Drug Channels News Roundup, March 2025: PBM Unbundling Update, Stelara Biosimilar Price War, My $0.02 on the Optum Rx News, Follow the Dollar, and #DCLF2025

Spring has officially arrived in sunny downtown Philadelphia—the proud home base of Drug Channels. As you can see on the right, we celebrated in Miami at the Drug Channels Leadership Forum.

The vernal equinox also brought a surprising surge of industry updates and noteworthy news you won’t want to miss:

• Blue Shield of California provides a puzzling update to its PBM unbundling effort

• The Stelara biosimilar price war begins

• My reaction to Optum Rx’s pharmacy reimbursement announcement

• A valuable Follow the Dollar primer

Plus, Dr. Glaucomflecken reviews UnitedHealth Group's vertical integration strategy.

P.S. Join my more than 61,000 LinkedIn followers for daily links to neat stuff along with thoughtful and provocative commentary from the DCI community.

Coming soon: PBM Industry Update: Trends, Challenges, and What’s Ahead. Our first webinar of the year will tackle the most controversial drug channel participants. Join Adam J. Fein, Ph.D., on April 4, 2025, from 12:00 p.m. to 1:30 p.m. ET, as he shares his expert analysis on critical industry developments. Click here to learn more and sign up.

What CVS Pharmacy’s New Cost-Plus Reimbursement Approach Means for PBMs, Pharmacies, Plan Sponsors, and Prescription Prices (rerun)

This week, I’m rerunning some popular posts while I prepare for Friday’s live video webinar: Drug Channel Implications of the Inflation Reduction Act.

For more on acquisition cost reimbursement for pharmacies, see Sections 8.4. and 12.3.4. of our new 2024 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

Click here to see the original post from December 2023.

---

Is the world ready for new ways to price pharmacy and pharmacy benefit manager (PBM) services? CVS Health thinks so, as evidenced by two new initiatives that it announced yesterday. Below you'll find details and links to source documents.

I commend CVS Health for attempting to address key economic challenges facing the retail pharmacy industry and for tackling the hidden complexities of PBM pricing models. As I explain, a shift to cost-based pharmacy reimbursement could stabilize CVS Health’s retail business by improving its dispensing profits.

Nonetheless, CVS Pharmacy’s cost-plus model has some notable shortcomings for plan sponsors and is far less “disruptive” than the company would like us to believe. Mark Cuban should be flattered—but not fearful.

What's more, other large pharmacies will likely follow CVS with attempts to force payers and PBMs to accept some form of cost-plus reimbursement. (Et tu, Walgreens?) If that happens, expect higher prescriptions prices, less efficiency, and a slowdown in the inevitable retail pharmacy shakeout.

What CVS Pharmacy’s New Cost-Plus Reimbursement Approach Means for PBMs, Pharmacies, Plan Sponsors, and Prescription Prices

Is the world ready for new ways to price pharmacy and pharmacy benefit manager (PBM) services? CVS Health thinks so, as evidenced by two new initiatives that it announced yesterday. Below you'll find details and links to source documents.

I commend CVS Health for attempting to address key economic challenges facing the retail pharmacy industry and for tackling the hidden complexities of PBM pricing models. As I explain, a shift to cost-based pharmacy reimbursement could stabilize CVS Health’s retail business by improving its dispensing profits.

Nonetheless, CVS Pharmacy’s cost-plus model has some notable shortcomings for plan sponsors and is far less “disruptive” than the company would like us to believe. Mark Cuban should be flattered—but not fearful.

What's more, other large pharmacies will likely follow CVS with attempts to force payers and PBMs to accept some form of cost-plus reimbursement. (Et tu, Walgreens?) If that happens, expect higher prescriptions prices, less efficiency, and a slowdown in the inevitable retail pharmacy shakeout.

For more on the future of PBM and pharmacy pricing, join me on December 15 for a new live video webinar: Drug Channels Outlook 2024. I promise a a jam-packed 90 minutes filled with crucial information you need to know for the year ahead. Click here to learn more and sign up.

PBM Pricing Overhaul: Express Scripts Prepares for a World Without Rebates—But Employers May Not Change

This week, Express Scripts announced an innovative pharmacy benefit contracting model for members of the National Drug Purchasing Coalition (NDPC), a group of 18 large employers. Click here to read the fully-titled press release.

You should pay close attention to this b.i.g. news. It is structured so that Express Scripts will not profit from the flow of funds from a brand-name manufacturer to a plan sponsor. What’s more, the PBM’s compensation will be fully delinked from drug list prices. Instead, Express Scripts will earn only fixed management fees plus additional at-risk compensation tied to clinical outcomes.

I spoke to Express Scripts and the NDPC’s consultant to clarify how the new model will differ from more conventional structures. As I see it, this PBM compensation approach could be an important step in our industry’s journey toward a world without rebates.

For now, it only applies to a sliver of Express Scripts’ revenues. But if the new pricing model is widely adopted, Express Scripts (Cigna) will be able to escape drug channel disruption unscathed.

The biggest unknown is how employers will behave as they select pharmacy benefits. Will the funds flowing transparently through the PBM be put toward solving the reverse insurance issue the gross-to-net bubble? Will this lower out-of-pocket costs for patients? As they say: Mo money, mo problems.

Seven Pharmacy and Channel Implications of the New AMP Final Rule (rerun)

This week, I’m rerunning some popular posts while I attend the 2016 Armada Specialty Pharmacy Summit. Click here to see the original post and comments from January 2016.

---

Well, pierce my ears and call me drafty! Late last week, the Centers for Medicare & Medicaid Services (CMS) finally released its long-overdue final rule regarding Average Manufacturer Price (AMP) under the Patient Protection and Affordable Care Act (ACA). Since 2012, CMS has announced—and then delayed—the release of the final rule at least five times. Makes you proud to be a taxpayer, doesn’t it?

Savor all of the bureaucratese for yourself in the oh-so-brief 658-page rule, known to the cool kids as CMS-2345-FC. (Note: Not the name of a new Star Wars droid.)

The rule is effective April 1, 2016. (Seriously.) Below, I highlight what it could mean for drug channels, including observations on:

• Prescription reimbursement
• Pharmacy profits
• Manufacturers’ channel strategies
• Bona fide service fees
• Manufacturer-retail direct distribution arrangements
• And more!

Enjoy.

Seven Pharmacy and Channel Implications of the New AMP Final Rule

Well, pierce my ears and call me drafty! Late last week, the Centers for Medicare & Medicaid Services (CMS) finally released its long-overdue final rule regarding Average Manufacturer Price (AMP) under the Patient Protection and Affordable Care Act (ACA). Since 2012, CMS has announced—and then delayed—the release of the final rule at least five times. Makes you proud to be a taxpayer, doesn’t it?

Savor all of the bureaucratese for yourself in the oh-so-brief 658-page rule, known to the cool kids as CMS-2345-FC. (Note: Not the name of a new Star Wars droid.)

The rule is effective April 1, 2016. (Seriously.) Below, I highlight what it could mean for drug channels, including observations on:

• Prescription reimbursement
• Pharmacy profits
• Manufacturers’ channel strategies
• Bona fide service fees
• Manufacturer-retail direct distribution arrangements
• And more!

Enjoy.

The Retail Generic Drug Inflation Slowdown: It’s Real

Looks like stock prices aren't the only things that have stopped rising. As we predicted in April, generic price increases are slowing down.

For the second quarter of 2015, we again found that generic drug price increases were lower than our previous examinations. So far in 2015, no drugs have had with mega-increases that exceed 1,000%. Below, I highlight comments by executives at the large wholesalers that confirm our slowdown analysis.

A separate RBC Capital Markets study (shown below) found an inflection point in the Food and Drug Administration’s (FDA) approval of new generic drugs. If the trend continues, new supply will enter the market and generic prices will decline. Hello, Econ 101!

Meanwhile, the pharmacy industry’s lobbyists may find that faster MAC updates may be quite painful if generic prices start falling. Wheee!

Retail Generic Drug Inflation Eases, but the FDA Keeps Prices High

Retail generic drugs usually get cheaper over time, but my previous analyses have documented substantial generic inflation. Our latest exclusive investigation, however, finds that generic inflation may be easing.

During the first quarter of 2015, generic drug price increases were low compared with our two most recent examinations. We also found no drugs with mega-increases (exceeding 1,000%).

While inflation has slowed, generic drugs that have experienced cost increases haven’t necessarily become cheaper. As I show below, the actions of the Food and Drug Administration (FDA) have prevented new supply from entering the market.

But as the FDA’s backlog of 4,000 applications starts to clear, generic costs will start deflating. Until then, expect some generics to remain costly and inflation to continue.

In the Third Quarter, Retail Generic Drug Inflation Kept on Truckin’

This Thursday, the Senate Subcommittee on Primary Health and Aging, currently led by U.S. Senator Bernie Sanders (I-VT), will hold a hearing titled “Why Are Some Generic Drugs Skyrocketing In Price?”

The hearing is not a surprise. As I discuss in Congress Grills Generic Drug Makers Over Price Inflation, Senator Sanders and U.S. Representative Elijah E. Cummings (D-MD) have been probing generic manufacturers.

Our latest exclusive analysis (below) finds that generic inflation is alive and well. During the third quarter of 2014, more than one-third of generic drugs became more expensive. A small number of drugs have experienced mega-increases (exceeding 1,000 percent) over the past three months.

I’m skeptical, however, that the Congressional hearing will tell us anything we don’t already know—or anything that Congressmen Sanders and Cummings haven't already concluded.

Drug Channels News Roundup, September 2014: WAG, Generics, NADAC, and Alliance Boots

Autumn has arrived! Time to gather your acorns, make fantasy football trades, and read my thoughts on these Drug Channels stories:

• Walgreens wants to sell its infusion business?!?

• New evidence that generic drug inflation is creating multiple generic tiers

• Texas Medicaid will base pharmacy reimbursement on acquisition costs

• Alliance Boots’ Stefano Pessina is not a fan of tobacco in pharmacies

Plus, the American Medical Association announces an innovative new cost-saving program: placebo doctors!

Retail Generic Drug Inflation Reaches New Heights

Surprise! Retail generic drugs are no longer getting cheaper over time.

Our latest exclusive analysis (below) finds that half of all retail generic drugs became more expensive over the past 12 months. And some of those drugs got much, much more expensive. One out of 11 generic drugs more than doubled in cost, with some increases exceeding 1,000 percent.

Product shortages appear to be the primary culprit. How did our retail drug supply chain become so fragile?

Drop by tomorrow, when I’ll review the winners and losers from this crazy phenomenon.

Drug Channels News Roundup, April 2014: PFE, WAG, UHC, and AAC

Welcome to my latest round-up of noteworthy news stories from the Drug Channels ecosystem. In this issue:

• Inversion—How a Pfizer/AstraZeneca deal could trigger a Walgreens headquarters move

• Reversion—Why UnitedHealthcare won't block retail co-pay cards…for now

• Subversion—Pharmacies stop New York’s AAC efforts

Plus, The Onion provides valuable advice for pharmacies looking to boost their Medicare star ratings.

Drug Channels News Roundup: February 2014

Our neverending winter is almost over! Get ready for an early spring with my monthly look at noteworthy new stories from the Drug Channels universe. In this issue:

• Hospitals Enter Specialty Pharmacy—Money on their Mind?

• PBMs and Health Plans—Buy or Build?

• New York joins the AAC Revolution—Done right?

• More Specialty Pharmacy Consolidation—Surprise? (No, not really.)

Plus, a really funny video about conference calls.

P.S. If you can’t wait for our monthly news updates, then join the twittering hordes following @Drug Channels.

Retail Generic Drug Costs Go Up, Up, and Away

For an updated analysis, see Retail Generic Drug Inflation Reaches New Heights (August 2014).

---

Retail generic drugs usually get cheaper over time. But our exclusive analysis (below) shows that about one-third of generic drugs have gotten more expensive in the past twelve months.

Even more surprising, a small number have skyrocketed. Twelve drugs’ costs have increased by more than 2,000%.

Drug shortages appear to be the primary culprit. Contrary to what some people believe, exploding generic costs are the one thing that can’t be blamed on Obamacare.

Pharmaceutical wholesalers have been the big winners. Some pharmacies have also benefited, but many are being squeezed by third-party payer reimbursements. My big questions: will continued price increases slow the pharmacy industry’s race-to-the-bottom generic price war or make preferred network participation less appealing to pharmacies? Keep an eye on this trend.

Surprise! CMS Dumps National Average Retail Price (NARP) Survey

The Duchess of Cambridge wasn't the only one delivering a surprise yesterday. In an unexpected announcement, the Center for Medicare and Medicaid Services (CMS) announced it will immediately terminate the National Average Retail Price (NARP) survey. (Read the CMS statement below.)

CMS didn’t give a reason, but I presume it’s a sequester-related budget cut. Wise fiscal planning, or another implementation failure for Obamacare?

Despite the move, I don’t think CMS will back away from the more-controversial (and less accurate) National Average Drug Acquisition Cost (NADAC) survey.

NADAC Momentum: California Abandons Average Acquisition Cost for Pharmacy Reimbursement

You may recall that California was in the process of transitioning Medi-Cal pharmacy reimbursement from the Average Wholesale Price (AWP) benchmark to an Average Acquisition Cost (AAC) benchmark. Would it be Heaven or would it be Hell? Alas, we’ll never know if a CA AAC is a lovely place, because California’s Department of Health Care Services (DHCS) just announced that the its plan is being put on hold. Click here to read the official DHCS statement.

Does this change mean slowing momentum for acquisition cost pharmaceutical benchmarks? I don’t think so. Instead, California actions implicitly endorse the National Average Drug Acquisition Cost (NADAC) data now being collected and published by the Center for Medicare and Medicaid Services (CMS). California wants CMS to take the political hits (and spend the money) to build a new U.S. pharmaceutical pricing benchmark.

The pharmacy industry may want to stab CMS’s efforts with their steely knives, but they shouldn't want to kill this beast. As I see it, they should actually be breaking out the pink champagne (on ice) for cost-based reimbursement, which essentially guarantees pharmacy profits. Read on and let me know if you agree.

What Free Generic Lipitor Says about Pharmacy's Future

Supermarket chain Wegmans just extended its discount program for atorvastatin, the generic version of Lipitor. Through the end of 2013, the total prescription price is … nothing. Yes, you read that right: $0.00. Click here to read the story from the Philadelphia Inquirer.

As I document below, a pharmacy's profits on a generic Lipitor prescription are still double the brand-name prescription's profits. At this stage in the generic life cycle, few other pharmacies are foolhardy (or desperate) enough to give up these superior generic profits. Wegmans' willingness to race to the bottom illustrates the inexorable downward economics facing retail pharmacy in coming years.

What’s the implied value of pharmacy counseling when the prescription is free? Hint: You don’t need to compute the circumference over the diameter to figure out the answer.

Pharmacy Profits Over the Generic Life Cycle: Explaining the NARP-NADAC Data

Tuesday’s article—Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins—generated a lot of email about the new National Average Retail Prices (NARP) and National Drug Acquisition Cost (NADAC) data sets. In particular, the data table showed average gross profit dollars (NARP minus NADAC) that were lower for generic prescriptions ($9.27) vs. brand-name prescriptions ($11.98). This result seems counter to everything that we all think we know about pharmacy margins.

The apparent discrepancy is resolved by comparing profit levels of  newly-launched generics vs. more-common older generics. Below, I discuss the following:

• Pharmacy profitability from a generic drug varies over the drug’s lifecycle.
• As shown using the examples of Lipitor and Plavix, a new generic provides pharmacies with gross profits that are 2-3 times larger than an equivalent brand prescription.
• 7 of the 10 most widely-dispensed generic drugs have average prescription prices below $10, so potential gross profits are correspondingly low.

The generic lifecycle profit framework also highlights the generic wave’s importance for pharmacies. As long as new generics are launching, life is grand. Once the wave peters out in 2016, margin pressure will be brutal for the retail pharmacy industry.

Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins

Last week, Myers and Stauffer, the contractors collecting pharmacy acquisition costs and revenue data for the Center for Medicare and Medicaid Services (CMS), unexpectedly presented average per-prescription pharmacy profit margins, by payer and prescription type. Click here to view the slide deck. (See pages 64-67.)

Nobody expected this CMS inquisition. They didn't wait very long to follow through on the implied visibility to pharmacies’ prescription economics, as I predicted in Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins.

Below, I summarize the new gross profit and margin computations based on NADAC and NARP data, along with adjusted numbers that account for the acquisition cost survey’s flaws. Highlights:

• A pharmacy’s average gross profit per prescription is $12.50.
• Gross margins on brand prescriptions average about 10%, while gross margins on generic prescriptions average about 50%.
• Pharmacies continue to earn more from Medicaid than other third-party payers.
• Cash pay prescriptions, most of which are generic, yield higher margins than third party prescriptions.
• The response rate for the acquisition cost survey is surprisingly high, especially among independent pharmacy owners.

Perhaps we shouldn't be surprised. After all, CMS’ chief weapon is surprise and fear. No, wait, their two weapons are fear, surprise, and ruthless efficiency. No, no, their *three* weapons are...Wait, I'll start again...

NADAC/NARP data are back!

The mystery deepens.

In contrast to my comments in this morning's post, CMS just republished the NADAC and NARP data on its Survey of Retail Prices web page.

Here are direct links to the data files:

• Draft NARP File [ZIP]

• Draft NADAC File [ZIP]

• NADAC Data Field Definitions [PDF]

I have not checked whether the data have changed since my download over the weekend.

Enjoy! You may want to download quickly, just in case they disappear again.