Monday, December 20, 2010

Pharmacy and PBM Trends for 2011

Hard to believe, but this is my 140th post of 2010. Thanks to everyone who read, commented, or forwarded the articles on Drug Channels. I hope you’ve had a fun and educational year. There's a special holiday video from my good friend MC Ad-Elf at the bottom of today's post.

To wrap up the year, here are four big trends that we'll be talking more about in MMXI:

  • Market Growth and the Shift to Specialty
  • Boom-to-Bust for Generic Drugs
  • Cost-Plus Pharmacy Reimbursement
  • Preferred Pharmacy Networks
Below is an overview of each trend along with a summary of the drug trend forecasts provided by CVS Caremark (NYSE:CVS), Express Scripts (NASDAQ:ESRX), and Medco Health Solutions (NYSE:MHS). If you're curious to know more, I devote the final third of the 2010-11 Economic Report on Retail and Specialty Pharmacies to analyzing these trends.

FYI, the introductory discount on my new pharmacy report ends tomorrow. It’s the perfect stocking stuffer for all the executives on your Christmas list!

Market Growth and the Shift to Specialty—Pharmacies will benefit from the expected overall growth in demand for prescription pharmaceuticals. Greater dispensing of specialty pharmaceuticals will increase revenue growth at pharmacies, although the concentration of the specialty pharmacy industry means that a small number of pharmacies will benefit disproportionately from this growth. Revenues in the pharmacy industry will shift away from traditional brand-name drugs to specialty drugs over the next few years.

The largest Pharmacy Benefit Managers (PBM) provide forecasts for drug trend—the change in per-member, per-year (PMPY) prescription drug expenditures of their clients. Note that these trend figures are not necessarily comparable among PBMs due to differences in methodologies and sample composition.

The exhibit below summarizes the most recent forecasts for traditional, specialty, and overall drug trend.
Drug trend for traditional drugs is forecast to grow at about 5% to 8% in 2010 and 2011, but will drop in 2012 following the introduction of new generic drugs such as Lipitor. Drug trend for specialty drugs is forecast to remain in the mid-teens in the next few years.

Boom-to-Bust for Generic Drugs
—It is projected that $102.7 billion of current branded product revenues will be lost to generic competition from 2010 to 2020. The superior profitability of generic drugs will benefit all participants in the pharmacy supply chain—pharmacies and drugstores, PBMs, and drug wholesalers. However, payers are becoming more sophisticated and knowledgeable about pharmacy profits from generic drugs. They are pushing back against extraordinary profit levels by requesting to share more fully in the savings from generic substitution. Competition among pharmacies will also reduce the overall profitability of generic prescriptions for pharmacies.

Cost-Plus Pharmacy Reimbursement—Reimbursement approaches based on pharmacy acquisition cost continue to gain momentum. Two state Medicaid programs began to implement these programs, and a number of new direct-to-payer, cost-plus agreements were announced by large pharmacies. These models will accelerate consolidation in the pharmacy industry, but payers also need to evaluate the potential negative impact on generic dispensing incentives.

Preferred Pharmacy Networks—A growing trend is the establishment of retail pharmacy networks that use financial incentives or explicit restrictions to direct consumers into specific pharmacies or channels. A number of high-profile new programs were announced in 2010. As the trend toward preferred and restricted pharmacy networks accelerates, these programs will increase market share for retail pharmacies designated as “preferred” providers of pharmacy services. We expect the number of preferred pharmacy networks to grow over the next five years as payers seek additional savings in drug spending, but restricted pharmacy networks will not expand. However, open networks will remain the most common network design.


Here's a special holiday greeting from my good friend MC Ad-Elf. (Turn up your computer speakers for the full effect. Be patient—it may take a moment to load.)

He's a damn fine dancer, don't you think? Happy holidays!

Click here if you can't see the video.


  1. Never knew you had such the dance moves!

  2. Great stuff Adam.
    Happy Holidays and have a great 2011.

  3. Thank you for all of your great information, Dr. Fein. You have delivered valuable content to our organization with a humorous touch. Have a happy new year!

  4. Adam
    You are a fine try out for Dancing With The Stars.
    Bruce S.

  5. Adam, I knew that Alabama had implemented a cost-plus Medicaid Rx reimbursement system, but what other state has done so?

  6. Oregon's cost-plus plan starts in January 2011. See Drug Channels News Roundup: September 2010. If you have the report, I discuss both plans on pages 63-64.


  7. I personally think that generic drugs have a good chance to be widely embraced and welcomed by the market. Because of the economy, a lot of people will prefer them than the branded ones because of the huge price difference.