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...

Tuesday, March 31, 2009

Walgreens to Washington: Make my day

Walgreens is headed for a showdown with Washington State over Medicaid reimbursement rates. Per Walgreens official announcement yesterday:

"As a result of extreme reimbursement cuts in the State of Washington Medicaid program, Walgreens (NYSE:WAG)(NASDAQ:WAG) today announced it will withdraw 44 of its pharmacies from the state's Medicaid program as of May 1."

I expect other pharmacies to follow Walgreens lead, putting Washington state in the unenviable position of having to backtrack and try again. Next time, perhaps the state will focus on generic drugs, the real source of potential savings for public programs.

SUDDEN IMPACT

On April 1, Washington state is planning to reduce the Medicaid pharmacy reimbursement for single source (brand) drugs from Average Wholesale Price (AWP) minus 14% to AWP minus 20%. See the state's official announcement from Feb 26, 2009.

Given the proposed date of enactment, you might be tempted to think that this is an April Fool's joke. AWP minus 20% would put Washington last among the 50 U.S. states for single source drug reimbursement based on CMS' December 2008 list of Medicaid reimbursement rates from around the country.

Granted, Medicaid is more generous than private payers -- see the data in Pharmacy Profits and Wal-Mart. But I'm still puzzled by the economic logic behind the state's move given the pricing dynamics in the pharmacy supply chain. Why attack pharmacy reimbursement for brand-name drugs?

Maybe the Department of Social & Health Services has an anti-Willie Sutton approach -- because brands are not where the money is.

MAGNUM FORCE

In fact, The real money for pharmacies in Medicaid comes from generic (multiple source) drugs.

High generic pharmacy margins led directly to the Deficit Reduction Act of 2005 and the Average Manufacturer Price (AMP) fight. See the "Our Story So Far" section of my April 2008 article The AMP Saga Goes On and On and On.

The newest data show that Medicaid is still more generous for generics than Medicare Part D plans. A 2009 OIG study found that the average Part D and Medicaid pharmacy reimbursement amounts were similar for selected single-source drugs. However, Medicaid pharmacy reimbursement amounts typically exceeded the average Part D reimbursement amounts for selected multiple-source drugs. (Source: Comparing Pharmacy Reimbursement: Medicare Part D To Medicaid)

Stay tuned for more excitement as the twin demons of "health care reform" and "cost control" collide.

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Sesame Street Explains the Bernie Madoff Scandal

OK, this video clip has absolutely nothing to do with the post above, but I think it is hilarious. YMMV.

Friday, March 27, 2009

Wal-Mart's Next Move

Yup, I told you so.

According to a Bloomberg article, Wal-Mart is now planning to expand its direct-to-payer (my term) pharmacy business to U.S. employers that fund their own health-insurance plans. Wal-Mart estimates that there are 75 million Americans in these plans.

It's a good article, so I suggest reading it for yourself: Wal-Mart’s Retail Muscle Helps Expand Drug Sales.


Wal-Mart first launched a direct-to-payer arrangement with Caterpillar (CAT) last September. The model can best be described as a “preferred network” versus an explicitly “restricted network.” Members have a zero-dollar co-pay for generics at Wal-Mart, but can choose to fill their prescriptions at other retail pharmacies for the normal $5 generic copay.


Here are my two published analyses of the WMT-CAT deal:

My comments in these two articles remain valid, so here are a few additional thoughts:
  • In the article, Wal-Mart confirms that it does not plan to compete with Pharmacy Benefit Managers (PBMs) for claims administration and benefit management. Long-time readers will recall that I predicted this approach in my January 2008 article Wal-Mart's PBM Game Plan.

  • Tom Ryan, CEO of CVS Caremark, alluded to “people experimenting with limited networks” on the company's last earnings call. CVS has only dipped its toe into the preferred network model with Maintenance Choice and Bridge Supply. If Wal-Mart gets traction, then I expect a stronger push by CVS Caremark, especially if the revenue synergies between retail and PBM don’t start showing up soon. See my analysis in CVS Caremark: No Visible Revenue Synergy.

  • Wal-Mart appears to be shifting retail market share away from wholesaler-supplied dispensing channels, especially independents, small chains, and other non-self-warehousing retailers. Thus, Wal-Mart’s strategy will continue to put indirect pressure drug wholesalers like AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson Corporation (MCK).
Michael Struhs, Wal-Mart’s director of health and wellness business development, and Todd Bisping, Caterpillar’s pharmacy-benefit manager, plan to discuss the test results from their program on PBMI webcast later today (Friday) called Innovation in the Marketplace. However, the webcast costs $279 and they only have 30 minutes out of the 90-minute program.

The real earthquake will occur when Wal-Mart announces its next direct-to-payer arrangement, which I expect will occur fairly soon.

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For the uninitiated, the photo above shows Risk, a board game with the goal of world domination through the elimination of the other players.

'nuff said.

Monday, March 23, 2009

New FDA Chief's Surprising Link to Drug Wholesaling

President Obama has nominated Dr. Margaret Hamburg to be Commissioner of the Food and Drug Administration (FDA). However, you may not know that Dr. Hamburg’s first-hand knowledge of the drug distribution business because she’s on the board of directors of a major healthcare wholesale distributor. If she is confirmed, I expect that the FDA will move forward more quickly on a national strategy for the drug distribution system.

As I point out in Federal Pedigree Sand Trap, the FDA has struggled to implement a coherent national strategy for pedigree, leading some states to introduce new pedigree legislation. The topic will heat up even further given proposed importation legislation (Surprise! New Importation Bill Introduced) and the FDA’s obligation to establish technology standards for the pharmaceutical supply chain by 2010 (Dear FDA: Eight is (Not) Enough).

However, we could soon have someone running the FDA who actually understands distribution and supply chain issues. Imagine that!

Since 2003, Dr. Hamburg has been on the Board of Directors of Henry Schein, one of the largest wholesale distributors of dental, veterinary, and medical products to office-based physicians, dentists, and veterinarians. The company was recently named the “world’s most admired” health care wholesaler by Fortune magazine. See Henry Schein at a Glance for the official overview of their business.

Although pharmaceuticals are a minority of its overall business, Henry Schein is an Authorized Distributor of Record (ADR) for most leading drug makers. Thus, the company has had to sweat the details of state-level pedigree requirements, including varying pedigree standards for human versus animal health products. Notably, Schein was the first wholesale drug distributor in the nation to have its entire distribution system accredited through the NABP’s Verified-Accredited Wholesale Distributors® (VAWD®) designation in 2006. The company generates about one-third of its revenues from international markets, so drug importation could be another hot topic for the company.

Dr. Hamburg’s affiliation with Henry Schein has also been personally profitable for her. Her shares are worth more than $2.3 million and she received director’s fees of about $250,000 (in 2007). Naturally, she will resign from the Board and sell her shares once confirmed.

Roy Poses, who blogs at Health Care Renewal, is skeptical about Dr. Hamburg’s objectivity, writing:

Given that Dr Hamburg has spent over five years living with the obligation for unyielding loyalty to the interests of Henry Schein, and has become what many people would consider rich in the process, how easy will it be for her to turn to becoming a strict regulator of the products her former company used to sell?

I’m not as cynical as Dr. Poses and believe that Dr. Hamburg can still be effective. Nevertheless, I am curious to see how her personal experience at a distribution company (versus a manufacturer, pharmacy, or health care provider) will influence the FDA’s approach to pedigree, serialization, counterfeiting, diversion, secondary wholesalers, importation, etc.

Wednesday, March 18, 2009

Farewell, AWP

Yesterday, Judge Patti Saris approved the settlement in the long-running First Databank Average Wholesale Price (AWP) litigation, rejecting objections raised by the pharmacy industry. Judge Saris also offered some damning words about AWP as a pricing benchmark for pharmacy reimbursement, adding further urgency to the need for an alternative model.

So what happens now?
  • The WAC-to-AWP spread will be rolled back to 1.20 from 1.25 (a 4% reduction) for many drugs, not just the 1400 NDCs in the case.

  • First Databank will stop publishing Blue Book AWP values within the next two years.

As always, I encourage you to read Judge Saris' (surprisingly well-written) decision for yourself: Order Granting Final Approval of Settlement – March 17, 2009. You should also read First DataBank's statement.

OBJECTIONS TO THE SETTLEMENT

I’ve been following this saga for some time on Drug Channels. Here are the two key articles that will catch you up:

Briefly, First Databank's plan to roll back the AWP-to-WAC markup for so many drugs and discontinue publishing the Blue Book AWP data is not formally required by the settlement. Many pharmacy groups objected to this outcome because a roll-back of this crucial benchmark price would translate into lost dollars for pharmacies that get reimbursed based on AWP.

Objectors include a who’s who of the pharmacy association world: the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS), the Food Marketing Institute (FMI), the Long Term Care Pharmacy Alliance (LTCPA), the American Society of Consultant Pharmacists (ASCP), the Independent Pharmacy Cooperative (IPC), and the Pharmaceutical Care Management Association (PCMA).

Judge Saris soundly rejected their objections and offered these stinging words:

“[T]hese pharmacies (both chain and independent) and PBMs, reimbursed on the basis of AWP, were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits. None of the pharmacies protested the windfalls they received when prices were unilaterally inflated by five percent.” (page 14)

Needless to say, the pharmacy groups are not happy. Click here to read NACDS’ statement.

THE FUTURE OF PHARMACY REIMBURSEMENT

Judge Saris left no doubt about her views on AWP as a pharmacy reimbursement benchmark:

“AWP has been exposed as a faux inflated price unrelated to actual drug prices. Reliance on AWP is a trap for unwary and unsophisticated TPP (third-party payors) purchasers and results in consumers paying unwarranted co-payments.” (page 13)

Keep in mind that Judge Saris has previously identified “speed limits” for the WAC-to-AWP markup in unrelated AWP litigation. (See Judge Saris on Fictitious AWPs.)

Pay attention. The stakes have just been raised in the Average Manufacturer Price (AMP) debate.

Monday, March 16, 2009

Wholesalers In the News

Here is a news story that caught my attention last week:

Some Drug Wholesalers Fall Ill From Pharma Consolidation

Drug wholesaler stock prices took a tumble last week. As the Wall Street Journal article noted:
  • “[S]ome believe that the wholesalers, who are paid by the manufacturers to package and distribute products, will have less leverage when drawing up contracts with the large pharmaceutical companies.”

  • “Worries about a default by retailer Rite Aid Corp. -- it was included on a list published by Moody's Investors Service highlighting companies considered likely to default on their debt -- pressured shares of McKesson.”
Well, these items may sound familiar if you read my blog posts last Tuesday (Rite-Aid Hits the Bottom Rung) and Wednesday morning (My Comments on MRK-SCP). Of course, last week’s comments by McKesson Corporation’s (MCK) CFO about “some increased pressure on our sell-side margins in US pharmaceutical distribution” may have spooked some folks, too.

Astute readers will realize that I have not commented publicly on the dynamics behind the unexpectedly unresolved CVS Caremark (CVS) rebid. Last September's Wholesaler Impact of a Longs Drug Deal has some general background for the curious.


Wednesday, March 11, 2009

Rite-Aid Hits the Bottom Rung

Moody's just released an ominous list called the "Bottom Rung." It contains 283 companies that Moody's says are most likely to default on their debts. See Moody's Aims to Be Ahead on Defaults.

You will not be shocked to learn that good ol' Rite-Aid (RAD) has the dubious distinction of being 8th on this list of doom based on rated debt (source). Their "probability of default" rating is Caa2, which is a technical finance whiz way to say FUBAR.

I last wrote about Rite-Aid in June Rite-Aid: From Worse to Awful, when their stock price was a relatively robust $1.35 versus only a quarter ($0.25) after yesterday's stock market rally.

The last year has been tough for all stocks (as my 201K statement sadly shows), but it's been even tougher for Rite-Aid (down 92% as of yesterday) compared to Walgreens ( down 39%) or CVS Caremark (down 38%). Click here to see an up-to-date, real-time stock price comparison.

Time to start building industry scenarios for the end-game . . .

Tuesday, March 10, 2009

My Comments on MRK-SCP

Dow Jones interviewed me yesterday about Merck & Co's (MRK) proposed acquisition of Schering-Plough (SCP). See Drug Middlemen May Feel Pharma Consolidation Pressure.

Two quotes:
  • "In general, the consolidation of manufacturers is bad for wholesalers because it's giving the drug makers much more leverage in their fee-for-service negotiations.

  • "This deal is not a game changer for the wholesalers, but it's one more pressure point on their business."
And one paraphrase:
  • "The recently announced Pfizer-Wyeth deal, meanwhile, might have more of a direct effect on the wholesalers because Pfizer is just now adopting fee-for-service contracts with the distributors, and its terms could differ from those of Wyeth, Pembroke Consulting's Fein said. The larger a manufacturer, the more sales volume it controls, and therefore the more power it wields in negotiations, Fein said."

AmerisourceBergen (ABC) and Cardinal Health (CAH) both highlighted their "great relationships" (their words) with manufacturers. McKesson Corporation (MCK) had no comment on their relationships with manufacturers.

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Great editorial in the Wall Street Journal this morning on the pharma industry: Mergers & Inquisitions

"Deal-making is fast reshaping the pharmaceutical industry, and we wish we could say it was a sign of creative destruction. More likely it is the industry's way of anticipating, and building insurance against, the coming era of government-run health care."

I agree.

Monday, March 09, 2009

More on Drug Importation Economics

Given the heavy site traffic and comments (public and private) about Thursday’s importation posting (Surprise! New Importation Bill Introduced), here are a few more thoughts on the topic along with some totally unrelated Spinal Tap news.

Currency fluctuations can scramble importation economics

Check out the dollar’s volatility over the past six years – a 25 percent decline from 2002 through mid-2008. The trend sharply reversed in August as global investors fled to our (for now) safer currency.

The weak dollar led to a U.S. export boom, although export growth is now slowing as global economies falter and the dollar strengthens.

Will huge U.S. deficits lead to a weaker dollar in the future?
I have no idea, but I don't see how patients benefit from currency-driven drug shortages a la Parallel Trade and UK Drug Shortages.

Just more sand in the vaseline for importation enthusiasts.

More Fun from the CBO

Ooops. I pointed you to the wrong Congressional Budget Office (CBO) analysis in Thursday’s post about importation.

I highlighted this 2004 CBO white paper. But CBO has done at least two more recent reports, although the overall conclusions (limited savings of about 1%) were the same:

Note that CBO 10-year cost savings estimates went down by about $1 billion between 2005 and 2007, presumably due in part to the currency issue.

Thanks to Nick Basta, editor of Pharmaceutical Commerce magazine, for pointing out my oversight.

Manufacturer channel strategies

I got a number of emails regarding my comments about new limitations for U.S. distribution agreements from Pharmaceutical Market Access and Drug Safety Act (S.525).

In 2007, I highlighted one issue with regard to a predecessor bill in Will US logistics deals be illegal? I am also working on some educational materials about the impact of importation on pharmacy economics and the pharmacuetical supply chain. Drop me a line if you want to talk more.

SPINAL TAP: UNWIGGED AND UNPLUGGED

2007’s California pedigree legislation revealed that many Drug Channels readers are also Spinal Tap fans. Check out their current Unwigged and Unplugged tour. I just bought tickets for the May 14 show at the Keswick Theatre!

Thursday, March 05, 2009

Surprise! New Importation Bill Introduced

Sometimes, I don’t like being right.

In Tuesday’s post, I highlighted that unsafe drug importation is supported by both President Obama and Governor Sebelius, his latest nominee for Secretary of Health and Human Services.

One day later, Senators Byron Dorgan (D-ND), Olympia Snowe (R-ME), John McCain (R-AZ), and Debbie Stabenow (D-MI) introduced this year's model of the Pharmaceutical Market Access and Drug Safety Act (S.525).Fans of redundancy will recall 2007's S.242.

The festivities included the obligatory misrepresentations and falsehoods about cost savings and safety by the pro-importation lobby.

Sigh.

It’s really a shame that the public perception of pharmaceutical manufacturers is so low that no one recognizes the supply-chain dangers of cross-border importation. As someone who studies drug distribution, I believe that politicians are abdicating their responsibilities and endangering public health by opening up diversion doorways for criminals.

UNSAFE

Let me be clear:

  1. Diversion is the sale of a drug outside of the distribution channels for which it was originally intended, as in “made to be sold in Europe but diverted to the U.S.”
  2. Drug diversion is the primary way that counterfeit drugs get into legitimate pharmacies. Just ask the FDA’s Office of Criminal Investigations.
  3. Importation and parallel trade are – by definition – diversion.

Over the years, I’ve given you plenty of examples, such as Diversion from Canada via China, Canadian Dreamin', or even Crazy Talk from John McCain (a co-sponsor of S.525). Now we can get ready for fun headlines in the US such as “30K Fake Drugs Dispensed to Patients.” Wheee!

IMHO, Manufacturers should begin scrutinizing their wholesaler agreements with importation in mind. Trade relations and commercial relations executives should pay particular attention because the legislation explicitly limits the way a manufacturer can structure its U.S. distribution agreements. (Contact me privately for more details.)

NOT CHEAPER

Importation will open up new gateways for counterfeits but won’t save us much money because the price differences will be absorbed by the middlemen. See Importation Illusions.

Check out how Senator Dorgan blatantly twists the conclusions of a CBO study. Yesterday’s press release from Senator Dorgan’s office states:

"The Congressional Budget Office estimates the bill would save American consumers $50 billion over the next decade, including more than $10 billion in federal government savings.”

Alas, the press release deliberately omits the CBO’s actual conclusion. If you care, here is the 6-page CBO report: Would Prescription Drug Importation Reduce U.S. Drug Spending?

The very first paragraph states:

“On the basis of its evaluation of recent proposals, the Congressional Budget Office (CBO) has concluded that the reduction in drug spending from importation would be small.”

I hope that the journalists who read this blog are paying attention.

In the meantime, I remain surprised that Senator Dorgan's nose does not appear to have grown.

[Update: See my subsequent post More on Drug Importation Economics for details on two more recent CBO studies.

Tuesday, March 03, 2009

Obama + Sebelius = Drug Importation

The new version of Friday the 13th broke box office recordsa few weeks ago. So perhaps we should not be surprised that drug importation is also coming back from the dead to wreak havoc once more. The danger comes from both President Obama as well as his latest nominee for Secretary of Health and Human Services.

OBAMA’S BUDGET

President Obama's budget proposal slipped in the following curious phrase on page 67:


“The Budget supports the Food and Drug Administration’s (FDA’s) new efforts to allow Americans to buy safe and effective drugs from other countries …”
(source)

Huh? What does this phrase mean?
Didn't Obama back away from this idea during the campaign?

Granted, a President’s Budget is always long on vision and short on details, but I can’t find any other details in the full document. Naturally, this item did not merit inclusion in the economic projections included in the budget since importation won’t actually save any money. See my 2007 article
Importation Illusions or peruse my many previous DC posts. Check out the FDA Law Blog for a primer on the current legal issues.

BTW, I still believe that cross-border drug importation could benefit intermediaries such as wholesalers and pharmacies. (See
Drug Importation and Global Wholesale.)

GOVERNOR SEBELIUS

In contrast to a mysterious budget statement, the predilections of the latest HHS nominee are unambiguous. Governor Kathleen Sebelius signed Kansans up for I-Save-Rx in 2004. This program allows individual consumers to divert – excuse me, “import” – drugs from Canadian and European pharmacies.

The I-Save-Rx program was a failure – low participation rates and lax safety standards. The Illinois Auditor General found that 40% of inspection forms for pharmacies inspected for the I-Save Rx program were incomplete, and that the State did not monitor whether prescriptions were being filled only by approved pharmacies. (Source:
Illinois Auditor General’s Report)

Fans of political irony will appreciate that Governor Sebelius sided with impeached Illinois Governor Rod Blagojevich (!) when announcing the program in 2004. See
Gov. Rod Blagojevich and Gov. Kathleen Sebelius announce addition of Kansas to I-SaveRx prescription drug importation program.

This illegal importation scheme also featured prominently in Gov. Blagojevich’s impeachment, during which he said:


“If you are impeaching me on providing safe and affordable prescription drugs--going to Canada and getting the same medicines made by the exact same companies--then the governor of Wisconsin ought to be impeached, the governor of Kansas ought to be impeached, the governor of Vermont ought to be impeached.”
(Source)

Sorry, Ron, too late for impeachment. Governor Sebelius is now on her way to DC to run the soon-to-be
biggest payer for prescription drugs. I hope someone will save us from her support of “innovative partnerships” like I-SAVE-RX.

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P.S. It's 3/3/09. Happy square root day!