millions of pounds a year.” The headlines have predictably focused on this rather theoretical conclusion. (Example: OFT says new drug deals could cost NHS millions in the Times of London)

The more intriguing story are the reasons *why* the British government (a single payer) dislikes Pfizer’s plan. As I explain below, I think that the OFT report gives us fresh insight into why U.S. payers will care more about U.S. manufacturer channel strategies in a world of cost plus, Average Manufacturer Price (AMP) based pharmacy reimbursement.

Nudge Nudge

I’ve been covering Pfizer’s plan since it was announced 15 months ago and recently gave you some behind-the-scenes insights from the Director of Commercial Operations at Pfizer UK. You can read Pfizer’s description of the program on their UK web page.

Here’s some brief background to help you understand the following OFT report materials:


In the UK, manufacturers give wholesalers a discount of 12.5 percent off list price. Competition between wholesalers means that wholesalers pass 10.5 percent of their discount (84%) to retail pharmacies. Wholesalers get reimbursed for dispensing by the UK government’s National Health Service (NHS) based on list price.

However, the National Health Service (NHS), which is the UK government payer, gets to clawback any “excess profits” that a pharmacy earns from high discounts. This mechanism allows the single government payer to pay below list price because it shares in the financial gains of savvy purchasing by pharmacies.

The Ministry of Silly Reports

The OFT fears that the DTP model will reduce wholesaler competition, thereby shrinking the discount off list offered to pharmacies. The NHS would end up paying “hundreds of millions of pounds a year” because there will be less for the government to clawback from pharmacies. The OFT is also concerned that manufacturers will try to save money by reducing service levels to pharmacies and ultimately patients.

The core reasoning behind OFT’s anti-competitive fears appears in section 5 (pages 73-83) of the full report. It’s somewhat slow going, especially because the arguments are made without specific data or quantification.

Critically, the OFT does not recommend anything stronger than “monitoring the situation.” Translation: These (so far) theoretical concerns do not merit any formal actions.

And Now For Something Completely Different

The UK discounting dynamics will sound familiar to U.S. market participants. Here in the U.S., drug makers give certain discounts or fees only to wholesalers. The large buyers play the wholesalers off against each other and extract most of these discounts and fees. Just look at the recent negotiations between Cardinal Health (CAH) and CVS for an example.

But unlike the UK, U.S. pharmacies get to keep any extra profits gained from squeezing the wholesaler. “AWP minus” reimbursement creates powerful incentives for pharmacies to seek lower drug prices from their wholesale suppliers. Medicare and Medicaid do not financially benefit from higher spreads at the pharmacy level.

In contrast, an “AMP Plus” model would create a very different dynamic for a payer, who would share in the financial benefit from any reduction in Average Manufacturer Price (AMP). Thus, any manufacturer-led distribution changes that reduced competition for manufacturer discounts from direct buyers (wholesalers or pharmacies) would be opposed by payers.

Here in the U.S., payers have shown a willingness to alter drug distribution as a means to reduce costs. (Just look the growth of mail order.) I’m not suggesting that payers will suddenly care about a manufacturer's fee-for-service agreements or the number of authorized distributors. But I am suggesting that AMP will make them care a lot more than they do now.

Tuesday, December 11, 2007

More Monkey Business From Cardinal

Believe it or not, the U.S. Drug Enforcement Administration (DEA) has again suspended Cardinal Health’s (CAH) license to distribute controlled substances from its Lakeland, FL, distribution center. This suspension follows close on the heels of the November 29 DEA suspension at the company’s Auburn, WA, distribution center.

Two down; 26 warehouses to go?

Lakeland is midway between Tampa and Orlando, placing it smack dab in the heart of America’s Diversion Heartland™ in the state with the country’s first pedigree laws. Hmmm...

Cardinal’s press release states that the company is “reviewing its controlled substance procedures.” I guess another review can’t hurt. In its 10-K filed last August, Cardinal claims to have already “adopted policies and procedures designed to prevent the diversion of pharmaceutical products” in response to the Assurance of Discontinuance signed in December 2006 with the New York State Attorney’s office.

So far, Wall Street seems unconcerned because the suspensions will have no material financial impact. But doesn’t anyone else wonder if the DEA now has a dedicated Task Force examining every Cardinal facility?

In the meantime, perhaps Mr. Clark should lead a field trip to the new Good Medicine, Bad Behavior: Drug Diversion in America exhibit at the DEA Museum & Visitors Center in Arlington, Virginia. Looks fun to me.

Monday, December 10, 2007

Do Pharmacists want Pedigree?

Do pharmacists want pedigree laws? Who should pay for pedigree implementation in pharmacies?

I thought of these questions while reading the comments of Dave Wilcox, RPh, owner of Northwest Medical Pharmacy in Fresno. Mr. Wilcox testified on behalf of the National Community Pharmacists Association (NCPA) at the California Board of Pharmacy’s Work Group on E-pedigree last Wednesday. You can read his written testimony online.

NCPA argue that the implementation should be extended to January 1, 2011. They also raise two points that anyone concerned with pedigree should consider:
  • “As E-pedigree is implemented, independent pharmacists should be compensated for the costs associated with the purchase of multiple technologies.”
  • Regarding “inference” that a container has the items listed in it: “[A] pharmacist and other recipients of 'inferred' containers should be held harmless for the contents of the container.”
Both points highlight the potential burdens that pedigree activities place on pharmacies. Yet pedigree laws only close the loop in the supply chain if pharmacy buyers authenticate pedigree documents (whether electronic or paper). Validating pedigree based only on wholesaler shipments creates gaping holes in supply chain security.

Alas, I wonder if raising the costs and administrative burdens of pedigree for pharmacies could lead to rampant non-compliance and turn pedigree laws into a meaningless exercise that will not secure the supply chain.

The Return of Unsafe Sourcing?

I also wonder if the burden of pedigree could tempt some pharmacies to engage in unsafe buying practices, especially if any type of importation law gets passed in the next Congress.

A recent Integrichain white paper suggests that $10 billion in prescriptions products in 2006 were either diverted, parallel imported, or outright counterfeit. Their analyses suggest that most secondary wholesalers now buy from non-wholesale sources (including long term care facilities, retailers, and public health services) and then sell directly to pharmacies. (You can download this white paper after registering.) Florida continues to have major diversion problems in the first year of its new pedigree laws.

I hate to be the bearer of bad news, but we should all acknowledge that it will be very difficult for the CA Board of Pharmacy to catch non-compliance. The California Board of Pharmacy has 50 employees and a budget of less than $10 million. There are fewer than 20 field inspectors to cover 5,300 community pharmacies and almost 65,000 community pharmacists – and that’s before we start counting institutional pharmacies in hospitals and clinics!

Given these limited resources, the CA Board ambitiously aims to inspect every licensed facility once in every three year inspection cycle. Pedigree non-compliance will likely to be low on the list of potential frauds.

Who should pay for pedigree?

Last January, I warned that private companies are being forced to shoulder the burden of protecting the drug supply chain with a do-it-yourself (DIY) model. I don’t see much changing in the future.

So far, nearly all of the costs of pedigree are being borne by manufacturers and wholesalers. Independent pharmacists are busy just trying to keep their heads above water - as the comments about AMP made by pharmacists on my blog indicate.

Since many boards of pharmacy are composed of independent pharmacists, I sincerely doubt that these Boards will allow additional burdens or costs to be put on independent pharmacies. Just reread California’s statute, which I view as deliberately vague about whether pharmacies must actively check the pedigree from wholesalers.

Still not convinced? Consider the comments of Bruce Roberts, who recently highlighted NCPA’s intention to “minimize any impact” of Federal pedigree laws on independent pharmacy. In 2006, the American Pharmacists Association (APhA) expressed its mild support for the FDA's attempt to implement the PDMA but worried about any minor disruptions or costs to pharmacists. (Read the APhA statement to the FDA.)

So, what do the pharmacists out there think? Who should pay for pedigree? Am I being a realist or a pessimist?

Monday, December 03, 2007

Part D and Generics

I wonder if branded drug makers are having second thought about the Medicare Part D benefit.

On one hand, Part D has demonstrably improved access and reduced out-of-pocket costs for seniors with no drug coverage. (See PhRMA’s September 2007 study.) Part D has also slowed drug diversion from Canada, which improves patient safety.

However, the much-maligned “donut hole” also appears to be encouraging greater generic substitution. Check out a new OIG report called Generic Drug Utilization In The Medicare Part D Program., which examines 341 million prescriptions paid by Part D in the first half of 2006. During the first six months of the Part D program:

  • Generic drugs were dispensed 88 percent of the time when generic substitutes were available

  • 56 percent of all drugs dispensed were generics
Hey, whadda ya know? People respond to incentives. Under Part D, seniors have strong incentives to keep their total drug costs below the lower end of the donut hole ($2,250). As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution as well as shopping around at pharmacies.

Ironically, the donut hole may ultimately end up hurting brand manufacturers by accelerating already-rapid generic substitution rates. (Good New York Times article on this topic: Strategies to Avoid Medicare’s Big Hole). According to the Times, CMS estimates that generic dispensing rates are now 61.5%.

This unexpected dynamic could slow momentum for dramatic changes to the Part D program. Democrats perpetually chatter about using “direct price negotiations” with manufacturers to fund the elimination of the donut hole. Although the structure of the Part D benefit makes such negotiations virtually impossible to implement, brand manufacturers will likely feel much more pricing pressure from Part D plans.

The next few years will see an enormous wave of new generics. In 2006, Part D cost the Federal Government $47 billion in 2006, which is $13 billion less than the original estimate of $59 billion. Generic drug substitutions were a prime contributor to the 2006 reduction and lowered future cost estimates. Look for further reductions in the estimated cost of Part D, especially if Average Manufacturer Price (AMP) gets linked to Part D.

Ironically, I learned over Thanksgiving that my own grandmother was one of the few seniors who hit the donut hole. Why? Grandma told me that “she doesn’t believe in generics” because “they are just not as potent.” (I'm not making this up!) She insists on paying for brands even though her own pharmacist said that she is wasting her money.

Don’t worry – I thanked her on behalf of all branded manufacturers.

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BONUS: Boomer humor


Click here to see a very funny animation aimed at readers who are (or will soon be) eligible for Part D!

Friday, November 30, 2007

Cardinal Sins (Again)

The Drug Enforcement Administration (DEA) just suspended the Federal Controlled Substance registration of Cardinal Health’s (CAH) Auburn, WA, branch. According to the DEA news release:

“In spite of being warned by DEA about the characteristics of rogue internet pharmacies, Cardinal Health’s Auburn branch distributed nearly 18 million dosage units of hydrocodone to retail pharmacies between January 1, 2007 and September 30, 2007. Horen’s Drug Store purchased 605,000 dosage units of hydrocodone from Cardinal Health between March 1, 2007 and September 30, 2007.”

Sadly, diversion via retail and online pharmacies is now a major danger point for patients, especially those seeking controlled substances without prescriptions. (Just ask Al Gore III where he got his Vicodin.) Pedigree, RFID, and other more exotic security measures will do nothing to protect stupid people from unscrupulous sellers. Hopefully, these new systems will improve a manufacturer's ability to detect diversion and better monitor the behavior of wholesalers and pharmacies.

Cardinal is not alone is being hoodwinked by shady pharmacy customers. AmerisourceBergen (ABC) had its DEA license suspended in April at its Orlando site. At the time, the DEA claimed that AmerisourceBergen did not maintain effective controls against diversion of controlled substances (hydrocodone again!) to four internet pharmacies.

Faithful readers of Drug Channels will surely recall that Cardinal Health signed an Assurance of Discontinuance with the New York State Attorney’s office last December. (See Cardinal's Sins for details.) One aspect of the agreement required Cardinal to gather, monitor, and analyze customer sales data to detect instances of possible diversion of prescription pharmaceuticals.

I can't find any public statements from Cardinal about customer monitoring since their NY agreement was announced 11 months ago. However, the DEA's statements indicates that the company doesn't have a viable system in place yet.

The DEA’s move is also personally dispiriting because Mark Parrish, former CEO of Cardinal Health's distribution division, was a very public proponent of industry-wide initiatives to improve the safety of the medicine supply chain.

As Auric Goldfinger once said: "Once is happenstance. Twice is coincidence. The third time it's enemy action." Let's hope that Cardinal Health gets things under control soon.

Thursday, November 29, 2007

Current AMP Timeline

I've had a few emails recently regarding the release of the new Medicaid Federal Upper Limit data based on Average Manufacturer Price (AMP).

The most recent official timeline from CMS was issued on October 21 and states the following:

  • October 1-31, 2007: First monthly AMP reporting period

  • November 30, 2007: Manufacturers report October 2007 AMPs

  • December 30, 2007: FULs issued based on new October 2007 AMPs
So unless the NACDS/NCPA lawsuit leads to an injunction and/or S.1951 passes, you'll be watching the new LED Crystal Times Square New Year’s Eve Ball with champagne and AMPs.

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BONUS FUN FACT: You are smarter than a 16th grader!

The Prescription Access Litigation blog recently rated some pharma blogs for readability in Do you have to be a Genius to read this blog? Or an 8th grader? Drug Channels was rated at the "College (post grad)" level. (I have no affiliation with PAL.)

Gee, I try to only use words with clear and unambiguous definitions . . . like Average Wholesale Price. However, I now know why my blog keeps getting beaten up for its lunch money.

Monday, November 26, 2007

Big 3 on a Passage to India

The Indian newspaper Business Standard has a fascinating article on the Big 3 wholesalers' search for Indian suppliers. See US big 3 look for new Indian drug suppliers.

The article quotes "informed industry sources" that at least ten tier-II and tier-III Indian pharmaceutical companies with plants in Mumbai, Ahmedabad and Hyderabad are on the radar of AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK).

"Over the past few months, McKesson and Cardinal Health have sent executives to India to assess the capabilities of these companies, the sources said."

In a September post, I speculated that wholesalers will be moving closer to production to source generics, possibly even bypassing the generic manufacturers for certain products. The Big 3 are following in the footsteps of wholesalers in other industries and aggressively ramping up their private label programs.

What does this mean?
  • More pressure on generic manufacturers -- and more consolidation to come.
  • Lower acquisition costs for generic drugs -- and lower AMPs.
  • More rapid generic penetration for drugs going off patent.
  • Less attention to brands by distribution as the profits from generics grow faster (Wholesalers currently generate more gross profit dollars from generics than brands.)
The Big 6 chain and mail-order pharmacies -- CVS Corp with CareMark (CVS), Express Scripts (ESRX), Medco (MHS), Rite-Aid (RAD), Walgreens (WAG), and Wal-Mart (WMT) -- are the other major customers of generic manufacturers. They currently bypass wholesalers to buy generics except for fill-in and some minimal direct store delivery (DSD).

But as far as I know, the Big 6 are not being as aggressive in looking at India or China. If the Big 3 could source generics cheaply enough, then wholesalers could pick up major generic business from their largest customers.

Tuesday, November 20, 2007

Last Ditch Effort for S.1951

Although I wasn’t planning to post again before Thanksgiving, I want to let you know about the joint letter about Average Manufacturer Price (AMP) sent last Friday by eight trade pharmacy and pharmaceutical supply chain trade associations. The text of the letter was made public this morning.

The letter urges U.S. Senators to support S.1951 (Fair Medicaid Drug Payment Act of 2007), which has only 33 co-sponsors right now. Key points in this bill:
  • Removes mail order from the retail class of trade, which I identified as one of the most significant decisions in my Comments on AMP Final Rule.
  • Raises Medicaid payment to 300% of AMP instead of 250%.
  • Prevents publication of AMP data on the CMS website, which means it can’t be used as a reimbursement benchmark.
  • Bases pharmacy payment on a weighted average AMP. (I’m unclear about the benefit of this provision because weighting could lead to a lower AMP. In fact, a 2005 OIG study found that an AMP weighted by Medicaid expenditures was lower than the simple average.)
  • Applies the AMP formula only when three or more alternatives are available instead of two or more. This change will be especially beneficial for pharmacies, wholesalers, and PBMs during the first 180 days after generic launch.
Click here to read a useful summary that highlights the proposed mark-ups to the bill. The summary is identified as being created by American Pharmacists’ Association (APhA).

A related bill, H.R. 3140: Saving Our Community Pharmacies Act of 2007, is stalled in Congress according to Pharmacy Reimbursement Bill Stalls in Congress. (H.R. 3140 replaces AMP with a survey-based metric called “Retail Acquisition Cost.”) The article cites the so-called pay-go rules, which presumably also apply to S.1951.

“Concerns about the legislation's prospects stem from congressional "mandatory spending" budget rules, which require any spending increases to be offset by program cuts or tax increases. Budget estimates are that $3.5 billion will be needed to reimburse pharmacies fully for their costs of purchasing and distributing generic drugs for Medicaid patients.”

Regardless of the outcome, I must give credit to these associations for pulling out all the stops in support of their members.

Monday, November 19, 2007

Death by AMP

I just discovered an intriguing website that quantifies the final impact of AMP.

Try it yourself.
1. Go to this website.
2. Select "AMP" from the drop down menu.
3. Enter your specific data.
4. Click the button for your personalized results.

It turns out that 183.82 cans will stop me from writing about pharmacy economics anymore. YMMV.

Have a Happy Thanksgiving!

Thursday, November 15, 2007

PBMs and AMP

In my comments Monday on fictitious AWPs, I stated that alternate "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC) are unlikely to become widely adopted. Given some follow-up questions from readers, I want to explain why Pharmacy Benefit Managers (PBMs) should not be materially impacted by a shift in the benchmark from AWP to Average Manufacturer Price (AMP).

At least one PBM is acknowledging that WAC/AWP pricing will fade. JoAnn Reed, CFO and SVP of Finance of Medco Health Solutions (MHS), made the following comment on Medco's November 1 earnings conference call:

"On the WAC-based [sic], what we're hearing more is that it's going to AMP not to WAC, but the consultants are just making estimates. Right now no one has come up with the new benchmark, so we don't know where it's headed but for us as you know it's really no real impact to us because of our contractual language and there has been talk that it might happen in the latter part of 2008."

There are three significant points embedded in her comments:
  • AMP is likely to become the new pricing benchmark.

  • The AWP-to-AMP switch may begin in the second half of 2008.

  • PBM contracts will protect them if the benchmark changes.
Points 1 & 2 are exactly what I told you 3 months ago in The ASP Future is Here.

Point 3 is more important because she implies that contracts will be renegotiated or adjusted to preserve the original dollar-cost economic arrangements for the PBM. Thus:

PBMs will still get paid for the services they perform even if the specific compensation model changes. You can remove an intermediary but not the services provided by that intermediary. Hence, I'm skeptical of the “PBMs add no value” critics because it's at odds with the marketplace realities. The PBM’s business success reflects many individual business decisions by payers and insurers. If PBMs really added “no value,” then sophisticated payers would simply bypass them and perform the activity themselves. There are situations where this has occurred, but there has been no rush for the exits.

As long as the market for PBM services remains competitive, then the form of compensation is essentially irrelevant. PBMs are only a mild oligopoly today, at least judging by the 4-firm concentration ratio. In a June 2007 Drug Benefit News article (sorry, no link), the top 4 PBMs had 45% of total PBM covered lives. That's relatively low compared to more familiar oligopolies.

The advantages of greater PBM transparency are overrated. Consider an analogy: Imagine you are shopping for a car. You find two dealers, each of which will sell you the car for $20,000. Do you know or care if (a) dealer #1 earned its profit by marking-up the car over their cost or (b) dealer #2 earned its profit from a rebate paid by the manufacturer after the sale is made? No, of course not. You only care about the cost of the car. In other words, healthy competition about the dealers (intermediaries) provides the customer with the benefits of "transparency." (See my comments on Monday's AWP post for more on the drugs vs. cars analogy.)

I'd welcome any comments from PBM fans or critics.

Tuesday, November 13, 2007

Analysis of AMP Lawsuit Odds

Last Thursday, I discussed the Average Manufacturer Price (AMP) lawsuit filed by NACDS and NCPA against CMS. I speculated that an injunction was unlikely using the standards outlined in another case and my knowledge of the 1980s TV show L.A. Law.

Well, fear not, legal mavens. Jayne Juvan of Juvan’s Health Law Update has now provided a genuine legal analysis of this case in NACDS and NCPA Challenge Average Manufacturer Price Calculation. While Jayne is coy about predicting the ultimate outcome, I’ll be bolder and/or more foolish.

I predict that this legal challenge will fail and CMS will not be enjoined by the Court from implementing its Final Rule on AMP. You may not like my conclusion, but it seems consistent with the objective facts and standards of judgment that will be applied.

Legal Standards

Jayne has been noticeably absent from the blogosphere in the past few months, so it’s very good to have her back. She took time off from blogging for some silly reason like “working for pay.” Ha! Doesn’t she know what a blog is all about?

Anyway, Jayne reviews the specific legal precedents of the D.C. Circuit Court, which is where NACDS and NCPA are suing CMS. Although she is careful not to provide a formal legal conclusion, Jayne notes that standard applied by the D.C. Circuit is actually quite similar to the standard from the Second Circuit that I discussed on Thursday. (Thanks, Corbin!)

She points out that the case will likely rest on whether the harm of implementing the Final Rule is irreparable -- “impossible to repair, rectify, or amend.” Jayne quotes the D.C. Circuit as saying: “Mere injuries, however, substantial, in terms of money, time and energy necessarily expended in the absence of a stay are not enough.”

Evaluating Irreparable Harm

In re-reading the Complaint, I see very little discussion of irreparable harm by the plaintiffs. The complaint highlights the potential impact of AMP for retail pharmacies, such as:
  • Reduced hours and services
  • Being “forced out of the Medicaid program”
  • Forced to “close their doors altogether”
The first two items do not seem irreparable to me. Pharmacies could always extend their hours at some future date. Pharmacies may choose to stop participating in Medicaid, but CMS’ federal Final Rule does not legally “force” anyone out of a state-run Medicaid program.

The third claim has more theoretical merit, but continues the unfortunate tradition of exaggerating the financial impact of AMP. It also does not seem to exceed the “mere injuries” standard highlighted above.

The complaint notes CMS’ estimate of $8 billion in reduced reimbursement over five years. Given the growth in pharmacy spending, the real reduction in pharmacy revenues from AMP is estimated to be 0.5% in 2008. For the typical independent with $2.5 million in revenues, that translates into $12,500 less revenue per year ($2.5M*0.5%), or about $1,000 per month. That's not good news and will certainly require some belt tightening. But it's hardly the difference between bankruptcy and easy street in 2008.

Just to be clear, I have written very sympathetically about the plight of independent pharmacies under AMP. But AMP is not the only cause of the challenges facing independents. Please read Hype vs. Research and Heretical Questions about the AMP War before sending me hate mail.

Thus, I believe the injunction will fail because the Court will realize that there is little actual irreparable harm. I suspect the Court will also reason that we’ll have the opportunity in 2008 to assess the actual, non-hypothetical effects of this legislation (pro and con).

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Reminder: read the disclaimer below. And never forget that free advice from a blog might be worth what you paid for it.

Monday, November 12, 2007

Judge Saris on Fictitious AWPs

I got so busy last week with the CVS-WAG lawsuit, the AMP lawsuit, and a senior executive departure from a big wholesaler that I forgot to blog about the latest AWP legal news!

In case you missed it, Judge Patti Saris recently entered damages in the Average Wholesale Price (AWP) litigation against Astra-Zeneca and Bristol Myers Squibb. Both companies plan to appeal. Good coverage in Pharmalot: Foxes In The Chicken Coop Pay Big Fines.

I think the prospects for more AWP litigation are very high, especially after reading her latest decision. I also believe that Judge Saris' comments will effectively end the consideration of alternate "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC).

I discussed her original ruling last June in Comments on the AWP Decision, so the damages are just an incremental piece of bad news for the AWP benchmark. In the new decision, Judge Saris wrote:
  • “The overwhelming evidence at trial established that AWPs are fictitious and are rarely, if ever, prices paid by doctors for PADs or by pharmacies for [self administered drugs or SADs].”

  • “I conclude that defendants’ conduct was both knowing and willful because they knew that Medicare beneficiaries, and thus their insurers, were locked by statute into paying 20 percent of grossly inflated AWPs, which bore no relation to any average of wholesale prices in the marketplace.”
Whoa! Pretty strong anti-AWP sentiment.

I wonder how much longer AWP will remain as the primary benchmark for Part D plans. Per the report cited in Part D + AMP = Trouble, the average pharmacy payment from Part D insurers = AWP-15% + $2.10.

What about WAC?

Some people have suggested that Wholesale Acquisition Cost (WAC) could replace AWP as a pricing benchmark. WAC is the manufacturer's list price to drug to wholesalers or direct purchasers, excluding any discounts. NACDS has proposed WAC-based reimbursement for brand drugs in June 2005 Congressional testimony, a position the association reiterated in its February 2007 comments about AMP to CMS.

However, WAC is not a computed transactional price like AMP and therefore is subject to the exact same criticisms and problems of AWP. In fact, the First DataBank AWP case revolves around an alleged increase in the mathematical relationship between WAC and AWP.

Obligatory AMP reference

And don’t forget that the AWP litigation bandwagon is just getting started. Iowa was the latest state to hop onboard and sue pharmaceutical companies over drug prices:

“Iowa Attorney General Tom Miller announced Tuesday [Oct. 9] that the state has filed a lawsuit against 78 pharmaceutical companies, alleging the companies inflated drug prices for Medicaid patients, costing the state millions of dollars over several years…Miller said pharmacists also ended up benefiting financially from the inflated prices for Medicaid drugs in the scheme.”

Wait a minute! What did he say about pharmacies? Pharmacies benefited financially from AWP reimbursement under Medicaid?!?

Looks like I just discovered another reason to ban AMP!

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Thanks to Pharmalot for the wholesale graphic. He gave me a really good discount off list...

Friday, November 09, 2007

More Legal News: Caremark v WAG


One of the friendly tipsters who read Drug Channels pointed me to a just-filed lawsuit between Caremark (CVS) and Walgreens (WAG). (Read the legal complaint.)

This case highlights the power of competition in the marketplace and provides an intriguing counterpoint to H.R. 971: The Community Pharmacy Fairness Act of 2007.

Today's Legal News

Caremark claims that Walgreens prematurely cancelled its Provider Agreement to fill prescriptions for four health benefit plans. Walgreens fills prescriptions for 70,000 of the 380,000 participants in these plans. A Walgreen spokesman said that CVS Caremark had unilaterally reduced the amount of payments to Walgreen "to a level that impacts our ability to provide a high level of pharmacy service to those plan members." (Source: CVS sues rival over pharmacy pact.)

While I have no opinion on the factual or contract matters in this complaint, this dispute looks like more fallout from the CVS-Caremark merger. The complaint focuses on 2007 amendments to Walgreens’ Provider Agreement following the merger of Caremark Rx CVS Corporation.

The Power of Competition

This dispute also reminded me of my ninth post to Drug Channels in June 2006. (You are now reading post #156.)

Back in a June 2006 post, I presciently speculated on the likelihood of a merger between a large pharmacy chain and a PBM. At the time, I was motivated by Walgreens' decision not to fill prescriptions for Midwest Health Plan, a small HMO based in Michigan. I noted:

“Walgreens continues to signal a willingness to rumble. GM and Walgreens parted ways last year when GM removed Walgreens from the pharmacy network for its 1 million employees and retirees. Recall that the UAW and GM moved its members into mandatory mail order for chronic meds in 2004. Walgreens also won't fill prescriptions for state employees in Ohio.”

Walgreens has rejected the terms of a PBM contract before. And in our competitive healthcare system, any pharmacy can make a business decision to reject the terms of any contract. Disputes between PBMs and pharmacies reflect the ongoing workings of competitive markets.

Yes, big chains are much larger than an independent pharmacy, but that merely reflects the need for scale and countervailing power to compete. The economic reality of differences in bargaining power do not justify throwing out U.S. antitrust laws.

Thus, this case also highlights the controversy around H.R. 971: The Community Pharmacy Fairness Act of 2007. The House Judiciary Committee just approved this bill, which exempts independent pharmacists from antitrust laws so they can "collaborate in contract negotiations" with health insurers and pharmacy benefit managers.

The FTC testified in opposition to the bill (in this FTC Statement), arguing:

  • “At the end of the day, unless a health plan can assemble a network of pharmacies willing to contract with the plan, and attractive to consumers and employers, the plan will have nothing to sell in the marketplace.”
  • “Excessive buying power, known as ‘monopsony,’ enables buyers to depress prices below competitive levels. In response, sellers may reduce sales or stop selling altogether, ultimately leading to higher consumer prices, lower quality, or substitution of less efficient alternative products. It is important, however, to distinguish between this type of buyer power, which can harm competition and consumers, and disparities in bargaining power, which are common throughout the economy and can result in lower input costs and lower prices for consumers.”
Walgreens appears to be showing us how today's market works. Perhaps only economists like me appreciate this example. But as disputes between retail pharmacies and PBM become more common, we’ll see the market working its sometimes painful magic on behalf of our health care system. And like all things in our capitalist economy, your mileage will vary.

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Alas, legal training now seems crucial for following the retail pharmacy industry. Perhaps I should have paid more attention to L.A. Law in the 1980s, when Corbin Bernsen and I both had hair!


(Updated on 11/9/07 at 2:00 PM with quote from Boston Globe article.)

Thursday, November 08, 2007

The AMP Lawsuit Gambit

Yesterday, NACDS and NCPA unveiled their rumored lawsuit against CMS over Average Manufacturer Price (AMP). Despite substantial progress with AMP-related legislation, there was just no practical way that any of the bills could have been passed before the planned publication of AMP data at the end of November.

The associations are now seeking an injunction to block implementation of the definition of AMP in the Final Rule issued in July. I’m skeptical that they will get the injunction, but not very confident in my viewpoint given the vagaries (and my limited knowledge) of the legal issues.

Here are links to the key documents:
The complaint focuses on an alleged difference between the statutory definition of AMP in Section 1927 of the Social Security Act and the definition in the Final Rule. The plaintiffs claim: “The statutory definition of AMP is clear and simple.” I strongly disagree with this characterization, although it’s not appropriate for me to provide a point-by-point rebuttal in a public forum. (Sorry, legal mumbo-jumbo fans!)

To be honest, I have no idea whether this gambit will work. I was surprised when secondary wholesalers successfully got an injunction last year against the FDA’s implementation of the pedigree requirements of the Prescription Drug Marketing Act (PDMA), so perhaps history will repeat itself this December.

However, I do want to highlight some comments made in the last November’s PDMA injunction decision by Judge Tomlison. While the circumstances are different, she summarized the following guidelines in making her decision:
  • “A preliminary injunction is a drastic and extraordinary remedy that should not be granted routinely.”
  • “The Second Circuit has repeatedly held that the irreparable harm requirement is ‘the single most important prerequisite for the issuance of a preliminary injunction.’”
  • “Irreparable harm may be found where the moving party makes a ‘strong showing that economic loss would significantly damage its business above and beyond a simple diminution in profits.’”
By these standards, an injunction seems unlikely especially given the relatively minimal impact on pharmacy profits in 2008 and the historical analogy to Average Sales Price (ASP). (Reminder: I’m not a lawyer – please read disclaimer at bottom of page.)

As loyal readers know, I have strongly criticized the fear-mongering and hype associated with AMP. This latest twist adds even more drama to the debate. Who needs Hollywood writers when we have retail pharmacy?

Tuesday, November 06, 2007

Behind the Scenes of Pfizer UK

I’m blogging to you from the 2007 PharmaLink conference in Las Vegas. I’ll be speaking on Tuesday about the future of manufacturer-wholesaler relationships.

Today, I heard a fascinating presentation from Steve Poulton, Director of Commercial Operations for Pfizer UK. He explained how Pfizer shifted from selling through wholesalers to selling directly to dispensers using a single wholesaler as a logistics partner (Alliance Unichem).

I’ve been covering Pfizer’s strategy in previous posts (See Pfizer's UK Deal: Change is Here! and Pfizer wins again). Briefly, Pfizer now pays a per-package logistics fee to one wholesaler to distribute its products to pharmacies, hospitals, and dispensing physicians in the UK. Customers are purchasing from Pfizer, even though Alliance Unichem handles ordering and fulfillment.

Steve provided a lot more detail on the mechanics and costs behind Pfizer's strategy shift. A few interesting things that I learned:
  • Pfizer spent a lot of time and money setting up this program. There were many (10?) internal teams plus a steering committee. Total time from conception to "go live" was more than 3 years.
  • Over 22 million packs have been delivered since the program began.
  • Service levels to customers—defined as “on time, in full” deliveries—are now running at 99.4%, which is higher than when Pfizer used to sell through wholesalers. Hence, there have been very few actual customer complaints.
  • Pfizer did not intend to use only one wholesaler. However, AAH was told by its parent company (Celesio) to withdraw from contract negotiations. Phoenix, the third large UK wholesaler, apparently did not submit a proper response to the original RFP. Ironically, both AAH and Phoenix are now working with other manufacturers on logistics deals.
Clearly, the title of my most recent post on the UK situation was not accurate in stating Pfizer's UK Plan in Trouble. In particular, Steve claims that the use of a single wholesaler is not a problem because the government is only concerned that (a) costs to the National Health Service don’t go up, and (b) patients can still access Pfizer drugs.

Despite these positives, I’m still skeptical that Pfizer’s plan will stop counterfeits. UK pharmacies can still choose to be naughty and purchase parallel import or gray market products. Pfizer can guarantee the security of its own supply chain but can not force pharmacies to buy through the legitimate channel. Once again, pharmacies are the weak link in guarding the supply chain against counterfeits—a demand-side security problem that just won’t go away. (Sorry, pedigree fans.)

I also want to add that a Pfizer-type arrangement would be much, much more difficult here. There are only 15,000 points of dispensing over there compared to 150,000+ in the US. I saw a few US executives stop taking notes once Steve talked about the organizational and financial realities of direct distribution.

All in all, this was a great behind-the-scenes peek at an apparently successful channel redesign. Wish you were here!

Sunday, November 04, 2007

The Supply Chain Security Rivalry: Part 2

This is part 2 of my Supply Chain Security Rivalry story.

In Friday’s post (Part 1), I described the pedigree vs. track-and-trace division that has emerged among advocates of better supply chain security. I got a lot of private feedback on my comments. Many people gave me additional insight about the behind-the-scenes machinations, although it’s getting harder and harder to tell truth from spin. (Also check out the posted comments.)

As I see it, the battle will increasingly be fought via legislation, where track-and-trace is at a disadvantage relative to pedigree. This gives more influence to wholesalers and pharmacies, although their supply chain interests are not aligned on the implementation issues. No one wants to admit this obvious reality, creating uncertainty for everyone else and making me wonder whether the drug supply chain can ever be truly secure.

Pedigree not Track-and-Trace?

As I noted in California Dreamin’, the U.S. is many, many, many years from a workable track-and-trace security solution based on serialization. This practical reality is forcing HDMA to shift tactics away from track-and-trace in favor of federal pedigree standards.

At the 2006 RFID Adoption Summit (note the omission of “track-and-trace” in the event’s title), Mark Parrish issued a “call to action” for “the creation of a broad coalition to establish a target date for industry-wide implementation of a consistent track and trace system.”

Well, things change. In his remarks at the 2007 HDMA Leadership Meeting last month, Mr. Parrish stated: “Rx SafeTrack has fallen short of our ambition to have a date for when track-and-trace systems would be implemented.”

Translation: the HDMA and RxSafeTrack have now shifted toward a much more meaningful and achievable goal: “Rx SafeTrack will shift focus and drive efforts for uniform federal pedigree requirements.” So, we're now talking about Federal preemption of state pedigree requirements, which has the intuitive appeal of avoiding 50 different standards.

And as I have pointed out repeatedly on this blog, various pieces of Federal legislation have pedigree and serialization requirements buried in the details, including PDUFA. The primary House importation bill (HR 380) includes detailed requirements about pedigree and track-and-trace systems. Presidential candidate John Edwards has even made pedigree into a campaign issue. And let’s not forget the still-unimplemented pedigree requirements of the Prescription Drug Marketing Act?

Local Roadblocks

Unfortunately, I fear that lobbying will reduce any Federal pedigree to a lowest-common-denominator standard, putting us right back to where we started with the PDMA in 1987. And despite all the happy talk about collaboration and idea-sharing, I don’t think we can easily gloss over the challenges of federal preemption.

Most boards of pharmacy are composed of independent pharmacists who will want to maintain local control. Some states would gladly give up responsibility (blame?) for pedigree/counterfeits -- but other states now have pride of authorship (CA?). Florida has even been able to levy large fines for non-compliance against some wholesalers (like PSSI), giving states a financial incentive to maintain local authority.

Federal pedigree would make it harder for pharmacy to leverage local control unless the legislation is written to suit their needs. I presume that pharmacy associations will use their newfound political influence to shape supply chain standards. For example, chain pharmacies do not want to absorb the costs of reading pedigree or serialized data. They also recognize that these data have monetary value, which will throw a monkey wrench into the data sharing aspects of fee-for-service agreements.

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I wrote these two posts to stimulate more public discussion about the real issues at stake. We risk having the supply chain security debate evolve from a technology competition into a legislative quagmire. Who will win if safety becomes a legislative issue? Will patients really be safer?

What do you think?

Thursday, November 01, 2007

The Supply Chain Security Rivalry: Part 1

What's the best system for keeping the drug supply chain safe?

As the California deadline for ePedigree draws closer, the battle to define supply chain security standards will be getting much more intense. Two upcoming events will bring these distinctions more clearly into the open:
I advise you to pay close attention to the announcements and signals coming out of your favorite trade associations over the next few months. The game is changing and participants are aligning on different sides on key questions:
  • Who will manage the track-and-trace infrastructure?
  • Who will own and control the data generated from a track-and-trace system?
  • Will there be more than one repository of track-and-trace data?
My comments will be split into two parts. Part 1 provides some background on the two most likely approaches for supply chain security. I've dropped some hints throughout this post about one possible set of answers to the questions above.

Part 2 will appear on Monday. I’ll discuss where legislation could be going in the next few years.

Pedigree vs. Track-and-Trace

IBM and its supply chain partners are well represented on the RFID/Track & Trace agenda (hint #1) and IBM’s WebSphere RFID Information Center is already being used by AmerisourceBergen in Sacramento (hint #2). So, you should be paying attention to what IBM says.

Now I’ve been a wee bit critical of IBM’s annual RFID announcements but was pleasantly surprised to read a comparatively hype-free interview with John Delpizzo, head of IBM's sensors and actuators RFID division. Mr. Delpizzo seems downright reasonable in his discussion of serialization and the limits of epedigree as a solution to counterfeiting. Full interview here: IBM RFID chief on tracking counterfeit drugs.

But take note of the way he carefully distinguishes "track and trace" from "epedigree." (emphasis added)
  • “ePedigree makes it more difficult to do counterfeiting. I would argue that batch and lot level pedigree doesn't help much at all; it just gives you an inventory tool. When you move down to the item level and you uniquely identify items, you have a unique identifier on the bottle. So your counterfeiter is going to have to counterfeit the unique serialization on each bottle...which is more difficult.”

  • “I tend to talk more about it as track-and-trace than pedigree. Pedigree is one aspect we're trying to address. When you can track drugs that are serialized through the supply chain, you can track other problems, such as shipment verification, within the supply chain.”
Ironically, many people--including me--have criticized RFID tags as being not much more than inventory control tags. (See Myth #1 of More RFID Un-Hype.)

As a counterpoint to IBM's worldview, check out Pedigree Now, or Track and Trace Later. Which Is the Right Plan?, an editorial by Dirk Rodgers of Supplyscape. He claims:
  • “there are no standards today for track-and-trace and so any solution that claims to have those features will be proprietary software which leads to failed interoperability and wasted investment.”
  • “While it is true that there are teams within EPCglobal that are in the early stages of developing requirements for a track and trace extension to today’s pedigree messaging standard, these efforts will not result in usable changes prior to the January 2009 effective date of the California Pedigree regulation.”
Granted, Dirk works for a pedigree technology vendor. But he is correct in saying that there are no T&T standards nor is there genuine agreement on what "track & trace" even means. And as I noted in California Dreamin’, a truly closed-loop, interoperable track-and-trace security solution based on serialization will require a massive infrastructure upgrade at the 150,000+ points of pharmacy dispensing in the U.S. Plus, no one knows if pharmacies will have the technology and/or willingness to read serialized RFID tags.

Hmmm, SupplyScape is not on the official RFID/Track & Trace agenda . . . (Hint #3)

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On Monday, I’ll discuss the coming legislative battles over supply chain security standards.

In the meantime, I'll remain skeptical of the Motley Fool’s prediction that “demand for IBM's ePedigree system could soar.” Foolish, indeed.

Monday, October 29, 2007

Demystifying 867 Data

I want to let you know about a webinar this Wednesday called Demystifying 867 Analytics, which looks at the use of point-of-sale data from retailers and wholesalers. You should sign up and listen.

Yes, I know, webinars are usually boring, but this one will benefit from the presence of Josh Halpern and Jeff Sager from Integrichain. In my opinion, Integrichain is quickly becoming the leader in providing demand visibility at the outlet/point-of-care level to pharmaceutical manufacturers.

I’ve been particularly impressed with the company’s ability to connect multiple data streams from the pharmaceutical supply chain -- ex-factory sales data, wholesaler data (EDI 867 and 852 transaction sets), and third party data. Integrichain’s outlet-focused, bottoms-up (my words) methodology should also allow new data sources, such as ePedigree information, to be easily incorporated. In other words, they are not beholden to a single data stream or data provider.

Integrichain is benefiting from the IMS Health data mess. Novartis actually asked their sales reps to return bonus money because of faulty IMS market share data. Merck, Wyeth, and Lilly are reportedly also having problems with the accuracy of IMS’ mix of projected and survey data.

In the sprit of full disclosure, I should mention that I like Integrichain and its approach so much that I agreed to serve on the company's Advisory Board.

Friday, October 26, 2007

Chatter about a McKesson Buyout

I’ve been speculating about a drug wholesaler go-private buyout transaction for some time, most recently in March (Wholesaler LBO Time) and in July (The British are Coming?).

The Wall Street Journal adds some fuel to the fire on Thursday with In McKesson, Some Foresee 'Value' Lesson, an article looking at prospects for McKesson (MCK).

Key quote: “Rick Schnall, a senior executive of buyout firm Clayton, Dubilier & Rice, said McKesson has one of the best managements in the health-care business. He said "many private-equity firms would love to figure out a way" to buy it, though he said it is unlikely that such big deals will take place until difficulties in the credit markets pass.”

For those who don’t know, CD&R is a top-tier buyout fund that has been very successful with distribution businesses. They are currently invested in large distributors of electrical supplies (Rexel), lab supplies (VWR), food (US Foodservice), and building supplies (HD Supply). Click here to see a selection from their current portfolio.

As I see it, McKesson is the most logical LBO target among the Big 3 wholesalers, especially given its business mix, current operating platform, and age of the management team. Their acquisition of OTN, while pricey, improves their leverage in the fast growing specialty distribution business. A buyout would provide a platform for a transformational restructuring and open up some intriguing domestic and international acquisition opportunities.

BTW, McKesson’s Net Debt-to-EBIDTA ratio was actually negative (!) based on second quarter financials, making the company especially attractive to private equity. (Net Debt = Short Term Debt + Long Term Debt – Cash & Cash Equivalents, so the numerator in this ratio is negative.) McKesson’s enterprise value is $17.1 billion, which is certainly affordable once the credit markets settle down.

Drug wholesalers are listening to Tony Blair at their Annual Leadership Meeting this week. The WSJ story should create some interesting hallway chatter.

Tuesday, October 23, 2007

Ask your doctor...

And now for something completely different!

First, read about Hardee's new 920 calorie breakfast burrito, which has half a day's calories and a full day's worth of saturated fat and salt. Wow, that's really efficient!

Then watch Bill Maher's video below on the pharma industry. Sure, he takes some cheap shots at our industry, but he does have a valid point in a land of 920 calorie burritos. (Warning: Do NOT watch this video if you have no sense of humor or are easily offended by people like Bill Maher.)

Best line: "So ask your doctor if getting off your ass is right for you!"



Hat tips to Health Care Blog and Pharmalot.

Monday, October 22, 2007

Retail Pharmacy's New Power

H.R. 1474: Fair and Speedy Treatment (FAST) of Medicare Prescription Drug Claims Act of 2007 now has 222 co-sponsors. In other words, a majority in the House of Representatives formally support this bill.

Retail pharmacy is becoming extremely effective at defining the legislative agenda and terms of debate. My Lobbying for Pharmacy Profits from January 2 should have been even more aggressive.

I have been very personally disappointed with the amount of nonsense being spewed out there about AMP, Part D, and the future of retail pharmacy. Many public statements have been either factually incorrect or grossly misleading.

But my comments become insignificant when compared to the power of last month’s industry-wide Congressional lobbying effort organized by NACDS, NCPA, and FMI. Did you know about the new bi-partisan Congressional Community Pharmacy Coalition, with 34 founding member from the House? Their tagline is truly great PR: “Preserving patient access to America’s most accessible healthcare professionals.”

Seriously, is anyone else trying to provide any balance on these legislative decisions? PCMA, the trade association representing Pharmacy Benefit Managers, could only muster a bland and uninspired press release stating:

“Before rushing to judgment on the issue of 'prompt pay,' Congress should commission GAO to conduct an independent study to explore this issue generally and the role played by Pharmacy Service Administrative Organizations (PSAOs) particularly.”

Too late – judgment rushing is over! Should we presume that their weak defense indicates tacit approval of the FAST legislation?

Here’s some food for thought from PBMguru, who posted a very interesting comment to this blog a few weeks ago:

“The reality is that most PBM clients are self insured SMB’s (because most of the insured populace is covered by a self-insured SMB). These clients are no different than your independent pharmacies. They are both small businesses trying to compete in today’s marketplace. All of these businesses operate under their own respective billing payment cycles…who is to say which of the small businesses are more deserving of the money? Should we penalize SMB’s for providing a benefit to their employees or should we penalize retail and chain pharmacies for conducting business?”

Yes, PBMguru, life–and the pharmaceutical payment system—is full of tradeoffs. We’ll discover them soon enough.

Friday, October 19, 2007

Pfizer's UK Plan in Trouble

Pfizer may have to end or amend its exclusive distribution deal with UniChem, the wholesale arm of Alliance Boots (AB), under proposals being considered by the Office of Fair Trading (OFT). See Pfizer May Have To Unpick Exclusive Distribution from the Times (London).

Pfizer’s new plan (first discussed here last September) has at least two primary objectives: (1) Lower the risk of counterfeit products entering the supply chain, and (2) Recapture lost revenue from parallel importing.

My prediction: The OFT will require Pfizer to expand its network to at least one other wholesaler, but not require them to sell to all wholesalers.

In March, the UK wholesalers failed to get a legal injunction to stop Pfizer from implementing its new distribution plans.

Yet wholesalers have been much quieter about the announcements from other manufacturers like Sanofi-Aventis or Novartis, especially since these manufacturers plan to include other wholesalers (AAH or Phoenix). From what I hear, most major drug makers will announce more selective UK distribution plans by the end of 2007.

Frankly, the whole issue really comes down to basic business economics. Manufacturers in many industries can and do legitimately limit the number of wholesalers who are authorized to sell its products. Channel mavens like me refer to the degree of distribution selectivity – from one wholesaler (exclusive distribution) to an unrestricted number of wholesalers within a given market (intensive distribution).

I believe that any excluded UK wholesalers will continue their attempts to stop Pfizer (or others) from implementing strictly exclusive distribution, but will not be able to stop selective distribution.

It’s interesting to note the contrast with the U.S. Here, U.S. wholesalers successfully stopped the FDA from implementing the pedigree requirements in the Prescription Drug Marketing Act. Robert Drucker is probably a hero to any non-selected UK wholesalers given his company’s legal battle against the big three wholesalers and 16 major drug manufacturers. (See RxUSA’s July 2006 complaint for the alleged details.)

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P.S. Readership at Drug Channels is waaaay up since last year. In case you weren’t reading back in August ‘06, here is a background post on European drug channels: Curious about European Drug Distribution?

I discuss the US angle on distribution deals in light of U.S. importation bills (such as S.242) in Will US logistics deals be illegal?.

Tuesday, October 16, 2007

Part D + AMP = Trouble

The Democrat-controlled Committee on Oversight and Government Reform kicked off another round of predictable complaints about Medicare Part D with their report on private Medicare drug plans. Even Ed Silverman at Pharmalot felt the need to join the industry-bashing with his pejorative headline Medicare Part D Is A Costly Mess.

Although it’s a little early for Halloween, I want to give you some scary nightmares about a new monster that could walk among us very soon.

As I see it, the Part D debate and the Average Manufacturer Price (AMP) debate will soon converge. This potent combination would disrupt the retail pharmacy and drug wholesale industry while simultaneously crippling the innovative capacity of the pharmaceutical industry.

AWP Lives!

Page 14 of the new report on private Medicare drug plans provides some interesting data about pharmacy economics under Part D. The 12 Prescription Drug Plans (PDPs) in the Committee’s report reimburse pharmacies using the following formulas and payments:
  • Discount off AWP: 13.5% to 16.5%

  • Dispensing fees: $1.70 to $4.00
The Committee found that the average pharmacy payment from Part D insurers = AWP-15% + $2.10. Thus, a pharmacy would receive a payment (reimbursement) from the PDP of $87.10 for filling a Part D script with an AWP of $100.

NCPA keeps complaining about "low and slow" payments under Part D. I discussed the "slow" myth last month. Seems like they should turn down the rhetoric on "low" payments, too. What do pharmacists want -- AWP + 250%??

As an aside, the report incorrectly states that this amount represents a cost to the Medicare beneficiary. In fact, only beneficiaries in the “donut hole” would pay this amount as an out-of-pocket cost, assuming they had no additional coverage. According to IMS’ Part D report, just 6% of beneficiaries fell into this category. That’s not “typical” (common, average) based on my definition, although the headline to Figure 7 claims to show the “Flow of Payments for a Typical Brand Name Drug.” Whatever.

The Part DAMP Monster

Let’s review a few themes from the past few months of Drug Channels:
  • The AWP system is wounded and can not be repaired. (Sorry to be the bearer of bad news…) The new Part D report trashes AWP in Section D.
  • CMS and the states currently pay for 40 percent of U.S. retail prescription drugs through Medicaid, SCHIP, and Medicare. It'll be 50% within 10 years.
  • CMS is launching a new pricing benchmark called Average Manufacturer Price (AMP).

  • CMS is encouraging states to adopt AMP-based reimbursement methodologies for pharmacies.

  • AMP is widely opposed by everyone in the industry. Therefore, anti-pharma advocates will assume that AMP has merit.
  • The Democrats have been critical of the Part D benefit design, despite its popularity. (Hey, I warned you to watch out in July 2006!)
Now add politics into the mix. If the Democrats take back the White House, then we will have a new CMS Administrator in 2009. We may also have a Democrat-controlled Congress, too.

What if CMS requires Part D PDPs to adopt AMP-based methodologies for pharmacy reimbursement? Or mandates the use of AMP-based Federal Upper Limits (FUL) for both brands and generics in Part D?

The possibilities for mischief are virtually unlimited.

Spooky.

Time for Jeff Kindler to rethink his campaign contribution strategy?