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 The book is somewhat outdated because industry changes have addressed many of the secondary market problems described in the book.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.

Ridley-Thomas Editorial on E-pedigree

I know that I promised to take a blogging break, but I just can’t help myself.

Today’s Capitol Weekly, the “newspaper of California government and politics,” has an editorial by state Senator Mark Ridley-Thomas, sponsor of SB1307. As e-pedigree fans (?) know, this bill proposes a new phased-in timeline for California’s e-pedigree requirement. See CA E-Pedigree Timeline in Flux for details, although the bill has changed slightly since my last write-up.

Here is today's editorial: Time To Protect The Pharmaceutical Supply Chain.

Note this paragraph, which is clearly a rebuke to critics (like me) who argue that a national standard would be better:

“Other e-pedigree opponents have argued that California should defer to the federal government since drugs are manufactured, shipped and sold across the county. However, it has taken the federal government 20 years to adopt regulations required to implement the federal Prescription Drug Marketing Act (PDMA), which was passed to protect consumers from counterfeit or adulterated drugs. California did not wait for the federal government to act on environmental issues - why should we wait for them to act on this?”

Senator Ridley-Thomas’ editorial also represents a response to the Schwarzenegger’s Administration new legislative proposal for California pedigree regarding an “accredited distribution chain,” which is similar to the “Normal Channel of Distribution” rules implemented in many states. (Read the first draft proposal here.)

I presume that Senator Ridley-Thomas is also not a fan of H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008.

California’s current legislative session ends in August, so any action on SB1307 will happen over the summer.

Accenture's Track-and-Trace Straw Man

A new report from Accenture attempts to assess the financial costs of implementing a serialized track-and-trace system for the U.S. pharmacy supply chain. I commend NACDS and NCPA for correctly highlighting an important barrier to authentication of serialized products at the point of dispensing.

Full report: Current Status of Safety of the U.S. Prescription Drug Distribution System

But even if we assume that Accenture did a credible and impartial job building their pharmacy cost models, the estimates in this report reflect an extreme situation that no one is seriously advocating. In other words, Accenture’s calculations may not be technically wrong (in the way that the recent AMP study was wrong), but its conclusions are highly misleading given actual proposals and practices regarding supply chain security. Thus, you should think of this report as the inflated, upper bound, "worst case" costs of a track-and-trace thought experiment. Caveat lector.

BAR CODES AND DOLLARS AND DATA! OH MY!

Accenture created detailed pharmacy cost models for a 100% compliant “complete track and trace system” that is federally mandated to be implemented at the unique unit-level for all products everywhere at the same time.

I can’t evaluate the assumptions hidden in the pharmacy costs models because Appendix F, a detailed Excel spreadsheet with all of the calculations, was not made publicly available. But my math (see footnote) shows that first-year implementation costs to be +/- 3% of revenues for the following four pharmacy archetypes defined by Accenture:

• Large chain pharmacy (total annual retail sales = $18.8 billion): 2.6% of revenue
• Medium chain pharmacy (total annual retail sales = $450 million): 3.4% of revenue
• Small chain pharmacy (total annual retail sales = $60 million): 2.4% of revenue
• Independent pharmacy (total annual retail sales = $6.5 million): 3.1% of revenue

Note that these figures are much higher than Accenture's previous cost estimates. At the 2007 NACDS/HDMA RFID/Track & Trace Health Care Industry Adoption Summit (yes, that’s really the title), Accenture estimated that one-time implementation costs for pharmacies would be only 0.5% to 1.5% of revenue. (See page 9 of Accenture’s State of the Industry presentation from November 13, 2007.)

I think that some of the newly-discovered costs come from additional pharmacy labor for scanning serialized products in the newer estimates as well as the assumption of complete year one implementation. But given the surprisingly large inflationary bump, I also surmise that NACDS and NCPA got their money's worth from Accenture.

SOMEWHERE OVER THE RAINBOW

Careful readers will note that Accenture’s “complete track and trace system” is much more comprehensive than anything being seriously proposed or considered right now. In my opinion, Accenture has defined a “track and trace” model in an unrealistic manner and then proceeded to explain that such a model is cost prohibitive.

In other words, the report is built upon the Straw Man logical fallacy, which goes as follows:

1. Person A has position X.
2. Person B presents position Y, which is a distorted version of X.
3. Person B attacks position Y.
4. Person B concludes that X is false/incorrect/flawed.

This fallacy plays out in the interplay between the actual study and the press release about the study:

1. Legislators, regulators, and many industry participants want to implement serialized e-pedigree with national standards in the pharmaceutical industry.
2. Accenture has modeled the pharmacy costs of implementing a 100% compliant “complete track and trace system” that is federally mandated to be implemented at the unique unit-level for all products everywhere at the same time, i.e., the Straw Man version of current proposals.
3. Accenture's pharmacy cost models show that the Straw Man track-and-trace system would be ludicrously expensive to implement.
4. Therefore, there is no need for serialized e-pedigree with national standards in the pharmaceutical industry, given the many other steps already taken to secure the pharmacy supply chain. Q.E.D.

I’ll mention just four important ways that the actual implementation of “track and trace” will likely differ from the models estimated in Accenture’s report:

• A risk-based approach to serialization (RBATS) for high-risk products with the greatest likelihood of counterfeiting or diversion, which is included in H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008.
• “Normal Channel of Distribution” rules that exempt certain transactions in many states. Even California may incorporate this exemption, judging by the Schwarzenegger’s Administration new legislative proposal for California pedigree regarding an “accredited distribution chain.”
• Central-fill operations and mail order pharmacies that aggregate prescription fulfillment would dramatically lower the per pharmacy costs. (Neither is contemplated in the study.)
• The willingness of wholesaler’s and other third-parties to provide data center services as a fee-based service.

To be fair, Accenture's language is fairly neutral regarding the implications of the study, whereas the NACDS/NCPA press release mistakenly links the "results" to a specific legislative proposal. Hence my view that this report represents unrealistic, upper bound costs of a track-and-trace thought experiment.

I'LL GET YOU, MY PRETTY...AND YOUR LITTLE BLOG, TOO!

I am very sympathetic to the motivation behind this study. A truly closed-loop, interoperable track-and-trace security solution based on serialization requires a massive infrastructure upgrade at the 150,000+ points of pharmacy dispensing in the U.S. I have persistently criticized the RFID hypesters who ignore this practical aspect of the pharmacy supply chain. I keep reminding technology firms, legislators, and regulators that pharmacies do not want to absorb the costs of reading pedigree or serialized data. (See Pharmacists Haggle over Pedigree Costs, among other posts.)

The report correctly highlights the fact that counterfeit drugs are still extremely rare in the United States and summarizes some of the business changes that have occurred to make the supply more secure. However, I do not believe that the cost estimates in this report make an accurate contribution to the debate over supply chain security.

On the other hand, the report should spark some good discussion at this November’s NACDS/HDMA RFID Track & Trace Healthcare Summit. Notice that the word “adoption” has now been discreetly dropped from the event title!

Read the report, make up your own mind, and let me know what you think. Maybe you'll get an honorary degree of Th.D. (Doctor of Thinkology**), too!

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* Total Corporate Implementation Costs as % of Revenue = [(Cost Per Distribution Facility * No. of Distribution Facilities) + (Cost per Pharmacy Store * No. of Pharmacies) + Pharmacy Data Center Costs] / Annual Revenues

Example: Medium Pharmacy Chain = [($2,752,771 * 1) + ($103,939 * 100) + $2,288,265)] / $450,000 = 3.4%

** Yes, that's the honorary degree awarded by the Wizard of Oz to the scarecrow.

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.

Well Done, NABP!

Last week, the National Association of Boards of Pharmacy (NABP) named 79 online pharmacies that are not safe for patients. Rather than a general “watch out” message, the NABP actually listed the web addresses for these rogue sources.

Kudos to for naming names! I hope the NABP has a good firewall to repel the disgruntled spammers.

According to NABP, a site got on the bad guy list for one of the following three illegal activities:

• Does not require a valid prescription (71 sites)
• Foreign or non-FDA-approved drugs (35 sites)
• A physical address outside of the US (36 sites)

NABP has accredited 15 legitimate online pharmacies though the Verified Internet Pharmacy Practice Sites™ (VIPPS^®) program. In contrast, the 79 non-recommended sites are non-accredited through the Fake Online Outlets League™ (FOOL^®) program. (NABP doesn’t seem to allow direct links. Go to NABP and click “Internet Pharmacies” to find the list.)

NOPE, NOT SCARE TACTICS

In this recent Drug Safety Hub post, Allen Coukell, Director of Policy and Strategic Communications for the Pew Charitable Trust-funded Prescription Project, implied that the dangers of counterfeiting were scare tactics. He asked: “If you were an uninsured patient unable to afford medication in the US, would you rather get your prescription filled in a Canadian pharmacy or go without?”

If those are the only choices, you should go without. Primum non nocere. (“First, do no harm.”)

I find it incredible that a health professional such as Mr. Coukell would encourage personal importation via an online pharmacy given the risks.

Judging by his biography, Allen appears to be a Canadian pharmacist by training. So he should know that many so-called Canadian pharmacies are not actually in Canada. In fact, twenty-two of the sites on the NABP list have “Canada” in the company name.

Let’s face it -- People often buy online from unscrupulous sellers to get access to drugs they shouldn’t be getting anyway. Just visit the pain pill addicts at www.drugbuyers.com. They’ll tell you how to buy anything online, no questions asked.

Organized criminals, drug traffickers and terrorists could (and probably do) exploit gaps in our drug distribution system. I wish it were only fear-mongering and scare tactics, but unfortunately the risks are real.

P.S. Happy 100th birthday, Ian Fleming!

Pharmacists Haggle over Pedigree Costs

Last week, three major associations representing retail pharmacy – NACDS, NCPA, and FMI – came out with a joint statement opposing H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008, a bill that would establish national standards for the pharmacy supply chain. I praised this bill last month in National Standards: It’s About Time.

Pay attention to this debate because it signals the inevitable divergence of interests as we get closer to actually paying for a system to track finished drugs in the pharmaceutical supply chain. I’ve been predicting this split almost since Drug Channels launched in 2006, so here are some thoughts on what’s really behind the phamacists’ opposition – and how much it might cost you.

CLOSING THE LOOP

Pharmacists are complaining that H.R. 5839 would “mandate an unproven, disruptive and costly ‘electronic pedigree/track and trace’ requirement that would severely interfere with pharmacies’ ability to effectively provide vital prescription medicines and health care products and services.”

Sure, anyone who understands the pharmacy supply chain will agree that authentication creates costs for retail pharmacies. (See Do Pharmacists want Pedigree?). Kevin Nicholson, VP of Pharmacy Regulatory Affairs at NACDS, highlighted the operation and administrative burdens of pedigree for pharmacies in his May 1 testimony to the House Committee on Energy and Commerce.

But unless I’m missing something, these costs will be even higher for a pharmacy forced to work with the hodgepodge of potentially incompatible state-level track-and-trace systems sprouting up all over the country. Wouldn’t NACDS and FMI members such as Walgreen (WAG), CVS Caremark (CVS), or Kroger (KR) benefit from national consistency instead of having to manage the expenses of multiple systems?

MONEY TALKS

According to this Drug Topics article, “pharmacy groups are split over federal e-pedigree legislation.” NCPA reportedly supports the “intent” of H.R. 5839 while NACDS opposes any bill.

Why the split? You may recall from my summary of the bill that it contains grants for technology upgrades to “small pharmacies,” which is effectively defined to be “anyone except large member companies from NACDS or FMI.”

So, how much will it take to get the support of NACDS members? Mr. Nicholson started the bidding at $30,000 per pharmacy in his May 1 testimony (see page 7). That’s about $180 million each to CVS Caremark (CVS) and Walgreen (WAG).

True, such a figure may be a mere gratuity in the world of Washington, but that’s still some serious moola. It's also a 50% increase from the $20,000 per pharmacy estimate that NACDS reportedly made in January to the California Board of Pharmacy (see p. 18). I guess gas is not the only thing getting more expensive this year.

We all know that the “business value” of track-and-trace for the manufacturer can only be fully realized when pharmacies authenticate at the point of dispensing. So, who wants to step up and fund pharmacy-level implementation and data transmission?

To paraphrase a quote often attributed to Winston Churchill: We have established what’s going on. Now we’re just haggling over the price.

My Op-Ed: Securing the Supply Chain

Pharmalot, the Newark Star-Ledger’s outstanding online pharmaceutical industry news site, has just published my op-ed arguing that America’s approach to tracking finished drugs in the pharmaceutical supply chain needs a radical overhaul. You can read it here:

Securing America's Pharmaceutical Supply Chain

Unlike the blog, this article is written for a general audience. Same great Drug Channels taste, but now with 82 percent less jargon!

I’d love to hear what you think, especially since the style is intentionally more accessible.

Drug Channel Profits in the Fortune 500

Since the Fortune 500 rankings were published last week, I thought it would be fun to look at the revenues and profitability of the ten companies on the list that participate in the pharmacy supply chain. (Hey, everyone needs a hobby!) The financial data also give me an opportunity to address critics who have accused me of being insensitive about the profits of pharmacies and wholesalers. I also look at average investment returns, which have been higher for the channel than for manufacturers.

TEN COMPANIES

Here are the ten wholesalers, pharmacies, and PBMs companies that I found on the Fortune 500 list along with rank and links to the financial data as reported by Fortune:

• McKesson (MCK): 18
• Cardinal Health (CAH): 19
• CVS Caremark (CVS): 24
• AmerisourceBergen (ABC): 28
• Walgreen (WAG): 40
• Medco Health Solutions (MHS): 51
• Express Scripts (ESRX): 135
• Rite Aid (RAD): 142
• Omnicare (OCR): 386
• Longs Drug Stores (LNG): 453

I only include companies that earned a majority of their revenues from pharmaceuticals. This criterion excludes other retail formats with pharmacies (supermarkets and mass merchants). I also do not separate the revenues from each company’s various lines of business. I'd be analyzing the original company data if this were a consulting project, but I'll stick to Fortune's admittedly crude metrics for the blog.

Keep in mind that the Fortune 500 rankings are based on sales revenues, so there is substantial double-counting in this list. For instance, revenue from the same prescription could be counted at least three times by companies on this list if:
(1) the drug is sold by a wholesaler to a pharmacy;
(2) the drug is sold by a pharmacy to a consumer; and
(3) the pharmacy receives reimbursement for from a PBM.

For comparison, there are nine pharmaceutical manufacturers on the Fortune 500 with revenues ranging from $61 billion (Johnson & Johnson) to $12.7 billion (Schering-Plough).

PROFITS

As you can see in the table below, Return on Sales (ROS; profit as percent of revenues) was in the low single digits for all companies in this group, regardless of their position in the supply chain (retail pharmacy, wholesaler, or PBM). The median for my Drug Channels group is 2 percent.

(CLICK TO ENLARGE TABLE)

By contrast, median profit as a percentage of revenues was 16 percent of revenues for the nine drug manufacturers (range: -12% to 21%). Thus, the manufacturer-to-channel ratio is 8X.

However, ROS only tells us part of the profitability story because it ignores the balance sheet assets required to generate an income statement profit. A more meaningful comparison relates ROS to the assets required to generate those operating profits, so the table above includes Profits as a % of Assets, which I will call Return on Assets (ROA).

The profitability of companies in the Drug Channels universe looks much more attractive on this basis, as my friends on Wall Street know. The group median is 5% (Range: 0% to 11%). Again, there is no clear pattern related to supply chain position.

The ROA figures are closer to the pharmaceutical manufacturers, whose median profits as a percent of assets is 9 percent (Range: -5% to 13%). The manufacturer-to-channel ratio is now only 1.8X (versus 8X for ROS) reflecting a risk-return tradeoff. The additional profitability for manufacturers can be considered an innovation/risk premium. Discovering and developing new medicines is expensive, risky, and time consuming. Obviously, the ratio could vary over time, although I just relied on the single year data provided by Fortune.

INVESTMENT RETURNS

Investment returns for the Drug Channels group were higher last year as measured by the average Total Return to Investors for 2007 reported in Fortune’s list:

• 10 Drug Channels companies: 15.2% (Range: -49% to 104%)
• 9 Drug Manufacturers: 3.5% (Range: -32% to 38%)

2007 appears not to be an outlier. The drug channels had a higher average 10 year total return than manufacturers. The channels group has a wider range for both time periods, in part reflecting a greater diversity of business models compared to manufacturers.

SO, WHAT HAVE WE LEARNED?

1) By a conventional metric (revenues), many drug channel participants are substantially larger than the manufacturers.

2) A frequently cited metric of profitability (Profit as % of Revenues) makes drug channels companies look worse than a more appropriate metric such as Profit as % of Assets.

3) Investors earned greater average total returns from the drug channels group last year and over the past 10 years compared to the manufacturers group.

Will these returns hold up in 2008? Well, if I knew the answer to that question with certainty, then I’d be retired on a Caribbean island instead of pecking out another blog post for you!

Politicians Tackle Supply Chain Security

The Heparin contamination has pushed the security of America’s pharmaceutical supply chain to the forefront of the news. I’m not yet sure how politician’s newfound involvement in the topic will play out.

Yesterday, the House Committee on Energy and Commerce accused the FDA of failing to protect Americans from contaminated Heparin. Rep. John Dingell said: "Our citizens can no longer trust that their food, drugs or medical devices are safe when the FDA says they are." (See Lawmakers Fault FDA on Heparin.)

This Thursday, the House Committee will hold additional hearings on the Food and Drug Administration Globalization Act, a draft bill that proposes new fees and increases FDA resources directed to the safety of food, drugs, devices, and cosmetics. (The FDA Law Blog has a good summary.) Fans of Congressional hearings (hey, who isn’t?) can catch the play-by-play video webcast on this page.

The newfound attention to supply chain safety is also bringing some new players to the game. Last week, New York Senator Chuck Schumer announced plans for seemingly redundant legislation for a “track -and-trace system for prescription drugs to prevent contamination.” (Read his subtle and self-effacing press release.)

Roger Bate of the American Enterprise Institute wrote a good editorial cautioning against the knee-jerk protectionist inclinations of many politicians in China's Drug Dilemma (from The Wall Street Journal Asia.) He argues that Chinese government officials are trying to solve the quality problems, but face an uphill climb:

“China is a vast country with 31 provinces and 333 districts. Harmonizing – not to mention enforcing – drug quality control across them is therefore difficult, especially since there are over 6,000 manufacturers of western drugs and more than 2,000 traditional Chinese drug makers.”

America needs to harmonize its own internal standards for the pharmaceutical supply chain, too. I’ve been told that Thursday’s meeting will also include discussion of H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008, the national standards bill that I endorsed last week. Let’s hope the committee spends time on this useful bill that can help limit counterfeit finished goods from infiltrating the legitimate pharmacy supply chain.

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.

Can CA's e-pedigree law be Implemented?

Welcome back, my friends, to the enforcement debate that never ends!

The California Board of Pharmacy (CA BoP) is meeting today to consider the January 1, 2009, implementation deadline for e-pedigree along with the new CA pedigree legislation. (Read the agenda.) Similar to my prediction prior to the last meeting in CA Pedigree: Going to '11?, I think the Board will pontificate about “the industry as a whole” and once again avoid a vote on delaying implementation until 2011.

However, I have a new theory for you about why the Board will not be able to implement e-pedigree even if they decline to adjust the deadline. I also have a few connect-the-dots ideas suggesting that the Board is not even planning to enforce anything.

If you attend the meeting, drop me a line and I’ll post a synthesis of perspectives. As always, your anonymity is guaranteed.

IS PEDIGREE AN UNDERGROUND REGULATION?

As you may know, pedigree is covered in sections 4034 and 4163 of the California Business and Professions Code.

According to California’s Office of Administrative Law, all state agencies are required to adopt regulations following the procedures established in the Administrative Procedure Act (APA). If a state agency issues, enforces, or attempts to enforce a rule without following the APA, the rule is called an “underground regulation.” State agencies are prohibited from enforcing underground regulations.

I’m no lawyer, but California’s pedigree laws still seem “susceptible to interpretation,” a key test for APA procedures. (See What is a Regulation?) The CA Board of Pharmacy is using a great of judgmental discretion in carrying out its duties, as I point out in Pedigree and Obscenity.

Bryan Liang went further last week in his editorial “Protection against counterfeit drugs too important to rush” when he wrote: “Those participating in the supply chain — from pharmaceutical companies to community clinics to mom-and-pop drugstores — are greatly concerned about implementing a law that won’t work because of the unanswered questions of what an e-pedigree would entail — including what standard is right for the entire chain, what technology to use, what frequencies are mandated, how pill containers versus injectables would be treated, how to weather the costs of pedigree readers and writers, and, critically, who would be the owner, guardian and steward of the information.”

Similarly, David Fong, Pharm.D., senior VP of pharmacy & family care at Safeway, echoed these comments in a recent Drug Topics article: “We don’t believe that on January 1, 2009, the supply chain will be ready to comply with the rule.”

So has the CA Board of Pharmacy followed APA? If there are reasonable grounds to suspect that the Board has not followed APA, then a simple legal challenge will prevent the Board from enforcing pedigree laws on January 1, 2009. (Fair warning: This is not legal advice. See disclaimer below. Your mileage may vary.)

GETTING READY FOR … NOTHING?

Through my work with Secure Symbology, I have seen first-hand that an integrated serialization/e-pedigree solution can be implemented on a high-speed packaging line using 2-D bar codes. However, many (most?) manufacturers, wholesalers, and pharmacies will not be ready by the arbitrary deadline of 1/1/09. While counterfeit drugs remain an ongoing threat, there seems to be little logical or fact-based rationale for rushing ahead with a law that is still susceptible to interpretation.

So, does the Board (privately) expect a delay?

Clue #1: The Board of Pharmacy’s budget will increase by only 2.5 percent and they will add no new positions in the fiscal year during which it implements e-pedigree. (See Pedigree and Obscenity.) Huh?

Clue #2: Judith Nurse, Supervising Inspector at the CA Board of Pharmacy, spoke by telephone at the SecurePharma conference in February. I wrote down the following quote: “We do not want to be the pedigree police.” Does this statement mean that the Board plans not to enforce the pedigree law?

Clue #3: I asked Ms. Nurse the following question at SecurePharma: “It seems likely that many manufacturers and wholesalers will not be able to comply with the pedigree laws by January 1, 2009. What contingency plans has the Board of Pharmacy prepared to handle such a situation?” Ms. Nurse replied: “We have not developed any contingency plans.” If this is supposed to make consumers feel safer, then I’m really worried!

DO AS I SAY…

According to its own assessment, the CA BoP’s staffing is “insufficient to perform mandated duties at desired levels.” Perhaps that explains why the CA Board of Pharmacy has not yet bothered to post the minutes from January’s Public Board Meeting on the Board and Committee Meetings section of its own website (as of March 24).

Guess they need more time to comply.

*NEW* CA Pedigree Legislation

Today’s lesson: If at first you don’t succeed, change the rules!

Two bills were introduced last week that would modify California’s pedigree legislation.

Just to be crystal clear: Don’t stop planning for January 1, 2009. Obviously, there can be no guarantee that either the proposed legislation will pass or that the Board of Pharmacy will vote for a delay to 2011. Nevertheless, the likelihood of a delay or phased implementation just went up again.

I'M JUST A BILL

You can read the text of the proposed bills at these links:

SB 1307 (introduced by CA State Senator Ridley-Thomas)

SB 1270 (introduced by CA State Senator Cedillo)

SB1270 is more interesting of the two because it potentially changes the January 1, 2009, implementation date. The text looks like a placeholder to me:

“This bill would instead impose the pedigree requirement and the prohibition against selling, trading, transferring, or acquiring a dangerous drug without a pedigree on an unspecified date, authorize the board to extend the compliance date to an unspecified date in those specified circumstances, and make conforming changes.” (emphasis added)

Right now, the CA Board of Pharmacy only has the ability to delay implementation of e-pedigree requirements until 2011 if the board determines that “manufacturers or wholesalers require additional time to implement electronic technology to track the distribution of drugs within the state.” (See CA Pedigree: Going to '11?) Unfortunately, the Board’s decision making process regarding the 2009 deadline seems dysfunctional and unnecessarily opaque, as I describe in Pedigree and Obscenity.

I’ve been told that additional legislation may be on the way, especially with regard to phased implementation such as a risk-based approach to serialization. You can read more about California’s legislative process here.

AND SPEAKING OF SERIALIZATION...

I will be attending SecurePharma2008 on Tuesday morning. If you'll be there, please stop by and see me at the Secure Symbology booth at 10:30 AM on Tuesday. I’m always looking for good story ideas and tips for Drug Channels.

I'll be at the booth with other members of Secure Symbology’s Advisory Board of Directors. But please don’t call us booth babes!