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...

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.