Pay attention to this report because it illustrates the generic drug profit dynamics that exist elsewhere in healthcare – retail pharmacies, providers, wholesalers, and PBM mail order. And as generic utilization rates will move toward 75 percent over the next few years, I expect that pharmacy channel margins on generic drugs will be increasingly seen as a mechanism by which payors can manage their drug trend.
As always, I encourage you to read the full report, available for download here: Medicare Payment For Irinotecan.
A Peek at Cost-Plus Reimbursement
The OIG looked at prices and reimbursement for Pfizer’s Camptosar (irinotecan hydrochloride) after the launch of nine competing generics on
Since Medicare pays for irinotecan through the Part B program, provider reimbursement is calculated using the Average Sales Price (ASP) plus five percent. I refer to the Part B approach as “cost plus” reimbursement in contrast to the “list minus” reimbursement models typically used for retail pharmacy. In a cost-plus model, the total margin dollars available to the drug channel are capped at a percentage of the manufacturer’s actual sales price.
Drug Channel Life Cycle Economics
The OIG report highlights the profit opportunity for providers and wholesalers created by the two-quarter time lag between the calculation of the cost-plus reimbursement benchmark and the actual acquisition cost.
Here’s a simple illustration using fictional data inspired by the OIG-reported figures: (Click to enlarge.)
In my example, average per-unit margin dollars between manufacturer and patient ultimately fall to $2.55, but not before spiking up from $6.25 to $80.25 (1200 percent). Since ASP is a weighted average of brand and generic prices, my example actually understates the profit potential for a provider that immediately substitutes the generic version.
Cost-plus reimbursement models, such as the ASP-based approach used in Medicare Part B, use market prices to dictate the pace of decline. In contrast, retail pharmacy margins can get compressed earlier in the cycle through maximum allowable cost (
Getting Incentives Right
As I see it, the superior profitability of generic drugs for the drug channel has dramatically accelerated generic substitution rates during the past ten years. Check out the page 10 of Medco’s most recent Drug Trend Report, which shows Ambien (zolpidem) gaining 97% share of mail scripts and 79% of retail scripts with seven days of launch.
While brand manufacturers may not like to see these figures, private payors recognize that rapid generic substitution is crucially important for lowering their drug trend. Pharmacies, providers, PBMs, and wholesalers are all racing the clock against the expected reimbursement decline for generics.
Alas, OIG seems to miss this essential point. If Medicare completely eliminated the profit opportunity from generics (under Part B or otherwise), costs would likely increase because generic substitution would slow down. On the other hand, the big profits in 2008:Q2 raise eyebrows.
Thus, the real question that OIG and Medicare should ask is more complex: At what level of drug channel profits could payors still encourage rapid generic substitution while not “overpaying” for generics? Understanding how payors will answer this question will help predict the future profit streams of pharmacies, wholesalers, and PBMs.
Thank you. I hope you write your Senator, Congressman, etc, etc. As you well know the government has an uncanny way of screwing it all up...ReplyDelete
Great analysis, Adam! It make me wonder if there's a better way instead of the feast or famine approach.ReplyDelete
Interesting discussion. Maybe there should be a defined ramp down in reimbursement, but the current 6 month lag may just be fine. I wonder how much it costs annually.ReplyDelete
Presumably slamming the price down immediately would still force the use of generic, but would save a lot of money.
I am on medicare. With my medicare rx insurance I pay $7.00 per month for a generic blood pressure medication.ReplyDelete
If I send my prescription to costco (which is not recognized by my insurance co) I can buy the same drug and quantity for approx 2/3 of the price I pay with "insurance"
What's wrong with this picture? Am I paying for medicare insurance so I can pay more than the uninsured??
OK, am a little late to the Irinotecan party, but now we have Oxaliplatin. Yes, Medicare "overpays".ReplyDelete
More egregious; the Medicare beneficiary copayment. In it's worst form, the patient writes the copay check based upon a brand price (in ASP) that is six months old for the generic that was just administered to them and actually cost the doc a fraction of the ASP that determined the copayment. Between Irinotecan and Oxaliplatin, this "excess" copay will likely top $100 million before generic prices stabilize ASP.
Given Part B patent expirations over the coming years, the patient copay exposure could be measured in billions.