Wednesday, September 12, 2007

Hype vs. Research

On Tuesday, I posted A Misleading Study on Pharmacy Reimbursement, a critique of a new study describing pharmacy reimbursements under the Medicare Part D program. The full research paper from the Journal of the American Pharmacists Association can now be downloaded here: Prescription drug payment times by Medicare Part D plans.

The complete article naturally offers a much more nuanced perspective than either the Executive Summary or NCPA’s press release. However, the authors and NCPA overreach by drawing conclusions that are not supported by the study. Their attempts to shift blame to payers, customers, and wholesalers are designed to influence health care policy in a way that benefits pharmacies at the expense of everyone else.

Thus, my primary critique remains valid – the results of this study are being marketed in a misleading way to the public and to Congress. The evidence in this study certainly does not warrant having Congress interfere in the working of a competitive free market.

What the Study Really Says

The actual paper is well-reasoned and carefully worded. The researchers – Dr. Shepard, Dr. Richards, and Ms. Winegar –present detailed statistical summaries information broken out by month, by year, and by Part D plan.

One hidden bias comes in the aggregation of time frames for analysis. The authors show us only four points in the distribution: less than 15 days; 15-30 days; 31-60 days; 60 days or more. Thus, a claim paid on day 32 is treated the same for the purposes of their analyses as a claim paid on day 60. The impact of this choice is not readily apparent, but would be quite significant for concluding anything about the cash flow impact on a pharmacy.

As I correctly deduced from the Executive Summary, the median number of days to payment after adjudication dropped below 30 days for the last five months of 2006. Amazingly, one of the headline conclusions of the summary – “50.0% of claims were paid more than 30 days after adjudication” – is actually false for the last five months of 2006! (See Table 1 in the paper.)

The academic tone stands in sharp contrast to the summary and NCPA press release that I wrote about on Tuesday. The Executive Summary is attributed to the same researchers and presented on the letterhead of the Center for Pharmacoeconomic Studies. My critique of the summary remains valid, especially with regard to changes over time throughout 2006.

Strategy #1: Blame Payers

NCPA desperately wants to conclude that PBMs and third-party payers are guilty of “destroying” independent pharmacies. NCPA even goes so far as to make the following claim: “This study presents strong evidence that PBMs are ‘gaming the system’, making interest on the ‘float’ they get by not paying pharmacies in a timely manner.”

The actual research paper provides no support (strong or otherwise) for such a conclusion. NCPA appears unwilling to consider possible alternative explanations for declining numbers of independent pharmacies. As I noted on Tuesday, the amount of financial hardship facing an average independent pharmacy may not be enough to tip a healthy, well-run business into bankruptcy. It’s a stretch to blame payers based on the paper.

Strategy #2: Blame the Customer

What if the decline of independent pharmacy is really part of a larger shift in consumer preferences? Many U.S. consumers prefer to shop at larger stores. As a result, retailing is become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. (I discuss these issues in more depth in Chapter 8 of my new book Facing the Forces of Change®: Lead the Way in the Supply Chain.)

As the table below shows, pharmacy is on par with other retail sectors dominated by large chains, at least judging by the decline in the number of small companies (less than 20 employees. (Source: Statistics of U.S. Businesses.)

Note that the most recent data are from 2004, well before Part D.

Here’s an even more controversial explanation—maybe independents are upset at losing cash pay customers who now have access to a comprehensive drug benefit. As pharmacist Tom Connelly pointed out in his comment on Tuesday’s post: “Our biggest problem with Medicare Part D was seeing a minor, but not insignificant, portion of our prescription revenue going from immediate pay--cash on the barrel head--to 30 to 40 days out.”

Would pharmacists really prefer that seniors reach into to their own pocket simply to alleviate their cash flow problem? (No, of course not.)

Strategy #3: Blame the Wholesaler

It also defies economic logic to point the finger at the wholesalers for their payment terms. Smaller retail customers rely on wholesalers for many services—delivery, credit, generic sourcing, retail management. As a result, an independent pharmacy provides higher profits for a wholesaler than a large, powerful, self-distributing pharmacy chain such as CVS Corp or Walgreen (WAG).

Why would wholesalers want to kill their most profitable customers? In reality, wholesalers are working hard to help independent pharmacies survive in an increasingly competitive industry. (See Trouble Ahead for Independent Pharmacies for more background.)

Making Policy

Based on an objective look at the available evidence, there seems to be little compelling reason for Congress to interfere in a free market that will ultimately arrive at a reasonable solution for all parties. The marketplace reality is that third-party has overtaken cash pay at the pharmacy. We can’t rewind the world to make it more convenient for operators of independent pharmacies.

Perhaps I am too skeptical, but I wonder how many policymakers will venture beyond the Executive Summary and NCPA’s press release on this issue. The high level talking points are likely to crowd out an appropriate discussion of the costs and benefits to consumers and our health care system. Hopefully, my blog posts can make a small contribution to a more fact-based debate.


  1. Dear Dr. Fein

    Ouch! I sure didn't mean to imply that my cash flow was more important than my senior patients' access to proper medical therapy. That first real ugly month of Part-D we were doing eveything we could, including dispensing free "advances" to patients with "pending coverage," to make sure our senior patients were getting the meds they needed. We spent hours on the phone trying to reach "help" lines that were busy for literally days on end.

    That's past us now, we hope.

    Do I as a pharmacy owner expect to make a profit? Of course I do. But when I made my earlier post it was in the context of the impact Medicare Part D reimbursements had on my particular independent pharmacy. I think we take real good care of all our patients, and I think our market share (if you want a scientific indicator) in this community bears that out.

    "Would pharmacists really prefer that seniors reach into to their own pocket simply to alleviate their cash flow problem?"

    Boy, that really smarts.

    Tom Connelly, RPh

  2. Hmm, maybe my comment came out sounding harsher than I intended. I hope you recognize that I was not trying to put words in your mouth.

    Nonetheless, it does seem like a shift from cash-to-third party payment has been a double-edge sword for pharmacy. The loss of cash pay (which has 0 days DSO) is traded off against the increased script volume b/c more people have access to drugs.

    For the record, I believe that pharmacists do important, valuable work and they deserve to be paid for the value that they add to patients and the health care system.


  3. The way I read the exe summary, 50% of independent pharmacy claims weren't reimbursed in 30 days or less -- so that would correspond with Table 2 in the paper (instead of Table 1)?? In that table the last few months show that more like 40% weren't paid in that time, expect for December where it jumped back up to 49.5%. The December number was mentioned in the executive summary.

    The distribution of claims paid on day 31, 32, 33 ... through 60 would be interesting.

    Don't PBMs claim to pay twice a month anyway? If so, how would legislation requiring twice a month payment cost anyone more than things are costing now? Is it just the principle of not having legislation that might be unnecessary?

  4. For what it's worth, here's a snapshot. In today's (9-13-07) mail I received the following remittances:

    Aetna for period 8/18/07 to 8/24/07
    Anthem 8/24/07 to 8/30/07
    Caremark 8/8/07 to 8/18/07
    Pharmacare 8/16/07 to 8/31/07
    Prime Therapeutics 8/25/07 to 8/31/07
    RxAmerica 8/16/07 to 8/30/07

    Some PBMs pay twice monthly, some bi-weekly, some weekly, some when they get around to it (Don't laugh--we had one in Baltimore several years ago that was consistently 4 months behind and wouldn't send a check until you harrassed them.)

    One of my concerns with this "prompt pay" legislation is that instead of making the PBMs pay more quickly, they may go the other route and pay at the new legislated limit of 30 days or what have you.

    And how do you figure days out? Is the Aetna payment above 26 days out or 20 days out? Or do you calculate an average?

  5. To anonymous above,

    S.1954 places burdensome requirements regarding the timeliness of claims payment in the absence of actual evidence of (a) direct harm being caused by the current system, or (b) systemic or intended slowdown by Part D payers versus other payers.

    IMHO, health care policy should be based on facts, not partisan passion or lobbying. (Translation: I'm an economist, not an elected official.)


  6. Dr. Fein, I have a couple of comments about what you said here, and in your comment responses.

    First, in regards to:
    "Would pharmacists really prefer that seniors reach into to their own pocket simply to alleviate their cash flow problem? (No, of course not.)"

    I'm sorry, but I'm trying to run a business here, not a charity. For years, I've been saying that a pharmacy uses the green cross symbol, it's not the Red Cross. I don't see grocery stores handing out food to the homeless. I have a product I need to sell in order to pay the people I bought it from, and hopefully make a couple of bucks to feed my family. It's actually that simple.

    Secondly, in regards to:
    "..there seems to be little compelling reason for Congress to interfere in a free market that will ultimately arrive at a reasonable solution for all parties"
    "S.1954 places burdensome requirements regarding the timeliness of claims payment in the absence of actual evidence of (a) direct harm being caused by the current system, or (b) systemic or intended slowdown by Part D payers versus other payers"

    How can you say there is little reason to interfere?? Would someone please give me a good reason to NOT pay withing 5 business days? Why is it that a small or large business needs to get a loan to pay their bills, when other people can take as long as they wish. My statements are due on the 10th of the month, and it's up to me to make sure that I have the money to pay it, or pay high interest and late fees. Why is it MY problem to come up with the money elsewhere, when the PBM are taking their sweet time sending the payments out?? I received a payment last year from a plan (can't remember which), where the envelope had a date stamp from 2 days prior, but the check inside it was from TEN DAYS prior. In other words, the check was literally sitting around, not getting sent out!!

    You want to talk about direct harm caused by the current system, go talk to the pharmacy technicians who are underpaid and getting their scheduled hours reduced due to budget constraints. Talk to the independent pharmacy owners in Florida who were receiving letters last year from Walgreens offering to buy their business after Walgreen's PBM, WHI, spent the first half of the year lagging way behind on paying these same pharmacies the money they were owed. These are shameful practices sir. Oh, and you might call them harmful too.

  7. Sorry, forgot to mention something. The ideal situation is to have all PBM's pay ALL the claims due within, say 5 business days to be lenient (I see no reason why 48 hours would not be sufficient.. we can have that be a future goal further down the line).
    This slow payment has gone on long enough, Medicare D just made it worse because there were dozens of new plans in each state that covered patients who used to be self-paying cash customers. That's why they are the easy target, but it's just the tip of the iceberg.. at least I hope it is.

  8. Whenever the PBMs and/or CMS want to publish their data showing twice a month payments like CMS claims, I'll be happy to fairly consider it. Until then, I'm sticking with this study. It closely resembles our experiences with Part D claims last year, and even now it takes months to get payment from some.

    Dana Roberts

  9. I think that we are all missing a very important point in the discussion. PBM’s are not payors. Self-insured groups, HMO’s, TPA’s, MCO’s, and underwriters are payors. PBM’s are intermediaries.

    The point is that the PBM cannot pay the pharmacy for a claim until it receives payment from the payor. The payor works on a billing cycle just a few days before the pharmacy payment cycle. For example, the last PBM I worked for paid claims twice monthly with a cutoff of the 15th of the month and the last day of the month. Bills were sent to the payors the day after the cutoff date. The payors had, officially, a due date 5 days from the bill date, but none of the customers paid on time. (The PBM is not in a position to charge its commercial customers late fees. If it did, it wouldn’t have any customers.) The provider checks were then cut on the 15th day. If the payor hadn’t yet paid the claims by the 15th day then the pharmacies weren’t paid for those claims until the following payment cycle.

    It sounds easy to say that the PBM’s need to float the money. But when we look at raw data we will see that it is infeasible. A PBM which process 1,000,000 claims per week at an average blended cost per script of $70.00 would have to float $70 million per week to the providers because it’s customer haven’t paid on time. If a 48 hour claims payment mandate was put in place the only 3 PBM’s that would remain in business would be Medco, CVS/Caremark, and Express Scripts. They are the only 3 which have enough available cash to float that kind of money. Do you really want to be stuck with the big 3 as the only PBM’s? I am going to go out on a limb and say no because we both know that providers get the best service from small PBM’s.

    It also sounds easy to say that the PBM’s need to aggressively enforce due dates with their clients. The reality is that most PBM clients are self insured SMB’s (because most of the insured populace is covered by a self-insured SMB). These clients are no different than your independent pharmacies. They are both small businesses trying to compete in today’s marketplace. All of these businesses operate under their own respective billing payment cycles. I would also bet that most of the SMB’s out there don’t have the cash to pay claims every 48 hours. They have to pay claims when their own revenue cycle allows. Anyway, who is to say which of the small businesses are more deserving of the money? Should we penalize SMB’s for providing a benefit to their employees or should we penalize retail and chain pharmacies for conducting business?

  10. Dr. Fein,

    Exactly how does the Medicare Part D program operate. see below---

    Pharmacy fills and bills for prescription to PDP.

    When does the PDP receive its money for the prescription and under what payment formula does the PDP get paid?

    What is the profit that the Government has guaranteed any PDP -if any?

    Why can't a pharmacy negotiate their contracts with the Medicare PDP or any PBM?

    If the Mediare PDPs want to dispute the claims of late payments then why don't they just show the proof?

    At least Professor Sheppard has submitted a study of the late payments. If the the Medicare Part D (PDPs)or (PBMs) want to show it wrong, then let them prove it, instead of you speacking for them. It is quite simple.

    Also, please provide answers for all of the questions above. Maybe everyone will finally be able to see past the smoke and mirrors.

    I am not a whinner or crier, but I saw the payment problems and as a businessman prepared for it. They still exist, not only in longer payment cycles but also on the product reimbusement side and the dispensing fees paid. I do not believe there is a "conspiracy" against the small business owner of a pharmacy. I do believe it is the object of many PBMs and Medicare PDP to drive as much business to the mail order model. Do you not agree?

    Bruce Rogers

  11. To Bruce Rogers:

    Thanks for commenting.

    I suggest that you read The Part D Payment System, a very informative briefing by MedPac.

    As the briefing points out, Medicare does *not* pay for any drugs directly under Part D. Instead, Medicare pays a per-enrollee premium to a PDP (adjusted for various factors). Essentially, Medicare is just subsidizing a premium paid by an individual consumer.

    PDPs are free to create differentiated plans with varying levels of coverage. They compete with each other, which is one reason that premiums have gone down and are lower than originally predicted.

    But here's a key point: PDPs bear some risk for the drug spending by their enrollees. There is no guaranteed profit. Also note that PDPs negotiate with manufacturers, so there's really no way for “direct negotiations” to occur unless we throw out the whole system and start again. (Not recommended...) OTOH, the government could start a plan to compete with PDPs and we’ll let the enrollees decide.

    As PBMGuru notes above, PBMs and PDPs are intermediaries working on behalf of the real payors, so pushing one part of the payment system for “prompt payments” could have many unintended consequences. Pharmacies certainly can negotiate with the payment intermediaries (PBMs, PDPs), but most small independents are price takers in today's marketplace. They lack market power to demand better terms or higher fees from the companies working on behalf of the payors.


  12. As noted in the document "Part D Payment System", "CMS pays plans a monthly prospective payment for each...". This clearly indicates that PBMs are "floating" funds. When pharmacy does not fill an rx for client Jones, the pbm has been able to sit on that money. Don't attempt to imply that pbms need to wait to get paid. They are clearly paid in advance for each and every enrollee, regardless if each enrollee gets medicine or not.

    "CMS also provides... interim prospective payment adjustments..."
    PBMs are being reimbursed for their "risk". Again, that word prospective. Doesn't that mean in advance of service provided? Most Americans would love to be paid in advance. However, payments to my pharmacy are easily 30-60 days after service.

    I've got a better idea. Let's cut out the middle man (PBM) and I'll contract directly with the government to get paid in advance for the medicines sold later in the month. Give me the rebates that PBMs get and I'll sell cheaper with more happy customers. Show me the politician that will back this plan and I'll guarantee that that politician gets re-elected.

    But wait, he's probably not worried about re-election, but instead keeping all the "goodies"(aka cash, dinners, vacation, golf, etc.) from Big Pharma and PBM lobbyists.

    The fact is Big Pharma, PBM and Insurance are killing healthcare in America. They are primarily responsible for skyrocketing healthcare costs and just the general cost of living for that matter. The paying public better wake up or it will only get worse.

    Thanks again for this forum. And once again I will stress that I believe your point of view to be very narrow (in favor of Big Pharma/PBM).

  13. Marc,

    Your understanding of the program is not accurate. This a prospective insurance payment, not a prospective drug payment. CMS also gets a refund if they make too much money. See MEDICARE EXPECTS TO RECOVER $4 BILLION FROM PART D PLANS FOLLOWING 2006 PLAN RECONCILIATION


  14. "smoke & mirrors" will be the outcome of PBM "losses". There will be no way to prove their losses unless there is true transparency in their finances. As we all know, this is impossible.

    Yes,my understanding is correct. The PBM receives an insurance payment. This insurance payment is for part D. Part D is the drug plan. Therefore, it is directly for drug payment. Get your facts straight as to how this system works!!!

    In addition, what Medicare "expects to recover" and what will actually be recovered will be dramatically different. This is my prediction.