Thursday, August 26, 2010

Drug Channels News Roundup: August 2010

Here's a rundown of noteworthy news stories from the Drug Channels universe in August.

In this edition, we look at the latest bogus study of drug prices from AARP, get an update on CVS Caremark’s (NYSE:CVS) PBM selling season, hear more about NACDS' secret AMP letter, and learn how McKesson (NYSE:MCK) avoids taxes using an Irish subsidiary. Blimey!

Speaking of the secret AMP letter, please say hello if you see me in the audience this Sunday morning at the NACDS meeting in San Diego during Medicaid Expansion and Changes to Pharmacy Reimbursement. Then join me for a brunch of eggs, spam, bacon, spam, spam, and AMP!

AARP Says Brand-Name Drug Prices Up 8% in 2009
The latest AARP/University of Minnesota continues an unbroken string of misrepresentation versus a proper price index such as the BLS' methodology. FWIW, a footnote on page 19 of the original report illustrates just one of the many serious biases in this latest iteration: "In order to measure the impact of changes in retail price alone, the weights for drug products in this market basket are fixed over time. Drug products that enter the market as generics after 2006 will not be included in this index." Yes, you read correctly—the branded price is included in the computation even if the drug became generic during the past 4 years. Thus, the new report ignores generic substitution effects and what seniors actually paid. But hey, why read boring old footnotes when it’s easier to mindlessly bash pharma companies!

CVS Caremark Drug-Benefit Turnaround Tied To Sharper Marketing
Intrepid Dow Jones reporter Dinah Jones follows the progress of CVS Caremark under Per Lofberg’s leadership. She writes that the company “is bouncing back from a rocky ‘selling season’ last year that led to billions of dollars in lost accounts, thanks to a honed marketing message and competitive pricing in its pharmacy benefit management business.” She also discusses the Aetna deal, which I analyze in CVS-Aetna: Less Than Meets The Eye?

Where, Oh Where, Have Our AMP Rules Gone?
My friend Chris Cobourn at CIS responded to Secret AMP Letter Emerges; FUL Delay Likely. Chris echoes the pharmacy lobby’s plea for formal rule-making by the Centers for Medicare & Medicaid Services (CMS) instead of painful-sounding “sub regulatory guidance,” writing:
“First of all, I agree with the wish to see actual regulations with a sufficient comment period. The manufacturing community is familiar with “sub regulatory guidance” throughout the history of the Medicaid Program … The Final Rule was the first time in the Medicaid Program that we had actual regulations. And, although the changes were dramatic and had a huge operational and systems impact on manufacturers, at least we had it down on paper what was required.”
Drug Giant McKesson Moving Huge Revenues Through Its Irish Outlet
According to this article: “US drug giant McKesson Corporation is channelling almost $10 billion a year in overseas revenues through a Dublin-registered subsidiary … The vast bulk of the money routed through Ireland comes from the company’s pharmaceutical sales in Canada, Israel and Mexico, according to new company filings.” Tax Breaks: They're Magically Delicious!


  1. What do you mean 'Urgghh'? I don't like AMP!

  2. Adam,
    In re: AARP/Univ of MN analysis, I looked at this report and I agree with your critique of their methodology. However, when I looked at the actual BLS data collected, they reported a price index increase of 4.4% for December 2009 vs the 8% increase reported by AARP. Does 4-5x inflation make you feel any better than 8x inflation? I'm not complaining about pharma companies. In the long run, I'm more concerned about the lack of a truly free market. In the meantime, we will have all kinds of "strategic" games as it relates to pricing decisions (especially after elections).

    More importantly, I noticed beer prices were up 2.8% in 2009. What's up with that?

  3. Well, if you want to get all wonky on me, then I must point out that the CPI is a poor benchmark for drug prices.

    About 30% of the CPI is comprised of "Shelter," which measured using two CPI indexes:
    - Owners’ equivalent rent of primary residence (OER)
    - Rent of primary residence (Rent)

    See this BLS article for more details.

    Since the U.S. housing market is unusually depressed versus historical norms, the CPI is an especially poor benchmark--unless you are trying to make a political point rather than a fact-based economic argument.

    Why not compare the price of pharmaceuticals, which provide health, to gold, which has essentially no practical value? Gold prices were up about 39% in 2009, so drugs looks cheap compared to that benchmark. (I'm only half-kidding here.)


  4. No idea about the beer. Inflation in Super Bowl commercial pricing, perhaps?

  5. Fair point about the CPI - but you did cite it as a "proper price index" - albeit a flawed one for other reasons. And compared to all of health care costs, pharmaceutical prices are growing at a slower rate. My real point is that because of the Medicare entitlement and third party payment structure that exists, there are significant incentives for Pharma to increase prices at a politically "optimal" amount. Market forces are in the mix but not to the extent they need to be to produce better outcomes.

    Rather than tinker with AMP, importation, and other price controls, I believe we need a new market based model. The Med D donut hole failed to accomplish this goal. If we had a truly free market, perhaps we would even see real price competition (i.e. 10% less expensive compared to last year) or "20% off sales". I doubt this will happen any time soon but I can always hope.

    p.s. I'm thinking the price of beer went up due to all the beer summits that Obama had (including that $80B one with Pharma).