Summer Reading

Dear Drug Channels readers,

I’m going to take a break from blogging in July and August.

But never fear -- there's no need to lounge around reading Danielle Steel novels! Below are seven recommended books on the pharmaceutical and pharmacy industry.

Alas, there are no good books to recommend on pharmacy economics or the pharmaceutical supply chain -- the core topics of my Drug Channels blog. I’ll get around to writing that book one of these days.

I’ll be back after Labor Day unless some major news event compels me to write sooner. In the meantime, send me an email if I’ve missed your favorite book and I’ll add it to the list.

Have a great summer!
Adam

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Dangerous Doses – Great book, especially if you want understand why Florida passed a pedigree law. The book is somewhat outdated because industry changes have addressed many of the secondary market problems described in the book. Nonetheless, it is perhaps the most readable and suspense-filled book on my list. Highly recommended for fans of drug channels!

Skin in the Game: How Putting Yourself First Today Will Revolutionize Health Care Tomorrow – An intermittently interesting look at the concepts behind consumer-directed healthcare movement, notable because it is co-authored by John Hammergren, Chairman of the Board, President, Chief Executive Officer of McKesson (MCK). Kudos to Mr. Hammergren for avoiding the usual self-aggrandizing CEO puffery, although there's too much filler that sounds like it was written by the large research team credited in the preface. Given the tone of this book and the importance of health care in the 2008 election, I am quite surprised that Mr. Hammergren has not donated any of his considerable personal wealth to a political candidate since he made a $1,000 contribution in 2000 to John Kerry. (Search OpenSecrets.org if you don’t believe me.)

Protecting America's Health: The FDA, Business, and One Hundred Years of Regulation – This is a fascinating look at the evolution of the pharmaceutical industry and the history of U.S. drug regulation. Be warned – there are some shameful events in the industry’s past, but the book maintains a (mostly) even-handed perspective. The author conveys historical events in a lively and interesting way, so the book is an entertaining way to get an historical perspective on the politics and science of drug regulation.

The Business of Healthcare Innovation – A solid analysis of key commercial issues in the four major business sectors developing innovative healthcare products - pharmaceuticals, biotechnology, medical devices, and information technology. Each sector receives a chapter-length analysis that includes market structure, key players, product development, commercialization, alliances, business strategy, and growth prospects. Thoughtful executives will be grateful for the book's solid research foundation and unwavering focus on practical business strategy issues. (You can read my full review on Amazon.)

Pharmaceutical Economics and Policy – This book provides an academic look at the economics of the pharmaceutical manufacturing industry. Read it to get grounded on some fundamental principles behind the industry and to better understand the strategies that pharmaceutical companies pursue. The book is quite dense, so I advise you to dip into it as a reference rather than trying to read it straight through, i.e., this is not beach reading. There are also many helpful references to reputable academic research about the drug industry.

Marketing Channels (7th Edition) – This MBA-level textbook is a must-own for any executive who thinks strategically about the way in which customers buy their company's products. While not specific to the pharmaceutical industry, many of the general principles apply to companies within U.S. drug channels -- pharmacies, wholesalers, PBMs, payors, salespeople, etc. I can personally vouch for the validity of their insights into channel strategy since I co-taught an executive education program at The Kellogg School with two of the co-authors, one of whom was on my PhD dissertation committee. (You can read my full review on Amazon.)

Guide to Federal Pharmacy Law – Alright, I’ll admit that this one is for hard-core pharmacy industry analysts only. I have used it as a reference on certain distribution issues, although the book does not cover every relevant topic and can be out-of-date on fast-moving topics such as pedigree. As a non-lawyer, I enjoy reading the author’s analyses of individual pharmacy law cases.

A Pharmacist’s View of $4 Prescriptions

Yesterday’s post on Walgreens (WAG) and Wal-Mart (WMT) (Walgreens’ $4.33 Surrender to Wal-Mart) set a new web traffic record for Drug Channels. Guess I struck a nerve!

Today’s post is a guest editorial from Jeff Ellis, R.Ph., about $4 prescriptions. Jeff is the editor of the E-Info Exchange, the e-newsletter of the Illinois Pharmacists Association. He has kindly given me permission to reprint his June 13, 2008, editorial from the IPhA newsletter. Enjoy!

Adam

P.S. See How Pharmacists View Wal-Mart's Pricing Strategy for my historical (circa October 2006) perspective on the issue.

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In My Opinion

By Jeff Ellis, Editor, E-Info Exchange, IPhA

This week I have focused on the $4 prescription. I honestly thought it would go away as it seemed such an incredibly bad idea, particularly if one expected to at least break even when dispensing a prescription. I did not foresee the tenacity of a certain chain who shall remain nameless and who very possibly owns the world; or the accolades from society that followed. I assume the publicity from the stunt is “priceless”, so it continues. This morning NBC5 in Chicago (I live on the fringes of Chicagoland) announced Dominick’s is getting in line. So that only leaves Walgreens, CVS and Osco holding the line unless I missed the announcement (a very reasonable assumption).

How do you answer this? I have come up with some conclusions.

1. Close.
2. Meet the price (which may lead to #1).
3. Beat the price (which also may lead to #1).
4. React to it using halfway measures and hope it goes away (which also may lead to #1)
5. Offer more value for the higher price. Decide what that value is, publish it to our patients, sell all the employees on the idea and adhere to it slavishly.

There are no doubt many other ways to respond and we all would certainly like to hear what they are. The platitudes and clichés I see in articles seem unimpressive. I hear constant talk about $4 a gallon gasoline and how it is affecting patients. One response is to reduce the amount of money they pay for prescriptions, no matter how annoying, how little service or how long the wait is. (Aside: A gallon of gas is more than a prescription at Wal-Mart.)

We are attempting to sell PBMs, as well as the state and federal governments on the idea that to break even on a prescription we must get about $9 over cost. All studies say so. The $4 prescription is not helping our cause. It is also disheartening to me that such large employers of pharmacists seem to think so little of pharmacy.

If pharmacists decide (individually) they do not want to work for an employer that thinks nothing of their profession, I foresee these employer(s) crying to regulators about how the shortage of pharmacists is affecting their ability to deliver $4 prescriptions to their customers (they are, of course, customers-not patients) and how the only solution is to train technicians to staff their pharmacies and we need a change in regulation to allow this.

Consider the ramifications of that. I am not convinced that some of the leaders and educators of this profession do not see this as the future and are training our young pharmacists for this eventuality. But how many consultant pharmacist positions are out there?

Walgreens’ $4.33 Surrender to Wal-Mart

Walgreens (WAG) has begun touting its Walgreens Prescription Savings Club, which offers a 3-month supply of over 400 generics for $12.99 (plus an annual membership fee). “That’s just over $4 a month” screams the promotional literature. (It’s $4.33 per month for math geeks.)

Walgreens latest move suggests that the low-priced generic wave is having a bigger effect that many people (including me) expected. It also means that competition in the private sector is now removing generic margin from the channel much faster than an Average Manufacturer Price (AMP)-based FUL ever could have.

WAL-MART SETS THE RULES

When Wal-Mart (WMT) launched its $4 generic drug program in September 2006, I wrote the following in Wal-Mart's Generic Pricing Will Trigger Big Changes: “Folks, we are witnessing a triggering event in real-time. I think Wal-Mart’s move will create massive change in the U.S. pharmaceutical distribution system because it threatens our current system of cross-subsidization.”

Non-pharmacy chains followed Wal-Mart’s move – Target, Kroger, Safeway, Giant Food, et al. These retailers have been able to absorb lower generic margins because pharmacy represents a minority of their sales and gross profits.

Non-pharmacy chains are taking advantage of the high generic margins embedded within in the traditional pharmacy business model, especially for cash-pay customers. If you don’t know what I mean by “cross-subsidization,” click here to read my post from May 2006 in which I predicted this outcome.

Here are my three most recent analyses of Wal-Mart’s generic drug strategy:

• Wal-Mart Redux (May 2008)
• Wal-Mart's PBM Game Plan (January 2008)
• Wal-Mart's Gain is not Walgreen's Pain (November 2007)

WALGREENS REACTS

Like many people, I’ve believed for some time that chains such as CVS Corp (CVS) or Walgreens (WAG) were not especially vulnerable to Wal-Mart’s (WMT) $4 generic program because customers with third-party insurance do not save much versus standard co-pays. Walgreens was so confident in its own business model that it issued this Statement On Wal-Mart’s Promotional Drug Pricing in October 2006:

“Walgreens will not match Wal-Mart’s promotion. Once consumers learn the fine print of Wal-Mart's program, they'll realize Walgreens offers the best value for pharmacy patients with its convenient locations, close-in parking and unique pharmacy services.”

But on Monday’s earnings call, Walgreen President Gregory Wasson recanted, stating: “Discount retailers and grocery chains are picking up their pace of promotional pricing, especially in the pharmacy, which they’re using to build traffic.” Hence the emphasis on the new savings card, albeit with the requisite positive spin about convenience, service, brand, yada yada yada.

Overall, Walgreens still looks like a very strong company. The convenience factor is surely higher than Wal-Mart for most consumers. But I wonder whether Walgreens is throwing in the towel too soon simply because we are in a generic drug lull. I also note that Walgreens is aggressively (and sensibly) diversifying away from its core retail pharmacy roots.

Unfortunately, it’s very difficult to assess the true impact of $4 generics because Walgreens provides almost no public disclosure about its generic volume and margins. (Pet peeve: Despite representing 70%+ of pharmacy revenues, pharmacy chains mysteriously still consider financial data about the retail prescription business to be “not material.” Yeah, right.)

COMPETITION IS EVEN WORSE THAN AMP

Most pharmacists have been fretting about reduced generic margins for Medicaid scripts if the Average Manufacturer Price (AMP) rule ever gets implemented (and cheering every legislative victory.) But Walgreens' move signals that competition among pharmacies is now removing generic margin dollars from drug channels much faster than AMP. I suspect that Pharmacy Benefit Managers (PBMs) will be worried by Walgreens decision, too.

I have been trying to warn pharmacists for the past year that AMP is NOT the single biggest threat to the survival of independent pharmacies or to generic script margins. The pharmacy shakeout is coming, but don’t put all the blame on CMS.

AWP: Dead Parrot or Just Resting?

Multiple people have emailed me in the last two weeks with variations on essentially the same question: Is Average Wholesale Price (AWP) no more? Has it ceased to be? Has it expired and gone to meet its maker? Bereft of life, does AWP rest in peace? If it wasn’t nailed down in many contracts, would it be pushing up the daisies? Has AWP rung down the curtain and joined the choir invisible?

In other words, is AWP an ex-benchmark?

Definitely. Maybe. Perhaps not. Here’s a quick update along with links to some helpful resources.

OUR STORY SO FAR

First Databank allegedly increased the spread between Wholesale Acquisition Cost (WAC) and Average Wholesale Price (AWP) from 1.20 to 1.25 on certain drugs in 2002. Many people first became aware of the situation through an October 2006 front-page story in the Wall Street Journal (How Quiet Moves by a Publisher Sway Billions in Drug Spending).

U.S. District Judge Patti B. Saris gave preliminary approval to a legal settlement in June 2007. There were two important elements of the settlement with regard to the publication of AWP:

• The WAC-to-AWP spread would be rolled back to 1.20 (if an NDC’s spread was higher) for all drugs
• FDB would stop publishing AWP no more than 2 years after the final court order

Since AWP is still widely used as a drug reimbursement benchmark for pharmacies, this proposed settlement affected the economics of many providers that were not involved in the lawsuit or settlement. In particular, pharmacy associations objected to the proposed class settlement, including the Pharmaceutical Care Management Association (PCMA), the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI).

In January 2008, Judge Saris rejected the original settlement and requested that the parties come back with a new settlement plan. An amended settlement was filed in June 2008 in which First Databank would roll back the AWP-to-WAC markup only for the subset of about 1,400 drugs identified in the original complaint, among other actions.

However, the amended (and still unapproved) settlement does not require First Databank to stop publishing AWP or roll back AWP on all drugs. Nonetheless, FDB has announced that it will unilaterally roll back the AWP for all drugs to 1.20 and discontinue publishing the Blue Book AWP data independent of the litigation. (See the June 2 letter on its website.) So the outcome would be the same (no more published AWP) although the currently proposed settlement does not technically require the demise of AWP.

Meanwhile, San Francisco and Connecticut have both filed suit against McKesson (MCK) regarding the company’s alleged role in the 2002 increase in the WAC-to-AWP spread. (See Connecticut sues McKesson on racketeering charges.)

MY TAKE:

1. AWP may not be quite dead yet, but it is certainly pining for the fjords (as discussed in the video below). For instance, other AWP lawsuits unrelated to FDB have created legal “speed limits” for the WAC-to-AWP markup. (See Judge Saris on Fictitious AWPs.)
2. Alternative list price benchmarks, such as WAC, are likely to become more common. Example: the Department of Defense’s TRICARE contract that I discuss in Big WAC Attack.
3. Where possible, pharmacy reimbursement relationships will be structured to maintain dollar-based economic arrangements regardless of the benchmark. Medco Health Solutions (MHS) discussed this issue in November. (See PBMs and AMP.)
   
4. Computed (non-list price) benchmarks such as Average Manufacturer Price (AMP) could one day become the norm for retail pharmacy, but the legal and publication status of AMP makes the timing very uncertain. (See my many posts on AMP for more.)

RESOURCES

• FDB AWP Communications
• FDB/Medi-Span AWP Settlement Website
• Hagens Berman Sobol Shapiro (court documents)

AND NOW FOR SOMETHING COMPLETELY DIFFERENT

Special thanks to John Cleese and Michael Palin for this video overview of AWP’s legal status:

An AMP Fix for Rural Pharmacies

Pharmacist trade associations are pursuing an aggressive, take-no-prisoners approach to “fixing” the Average Manufacturer Price (AMP) situation by citing the dangers to patient access if rural independents fail.

In fact, two recent studies support the idea that some rural communities could face access challenges if the local pharmacy closes. However, less than one percent of the U.S. population faces potential access problems and there are less than 2,000 at-risk rural pharmacies. In other words, the problem appears to be smaller and more fixable than pharmacy industry rhetoric.

So why not solve the rural access problem with a targeted solution for at-risk pharmacies that would cost much less and thereby have a greater chance of success? Rural pharmacists should be asking this question.

RISKS TO PATIENTS IN RURAL AREAS

Eric Shields, Pharm.D., maintains a blog and website for Montana pharmacists called GrizRPh. Eric is a self-confessed “avid fan of Drug Channels” (thanks!), but feels that I underestimate the dangers to rural pharmacies from AMP.

In an exchange with me following a recent GrizRPh blog post, Eric makes two compelling points about rural pharmacies:

• Access to healthcare would be compromised if a town’s only pharmacy closes and there are no viable alternatives within a reasonable driving distance.
• Pharmacies in rural communities can’t get bigger (as I suggest in Pharmacy Profits & Part D) because they serve small, fixed rural populations that are not growing.

These are very legitimate access issues for individual pharmacies, such as the store where Eric works now. Tobey Schule, RPh (owner of Sykes Pharmacy in Kalispell, MT) testified in May 2007 before the Senate Committee on Finance about the unique challenges facing his rural pharmacy. (Click here to read his testimony.)

THE SCOPE OF THE RURAL ACCESS PROBLEM

Alas, the plural of anecdote is not data.

To assess the prevalence of rural access problems, I found two recent studies that attempt to quantify the impact of access on individual communities or consumers. There may be more, but these two illustrate the situation.

• Reliance on Independently Owned Pharmacies in Rural America – “In over 2,000 rural communities, the only local pharmacy is independently owned, and in 1,044 of those communities, there is no other pharmacy within 10 miles.” The total population in these communities was 1.7 million people in 2000. This study, which was funded by HHS’ Federal Office of Rural Health Policy, also generated useful state-by-state maps.
  

• Consumer Access to Pharmacies in the United States – “Independent pharmacy consumers in rural areas typically have access to 14 competing pharmacies located with 15 miles of their current pharmacy.” This study was funded by the Pharmaceutical Care Management Association and cited by PWC in its study.

In other words, these studies imply fewer access problems than the exaggerated claims that 11,105 pharmacies will close due to AMP.

AN AMP FIX FOR RURAL PHARMACIES

If rural access is the real problem, then let’s find a solution to that problem.

How about we ask states to designate rural pharmacies that are the sole provider in a community as Critical Access Pharmacies (CAP)? These pharmacies would be eligible for higher dispensing fees that would be set based on the pharmacy’s cost accounting data. There should be about 1,000 to 2,000 such pharmacies in the U.S.

There is CMS precedent for this policy. Medicare designates approximately 1,300 small hospitals as Critical Access Hospitals (CAH). According to this MedPAC briefing document, CAHs are limited to 25 beds and primarily operate in rural areas. To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital. States can also waive the distance requirement for a hospital declared to be a “necessary provider.”

Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on each hospital’s reported costs. Each CAH receives 101 percent of its costs for outpatient, inpatient, laboratory and therapy services, as well as post-acute care in the hospital’s swing beds.

RISK AND REWARD

NACDS, NCPA, or FMI are pursuing an aggressive, take-no-prisoners approach to a legislative AMP “fix.”

An alternative approach would be to advocate with Congress and/or CMS for a targeted, solution aimed at mitigating the specific risk of rural access. Judging by the studies cited above, a targeted CAP program would have much lower costs than an all-or-nothing AMP rollback. Therefore, it would be more palatable to lawmakers and perhaps more likely to get enacted.

My web traffic shows many readers of Drug Channels in the U.S. Senate and House of Representatives. Perhaps they can help pharmacy craft a winning solution for rural pharmacists.

Back to you, Eric.

AMP Delay Buried in New Medicare Bill

On Friday, Senator Max Baucus (D-MT) proposed a mammoth Medicare/Medicaid bill that further delays the implementation of Medicaid’s Average Manufacturer Price (AMP) provisions. Depending on your perspective, a delay would represent either the salvation of the pharmacy industry or the victory of emotion over economics.

The bill is called Medicare Improvements for Patients and Providers Act of 2008 (S. 3101). Here are some links for your reading pleasure:

• Official Bill Summary
• Full text of S.3101
• THOMAS listing (full Senate information)

The bill primarily focuses on proposed cuts in physician payments, as the AP headline makes clear (Bill would eliminate Medicare cut for doctors). The text of the bill runs to an awe-inspiring 259 pages.

AMP is addressed way down in Section 203 (on page 251 out of 259 in the full text). Two key points:

• Delays the use of AMP for Federal Upper Limits of multi-source (generic) drugs until at least September 30, 2009
• “Temporary” suspension of online publication of AMP data until at least September 30, 2009

Note that the new bill does not incorporate many elements of Senator Baucus’ previously proposed bill S.1951, which has been slowly gaining support. S.1951 now has 49 Senate co-sponsors, including Barack Obama (since last December) and more recently Hillary Clinton (since March). John McCain is not a co-sponsor.

Of course, this is Washington DC, so who really knows whether the AMP section will survive the inevitable earmarks and horse trading. But notch up another victory for the pharmacy’s lobbyists, who are definitely earning their pay!

11,105 Pharmacies Gone?!? Just More AMP Hype

A new report prepared by PriceWaterhouseCoopers (PWC) claims that 11,105 pharmacies will close due to the Average Manufacturer Price (AMP) provisions in the Deficit Reduction Act of 2005 (DRA).

• Press release from the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI)
• Impact of the Deficit Reduction Act of 2005 on Pharmacies by State (Full Report)

However, as I explain below, this report is fundamentally flawed in a way that will be immediately apparent to anyone familiar with pharmacy economics. In my opinion, the “findings” are not a reliable or accurate prediction of the actual outcome of AMP on the pharmacy industry. No one in the channel – manufacturers, PBMs, wholesalers, pharmacies, and payors – should use this report to plan business strategy.

QUICK OVERVIEW

The centerpiece of the report is a state-by-state estimate of the number of pharmacies that will close if AMP is used to compute the FUL. (See The AMP Saga Goes On and On and On for background.) There are many questionable methodological aspects behind these estimates, but the most significant assumption in PWC’s model derives from the variation in the 2001 average pharmacy net profit.

The average Net Profit reported in 2001 was 3.5% (as reported in the 2002 NCPA-Pharmacia Digest.) However, according to the self-reported data from the report: 13% of independent pharmacies had a net loss in 2001; 28% had a net profit of less than 2% in 2001; 33% had a net profit between 2% and 5% in 2002; and 26% had a net profit of 5% or more.

PWC’s model assumes that AMP would cause all pharmacies with negative net profits, i.e., a net loss, to close and also cause some percentage of pharmacies with “low” net profits to close.

BTW, Dr. Schondelmeyer’s November 2007 report from the AMP lawsuit used a similar approach to come up with the “loss of 10,000-12,000 pharmacies” guesstimate that has been cited up until now.

PHARMACY ECONOMICS 101

Understanding the flaw in the report’s method requires a quick review of a retail pharmacy’s income statement:

• Gross Profit = Revenues minus Cost of Goods Sold (COGS)
• Net Profit = Gross Profit minus Operating Expenses
• Operating Expenses = Owner compensation + Payroll Expenses (excluding owner’s comp) + Other Expenses (rent, utilities, etc.)
• Owner's Discretionary Profit Before Tax = Net Profit + Owner Compensation
  

Key insight: A reduction in reimbursement has no direct effect on a pharmacy’s Net Profit.

A reduction in reimbursement, such as the use of AMP for FUL computations, lowers Gross Profit by reducing Revenues (assuming no change in COGS, among other things). However, the impact on net profit depends on whether a pharmacy can alter its operating expenses in response to a decline in Gross Profit.

If a pharmacy’s costs are entirely fixed regardless of changes in reimbursement, then a reduction in reimbursement translates directly into a loss of net profit. However, the impact on net profit would be less significant if a pharmacy can adjust its expenses in response to a change in reimbursement levels.

OPERATING LOSS OR TAX STRATEGY?

A private business may report an “net loss” for many reasons that do not relate to the true financial health of the business. For example, there could be tax minimization benefits for a business owner from reporting a low or negative net profit while generating high personal income for the owner.

Thus, the “average” pharmacy could have reported an “net loss” if the average pharmacy owner had chosen to pay himself or herself a larger bonus of instead reporting a positive net profit on the NCPA survey. In other words, a decline in Gross Profit could be offset by a reduction in profits to the owner without causing the business to shut down.

I’m no accountant, but a “global market leader for tax services” such as PWC should have considered these financial issues in their computations. If you understand these matters, then you too will question the core assumption that 13% of pharmacies with a “negative net profit” will automatically close.

So here’s another way to think through the math.

• PWC estimates that average pharmacy net profits drop by $23,300 due to DRA.
• The most recent data reported (2003) put Owner's Discretionary Profit Before Tax at 8.1% of revenues.
• Using the most recent average revenue data of $3.6 million per independent pharmacy implies that Owner's Discretionary Profits were about $293,000.

Unfortunately for owners of independent pharmacies, the most obvious way to stay in business would be to reduce average pharmacy owner compensation by $23,300 to about $270,000 per year.

Personally painful? Yes. So the real (and still unanswered) question becomes: At what point will an independent pharmacy owner decide that the Owner's Discretionary Profit is too low and shut down or sell the business?

BOTTOM LINE

Look, I understand what’s going on. Pharmacists want to be compensated appropriately for the value that they contribute to U.S. health care. I fully support pharmacists’ First Amendment rights to advocate on behalf of their own interests. See In Defense of Lobbyists from Friday’s Wall Street Journal for a spirited POV on this subject.

I’m just bothered that pharmacists are making the case using misleading analyses rather than explaining their true value to the health care system or confronting the cross-subsidies of the pharmacy economic model. I’m disturbed to think that this report might be used by outside parties to predict the actual impact of DRA. I also suspect that many independent pharmacists may begin to believe (falsely) that AMP is the single biggest threat to their collective survival.

Just to be clear, I have no stake in the outcome of the AMP battle. I’m not being paid to write this blog nor do I get paid for advocating any particular position regarding AMP. I don't have a grudge against retail pharmacists - honest!

But I do believe strongly in the value of independent expert analyses. Unfortunately, the latest AMP report appears to be political theater designed to influence policy makers rather than a genuine attempt to quantify the impact of AMP. Too bad.

Wal-Mart Redux

Wal-Mart Stores (WMT) latest expansion of its generic drug program represents more of the same despite the company's promise on Friday to make a “major health care announcement.” Nonetheless, the company’s latest comments shed additional light on the true economics of the program.

Click here to see the complete list of eligible drugs.

Here are some high level points about Wal-Mart’s generic program.

More Volume = Lower Cost of Dispensing. Way back in my still-valid December 2006 analysis, I predicted that Wal-Mart would benefit from the program by generating incremental prescription volume for its relatively underutilized pharmacies. Wal-Mart senior vice president John Agwunobi confirmed my view yesterday in this Associated Press story, saying: “It also offers us the ability to add capacity to our pharmacies without adding people."

Wal-Mart’s generics are not loss leaders. Last October, I compared Wal-Mart’s retail generic prices to average acquisition costs and found average gross margins of 24%. These calculations dramatically underestimate Wal-Mart’s actual gross margin because Wal-Mart's product acquisition costs are much lower than the independents, supermarkets, and small chains that buy through wholesalers.

State governors love this program. Medicaid does not pay more than a cash customer at a given pharmacy because a pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. Thus, states pay less whenever Wal-Mart fills a Medicaid generic script for which Wal-Mart’s retail price is below the Medicaid reimbursement rate. State revenues are declining due to the economic slowdown, making Wal-Mart look good.

Cash-pay customers also love the program. Wal-Mart is offering a great value for uninsured and under-insured patients, a point that I made in the Financial Times on Monday. In contrast, consumers with third-party insurance do not save much versus standard co-pays, which is why chains such as CVS Caremark (CVS) or Walgreens (WAG) are not very vulnerable to Wal-Mart’s program.

Price shoppers are fans, too. There are wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right.) Wal-Mart’s program simplifies the search process, especially for elderly Part D participants trying to stay below the donut hole. (See Part D and Generics.)

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Curiously, NCPA declined to issue its usual denunciation about how Wal-Mart’s program is a “classic bait-and-switch” (9/28/06) or “devaluing and destroying the practice of pharmacy” (9/27/07). Perhaps the surviving independents have figured out how to coexist with Wal-Mart, as implied by 2007’s unexpected growth at independent pharmacies?

The AMP Saga Goes On and On and On

There are some new developments for Average Manufacturer Price (AMP), although the situation has now devolved into a somewhat arcane legal battle. Unless there is a legislative fix (unlikely), then I expect that CMS will punt this issue to the next administration in 2009.

OUR STORY SO FAR

As a reminder, the Deficit Reduction Act of 2005 required the Center for Medicaid and Medicare Services (CMS) to set the Federal Upper Limit (FUL) on payment for generic drugs at AMP plus 250 percent. The FUL is currently computed using the Average Wholesale Price (AWP) list prices, although some states opt to establish reimbursement limits below FUL at maximum allowable cost (MAC).

The change to AMP was advocated in September 2005 by the Bipartisan Commission on Medicaid Reform and the National Governor’s Association. This change was made in part because pharmacies were earning extraordinary profits from dispensing generic drugs in the Medicaid program.

In 2002, filling a script for a generic less than 5 years old gave a pharmacy $32 in “spread” – the difference between Medicaid reimbursement and acquisition cost. Filling a branded script yielded a comparatively skimpy $14 spread. (Source: Medicaid’s Reimbursements to Pharmacies for Prescription Drugs, a December 2004 CBO report that always generates hate mail from my pharmacist readers.) Private insurers, in the form of Medicare Part D plans, have done a better job at equalizing the dollar margins for brands and generics. (See Pharmacy Profits & Part D.)

CMS issued its Final Rule for implementing the AMP provisions of the DRA in July 2007. NACDS and NCPA, the two leading pharmacy trade associations, filed suit against CMS. To my surprise, they got an injunction that prevented CMS from adopting the AMP-based pharmacy reimbursement formula and publishing AMP data on the Internet. If you believe the over-heated rhetoric, then this legal delay saved up to 12,000 pharmacies from financial ruin.

COMING NOT-SO-SOON

More recently, NACDS and NCPA have opposed CMS’ subsequent clarification of “multiple source drugs” (a.k.a. generics) based on two technical legal objections. Yesterday, the two organizations were granted permission to file an amended complaint that challenges this new multiple source drug rule. The wheels of justice can grind slowly, so I don’t expect a resolution anytime soon.

Legislative action continues via pleas to pass The Fair Medicaid Drug Payment Act of 2007 (S.1951 and H.R. 3700). Neither bill has progressed very far. Senator Baucus, who sponsored S.1951, seems preoccupied with delaying the Medicare physician fee cut for 18 months. Perhaps Congress will feel generous since they voted on Thursday to delay seven new Medicaid regulations.

Just in case, NACDS sent a letter to Congress that asks for joint passage of the AMP bills along with unrelated bills about e-prescribing in Medicare. I presume the unstated motivation is to link the purported savings from e-prescribing to the extra costs of the Medicaid AMP increase.

NOT THE END

So, we are not very close to resolution, which is perhaps a small net benefit to pharmacies. I’ll occasionally check in on our old friend AMP but will primarily turn my attention to other topics until some big news breaks.

Tier 4 Co-Pays and Pharmacy Prices

Monday’s New York Times story about on Tier 4 co-payments (Co-Payments Soar for Drugs With High Prices) generated a lot of attention. The article highlighted the heavy financial burden placed on patients when their insurance plans require 20-30 percent co-payments on very expensive specialty drugs. 86% of Medicare drug plans now have a Tier 4 co-payment level.

The New York Times editorialized that “something has gone terribly wrong when patients have to pay thousands of dollars a month for drugs that they need to maintain their health — and possibly save their lives.” PCMA used the story to advocate for generic biotech products or biogenerics. Brass and Ivory, a “carnival of MS bloggers,” has a good round-up of reactions to the story from patients and others around the web.

Here’s my Drug Channels spin—I don’t see how patients can appropriately manage their piece of the pie under these new programs without adequate access to pricing information. The story also illustrates how the economics of the pharmacy supply chain can have unintended and unseen influences on benefit design and patient behavior. Below, I take a look at Copaxone , a treatment for multiple sclerosis that was highlighted in the Times story. Even an industry expert like me had trouble gathering the right data.

BLOOD, SWEAT, AND TIERS

Here’s the real problem: How should we manage the growing costs of specialty drugs? According to the latest Express Scripts Drug Trend Report:

• Specialty drug spend increased by 14% in 2007, with about 60% of the increase due to increased utilization and only 35% due to price increases.
• Non-specialty spending grew by only 4.4% in 2007.
• Specialty spending is forecast to grow through 2011 at 18-20% per year, which will be 3-4X the rate of non-specialty spending.

Conventional (economics) wisdom holds that shielding consumers from the true costs of their health care decisions will lead them to “over-consume” health care. The theory of consumer-directed health plans is built around this notion. In many situations, the theory works. For instance, seniors under Medicare Part D are highly motivated to keep their total drug costs below the lower end of the doughnut hole. As a result, more seniors are trying to get the biggest bang for their buck by accepting generic substitution, as well as shopping around at pharmacies. (See Part D and Generics.)

Presumably, tier 4 plans could both offset payer’s costs while also encouraging lower utilization use of expensive specialty drugs by patients. However, the situations described in this article are much different because:

• there are no generic alternatives;
• the drugs are essential for care;
• the drugs cost thousands of dollars per month; and
  
• typical cost-sharing ratios put substantial financial burdens on patients.
  

Thus, tier 4 plans could be totally counterproductive and ultimately more costly if they lead to non-adherence to therapy, excess hospitalization, etc.

THE TRACKS OF MY TIERS

Even if we put aside the essential nature of these drugs, there are still two more prosaic challenges that the NYT article ignores completely:

(1) How easily can a consumer manage their co-payment levels?

(2) What price should be used as the basis for the co-pay computation?

Let’s look at Copaxone, which features prominently in the Times’ story of Ms. Robin Steinwand of Maryland. Under Ms. Steinwand’s (now discontinued) pharmacy benefit plan, Kaiser Permanente increased her co-pay from a flat $20 per month to 25% of the drug’s cost (up to a maximum of $325). She hit the $325 maximum in the first month.

In theory, co-pays calculated as a percent of a higher cost drugs should motivate a consumer to shop aggressively for the pharmacy that offers the lowest drug cost and therefore the lowest dollar co-pay.

But is that even possible? Here’s what I found for Ms. Steinwand's hypothetical search:

Maryland’s Prescription Drug Price Finder provides little help. It only lists the comparative list prices for 26 commonly used drugs. Other states, such as New York, typically gather data on the top 150 most prescribed drugs. However, Copaxone generates only $300 million in retail pharmacy sales (#112 nationally in 2007 per Verispan data), so the drug is unlikely to appear on any state price finder sites.

I was also unsuccessful in getting prices from the websites of CVS, Walgreens, or Wal-Mart, so my assistant Angela called some Maryland pharmacies to gather the following range of “list prices”:

• CVS (Silver Springs, MD): “approx. $2,200” but must be special-ordered
• Wal-Mart (Laurel, MD): $2,343.68 but must be ordered from Wal-Mart Specialty Pharmacy in Florida
• Rite-Aid (Silver Springs): $2,390.99
• Walgreens (Potomac, MD): $2,560.99

Knowing a bit about the pharmaceutical industry, I managed to turn up the following publicly available information. I doubt the average consumer would be able to locate and interpret these data.

• Average Wholesale Price (Q4:2007) = $2,096.54 (from Florida’s ACHA site, among other places)
• Average Sales Price (during Q4:2007) = $1,564.47 (from CMS’ drug pricing files)

According to the article, the drug was being dispensed from a retail pharmacy at a “cost” of $1,900, which suggests that Kaiser was reimbursing the pharmacy at around AWP minus 10%. Given typical channel mark-ups, I presume that the pharmacy would not have covered its acquisition cost without the $325 co-payment. (No, I am NOT implying that pharmacy kept the difference between ASP and AWP-10%.)

TIERS FOR FEARS

Even though Kaiser has altered the program described in the article, it’s clear that Tier 4 co-payments may be here to stay. However, Tier 4 co-payments seem like a half-baked idea right now. The wide variations in pharmacy prices for Copaxone make me skeptical that a savvy consumer (or payer) can ever truly figure out how to get the “best deal” on a potentially substantial out-of-pocket co-payment.

In the meantime, “Go broke or die” doesn’t seem like a sensible policy to me.

Wrestling with AMP

CMS won’t appeal the preliminary injunction against the full implementation of the Average Manufacturer Price (AMP) Final Rule. So, there’s still No AMP for You, at least until CMS regroups. But stay tuned because industry insiders are now rallying behind a Senate bill that will fix AMP once and for all.

AMP-Mania XI

Gosh, it’s hard to believe that the AMP Injunction is already 11 weeks old!

Drug Topics recently ran a cover story called Bracing for a Showdown, which has a useful background on the AMP story from the pharmacists’ perspective. I pop up in paragraph 51 (out of 53) to scare the daylights out of pharmacists by stating:

“Pharmacists are being exposed to economic realities that they haven't faced before that are removing protections that protected them from fundamental economic realities. Retail pharmacy is now experiencing what has happened in other retail sectors over the past 25 years. Pharmacies need to get big, get focused, or get out.”

TOTAL NONSTOP ACTION

NCPA has posted its two most recent submissions to CMS related to the Final Rule:

NCPA’s Comments on CMS’ Final AMP Rule

Appendix to NCPA Comments

The Appendix is by far the more interesting document because it attempts to support NCPA’s claims that roughly half of all independent pharmacies will vanish due to AMP. Rather than rebutting the statistically shaky claims in the Appendix document on the blog, I will simply suggest that you re-read my Pharmacy Profits & Part D post as well as the comments to that post.


I wonder if the Editors of Drug Topics secretly agree with me about the exaggerated claims of harm from AMP. They chose to illustrate the showdown using the metaphor of professional wrestling – a “simulated sport and performing art.” (!)

S.1951 TAGS IN

I recently had the opportunity to ask Kathleen Jaeger, President and CEO of the Generic Pharmaceutical Association, about the future of AMP. She told me that there will be a coordinated legislative push this Spring for S.1951 (a.k.a. The Fair Medicaid Drug Payment Act of 2007). The first volley was sent Tuesday by NACDS with this letter to Senate and House leaders.

This bill, which has been referred to the Senate Finance Committee, has 42 co-sponsors, including Senator Barack Obama (but not Senators McCain or Clinton). I covered the key points from this bill in Last Ditch Effort for S.1951 last November, when there was an attempt to get movement before the Winter Recess.

CMS has not even bothered to update its own page on FUL since the injunction, so the momentum remains with the pharmacy industry. As scholar and philosopher "Rowdy" Roddy Piper, Ph.D., once said: "Just when you think you know the answers, I change the questions."

The Price Might Be Right

I just read an interesting new report about drug price comparison web sites run by 10 U.S. states. But the wide variations in pharmacy prices for a common, high volume generic make me wonder about the efficiency of the pharmacy market and the value of apparent transparency.

10 STATES, MANY PROBLEMS

The Center for Studying Health System Change just released a study called State Prescription Drug Price Web Sites: How Useful to Consumers? I’m not familiar with the organization, but I found the report to be very useful.

Consumers in 10 states can compare the price of selected prescription drugs at different pharmacies. These sites provide the retail pharmacy price, which is usually measured as the “usual and customary price” charged to Medicaid. In theory, these prices could help uninsured or underinsured consumers shop around for lower prices.

Unfortunately, the data provided by these sites are apparently not always usable. The report documents some predictable problems, including:

• Infrequent and incomplete updates of price data
• Few reporting pharmacies
• Small number of drugs reported
• Inconsistent use of modern web search tools

SHOPPING FOR SIMVASTATIN

Florida has a one of the better sites and is highlighted in the new report.

Just for fun (!), I compared the pharmacy prices listed on the Florida site (http://www.myfloridarx.com/) for simvastatin (generic version of Zocor) 40 MG tablet. I searched pharmacies in Hialeah, FL, which is an urban market included in the new report.

Prescription price data was available for 40 out of 70 pharmacies:
Average = $115.54
Range: $9.70 to $221.43

Since I’m a wild and crazy guy, I also dug up Florida’s Maximum Allowable Cost (MAC) data, which tells me the maximum ingredient cost reimbursement to a retail pharmacy for filling a Medicaid script. MAC data for Florida’s Medicaid program are also available online here, although not in a consumer friendly format. (I love the Internet!)

There are 40 NDCs on the Florida MAC list for simvastation 40 mg. Price per tablet is $1.8995 per tablet, so a 30-day script is $56.99. Florida’s Medicaid dispensing fee was $4.23, making total pharmacy reimbursement $61.22 for this script.

Now here is something interesting: the cash price at three chains is *below* the MAC reimbursement from Medicaid. The Hialeah list included 8 Walgreens (WAG) pharmacies ($59.99), 3 CVS pharmacies ($54.59), and 1 Wal-Mart (WMT) pharmacy ($54.54). In other words, Medicaid pays more than a cash pay customer.

Correction (2/20/08): Medicaid does not pay more than a cash customer at a given pharmacy because the pharmacy can not be reimbursed by Medicaid for more than its Usual & Customary charge. However, an uninsured cash-pay customer buying at Walgreens would pay less than Medicaid would pay to a pharmacy with a U&C above the Medicaid reimbursement rate. Thanks to Marc for the clarification. See the comments below for more details.

THE MYTH OF TRANSPARENCY

While Florida’s site does a reasonabl