UnitedHealthcare Employer & Individual, a UnitedHealth Group (NYSE:UNH) company, announced a new pilot program that will reimburse physicians on a cost-plus basis for chemotherapy drugs. Here’s the official press release: New Cancer Care Payment Model by UnitedHealthcare Employer & Individual to Focus on Best Treatment Practices and Better Health Outcomes.
This pilot program shows a prominent payer experimenting with pharmaceutical reimbursement in the non-retail drug channel. While not as novel as the media coverage would have you believe, it's another signal of change for payers, physicians, manufacturers, and wholesalers. Some observations:
- The cost-plus revolution is accelerating. This announcement should be no surprise if you’ve been following recent developments in retail drug reimbursement. My comments in Industry Impacts of Cost-Plus Reimbursement apply equally well to the physician model. Payers are unbundling drug price and professional fees because existing reimbursement models can provide inappropriately high profits on drugs and create inappropriate financial incentives. UnitedHealth claims that drug mark-ups account for 65% of an oncologist's income. Their vice president of oncology referred to physicians as "drug dealers” (huh?) in yesterday’s Wall Street Journal. Hmmm, time for some media training?
- A computed average price benchmark has many uses. Despite media hype, this model is not really new for office-administered drugs because it relies on a familiar benchmark. The press release states that “chemotherapy drugs will be reimbursed at the manufacturer’s cost.” UnitedHealthcare confirmed to me that “cost” will be Average Sales Price (ASP), which is the basis for reimbursement for Medicare Part B drugs and already used by many commercial payers. ASP data are freely available on a public Center for Medicaid and Medicare Services (CMS) webpage: http://www.cms.gov/McrPartBDrugAvgSalesPrice/. More on ASP below.
- Will this model affect generic substitution and drug wholesalers? The two-quarter data lag baked into the Part B ASP model allows very high physician profits early in the generic life cycle, thereby creating powerful incentives for rapid generic substitution. (See Generic Drug Profits: Too High or Appropriate Incentive?) Could UnitedHealthcare’s plan inadvertently reduce substitution speed for soon-to-launch generic oncology drugs such as Gemzar and Taxotere? AmerisourceBergen (NYSE:ABC) and McKesson (MYSE:MCK) get a huge financial benefit from generic oncology drugs, so any reduction in substitution rates due to new payment models will be negative for the drug wholesalers, too.
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Bloomberg Business Week scored a major scoop this week by being the first to report publicly that Walgreens is looking to sell its pharmacy benefit management (PBM) business. See Walgreen Said to Seek Sale of Pharmacy-Benefits Manager.
