Tuesday, March 23, 2010

Health Reform: Impact on Drug Channels

Hey, did you hear that the House of Representatives passed a health care bill? Observant readers may have seen something about it in the news.

Anyway, here are my initial thoughts on the impact for the Drug Channels universe—Pharmacy Benefit Managers (PBMs), pharmacies, and wholesalers. Briefly:
  • Pharmacy Benefit Managers (PBMs) will gain from the expanded coverage in the bill. The “transparency” requirements, while an unnecessary reporting burden, should not be material.
  • Retail pharmacies will benefit from increased prescription volume and various legislative “fixes,” but face margin risk as the uninsured get the advantage of third-party bargaining power.
  • Drug wholesalers will primarily benefit along with their pharmaceutical manufacturer suppliers.
We have a long way to go before many aspects of this flawed bill are implemented, although tax hikes start later this year. Consider my $0.02 to be a down-payment on future analysis.


PBMs will be big winners from health care reform since they are the likely administrators of expanded prescription drug insurance. I assume that most plans sold through health insurance exchanges will include some type of drug coverage. This brand-new market will appear in 2014, which is conveniently right after the big wave of generic launches.

Below is a look at the CBO’s analysis of the Senate bill with the reconciliation fixes.The CBO estimates that the total number of non-elderly people with insurance will grow by 50 million people under the health reform legislation compared to an increase of only 10 million under current law, i.e., no reform.

One potential negative for PBMs is greater government oversight via the “transparency” requirements, although I view this element to be insignificant given the legislative specifics. The CBO rated this element as budget neutral, i.e., no practical economic impact at all. As you know, I view the whole transparency quest pushed by retail pharmacies to be nonsensical and highly self-interested. See Why do pharmacy owners care about PBM transparency?

The bill establishes a regulatory pathway for biosimilars, which will be a long-term benefit for PBMs and payers. However, the 12-year exclusivity pushes the impact far out into the future.


The good news for pharmacies is that overall prescription utilization would grow, which is what happened in 2006 when the Medicare Part D benefit was introduced. At the same time, greater insurance coverage would also depress pharmacy margins. See Pharmacy Profits and the Uninsured. This margin decline also happened after Part D as the uninsured got coverage and Part D plans reduced excessive Medicaid reimbursement for generics for the dual eligibles.

The pharmacy industry gets a reprieve on the Average Manufacturer Price (AMP) issue, although I have been assuming a Federal Upper Limit (FUL) adjustment even when health reform looked dead. The impact is neutral to slightly positive, but certainly not nearly as important as the rhetoric around AMP.

The two major pharmacy trade associations each released a statement highlighting other relevant provisions, such as Medication Therapy Management (MTM):

The pharmaceutical industry will generally win from this bill, as many analysts have noted. Drug wholesalers will certainly ride along with the increased product volumes. The 12-year exclusivity for biologicals will be a mixed bag given new distribution models, but the wholesalers’ role in specialty distribution (especially oncology) should make it a net positive.


The Wall Street Journal takes a dim view of these private corporate benefits, writing in a blistering editorial yesterday:
“We also can't mark this day without noting that it couldn't have happened without the complicity of America's biggest health-care lobbies, including Big Pharma, the American Medical Association, the American Hospital Association, the Federation of American Hospitals, the Business Roundtable and such individual companies as Wal-Mart. They hope to get more customers, or to reduce their own costs, but in the end they have merely made themselves more vulnerable to the gilded clutches of the political class.”
I agree with their perspective on the risks despite my generally rosy views above. If health care costs continue to escalate, then we can expect to revisit “reform” again and again in coming years. The Drug Channels universe has some protection because pharma costs are growing more slowly than costs in other parts of the system.

There is no shortage of opinions on the bill. However, I personally recommend you read the always thought-provoking Greg Mankiw, who offers an economist’s perspective in Healthcare, Tradeoffs, and the Road Ahead.


  1. Re your post today, thought I'd pass on 2 things.

    Re pbms, the federal subsidy to employers in part d for retiree coverage will lose its tax exepmtion starting next year, so employers effectively lose 1/3 of its value. To the extent this drives any employers to drop retiree coverage there could be a shuffling of some lives for pbms.

    For retailers, it may be important to recognize they are very big employers, and many big employers have come out and said the bill will drive up their costs meaningfully - so as employers it will be interesting to see what they say the impact is.

    Just two cents to toss on the pile of issues.

  2. Adam, what will the impact be on drug prices? Also, how will pharmacies react to the loss of margin from cash customers, will they try to increase margins from insured customers, and if so, how?

  3. For most employers the new law will result in increased costs for continuing health care coverage. However, to any employers that traditionally have had high employee turnover - ie Retailers - this is a great opportunity to get out of the employer provided health benefits business. The penalty is likely to be less than the cost of providing health coverage and with the mandate of a maximum 90 day waiting period for employee coverage, the case for pushing employees to the health insurance exchange makes perfect sense.

  4. How will the changes regarding Medicaid rebates affect MCO and rebates?