Thursday, February 08, 2018

Specialty Distributors’ Customer Mix Changes As Physician Buy-and-Bill Fades

In A Lesson from McKesson: How Specialty Pharmacy Growth Is Hurting Wholesalers, I explained the challenges to wholesalers' profits from the growth of patient-administered specialty pharmacy drugs.

Today, I provide a complementary look at the changing customer mix of wholesalers’ specialty distribution businesses for provider-administered drugs.

As you will see below, the latest data show that specialty distributors’ revenues from independent physician offices and clinics have eroded significantly. These customers now account for less than half of specialty distributors' business.

This change mirrors the ongoing disruption of the buy-and-bill market, where higher-cost hospital outpatient settings have been crowding out lower-cost physician offices.

The evolution of buy-and-bill has been generally negative for wholesaler profits, though the public companies have been relatively silent on the implications. It’s another aspect of the specialty boom that may prove not to be relaxing times for the wholesale distribution channel.

FOUND IN TRANSLATION

Specialty distributors sell specialty pharmaceuticals primarily to physician-owned/operated clinics, hospitals, and hospital-owned outpatient clinics. The biggest specialty distributors are divisions of the Big Three wholesalers: companies owned by AmerisourceBergen (Oncology Supply, ASD Healthcare, and Besse Medical), Specialty Solutions (a business unit of Cardinal Health), and McKesson Specialty Health (a business unit of McKesson Corporation). Other specialty distributors include CuraScript SD (a business owned by Express Scripts) and many smaller companies.

To evaluate changes in the specialty distribution market, we rely on the Healthcare Distribution Alliance’s (HDA) recently released 2017 Specialty Pharmaceutical Distribution Facts, Figures and Trends. (Free download with registration)

The 2017 report is based on responses from five unnamed specialty distributors that collectively have more than $60 billion in specialty distribution revenues. In the chart below, I included data from previous editions of this report.

For a deep dive into the buy-and-bill channel, see Section 3.1. of our 2017–18 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

BUH BYE, PHYSICIAN BUY-AND-BILL

The HDA data track the evolving customer mix of specialty distributors. Specialty distributors’ revenues for independent physician offices and clinics have declined significantly, from 73% of sales in 2011 to 45% in 2016.

[Click to Enlarge]

Over the years, I have been tracking the decline and fall of physician buy-and-bill for specialty drugs. The HDA data are consistent with this broader evolution of the buy-and-bill system for provider-administered drugs.

For example, hospital outpatient sites now constitute more than one-third of Medicare spending and have been crowding out physician offices. Part B payments to physician practices are growing much more slowly than are payments to hospitals. See New Part B Buy-and-Bill Data: Physician Offices Are Losing to Hospital Outpatient Sites.

Consider that the share of oncology practices owned by hospitals and health systems has doubled, from less than 30% in 2010 to nearly 60% in 2015. See the chart in our April 2017 news roundup.

I review the factors driving the shift in sites of care in Section 6.4. of our our wholesaler economic report.

BUH-BYE, PROFITS

The ongoing customer mix shift negatively impacts wholesalers’ specialty distribution subsidiaries and overall profitability:
  • Loss of GPO admin fees. The largest group purchasing organizations for physician practices are owned by the largest specialty products distributors. (See Section 3.2.2. of our wholesaler economic report. These GPO relationships let distributors create preferred supply relationships for product distribution while earning GPO administration fees. However, health systems do not contract via the community practice GPOs. The profits therefore vanish after a practice is acquired by a health system.
  • Reduced margins. When care shifts from independent practices to hospitals, the distribution channel’s profits typically decline. That’s because servicing an individual physician practice is generally more profitable for a wholesaler than is servicing a hospital or health system. A full-line wholesaler’s sell-side margins from a hospital customer are generally lower than a specialty distributor’s margins from a community-based physician practice. Additionally, the remaining independent practices are generally larger and more professionally managed than the practices that have been absorbed by health systems.

    Some wholesalers have been mitigating these profit losses by selling products to hospitals via their specialty distribution businesses. However, ordering and payment are facilitated by the full-line wholesale business that has a prime vendor relationship with a hospital. In theory, a wholesaler can still offer one-stop shopping for its hospital customer, while sustaining the different margin and profit structures between specialty distribution and full-line wholesaling. However, some hospitals and health systems are demanding comparable pricing across these channels.
The public companies have been vague about the changing nature of their specialty distribution customers.

Despite the potential negative effects of the shift in care, wholesalers will likely retain their role in channels for provider-administered drugs. We expect that hospitals and physicians will continue to rely on distribution intermediaries as their primary sources of supply.

At least specialty distributors have that going for them, which is nice.

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