Monday, October 22, 2007

Retail Pharmacy's New Power

H.R. 1474: Fair and Speedy Treatment (FAST) of Medicare Prescription Drug Claims Act of 2007 now has 222 co-sponsors. In other words, a majority in the House of Representatives formally support this bill.

Retail pharmacy is becoming extremely effective at defining the legislative agenda and terms of debate. My Lobbying for Pharmacy Profits from January 2 should have been even more aggressive.

I have been very personally disappointed with the amount of nonsense being spewed out there about AMP, Part D, and the future of retail pharmacy. Many public statements have been either factually incorrect or grossly misleading.

But my comments become insignificant when compared to the power of last month’s industry-wide Congressional lobbying effort organized by NACDS, NCPA, and FMI. Did you know about the new bi-partisan Congressional Community Pharmacy Coalition, with 34 founding member from the House? Their tagline is truly great PR: “Preserving patient access to America’s most accessible healthcare professionals.”

Seriously, is anyone else trying to provide any balance on these legislative decisions? PCMA, the trade association representing Pharmacy Benefit Managers, could only muster a bland and uninspired press release stating:

“Before rushing to judgment on the issue of 'prompt pay,' Congress should commission GAO to conduct an independent study to explore this issue generally and the role played by Pharmacy Service Administrative Organizations (PSAOs) particularly.”

Too late – judgment rushing is over! Should we presume that their weak defense indicates tacit approval of the FAST legislation?

Here’s some food for thought from PBMguru, who posted a very interesting comment to this blog a few weeks ago:

“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…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?”

Yes, PBMguru, life–and the pharmaceutical payment system—is full of tradeoffs. We’ll discover them soon enough.


  1. Dr. Fein,

    It seems you seriously underestimated the power we Independents still have (just kidding.. I'm genuinely shocked that the lobbying was that successful!). Truthfully though, this is a great win. I still don't understand why you're fine with the PBM's not having to pay up prescription claims quickly. You keep talking about the distribution channels and the money flowing through those channels, etc... However, we Independent pharmacy owners are simply sick and tired of waiting for our money. Just because this is the way it has been done all along (slow payments) does not make it right.
    Does this mean that the wholesalers will demand their bills to be paid quicker now? Maybe, but we'll fight that battle when we get to it. Right now I would just like to take a moment to enjoy this win for a little while, before the next battle begins.

  2. Dr. Fein,

    You should start thinking of the PBM's as Credit Card companies. They have no inventory, they are just middle men. If a credit card company can move your money into your account within 72 hours, why can't a PBM? Just like a credit card transaction, a PBM transaction is also done electronically. There should be no lag time when it comes to a PBM issuing payment.

  3. Dr. Fein,

    With all due respect, you obviously have not been out to a state legislative hearing lately and seen all the gucci loafered PBM lobbyists that show up. It would take a Carnival cruise ship to hold them all. Also, I think you are missing some historical perspective if you don't remember the days when the PBM would bill clients twice monthly requiring immediate electronic payments all the while reimbursing pharmacies by mail once monthly...what happen to all the interest money? Any guesses? Wall Street knows the answer. Give the pharmacies a break.

  4. You are missing my point about tradeoffs.

    Let’s say the FAST legislation passes. Then what?

    Here are a few possibilities:

    1) The definition of “clean claim” will be tightened and payment times may actually get longer.

    2) PBMs will ask their customers (payers) for 14 day terms. Many of these customers are small businesses themselves who will now have their own cash-flow problems. This creates a ripple effect in the economy and ultimately raises the cost of healthcare insurance. (As an economist, I’d say this is a transfer of economic rent from a broad group to a small, well-organized group of advocates.)

    3) If clients push back successfully against PBMs, then PBMs with a lower cost of capital will be the winners. This dynamic will favor larger PBMs over smaller PBMs, leading to further consolidation and strengthening of the big 3. Retail pharmacy’s negotiating power will go down further, perhaps triggering more consolidation between chains and PBMs.

    I realize that you are pro-pharmacy. But the benefits to pharmacy are not free and will ultimately come at someone else’s expense – and not necessarily at the expense of evil PBMs.

    The law of unintended consequences may bite back hard on pharmacy. Who knows? In five years, the pharmacy lobby may view FAST as a major strategic error.

    Just some food for thought before everyone cheers for an obvious win for “patient access.”


  5. Adam,

    I am pro-payor (having worked for some of the largest plans in the US), pro-small business (aka local pharmacy) and anti-oligopoly (Top 3 PBMs per Barbara Martinez). I am also pro PBM when their interests are truly aligned with the payers which they rely on and leverage to operate successfully.

    1. The point is that the payment terms should not be different between payor and pharmacy purely to extract additional margin for the PBM. That adds to the costs of US healthcare and disadvantages small pharmacies, and usually the payers don't even know it is happening to the extent that it is. I have actually seen thousands of invoices with hundreds of groups. Believe me, I don't think FAST is going to make reimbursement payments any longer. PBMs are already careful and deliberate about what is a "clean claim" and what is not and the timing of final adjudication. There is not a lot of extra room here for gaming the system via tightening of definitions. And currently, the PBMs have the discretion and control both ways, which is why there is a problem.

    2. Most small businesses are fully insured, not self funded, and as such are covered through prepayments of premium dollars. The "economic rent" is already paid in advance. The terms of PBM agreements with plans are already tight...that is my point - PBMs manage the payer side very tightly already, i.e., accelerated payments are already the norm.

    3. I hope you are not suggesting that clients should not push back harder against PBMs? Clients cannot forever accept $30.00 gross margins on generics at mail. PBMs already have the highest gross operating margins in health care. The oligopoly is already favored and more consolidation will occur regardless of legislation. When you have oligopoly conditions, the only fix is through legislation or litigation. Economic history has shown us that.

    Thanks for your time....

  6. Thanks for your thoughtful comments.

    Keep in mind that using payment terms for working capital is the norm in the pharmacy supply chain. Drug wholesalers get paid within 14 days from pharmacies but can pay their suppliers within 4 weeks and still earn a "prompt pay" discount. (See my 2005 paper Preparing for the Future Retail Supply Chain.)

    But the harsh reality is that the retail pharmacy industry is going through what many other US retail industries have gone through -- consolidation and chain dominance. Good independents will thrive, but the tough environment will shakeout many marginal players. No one wants to hear that it could happen to their business.

    PBMs will not always be the power players in the channel, especially as the government becomes the dominant payer. Making PBMs into the bad guys to push a legislative fix is dangerous public policy, especially when policy is being based on shoddy and self-serving data. The ends do not always justify the means.


  7. Adam,

    I agree with some of your points...the best pharmacies will survive and the supply chain does work on staggered payments. RE: the supply chain, though, the difference is (and it is a big difference) that most of the supply chain, starting with the manufacturer, does not claim to be in "alignment" with the payor. The PBM does. Of course, that claim is simply not true for most spread pricing PBM contracts.

    I am not making the PBMs out to be the bad guys. They have done that on their own. News stories are 90% negative; 21 Attorney Generals have sued them; three or more states have brought direct legal action one of which resulted in a jury verdict of fraud; the United States government filed two lawsuits leading to two $100 million+ settlements; a dozen or so AGs are now bringing action alleging Medicaid fraud against one PBM; numerous private plans have brought legal actions, one suit in St. Louis may be classed: the DOL has written letters of concern about PBM practices; both Repubs and Dems are supporting PBM regs, etc...

    Are they all wrong?

    Of course not. PBM practices are riddled with conflict - it is inherent when you claim to be the "manager" or "cost containment" agent (the newest mantle by one of the PBMs is agent of "trust"), while over 50% of your profits are coming from retailing via mail and spread pricing at retail, interest on the float, "administrative" fees on rebates which are sometimes greater than the "rebate" itself, using commonly understood terms like "maximum" allowable costs (MAC) all the while having multiple MAC lists to drive more margin, etc...should I continue?

    As far as "self-serving" data, if I understand your concern, we should not trust data from Price Waterhouse either, hired by PCMA? Everybody has their own data and promotes it. But, again, all the parties I mentioned above can't be wrong. One of the ways to figure all this out is to follow the money. I think you know where that leads, disproportionately so. Nothing wrong with profits, but don't claim to be working in my best interests when my costs go up 15-21% every year from 1996-2003 and 5-10% thereafter (greater than inflation), all the while raking in spectacular profits, year after year. When we are handling plan assets, it is all about trust!


  8. Sorry to appear anonymous, I just didn't have the inclination to sign up. I am Christopher L. Richmond, former owner of a fifteen-store retail pharmacy chain largely based in supermarkets.

    I've been following your blog for about two months now. Typically I find them informative and objective, and I have been satisfied merely to inform myself by reading the threads without feeling the need to post a comment. Until now.

    Dr. Fine, with all due respect, as a relative newcomer to your blog, I must reveal to you that from my point of view you are not completely objective where it comes to "retail pharmacy". It seems your expertise in supply chain economics has shrouded your view somewhat to other salient elements.

    I don't really want to recite tired old arguments about access to pharmacy services, etc. But you know what? They ring true to congressional representatives and regular folks. To them, the pristine efficiencies you may envision in the supply chain don't really amount to a puff of smoke. They just want their meds and not a lot of hassles. "Retail Pharmacists" are the magicians who on the one side attend to the need of these regular folks (who, by the way, voted in their congressional representatives to do what?, represent them?), and on the other side navigate the overtly hostile, thinly disguised, apparatus designed to eliminate "retail pharmacy" because it seems annoyingly inefficient and eats into the profits of the PBMs and insurers. If only everything was delivered via mail order, we could all make so much more money!

    And, now to my point, as long as the profit motive infuses the health care system, there will always exist a conflict against paying for healthcare delivery. Also, the more complex the delivery system becomes, the more opportunity exists for middlemen, who, by definition, never actually deliver a direct service to a patient, to exploit the system to their advantage. Retail pharmacists are not middlemen. We are healthcare providers. Pharmacy is a profession (read, we get paid to render the care we provide). As the "silver tsunami" crests (the baby-boomer onslaught) it will become more and more evident that the funding of healthcare in this country is the purview of the government; like defense, for example. My view is that all the middlemen and their profit motives should be swept aside and that we have universal healthcare for all, funded by the government. That should become the law of the land.

    Many may see this view as radical. I see it as necessary.

    Christopher L. Richmond

  9. Christopher,

    I agree that pharmacy is a profession. But even with universal healthcare, I presume that you will want (and deserve) to be compensated for your services and value. So regardless of the payer, we will have to confront a more insidious tradeoff baked into the pharmacy business model: you get paid for rendering care by selling products.

    Put more harshly: pharmacists give away healthcare services and recoup the costs of their services through product margins. Attempts to reduce so-called excessive product margins expose these hidden economics, undermining the business model and causing problems for business owners like you.

    If you look back to May 2006, my second post on this blog warned that exposing the hidden cross-subsidies would create disruption. (Will Unbundling Crush Pharmacy Profits?) But with the benefit of hindsight, I didn't pay enough attention to the services side of the story. However, I think my points still stand up to scrutiny:
    1) Pharmacists deserve to be compensated for their services.
    2) Allowing very high margins on generics is a very inefficient way to compensate pharmacists.
    3) Battling to protect a broken business model with faulty and misleading statistics will only postpone the pain for a very short time.

    Thanks again for your comments.


  10. Adam, maybe we are gaining some ground; a little perhaps...I don't think giving health care away for free via the government is the answer either. The inefficiencies will be exponential. But, the current system ain't working for sure, and I understand all sides of the argument to fix it.

    One of the problems is that middleman have assumed control of the processes and flow of money, seeking long term contracts with payers and, on the flip side, demanding at will, contracts of adhesion with providers and manufacturers, creating enormous, extra spread that did not exist 15 years ago. I estimate PBMs have added some $6 billion to the US annual pharmacy costs, and created a cycle of inflation at the manufacturer level in order to maintain margin at that level. This can be easily graphed. This did not happen overnight, but evolved as PBMs added lives and leveraged that into control over the system.

    What we have is an pure definitional oligopoly, which frankly, I assume you agree with since you have not refuted. The market, historically, has not been able to fix the problems of oligopolies without help. Again, the fact is PBMs have the highest gross operating margins in health care. If we are truly interested in economic theory, then we have to ask ourselves a key question, i.e., should the entity tasked with "managing" the benefit make more money (exponentially so) when the costs go up, or be paid and bonused on performance and keeping costs low. Most CEOs would be out of a job if they failed to control escalating costs the way PBMs have over the last decade. Payers are in a catch 22, though, with few options. Many payers are now moving back to the old indemnity mindset with percentage copays and deductibles, and consumer driven choices. What else can they do - they certainly cannot rely on the "manager." Can you imagine your 401K manager, keeping over half the gains they made with your money? I don't think so. Yet, that is exactly what PBMs are doing, and it is driving health care costs up.

    I found your point about generics being an inefficient way to compensate pharmacists very interesting. That may be right; perhaps a better way to compensate them is for highly important cognitive services and disease management (which mail order cannot really do). My question is, if you really believe this, why should the PBM (who is the "manager") reap 50% of their profits from generics? A classic middleman scheme turned greedy...

    Also, I think we should all be upfront in this discussion about who butters our bread. Mine is buttered by the folks who pay the bills, the payers. How about you?

    Love the discussion!

  11. Keep in mind that I'm not excluding PBMs from of my middlemen profit conundrum. They are also being paid for their administrative services with (various) product margins. In some cases, this aligns incentives. Other times -- not so much. Hence, we see a trend toward fixed per-beneficiary fees.

    The PBM industry is a mild oligopoly today, at least judging by the 4-firm concentration ratio. In a June 2007 Drug Benefit News article (sorry, no link), the top 4 PBMs had 45% of total PBM covered lives. That's relatively low compared to drug wholesaling (95%) or other industries (tobacco, beer, films, etc.)

    As to your last point: My revenue sources are very diversified across many clients and many industries (i.e. not just healthcare). Otherwise, I couldn't be so controversial on this blog!


  12. Adam, I think we have some agreement.

    I have the control at 70% via the Big Three...I can live without tobacco, films and beer (yes, even beer), but it is a little harder without is a life and death oligopoly to many.

    You are diversified - smart that I can really appreciate. Thanks...