I laughed through my Fruity Pebbles this morning at Most Science Studies Appear to Be Tainted By Sloppy Analysis from today's Wall Street Journal.
The article's core premise -- most published research findings are wrong -- seems too extreme to me. However, the following sentence caught my eye:
"In a wilderness of knowledge, it can be difficult to distinguish error from fraud, sloppiness from deception, eagerness from greed or, increasingly, scientific conviction from partisan passion."
A fitting capstone to my controversial postings on pharmacy reimbursement from Tuesday and Wednesday.
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Friday, September 14, 2007
Wednesday, September 12, 2007
Hype vs. Research
On Tuesday, I posted A Misleading Study on Pharmacy Reimbursement, a critique of a new study describing pharmacy reimbursements under the Medicare Part D program. The full research paper from the Journal of the American Pharmacists Association can now be downloaded here: Prescription drug payment times by Medicare Part D plans.
The complete article naturally offers a much more nuanced perspective than either the Executive Summary or NCPA’s press release. However, the authors and NCPA overreach by drawing conclusions that are not supported by the study. Their attempts to shift blame to payers, customers, and wholesalers are designed to influence health care policy in a way that benefits pharmacies at the expense of everyone else.
Thus, my primary critique remains valid – the results of this study are being marketed in a misleading way to the public and to Congress. The evidence in this study certainly does not warrant having Congress interfere in the working of a competitive free market.
What the Study Really Says
The actual paper is well-reasoned and carefully worded. The researchers – Dr. Shepard, Dr. Richards, and Ms. Winegar –present detailed statistical summaries information broken out by month, by year, and by Part D plan.
One hidden bias comes in the aggregation of time frames for analysis. The authors show us only four points in the distribution: less than 15 days; 15-30 days; 31-60 days; 60 days or more. Thus, a claim paid on day 32 is treated the same for the purposes of their analyses as a claim paid on day 60. The impact of this choice is not readily apparent, but would be quite significant for concluding anything about the cash flow impact on a pharmacy.
As I correctly deduced from the Executive Summary, the median number of days to payment after adjudication dropped below 30 days for the last five months of 2006. Amazingly, one of the headline conclusions of the summary – “50.0% of claims were paid more than 30 days after adjudication” – is actually false for the last five months of 2006! (See Table 1 in the paper.)
The academic tone stands in sharp contrast to the summary and NCPA press release that I wrote about on Tuesday. The Executive Summary is attributed to the same researchers and presented on the letterhead of the Center for Pharmacoeconomic Studies. My critique of the summary remains valid, especially with regard to changes over time throughout 2006.
Strategy #1: Blame Payers
NCPA desperately wants to conclude that PBMs and third-party payers are guilty of “destroying” independent pharmacies. NCPA even goes so far as to make the following claim: “This study presents strong evidence that PBMs are ‘gaming the system’, making interest on the ‘float’ they get by not paying pharmacies in a timely manner.”
The actual research paper provides no support (strong or otherwise) for such a conclusion. NCPA appears unwilling to consider possible alternative explanations for declining numbers of independent pharmacies. As I noted on Tuesday, the amount of financial hardship facing an average independent pharmacy may not be enough to tip a healthy, well-run business into bankruptcy. It’s a stretch to blame payers based on the paper.
Strategy #2: Blame the Customer
What if the decline of independent pharmacy is really part of a larger shift in consumer preferences? Many U.S. consumers prefer to shop at larger stores. As a result, retailing is become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. (I discuss these issues in more depth in Chapter 8 of my new book Facing the Forces of Change®: Lead the Way in the Supply Chain.)
As the table below shows, pharmacy is on par with other retail sectors dominated by large chains, at least judging by the decline in the number of small companies (less than 20 employees. (Source: Statistics of U.S. Businesses.)
The complete article naturally offers a much more nuanced perspective than either the Executive Summary or NCPA’s press release. However, the authors and NCPA overreach by drawing conclusions that are not supported by the study. Their attempts to shift blame to payers, customers, and wholesalers are designed to influence health care policy in a way that benefits pharmacies at the expense of everyone else.
Thus, my primary critique remains valid – the results of this study are being marketed in a misleading way to the public and to Congress. The evidence in this study certainly does not warrant having Congress interfere in the working of a competitive free market.
What the Study Really Says
The actual paper is well-reasoned and carefully worded. The researchers – Dr. Shepard, Dr. Richards, and Ms. Winegar –present detailed statistical summaries information broken out by month, by year, and by Part D plan.
One hidden bias comes in the aggregation of time frames for analysis. The authors show us only four points in the distribution: less than 15 days; 15-30 days; 31-60 days; 60 days or more. Thus, a claim paid on day 32 is treated the same for the purposes of their analyses as a claim paid on day 60. The impact of this choice is not readily apparent, but would be quite significant for concluding anything about the cash flow impact on a pharmacy.
As I correctly deduced from the Executive Summary, the median number of days to payment after adjudication dropped below 30 days for the last five months of 2006. Amazingly, one of the headline conclusions of the summary – “50.0% of claims were paid more than 30 days after adjudication” – is actually false for the last five months of 2006! (See Table 1 in the paper.)
The academic tone stands in sharp contrast to the summary and NCPA press release that I wrote about on Tuesday. The Executive Summary is attributed to the same researchers and presented on the letterhead of the Center for Pharmacoeconomic Studies. My critique of the summary remains valid, especially with regard to changes over time throughout 2006.
Strategy #1: Blame Payers
NCPA desperately wants to conclude that PBMs and third-party payers are guilty of “destroying” independent pharmacies. NCPA even goes so far as to make the following claim: “This study presents strong evidence that PBMs are ‘gaming the system’, making interest on the ‘float’ they get by not paying pharmacies in a timely manner.”
The actual research paper provides no support (strong or otherwise) for such a conclusion. NCPA appears unwilling to consider possible alternative explanations for declining numbers of independent pharmacies. As I noted on Tuesday, the amount of financial hardship facing an average independent pharmacy may not be enough to tip a healthy, well-run business into bankruptcy. It’s a stretch to blame payers based on the paper.
Strategy #2: Blame the Customer
What if the decline of independent pharmacy is really part of a larger shift in consumer preferences? Many U.S. consumers prefer to shop at larger stores. As a result, retailing is become more concentrated and increasingly dominated by chain stores, warehouse clubs, home centers, and big box superstores. (I discuss these issues in more depth in Chapter 8 of my new book Facing the Forces of Change®: Lead the Way in the Supply Chain.)
As the table below shows, pharmacy is on par with other retail sectors dominated by large chains, at least judging by the decline in the number of small companies (less than 20 employees. (Source: Statistics of U.S. Businesses.)
Note that the most recent data are from 2004, well before Part D.
Here’s an even more controversial explanation—maybe independents are upset at losing cash pay customers who now have access to a comprehensive drug benefit. As pharmacist Tom Connelly pointed out in his comment on Tuesday’s post: “Our biggest problem with Medicare Part D was seeing a minor, but not insignificant, portion of our prescription revenue going from immediate pay--cash on the barrel head--to 30 to 40 days out.”
Would pharmacists really prefer that seniors reach into to their own pocket simply to alleviate their cash flow problem? (No, of course not.)
Strategy #3: Blame the Wholesaler
It also defies economic logic to point the finger at the wholesalers for their payment terms. Smaller retail customers rely on wholesalers for many services—delivery, credit, generic sourcing, retail management. As a result, an independent pharmacy provides higher profits for a wholesaler than a large, powerful, self-distributing pharmacy chain such as CVS Corp or Walgreen (WAG).
Why would wholesalers want to kill their most profitable customers? In reality, wholesalers are working hard to help independent pharmacies survive in an increasingly competitive industry. (See Trouble Ahead for Independent Pharmacies for more background.)
Making Policy
Based on an objective look at the available evidence, there seems to be little compelling reason for Congress to interfere in a free market that will ultimately arrive at a reasonable solution for all parties. The marketplace reality is that third-party has overtaken cash pay at the pharmacy. We can’t rewind the world to make it more convenient for operators of independent pharmacies.
Perhaps I am too skeptical, but I wonder how many policymakers will venture beyond the Executive Summary and NCPA’s press release on this issue. The high level talking points are likely to crowd out an appropriate discussion of the costs and benefits to consumers and our health care system. Hopefully, my blog posts can make a small contribution to a more fact-based debate.
Tuesday, September 11, 2007
A Misleading Study on Pharmacy Reimbursement
NCPA is touting the results of a new study that purports to provide “incontrovertible evidence of the slow reimbursement pharmacies have endured with Medicare Part D prescription drug claims.” (See the press release.) NCPA is quite forthright in their desire to influence two bills pending before Congress: S.1954 (Pharmacy Access Improvement Act of 2007) and H.R.1474 (The Fair and Speedy Treatment of Medicare Prescription Drug Claims Act of 2007).
I strongly disapprove of the manner in which this study’s results are being presented to the public and to Congress. It would be foolish to base health care policy based on the partially-disclosed results of this incomplete and biased study.
Bikini Research
The full study has not been released so we can only rely on the skimpy Executive Summary. And like a skimpy bikini, what the summary reveals is interesting -- but what it conceals is essential.
Consider this example of selective disclosure.
As we all remember, the Part D launch in January 2006 was fraught with operational difficulties, many of which were subsequently resolved. According to IMS Health, Part D scripts grew from 0% to 17% of the retail market during the first six months of 2006 before stabilizing at 17% for the second half of 2006.
Yet the Executive Summary conveniently averages all of 2006 together, thereby artificially inflating the magnitude of the "prompt payment problem."
Here are the implied median number of days between submission and adjudication as reported in the summary:
January 2006: 106 days
February 2006: 93 days (-12% vs. January)
March/April 2006: 54 days (-49% vs. January)
May through December: No disclosure
The trend is clear, but where are the data from the rest of the year? If the Executive Summary was intellectually honest, then it would have provided more information about changes over time. At a minimum, the summary should show the results for the first half versus second half of 2006.
These omitted data are crucial for interpreting the overall 2006 results. Figure 1 implies that the annualized median is 30 days for independent pharmacies and much lower for chains. Thus, the trend shown for the first four months must have continued. The median may have even dropped below 30 days for certain months in 2006!
Real-World Impact?
I published some Heretical Questions about the AMP War last month. Let me ask another heretical question: Is the magnitude of the allegedly slow payment worthy of a legislative fix?
The average independent pharmacy in this study filled 4,138 Part D scripts in 2006. The average retail script generated $60 in revenue at an independent pharmacy in 2006 (Source: NACDS). Therefore, Part D represented about $250,000 in annual revenue (about $21,000 per month) for a typical independent pharmacy in 2006. If half of these reimbursements come after 30 days, then the pharmacy is floating an additional $10,500 for a few weeks throughout the year.
Is this estimated float amount financially significant enough to require an Act of Congress? The study is silent on this matter, as well as other relevant questions. Are Part D claims being paid faster or slower than the other 90% of scripts? How are Days of Sales Outstanding (DSO) changing? What else should pharmacies be doing to better manage their balance sheet? What explains the performance gap between independents and chains? How sensitive are the results to the choice of break points (15 days, 30 days, etc.)?
The Full Story, Please
In my opinion, NCPA and the researchers will ultimately damage their credibility by peddling these partial results, which do nothing more than reinforce NCPA's longstanding preconceptions about PBMs. In the meantime, I call on the researchers and the NCPA to immediately release the raw data underlying the Executive Summary so that it can be subject to independent analysis and scrutiny.
I’d love to hear from you about this post. Email me or post a comment (anonymously, if you choose).
I strongly disapprove of the manner in which this study’s results are being presented to the public and to Congress. It would be foolish to base health care policy based on the partially-disclosed results of this incomplete and biased study.
Bikini Research
The full study has not been released so we can only rely on the skimpy Executive Summary. And like a skimpy bikini, what the summary reveals is interesting -- but what it conceals is essential.
Consider this example of selective disclosure.
As we all remember, the Part D launch in January 2006 was fraught with operational difficulties, many of which were subsequently resolved. According to IMS Health, Part D scripts grew from 0% to 17% of the retail market during the first six months of 2006 before stabilizing at 17% for the second half of 2006.
Yet the Executive Summary conveniently averages all of 2006 together, thereby artificially inflating the magnitude of the "prompt payment problem."
Here are the implied median number of days between submission and adjudication as reported in the summary:
January 2006: 106 days
February 2006: 93 days (-12% vs. January)
March/April 2006: 54 days (-49% vs. January)
May through December: No disclosure
The trend is clear, but where are the data from the rest of the year? If the Executive Summary was intellectually honest, then it would have provided more information about changes over time. At a minimum, the summary should show the results for the first half versus second half of 2006.
These omitted data are crucial for interpreting the overall 2006 results. Figure 1 implies that the annualized median is 30 days for independent pharmacies and much lower for chains. Thus, the trend shown for the first four months must have continued. The median may have even dropped below 30 days for certain months in 2006!
Real-World Impact?
I published some Heretical Questions about the AMP War last month. Let me ask another heretical question: Is the magnitude of the allegedly slow payment worthy of a legislative fix?
The average independent pharmacy in this study filled 4,138 Part D scripts in 2006. The average retail script generated $60 in revenue at an independent pharmacy in 2006 (Source: NACDS). Therefore, Part D represented about $250,000 in annual revenue (about $21,000 per month) for a typical independent pharmacy in 2006. If half of these reimbursements come after 30 days, then the pharmacy is floating an additional $10,500 for a few weeks throughout the year.
Is this estimated float amount financially significant enough to require an Act of Congress? The study is silent on this matter, as well as other relevant questions. Are Part D claims being paid faster or slower than the other 90% of scripts? How are Days of Sales Outstanding (DSO) changing? What else should pharmacies be doing to better manage their balance sheet? What explains the performance gap between independents and chains? How sensitive are the results to the choice of break points (15 days, 30 days, etc.)?
The Full Story, Please
In my opinion, NCPA and the researchers will ultimately damage their credibility by peddling these partial results, which do nothing more than reinforce NCPA's longstanding preconceptions about PBMs. In the meantime, I call on the researchers and the NCPA to immediately release the raw data underlying the Executive Summary so that it can be subject to independent analysis and scrutiny.
I’d love to hear from you about this post. Email me or post a comment (anonymously, if you choose).
Thursday, September 06, 2007
CVS' Channel Power
A new lawsuit gives us a peek into the behind-the-scenes economics of the CVS Corp-Caremark deal and highlights the challenges facing generic drug makers. I have not seen any news stories on this lawsuit yet, so perhaps this story is a Drug Channels exclusive.
In July, CVS filed suit against Prasco, LLC, a company that had a contract to supply generic Allegra to CVS. I posted the complaint online here since it is a matter of public record.
The contract allegedly specified that CVS had a “Most Favored Nation” clause to guarantee than CVS paid the lowest price of any customer, regardless of class of trade. (See paragraph 11.) But paragraph 21 of the complaint states: “As a result of the merger, CVS learned that, contrary the Agreement, Prasco had not, in fact, charged CVS the lowest price offered to any other customer. Instead, CVS learned that Caremark had been charged a lower price than CVS.”
CVS is following a time-tested post-merger purchasing strategy – compare contracts and ask for the best price. They are taking advantage of the fact that generic companies compete for supply contracts and “shelf space” by lowering prices to the biggest customers. In fact, CVS reported strong Q2 financials because they claim to have already reaped their projected $500 million in purchasing power synergies.
Of course, CVS’ synergies are coming at the expense of generic drug manufacturers such as Teva Pharmaceutical Industries (TEVA), Watson Pharmaceuticals (WPI), and Mylan Laboratories (MYL). Generic drug makers now have nine major U.S. customers:
Exhibit B of the Prasco complaint also demonstrates the power of a big buyer in the generic drug supply chain. “CVS Generic Pharmaceuticals Business Standards” (as of 2004) gives CVS price protection as a generic drug’s price falls. In other words, they can recover any decline in inventory value for products in their distribution centers plus five week’s inventory at store level (apparently without regard for actual store inventories.) This is the opposite of the investment buying by the channel that occurs for branded pharmaceuticals.
All in all, it’s a scary time to be a generic drug manufacturer, but a good time to be a big buyer of generic drugs.
In July, CVS filed suit against Prasco, LLC, a company that had a contract to supply generic Allegra to CVS. I posted the complaint online here since it is a matter of public record.
The contract allegedly specified that CVS had a “Most Favored Nation” clause to guarantee than CVS paid the lowest price of any customer, regardless of class of trade. (See paragraph 11.) But paragraph 21 of the complaint states: “As a result of the merger, CVS learned that, contrary the Agreement, Prasco had not, in fact, charged CVS the lowest price offered to any other customer. Instead, CVS learned that Caremark had been charged a lower price than CVS.”
CVS is following a time-tested post-merger purchasing strategy – compare contracts and ask for the best price. They are taking advantage of the fact that generic companies compete for supply contracts and “shelf space” by lowering prices to the biggest customers. In fact, CVS reported strong Q2 financials because they claim to have already reaped their projected $500 million in purchasing power synergies.
Of course, CVS’ synergies are coming at the expense of generic drug manufacturers such as Teva Pharmaceutical Industries (TEVA), Watson Pharmaceuticals (WPI), and Mylan Laboratories (MYL). Generic drug makers now have nine major U.S. customers:
- The Big 3 wholesalers – AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK)
- The Big 6 largest chain and mail-order pharmacies – CVS Corp with CareMark (CVS), Express Scripts (ESRX), Medco (MHS), Rite-Aid (RAD), Walgreens (WAG), and Wal-Mart (WMT).
Exhibit B of the Prasco complaint also demonstrates the power of a big buyer in the generic drug supply chain. “CVS Generic Pharmaceuticals Business Standards” (as of 2004) gives CVS price protection as a generic drug’s price falls. In other words, they can recover any decline in inventory value for products in their distribution centers plus five week’s inventory at store level (apparently without regard for actual store inventories.) This is the opposite of the investment buying by the channel that occurs for branded pharmaceuticals.
All in all, it’s a scary time to be a generic drug manufacturer, but a good time to be a big buyer of generic drugs.
Tuesday, September 04, 2007
GSK bashes RFID but quickly recants
Welcome back! Let's kick off September with some RFID anti-hype.
Now, I have nothing against RFID, which has many useful applications. However, I think RFID has been massively oversold relative to its actual ability to be a cross-company supply chain solution to counterfeiting and diversion. Read the many comments to my RFID Un-Hype post to get a flavor for the debate.
I must be developing a reputation as an RFID skeptic because multiple people sent me last week's story from The Times (London) reporting that GlaxoSmithKline’s (GSK) may abandon RFID in favor of “more reliable, less costly technology.” See GSK plan to beat drug counterfeiters may be scrapped. According to the article:
“[T]he programme, which uses technology developed by IBM, has been riddled with technical hitches. They include RFID tags breaking as they are attached to products, a failure of tracking technology to read them during transit and a widespread failure by wholesalers and retailers further down the supply chain to embrace the technology.”
Oooh, that’s gotta hurt!
Apparently GSK had second thoughts about this statement because their PR flack quickly recanted three days later in the not-quite-objective RFID Journal saying:
“RFID remains in place,” says GSK spokesperson Mary Ann Rhyne. “In fact, we've extended the RFID testing, and no cut-off time has been determined.”
Personally, I’m skeptical about anything in RFID Journal because it is a primary source of unabashed boosterism. They run polls that ask leading questions such as “Should the FDA mandate the use of RFID?” (68% of RFID Journals say yes!) I almost expect them to run a poll asking: “Is RFID a great technology for the pharma supply chain … or the greatest technology?”
So, what’s going on? Here are two theories:
One, I’ve learned that GSK will be presenting at the California Board of Pharmacy’s September 20 Enforcement Committee Meeting, so it would be bad form to suggest any delays with only 16 months left before the deadline. I’m curious to see how much they spin the Times story there. BTW, Pfizer (PFE) gave a very thorough and insightful presentation at the June 20 meeting, which I’ve posted online here. (Be patient -- it’s a 10MB file.) See page 3 of the meeting minutes for highlights. FYI, I discussed Pfizer’s doubts about RFID back in June.
Two, GSK may also feel embarrassed because the Times story mentioned IBM, who just two weeks earlier released its latest hype-filled press release about ePedigree. This time, they tout IBM's proprietary RFID Information Center (RFIDIC – pronounced “Riffy-Dick”?). One tech trade mag notes that IBM has nothing more than a reporting mechanism to "churn out a so-called ePedigree report."
Gosh, it seems like only yesterday that Paul Chang of IBM went on CNBC to announce that the pharmaceutical industry is rallying around RFID technology. Actually, it was August 8, 2006, and yes, I still have the transcript. Since it looks like IBM is planning to make this an annual summer event, I hope you will plan to join me in August 2008 for the Third Annual IBM RFID Barbeque and Pedigree Roast!
But seriously, I was quite impressed with how much Miss Teen USA (South Carolina) knew about geography. So, I've asked her to guest blog in a future Drug Channels posting so she can explain how RFID will make the pharma supply chain safer. Stay tuned!
----
Coming on Thursday: An exclusive peek behind the curtains of the CVS-Caremark combination.
Now, I have nothing against RFID, which has many useful applications. However, I think RFID has been massively oversold relative to its actual ability to be a cross-company supply chain solution to counterfeiting and diversion. Read the many comments to my RFID Un-Hype post to get a flavor for the debate.
I must be developing a reputation as an RFID skeptic because multiple people sent me last week's story from The Times (London) reporting that GlaxoSmithKline’s (GSK) may abandon RFID in favor of “more reliable, less costly technology.” See GSK plan to beat drug counterfeiters may be scrapped. According to the article:
“[T]he programme, which uses technology developed by IBM, has been riddled with technical hitches. They include RFID tags breaking as they are attached to products, a failure of tracking technology to read them during transit and a widespread failure by wholesalers and retailers further down the supply chain to embrace the technology.”
Oooh, that’s gotta hurt!
Apparently GSK had second thoughts about this statement because their PR flack quickly recanted three days later in the not-quite-objective RFID Journal saying:
“RFID remains in place,” says GSK spokesperson Mary Ann Rhyne. “In fact, we've extended the RFID testing, and no cut-off time has been determined.”
Personally, I’m skeptical about anything in RFID Journal because it is a primary source of unabashed boosterism. They run polls that ask leading questions such as “Should the FDA mandate the use of RFID?” (68% of RFID Journals say yes!) I almost expect them to run a poll asking: “Is RFID a great technology for the pharma supply chain … or the greatest technology?”
So, what’s going on? Here are two theories:
One, I’ve learned that GSK will be presenting at the California Board of Pharmacy’s September 20 Enforcement Committee Meeting, so it would be bad form to suggest any delays with only 16 months left before the deadline. I’m curious to see how much they spin the Times story there. BTW, Pfizer (PFE) gave a very thorough and insightful presentation at the June 20 meeting, which I’ve posted online here. (Be patient -- it’s a 10MB file.) See page 3 of the meeting minutes for highlights. FYI, I discussed Pfizer’s doubts about RFID back in June.
Two, GSK may also feel embarrassed because the Times story mentioned IBM, who just two weeks earlier released its latest hype-filled press release about ePedigree. This time, they tout IBM's proprietary RFID Information Center (RFIDIC – pronounced “Riffy-Dick”?). One tech trade mag notes that IBM has nothing more than a reporting mechanism to "churn out a so-called ePedigree report."
Gosh, it seems like only yesterday that Paul Chang of IBM went on CNBC to announce that the pharmaceutical industry is rallying around RFID technology. Actually, it was August 8, 2006, and yes, I still have the transcript. Since it looks like IBM is planning to make this an annual summer event, I hope you will plan to join me in August 2008 for the Third Annual IBM RFID Barbeque and Pedigree Roast!
But seriously, I was quite impressed with how much Miss Teen USA (South Carolina) knew about geography. So, I've asked her to guest blog in a future Drug Channels posting so she can explain how RFID will make the pharma supply chain safer. Stay tuned!
----
Coming on Thursday: An exclusive peek behind the curtains of the CVS-Caremark combination.
Thursday, August 23, 2007
News Update: August 2007
I’m going to take a break from blogging until after Labor Day. In the meantime, here are a few stories that you may have missed this month. Don't worry -- I’ll be back in September!
1) Pharmacy fights back
The Average Manufacturer Price (AMP) war has now moved to Congress, where multiple bills benefiting retail pharmacy have been introduced. Here are the major bills and their key provisions, which I’ll discuss further in upcoming posts:
2) Drug Imports: Coming Soon?
In early August, I speculated that drug importation may be inevitable within the next few years. The lawyers over at Hyman, Phelps & McNamara provide a useful legal analysis of HR 3161, the Agriculture bill that included controversial drug importation language. Check out House Passes FDA Appropriations Bill With Drug Importation Provision, which concludes that “…the House and Senate are headed for a showdown over the issue as a part of FDA appropriations legislation.”
3) Cracking the Top 100
Drug Channels is now #69 on the Healthcare 100 list of top blogs on health and medicine. (There are actually 390 blogs on the list, so it's a good page to bookmark.) Thanks for helping to make Drug Channels such a success!
I also want to give a special shout-out to Al Godley of Edge Dynamics, who was named to the PharmaVOICE 100 list of industry influencers. Congratulations on this well-deserved recognition, Al!
4) Phun Phact about Philly
Your friendly neighborhood pharmacy supply chain blogger is proud to live in the second "bloggiest" city in the US. Who knew?
1) Pharmacy fights back
The Average Manufacturer Price (AMP) war has now moved to Congress, where multiple bills benefiting retail pharmacy have been introduced. Here are the major bills and their key provisions, which I’ll discuss further in upcoming posts:
- S.1951: Fair Medicaid Drug Payment Act of 2007 – This bill changes the AMP formula and redefines retail class of trade, among other things.
- S.1954: Pharmacy Access Improvement Act of 2007 – Many items are stuffed into this bill, including prompt payment requirements for drug plans and limits on Part D co-branding.
- H.R. 3140: Saving Our Community Pharmacies Act of 2007 – This bill would replace AMP with a survey-based metric called “Retail Acquisition Cost.”
2) Drug Imports: Coming Soon?
In early August, I speculated that drug importation may be inevitable within the next few years. The lawyers over at Hyman, Phelps & McNamara provide a useful legal analysis of HR 3161, the Agriculture bill that included controversial drug importation language. Check out House Passes FDA Appropriations Bill With Drug Importation Provision, which concludes that “…the House and Senate are headed for a showdown over the issue as a part of FDA appropriations legislation.”
3) Cracking the Top 100
Drug Channels is now #69 on the Healthcare 100 list of top blogs on health and medicine. (There are actually 390 blogs on the list, so it's a good page to bookmark.) Thanks for helping to make Drug Channels such a success!
I also want to give a special shout-out to Al Godley of Edge Dynamics, who was named to the PharmaVOICE 100 list of industry influencers. Congratulations on this well-deserved recognition, Al!
4) Phun Phact about Philly
Your friendly neighborhood pharmacy supply chain blogger is proud to live in the second "bloggiest" city in the US. Who knew?
Thursday, August 16, 2007
Diversion from Canada via China
Bloomberg has a great story today in which Johnson & Johnson talks publicly about how they disrupted a counterfeit diabetes test supplier. See China Counterfeit Diabetes Tests Tracked by J&J. Unfortunately, the story once again shows the dangerous connection between diversion and counterfeiting.
The article makes for a gripping read. Following customer complaints, detectives followed the bogus products to 700 pharmacies where the products were sold, then to eight U.S. wholesalers, and then to two importers, one in the U.S. and another in Canada.
Here’s the rub: the defendant wholesalers apparently believed the counterfeit strips were lower-priced gray market products diverted from normal distribution channels.
So, we (re)learn the lesson that diversion is the primary way for counterfeit products to enter legitimate channels. That’s why allowing importation will open up new gateways for counterfeits. I just wish that Senator’s Dorgan and Snowe would try to understand the dangers!
Unfortunately, there’s still a fatal flaw in J&J’s distribution channel. One LifeScan executive is quoted as saying: “We recommend customers obtain their diabetes testing supplies from reputable sources to reduce their risk of receiving counterfeit product in the future.”
Sounds sensible, but a “recommendation” is much too weak. Why doesn’t LifeScan require all pharmacy customers to purchase only from authorized distributors and then require authorized distributors to only buy directly from the manufacturer? That's the situation for prescription drugs, where Inventory Management Agreements (IMAs) and Fee-for-Service agreements have limited product leakage into the grey market and closed a significant entry point for counterfeiters.
And I pointed out yesterday, there is still no way for the ultimate consumer/patient of these diabetic tests to know whether their pharmacy or its wholesaler got the product from a legitimate source. Very few people are willing to discuss this truly scary part of product security.
Hat tip to Pharmalot for highlighting this story.
-----------
P.S. Given the quality problems of Chinese goods, many people seem eager to throw out overseas sourcing for political reasons. Not me. I am simply arguing against diversion, not against Chinese sourcing. See The Risks of Chinese Sourcing on my Distribution Trends blog for more details.
The article makes for a gripping read. Following customer complaints, detectives followed the bogus products to 700 pharmacies where the products were sold, then to eight U.S. wholesalers, and then to two importers, one in the U.S. and another in Canada.
Here’s the rub: the defendant wholesalers apparently believed the counterfeit strips were lower-priced gray market products diverted from normal distribution channels.
So, we (re)learn the lesson that diversion is the primary way for counterfeit products to enter legitimate channels. That’s why allowing importation will open up new gateways for counterfeits. I just wish that Senator’s Dorgan and Snowe would try to understand the dangers!
Unfortunately, there’s still a fatal flaw in J&J’s distribution channel. One LifeScan executive is quoted as saying: “We recommend customers obtain their diabetes testing supplies from reputable sources to reduce their risk of receiving counterfeit product in the future.”
Sounds sensible, but a “recommendation” is much too weak. Why doesn’t LifeScan require all pharmacy customers to purchase only from authorized distributors and then require authorized distributors to only buy directly from the manufacturer? That's the situation for prescription drugs, where Inventory Management Agreements (IMAs) and Fee-for-Service agreements have limited product leakage into the grey market and closed a significant entry point for counterfeiters.
And I pointed out yesterday, there is still no way for the ultimate consumer/patient of these diabetic tests to know whether their pharmacy or its wholesaler got the product from a legitimate source. Very few people are willing to discuss this truly scary part of product security.
Hat tip to Pharmalot for highlighting this story.
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P.S. Given the quality problems of Chinese goods, many people seem eager to throw out overseas sourcing for political reasons. Not me. I am simply arguing against diversion, not against Chinese sourcing. See The Risks of Chinese Sourcing on my Distribution Trends blog for more details.
Wednesday, August 15, 2007
Lessons from Nigeria
Did you ever pick up a prescription and wonder if your pharmacy received a valid pedigree, imported drugs from outside the country, or dispensed an outright counterfeit to you? You and I have no way to know if our pharmacy is behaving ethically, even in a world of self-authenticating e-pedigree.
Well, just be glad you don’t live in Nigeria. Dora Akunyili, the head of Nigeria’s National Agency for Food, Drug Administration and Control (NAFDAC), estimated that 41% (!) of drugs in her country were fake or sub-standard in 2001. Today, the national average is down to a still-troubling 15%. (See Officials boost fight against counterfeit drugs for more background.)
In response, Pfizer (PFE) has just launched an intriguing pharmacy-level anti-counterfeiting initiative in Nigeria. As described in Pfizer Launches Friendly Pharmacy Initiative, the program provides disease awareness materials, training, and testing materials to pharmacists. But most interesting to me is the fact that the Pfizer-Friendly designation will signal the availability of genuine Pfizer products.
Pfizer’s Marketing Director made the connection to counterfeits directly, saying: “We want to have strong allies who will say no to clones, no to parallel imports, no to fakes or counterfeits. We want to create strong and effective disease awareness amongst our colleagues in Pharmacy practice and the patients down the streets in a language they understand.”
Naturally, any potential problems with counterfeit drugs in the U.S. pale in comparison with the Nigerian situation. Yet the Nigerian program makes me wonder:
How could drug makers partner with dispensing pharmacies in the U.S. to help consumers identify and validate legitimate pharmacies that practice “safe sourcing?”
What do you think? Which elements, if any, of the Nigerian program can be adapted to the U.S.?
Well, just be glad you don’t live in Nigeria. Dora Akunyili, the head of Nigeria’s National Agency for Food, Drug Administration and Control (NAFDAC), estimated that 41% (!) of drugs in her country were fake or sub-standard in 2001. Today, the national average is down to a still-troubling 15%. (See Officials boost fight against counterfeit drugs for more background.)
In response, Pfizer (PFE) has just launched an intriguing pharmacy-level anti-counterfeiting initiative in Nigeria. As described in Pfizer Launches Friendly Pharmacy Initiative, the program provides disease awareness materials, training, and testing materials to pharmacists. But most interesting to me is the fact that the Pfizer-Friendly designation will signal the availability of genuine Pfizer products.
Pfizer’s Marketing Director made the connection to counterfeits directly, saying: “We want to have strong allies who will say no to clones, no to parallel imports, no to fakes or counterfeits. We want to create strong and effective disease awareness amongst our colleagues in Pharmacy practice and the patients down the streets in a language they understand.”
Naturally, any potential problems with counterfeit drugs in the U.S. pale in comparison with the Nigerian situation. Yet the Nigerian program makes me wonder:
How could drug makers partner with dispensing pharmacies in the U.S. to help consumers identify and validate legitimate pharmacies that practice “safe sourcing?”
What do you think? Which elements, if any, of the Nigerian program can be adapted to the U.S.?
Thursday, August 09, 2007
Investment Buying: Not Dead Yet
Many inventory management agreements and fee-for-service agreements between manufacturers and wholesalers will be renegotiated over the next 24 months. So it’s interesting to note that investment buying remains an important source of drug wholesaler profits. (Click here for a little musical accompaniment to today's post.)
Peter Loftus from Dow Jones wrote a must-read article Wholesalers' Speculative Buying Still Unsettles Drug Sales to follow-up on the Pfizer (PFE) and Wyeth (WYE) inventory issues described in Harry Potter and the Wholesaler Inventory.
Here’s a key quote from the article:
Cardinal Health still practices what it calls "investment buying" with certain manufacturers, said spokeswoman Tara Schumacher. The company doesn't comment on specific customers or products. Also, it has "hybrid" relationships with some drug makers, engaging in speculative buying for some products and fee-for-service on others. "From the beginning, we knew we wouldn't have a 100% shift," Schumacher said. "That was never the intent. We wanted to ensure we were negotiating fair prices for each customer. We're comfortable with the economics of some of the contracts not being fee-based."
Translation: Investment buying is still around, just less prevalent and less visible. In some cases, investment buying appears to have shifted away from wholesalers to other points in the pharmacy supply chain.
I must give credit to Cardinal Health (CAH) for discussing this “open secret.” The adoption of inventory management and fee-for-service agreements has dramatically reduced (but not eliminated) drug wholesalers’ dependence on investment buying and price inflation. I estimate that inventory profits (investment buying + passive gains) are now less than one-third of wholesaler gross margins from large branded manufacturers.
If you don’t believe Cardinal, check out AmerisourceBergen’s (ABC) July 26 earnings announcement, in which they noted that “…operating income benefited from an above market sales increase in our proprietary generic drug program which offset in part the impact of fewer drug price increases in the June quarter.” (emphasis added)
The Wall Street Journal's Health Blog is more pejorative about these activities, writing Drug Wholesalers Back at Betting Window. That’s not really fair. Investment buying is nothing more than a means by which manufacturers can compensate wholesalers for the legitimate costs of distributing drugs. Unfortunately, there can be excesses in this system (summarized in the third paragraph of my 2005 article).
At least two senior wholesaler executives hate when I write about this topic. But facts don't cease to exist because they are ignored.
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P.S. Check out the new Health Wonk Review, edited by Julie Ferguson at Workers' Comp Insider.
Peter Loftus from Dow Jones wrote a must-read article Wholesalers' Speculative Buying Still Unsettles Drug Sales to follow-up on the Pfizer (PFE) and Wyeth (WYE) inventory issues described in Harry Potter and the Wholesaler Inventory.
Here’s a key quote from the article:
Cardinal Health still practices what it calls "investment buying" with certain manufacturers, said spokeswoman Tara Schumacher. The company doesn't comment on specific customers or products. Also, it has "hybrid" relationships with some drug makers, engaging in speculative buying for some products and fee-for-service on others. "From the beginning, we knew we wouldn't have a 100% shift," Schumacher said. "That was never the intent. We wanted to ensure we were negotiating fair prices for each customer. We're comfortable with the economics of some of the contracts not being fee-based."
Translation: Investment buying is still around, just less prevalent and less visible. In some cases, investment buying appears to have shifted away from wholesalers to other points in the pharmacy supply chain.
I must give credit to Cardinal Health (CAH) for discussing this “open secret.” The adoption of inventory management and fee-for-service agreements has dramatically reduced (but not eliminated) drug wholesalers’ dependence on investment buying and price inflation. I estimate that inventory profits (investment buying + passive gains) are now less than one-third of wholesaler gross margins from large branded manufacturers.
If you don’t believe Cardinal, check out AmerisourceBergen’s (ABC) July 26 earnings announcement, in which they noted that “…operating income benefited from an above market sales increase in our proprietary generic drug program which offset in part the impact of fewer drug price increases in the June quarter.” (emphasis added)
The Wall Street Journal's Health Blog is more pejorative about these activities, writing Drug Wholesalers Back at Betting Window. That’s not really fair. Investment buying is nothing more than a means by which manufacturers can compensate wholesalers for the legitimate costs of distributing drugs. Unfortunately, there can be excesses in this system (summarized in the third paragraph of my 2005 article).
At least two senior wholesaler executives hate when I write about this topic. But facts don't cease to exist because they are ignored.
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P.S. Check out the new Health Wonk Review, edited by Julie Ferguson at Workers' Comp Insider.
Monday, August 06, 2007
John Edwards and ... Pedigree?
It's official! E-pedigree has now become a campaign issue as we enter the final 15 (!) months before the 2008 Presidential election.
Presidential candidate John Edwards just issued his Smarter Trade That Puts Workers First, which includes the following unexpected statement:
Big drug companies have lobbied and litigated to prevent enforcement of the drug safety law passed in 1988. As president, John Edwards will require the pharmaceutical industry to quickly implement non-forgeable electronic "track-and-trace pedigrees" to ensure that drugs stay safe at every step in the supply chain, from factory to store. He will also start enforcing laws requiring sellers to prove that their drugs came from an authorized distributor and close the loophole that allows big drug wholesalers to ignore pedigree requirements.
(Note to John’s speechwriter: For the record, it is actually smaller wholesalers, not "big drug companies," that have litigated to prevent enforcement of the PDMA. See It's Official: PDMA is Back On Hold for some background.)
Notably, Edwards implies that he wants Federal pre-emption over state pedigree laws to close loopholes for "big drug wholesalers." This is deeply ironic, given the lobbying activities now underway. Politics does indeed make strange bedfellows.
Presidential candidate John Edwards just issued his Smarter Trade That Puts Workers First, which includes the following unexpected statement:
Big drug companies have lobbied and litigated to prevent enforcement of the drug safety law passed in 1988. As president, John Edwards will require the pharmaceutical industry to quickly implement non-forgeable electronic "track-and-trace pedigrees" to ensure that drugs stay safe at every step in the supply chain, from factory to store. He will also start enforcing laws requiring sellers to prove that their drugs came from an authorized distributor and close the loophole that allows big drug wholesalers to ignore pedigree requirements.
(Note to John’s speechwriter: For the record, it is actually smaller wholesalers, not "big drug companies," that have litigated to prevent enforcement of the PDMA. See It's Official: PDMA is Back On Hold for some background.)
Notably, Edwards implies that he wants Federal pre-emption over state pedigree laws to close loopholes for "big drug wholesalers." This is deeply ironic, given the lobbying activities now underway. Politics does indeed make strange bedfellows.
Drug imports are not here...yet
House OKs prescription drug imports, said the headline in a widely syndicated AP story on Friday. Pharmalot led with a similar headline.
These headlines are not really accurate. Nevertheless, drug importation fans continue to fight on, making me fear that this legislation is inevitable.
HR 3161, a massive agriculture bill, was passed on Friday by a vote of only 237-18. Math wizards will note that the total is far less than 435 district total because Republicans essentially boycotted the vote.
Here is the primary drug importation text buried inside the bill:
“SEC. 726. None of the funds appropriated or otherwise made available by this Act for the Food and Drug Administration may be used under section 801 of the Federal Food, Drug, and Cosmetic Act to prevent an individual not in the business of importing a prescription drug within the meaning of section 801(g) of such Act, wholesalers, or pharmacists from importing a prescription drug which complies with sections 501, 502, and 505.”
Obviously, this text is much less intrusive than the primary House importation bill (HR 380), the inaptly named Pharmaceutical Market Access and Drug Safety Act of 2007. H.R. 380, which now has 102 co-sponsors, includes detailed requirements about pedigree and track-and-trace systems. H.R. 380 and its Senate cousin S.242 impose many commercial restrictions on drug makers.
S.242 was undone by an amendment requiring the administration to certify the safety and effectiveness of imported drugs before they can be imported. In contrast, the House voted 283-146 to reject Rep. Jack Kingston's amendment to remove section 726 from the H.R. 3161 bill.
As Senator Vitter’s diversion obsession shows, the fans of importation draw inspiration from Spartan King Leonides: No retreat, no surrender. (Yes, I finally saw 300 this weekend.) So why do I still run into executives who claim not to be preparing for the eventual passage of an importation bill?
These headlines are not really accurate. Nevertheless, drug importation fans continue to fight on, making me fear that this legislation is inevitable.
HR 3161, a massive agriculture bill, was passed on Friday by a vote of only 237-18. Math wizards will note that the total is far less than 435 district total because Republicans essentially boycotted the vote.
Here is the primary drug importation text buried inside the bill:
“SEC. 726. None of the funds appropriated or otherwise made available by this Act for the Food and Drug Administration may be used under section 801 of the Federal Food, Drug, and Cosmetic Act to prevent an individual not in the business of importing a prescription drug within the meaning of section 801(g) of such Act, wholesalers, or pharmacists from importing a prescription drug which complies with sections 501, 502, and 505.”
Obviously, this text is much less intrusive than the primary House importation bill (HR 380), the inaptly named Pharmaceutical Market Access and Drug Safety Act of 2007. H.R. 380, which now has 102 co-sponsors, includes detailed requirements about pedigree and track-and-trace systems. H.R. 380 and its Senate cousin S.242 impose many commercial restrictions on drug makers.
S.242 was undone by an amendment requiring the administration to certify the safety and effectiveness of imported drugs before they can be imported. In contrast, the House voted 283-146 to reject Rep. Jack Kingston's amendment to remove section 726 from the H.R. 3161 bill.
As Senator Vitter’s diversion obsession shows, the fans of importation draw inspiration from Spartan King Leonides: No retreat, no surrender. (Yes, I finally saw 300 this weekend.) So why do I still run into executives who claim not to be preparing for the eventual passage of an importation bill?
Wednesday, August 01, 2007
The ASP Future is Here
I've stated before that Average Manufacturer Price (AMP) will become a new benchmark for pharmacy reimbursement.Both AMP skeptics and die-hard AWP fans should consider a must-read article called The Arrival of Average Sales Price from Biotechnology Healthcare. It describes how private health plans are now using Medicare’s average sales price (ASP) data to reimburse oncologists and other specialists for office-administered drugs.
I predict that CMS’ publication of AMP data will have a similar effect on retail pharmacy channels. List minus pricing models for pharmacy reimbursement based on AWP or WAC will not be sustainable once there is confidence in the published AMP data, which I predict will occur no later than mid-2008. Expect the retail pharmacy revolution to be in full swing by 2009.
ASP Adoption
The Arrival of Average Sales Price describes how many health plans have already adopted ASP models for oncology reimbursement. A survey of 102 plans found:
- List Minus: 52% of plans (68% of covered lives) used AWP
- Cost Plus: 36% of plans (30% of covered lives) used ASP
Physicians are making predictable changes in their practices –collecting co-payments, looking for bigger rebates from manufacturers, getting out of the injection/infusion business, etc.
Ironically, Judge Saris chastised third-party payers for not adopting cost-plus reimbursement models once Medicare devised the ASP model for Part B. (See my Comments on the AWP Decision from June.)
Looks like she was right about the outcome, but wrong about the timing.
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FYI, CMS issued an updated AMP timeline. The regulation now takes effect on October 1, 2007.