Drug Channels 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. Drug Channels reaches an engaged, loyal and growing audience of more than 20,000 subscribers. Learn more...

Monday, January 31, 2011

Drug Channels Earnings Calendar: 2010Q4

Starting tonight, the big 3 drug wholesalers and the Big 3 Pharmacy Benefit Managers (PBMs) will begin reporting their latest quarterly financial results. These financial reports and accompanying conference calls provide invaluable insights into the strategies and economics of companies within U.S. drug channels.

As a service to Drug Channels readers, I'm providing the upcoming calendar along with links to the earnings conference call webcasts for each company. If you don’t have time to listen to the calls, free transcripts show up on Seeking Alpha within a few days.

Pembroke Consulting retainer clients can contact me for post-game analysis on any of these reports. Gerson Lehrman Group customers can make a request via their GLG client representative.

Tuesday, January 25, 2011

Owning a Pharmacy: Still Pretty Profitable

Today’s surprising news: independent pharmacy owners are doing financially quite well, averaging about $274K in personal income in 2009.

This result comes from my analysis of the independent pharmacy industry based on The 2010 NCPA Digest Sponsored by Cardinal Health. My observations about independent pharmacies:
  • Pharmacy profit margins are not declining.
  • Pharmacy profits have doubled since 1999.
  • Pharmacy owners earned about $274K in 2009.
I think it’s important to review these facts every year since the pharmacy industry always describes margins to politicians as “thin” or “slim.” Any attempt to discuss pharmaceutical reimbursement is trumpeted as a “threat to patient health and access.” In reality, things are still pretty sweet for the average independent pharmacy owner.

Below are my computations and analysis. Take a moment to leave a comment with your own perspective or observations.

Monday, January 24, 2011

Restat (sponsor)

I am pleased to welcome back a sponsor to Drug Channels—Restat, the largest privately-held Pharmacy Benefit Manager (PBM).

Restat is marketing a cost-plus, preferred pharmacy model to self-insured employers as Align, which they describe as "a proven way for self insured employers to reduce the cost of their pharmacy benefit." Read more in the company's description below and on their website.

You may recall Restat as the sponsor of very interesting white paper titled The Value of Alternative Pharmacy Networks and Pass-Through Pricing: An Actuarial Analysis (free download). You can read more about the paper along with a spirited debate about its conclusions in Pharmacy Profits in Preferred Networks with PBM Transparency.

Welcome aboard, Restat!

P.S. Please email me if you would like to discuss upcoming sponsorship opportunities on Drug Channels.

Thursday, January 20, 2011

Drug Channels News Roundup: January 2011

Time for a rundown of noteworthy Drug Channels news stories from cold and snowy January. Here are four items for your consideration:
  • What, me worry? No PBM price war according to David Snow
  • The Church of Pharmacy: CVS battles to convert a Memphis church
  • Post-Valentine’s Track-and-Trace Bash! The FDA announces a February 15-16 workshop
  • What, me adhere? A worthwhile new white paper on innovative ways that PBMs are connecting with consumers
Plus, a fun way to visualize what a trillion dollars looks like. Ka-CHING!

Tuesday, January 18, 2011

Walgreens Joins the Attack on PBM Mail Profits

Walgreens (NYSE:WAG) launched a new advertising campaign last week to convince consumers to fill 90-day prescriptions at a Walgreens retail pharmacy instead of a mail-order pharmacy. Read the press release. The tagline: “It’s 3 refills in one. And for 3 months, you’re done.”

Walgreens announcement highlights the intense competitive battle to gain a privileged position as a consumer and clinical access agent. This competition benefits payers and consumers at the expense of generic and brand pharmaceutical manufacturers.

Low-price retail fulfillment is a threat to PBM profits, especially as the number of generic launches starts to decline post-2015. Walgreens joins Walmart (NYSE:WMT) and CVS Caremark (NYSE:CVS) in pursuing strategies that eliminate the traditional out-of-pocket cost difference for consumers between a mail-order vs. a store-based pharmacy. Will plan sponsors pay attention to drug channel margins and create a strategic vulnerability in the profit model of the other large pharmacy benefit managers (PBMs)—Express Scripts (NASDAQ:ESRX) and Medco Health Solutions (NYSE:MHS)?

Read on for my detailed observations and predictions about 90-day prescriptions at store-based retail pharmacies. FYI, you can learn more about mail-order economics for PBMs, plan sponsors, and consumers in The 2010-11 Economic Report on Retail and Specialty Pharmacies.

Friday, January 14, 2011

CMS Rejects South Carolina's Medicaid Pharmacy Payment Increase

I courted controversy last July in A Victory for Pharmacy Profits in South Carolina by showing that a proposed revision to South Carolina’s Medicaid program would have paid pharmacies far more than other states for no real reason at all. At the time, the NACDS had touted the increase as a "Major Victory for Patients and Pharmacy in South Carolina." The increase was intended to adjust pharmacy reimbursement for the September 2009 Average Wholesale Price (AWP) rollback.

Well, it turns out that the Centers for Medicare & Medicaid Services (CMS) agrees with me because CMS recently rejected the payment increase. In a heretofore unpublished letter from CMS Administrator Dr. Donald Berwick to South Carolina's Department of Health and Human Services, Dr. Berwick wrote that "the State's interpretation of the First DataBank. Inc. settlement is contrary to its intended purpose of correcting the inflated markup of AWP." (More excerpts below.) Oh, snap!

Hat tip to Eric Ward, an intrepid investigative journalist for TheNerve.Org. He obtained the letter through a Freedom of Information Act request and shared it with me. Read his article.

Thursday, January 13, 2011

Pharmacy Profits in Preferred Networks with PBM Transparency

A new report draws some unexpected conclusions about pharmacy profits when a prescription benefit plan sponsor combines a “transparent” pass-through Pharmacy Benefit Manager (PBM) contract with a preferred network design. See The Value of Alternative Pharmacy Networks and Pass-Through Pricing: An Actuarial Analysis. (free download) The study was conducted by Milliman, an actuarial firm, and sponsored by Restat, a privately-held PBM.

The surprising conclusion about a preferred network design with transparency? A majority of the savings come from reduced pharmacy margins, not from reduced PBM margins. Milliman estimates that the pharmacy gross profit per script would drop by 78% for brands and by 50% for generics. Yikes!

While these reductions seem awfully large to me, this report is a useful thought experiment that should spark some critical thinking by plan sponsors, PBMs, and pharmacies. The detailed estimates are pictured below. Let me know what you think in the comments.

Last February, I asked: Why do pharmacy owners care about PBM transparency? The Milliman study suggests an important corollary: Be careful what you wish for, lest it come true.

Tuesday, January 11, 2011

Who Paid for Prescription Drugs in 2009?

The boffins at the Centers for Medicare & Medicaid Services (CMS) just released the 2009 computations of National Health Expenditures (NHE), including the latest data for prescription drugs.

Total NHE grew by only 4.0%, the slowest rate in five decades and below the 5.7% growth rate predicted for 2009 by CMS only last February. Alas, the slowdown occurred because of the economy, not healthcare reform. As Carl Mercurio of the Corporate Research group wittily notes in his blog: To Slow Healthcare Spending Growth, Destroy the Economy.

In 2009, total NHE for retail prescription drugs were $249.9 billion in 2009, up 5.3% versus 2008. A few intriguing observations from my number-crunching:
  • Retail prescription drug prices, as measured by the Consumer Price Index for prescription drugs, rose 3.4% in 2009. Thus, real (inflation-adjusted) growth in drug expenditures was only 1.9%.
  • Public funds continue to crowd out private payers.
  • Medicare drug expenditures grew by 8.8%, while private health insurance grew by 5.1%.
  • Consumer out-of-pocket payments grew by only 2.2%.
  • Hooray! CMS' prediction of 5.2% growth from last February was pretty close to the actual rate, breaking their multi-year streak of poor forecasts. (See Drug Forecasts: Oops!...They Missed It Again.)
Read on for details and charts. Note that the NHE totals are net of manufacturer rebates, so the reported figures are lower than prescription sales of retail pharmacies. Policy wonks should check out the methodological note at the bottom for details.

Please note that the discussion of the Medicare growth rate was updated on January 13 based on comments from CMS. See below for details.

Monday, January 10, 2011

Meet Me at the National Pharmacy Forum

I want to let the Drug Channels audience know about the 2011 National Pharmacy Forum on February 7-9, 2011, in sunny and warm Phoenix. The event is co-hosted by the Health Industry Group Purchasing Association (HIGPA) and the Healthcare Industry Supply Chain Institute (HISCI).

I will be delivering the keynote address called “The Battle for Control Over Specialty Drugs.” I’ll examine the evolution of specialty drug distribution channels and the impact on hospitals and community alternative care sites. Check out the complete event details on the HIGPA site.

Send me an email if you’d like to arrange a one-on-one meeting. If you run into me at the convention, please introduce yourself and let me know what you think of Drug Channels.

Thursday, January 06, 2011

Health Care Reform and Pharmacy Benefit Premiums

I recently got around to reading the newest Managed Care Digest Series reports. These useful—but overly dense—reports compile tons of interesting data about pharmaceuticals, prescriptions, and benefit design.

One intriguing chart caught my eye. As you can see below, pharmacy premiums rose by 72% in Massachusetts after the state’s health care reform plan was launched in 2006. Meanwhile, premiums rose by only 27% in the rest of the country over the same period.

Harbinger of the U.S. future or just another foolish Bay State tradition, like rooting for the New England Patriots? (Hey, I live in Philadelphia...)

Tuesday, January 04, 2011

CVS-UAM: Part D Powerhouse with a Surprising Alliance

Welcome to 2011, the year with the third numerical palindrome (11-02-2011) of the 21st century.

The year's consolidation activity got started with a bang when CVS Caremark (NYSE:CVS) acquired Universal American's (NYSE:UAM) Medicare Part D Business. Read the press release.

The deal exemplifies the ongoing PBM consolidation trend that I have been predicting for a few years. Scale matters for Medicare Part D prescription drug plans (PDPs), too. (See data below). Profits from the coming generic boom create even more deal momentum. CVS Caremark even gets some bragging rights by taking one of Medco Health Solution's (NYSE:MHS) biggest Part D clients—a reversal of recent trends for these two competitors.

I want to highlight an intriguing but little-noticed angle on the deal. Starting in January 2012, the National Community Pharmacists Association (NCPA) will become business partners with its arch-nemesis CVS Caremark. Strange bedfellows, indeed!

Questions for CVS Caremark shareholders: How important is NCPA’s support of the Universal American Part D plans? Will the alliance reduce NCPA's anti-CVS lobbying to Congress and the FTC, thereby lessening political pressure on CVS Caremark?