The Dark Side of Pharmacy Efficiency

Please read yesterday’s USA Today article Speed, High Volume Can Trigger Mistakes.

As I note in Pharmacy Profits & Part D, current reimbursement models are benefiting higher volume, more efficient pharmacies. This article asks: Will efficiency come at an unacceptable price?

The article links prescription errors at the two largest retail chains -- CVS Caremark (CVS) and Walgreens (WAG) -- to factors such as pharmacist workload, volume incentives for pharmacists, and a corporate emphasis on throughput. As background, you may want to look at my comparison from last July of average Weekly Prescriptions Per Pharmacy.

Why do I think this is a must-read article for all readers of Drug Channels?

• It highlights the real human consequences underlying any breakdowns (preventable or not) in our system of pharmaceutical distribution.


• The article gives time to both critics and defenders of high-volume pharmacy.


• You may be motivated to examine your own prescriptions before swallowing a pill. (Walgreens actually has a very useful online Drug Information tool with pictures of specific pills.)


• There is a very cool interactive graphic of a prescription’s path through the pharmacy.

Frustrated Pharmacists

I also encourage you to browse through the 250+ comments. Yes, an inevitable number of comments are either: (a) personal stories about dispensing errors, or (b) rants against corporations, the US healthcare system, pharmaceutical manufacturers, etc.

However, I also found many thought-provoking and troubling comments from pharmacists, most of whom feel frustrated by the current system. Here are some excerpts:

I worked as a retail pharmacist for a period of time and can tell you that when somebody drops off a prescription they always have two questions: How much is this going to cost and how long is it going to take? Most throw in real relevant questions like "Where is the motor oil and is it the motor oil that was in the sale flyer last week?"

Stories like this are difficult for me to read. I am very proud of my profession, and have been for the over 20 years I have practiced pharmacy. Yes, we do make mistakes. I have made mistakes myself. To those who seem to indicate that pharmacists do not care, you have no idea what you are talking about. Every mistake I have made has caused me anguish. Any mistake I make is one too many, but unfortunately I have not been able to be perfect. If you think a $500 fine would clear my conscience, you could not be further from the truth.

One of my biggest concerns as a pharmacist is trying to properly council a patient on their medication as they talk on their cell phone. I try to wait until they are done talking, but then some of them get upset that I am making them wait. Would you talk on your cell phone in your doctor's office as he or she examined you? I would not. I am not saying that this occurrence absolves the pharmacist from properly counciling a patient, just that the patient also has the responsibility to listen.

I am a pharmacist and I am sick of the public treating their local pharmacy like a fast food chain. They expect a prescription in minutes and expect perfection. People don't understand that these medications are DRUGS, with side effects. I agree that the profession does need a makeover and additional staffing. I have a Doctor of Pharmacy degree but I don't get enough time to actually talk to patients about their medication because I'm busy checking over 500 scripts a day.

I was constantly pressured into filling prescriptions faster. The statements from the drug executives about the pharmacist exercising "professional judgment" are a joke. These companies don't care about anything but the bottom line. I was not treated as a professional; I was treated like a machine that churned out prescriptions. The stress was unbearable. I constantly worried that I was going to kill somebody. The workload was impossible and the help was insufficient.

We expect our prescriptions to be delivered to us like fast food, handed to us in fifteen minutes or less out of a drive through window. I am a pharmacist and routinely face customers who become hostile when told that it may take half an hour or 45 minutes to fill their prescriptions. Everyone thinks that they are the only person when needs medicine and that the pharmacy staff should just work faster to help them out.

You can also read the perspectives of two pharmacist bloggers here and here.

Big WAC Attack

As regular readers know, I have boldly (foolishly?) predicted that "list price" pharmacy reimbursement models such as Wholesale Acquisition Cost (WAC) are unlikely to replace the long-maligned Average Wholesale Price (AWP) list price benchmark. Many people, including yours truly and the CFO of Medco Health Solutions (MHS), expected Average Manufacturer Price (AMP) to emerge as a new retail reimbursement benchmark rather than WAC.

While I may still be proven correct, events over the past few months have changed the near-term dynamic. The publication of AMP is on hold for now, while AWP may be getting a reprieve. And last week, the Department of Defense gave a big boost to WAC as a pricing benchmark for pharmacy reimbursement, breathing new life into this alternative list price.

AWP: NOT DEAD YET

Before turning to the latest WAC news, let's catch up on the fate of AWP.

As you may recall, Judge Patti B. Saris issued an order granting preliminary approval to the First Databank (FDB) settlement last June. There are two important elements of the settlement with regard to the publication of AWP:

• The AWP-to-WAC markup would reduced to 1.20 (if an NDC’s ratio was higher)
• FDB would stop publishing AWP no more than 2 years after the final court order

However, final approval of the settlement was subject to a fairness hearing. As I mentioned last month in Pharmacy Profits & PBM Contracts, a number of pharmacy associations objected to the proposed class settlement, including the Pharmaceutical Care Management Association (PCMA), the National Community Pharmacists Association (NCPA), the National Association of Chain Drug Stores (NACDS) and the Food Marketing Institute (FMI).

Guess what? Judge Saris rejected the settlement on January 22 and requested that the parties come back with a new settlement plan. Apparently, Judge Saris is also reluctant to force First Databank or Medi-Span to stop publishing AWP.

Another legal victory for retail pharmacy – you can see NACDS dance in the end-zone in this press release about the proposed settlement.

HOW ABOUT WAC?

Wholesale Acquisition Cost (WAC) has been touted as a replacement for AWP. WAC is the manufacturer's list price to drug to wholesalers or direct purchasers, excluding prompt pay or other discounts. (See Section 1847A(c)(6) of the Social Security Act.)

Nine states currently incorporate WAC into ingredient cost reimbursement formulas for retail Medicaid prescriptions. In addition, NACDS proposed WAC-based reimbursement for brand drugs in June 2005 Congressional testimony, a position that they reiterated in a February 2007 comments about AMP to CMS.

Even if the original settlement had gone through, WAC would still have been available, as indicated on FDB’s web site: “First DataBank will continue to publish all other available drug pricing information, including WAC, Direct Price, and suggested wholesale price, as well as our clinical drug information.”

TRICARE LIKES WAC

In case you don’t know, TRICARE provides a pharmacy benefit to all eligible Uniformed Services members called TRICARE Pharmacy Program Services (or TPharm to its friends). Eligible beneficiaries may fill prescription medications at military treatment facility (MTF) pharmacies; through the TRICARE Mail Order Pharmacy (TMOP); at TRICARE retail network pharmacies (TRRx); and at non network pharmacies. Express Scripts (ESRX) currently has both the retail pharmacy and mail order contracts.

On Tuesday, the Department of Defense issued a consolidated (TMOP & TRRx) Request for Proposal (RFP) for TPharm. You can savor the RFP for yourself by visiting the homepage for Solicitation No. H94002-07-R-0004. (Hey, my lucky number!)

I am quite intrigued to see that WAC is the pricing benchmark.

For example, the “Total Expected Government Cost for Reimbursement of Retail Network Pharmacy Costs” (or TEGCFRORNPC) is computed using WAC (minus a discount from WAC and plus a dispensing fee). The Government also provided average WAC data for non-specialty brand name, non-specialty generic, specialty brand and specialty generic prescriptions under TPharm. (See Section L Attachment 6.)

While the DoD validates WAC for now, I still expect computed (non-list) benchmarks to become the norm for retail pharmacy. In the meantime, I will take my own advice about forecasting: Give an event or a date, but never both.

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P.S. Check out the new Health Wonk Review, a collection of blog posts about health care and the pharma industry. My recent post about Wal-Mart is included.

Fresh DEA News from Cardinal

Uh oh.

Cardinal Health (CAH) disclosed yesterday that the DEA is now focusing on a fourth Cardinal facility in Stafford, TX. No suspension yet, but the DEA is clearly crawling all over the company, as I predicted two months ago.

Cardinal also announced a number of new actions that suggest (to me) that they are now treating these issues seriously. Nonetheless, I wonder to what extent a corporation should take on monitoring and enforcement activities that are typically the responsibility of state Pharmacy Boards or Health Departments.

CARDINAL DIVERSION UPDATE

According to a 10-Q filed yesterday (available from Cardinal’s Investor page):
“[T]he DEA issued an Order to Show Cause, dated January 30, 2008, pertaining to the license to distribute controlled substances held by the Company’s Stafford, Texas distribution center (the “Stafford Order”). The Stafford Order did not suspend the facility’s license to distribute controlled substances, and no hearing date has been set.”

For non-lawyers, an Order to Show Cause is “is a type of court order that requires one or more of the parties to a case to justify, explain, or prove something to the court. Courts commonly use orders to show cause when the judge needs more information before deciding whether or not to issue an order requested by one of the parties.” (Source: Wikipedia)

So if I understand the legalese correctly, Cardinal has to convince the court *not* to suspend its license to distribute controlled substances from Stafford TX, as the DEA has apparently proposed. However, there is not yet a date for this hearing.

BTW, I don't mean to pick on Cardinal. As I pointed out on Tuesday, McKesson (MCK) may have similar issues and is apparently "negotiating a temporary restriction of its authority to distribute some drugs from a limited number of its distribution centers, in hopes of avoiding a general suspension of a controlled-substance distribution license." (per Cardinal Health: DEA Issues Order For Facility from Dow Jones.)

WHOLESALERS AS ENFORCERS?

Cardinal certainly seems to be paying attention to these issues judging by the new activities listed in the 10-Q:

• “Established a new centralized supply chain security and anti-diversion function accountable to executive management”


• “Begun implementing technological enhancements to augment the Company’s controls against the diversion of controlled substances”


• “Suspended the distribution of controlled substances to certain pharmacies based on the nature of activity in the pharmacies’ accounts”

Of course, this list will be familiar to anyone who has read the company’s settlement with the New York State Attorney General’s office in December 2006.

While I am glad to see Cardinal stepping up, I still question whether an unfair burden is being laid on a corporation that never asked to be a police force. Here are a few questions running through my mind:

1. Are Cardinal’s new initiatives a tacit acknowledgment that the state pharmacy boards didn’t do their job in monitoring rogue pharmacies? Where is the accountability for the Pharmacy Boards in Washington, Florida, and New Jersey?


2. How much responsibility should a wholesaler have for the behavior of its customers? (Check out the lively debate on this topic in the comments to my Dec. 12 Drug Channels post.)


3. As I noted in Pedigree and Obscenity, the California’s Board of Pharmacy is woefully underfunded relative to its grand ambitions for 2009. Can we look forward to additional mandates requiring companies to provide quasi-government surveillance services on January 1, 2009?

So, what do you think? Can any of my readers shed some light on the apparently widening problems at Cardinal?

New Signs of Rising Compliance Costs

Over the past few weeks, pharmaceutical wholesalers and healthcare products distributors have been reporting quarterly financial results for Q4 of 2007. At least three companies (so far) have reported costs of complying with supply chain security regulations that had a material impact on earnings per share.

As I see it, these examples are leading indicators for a troubling trend. No agency is taking a holistic, national view of the system or working to create an efficient, effective regulatory regime.
Instead, various agencies (Federal and State) are establishing diverse new reporting and regulatory requirements for pharmaceuticals.

Hopefully, all of these conflicting systems will make the pharmaceutical supply chain safer. In the meantime, manufacturers, wholesalers, and pharmacies are being forced to operate in a complex and mercurial enforcement environment, which could raise costs far beyond any purported safety benefits.

THE COSTS OF SAFETY

Today, it’s a few wholesalers under the microscope. Tomorrow, it could be the rest of us. So consider these examples to be potential early warning signs.

#1) The DEA suspended Cardinal Health’s (CAH) license to distribute controlled substances at facilities in Washington, Florida, and New Jersey despite the company’s December 2006 agreement to monitor pharmacies more carefully.

In last week’s release, Cardinal disclosed that efforts to fix the problems “may cost more than $30 million.” President and CEO Kerry Clark stated on the earnings conference call that “more than half” of the $30 million impact are expenses to control diversion, so I presume that the balance is a combination of fines, lost business from selling to diverters, and the “distraction” caused to the organization.

#2) McKesson (MCK) apparently has similar issues, although the DEA has not suspended any licenses as far as I know. On McKesson’s conference call last Friday, Chairman, President, and CEO John Hammergren disclosed a one-time non-tax deductible legal reserve related to diversion, stating:
“We are in discussions with the Drug Enforcement Administration and the U.S Attorney Offices to resolve claims around certain customer orders for selected controlled substances. We have been implementing improvements to our comprehensive controls and reporting procedures to avoid future claims of this type. And we've recorded a legal reserve of $13 million during the quarter within our Distribution Solutions segment and believe this reserve is adequate for the claims.”

#3) PSS World Medical Inc. (PSSI), a large med-surgical product distributors based in Florida, announced additional costs for pedigree in its fiscal third quarter release. The company has now “resolved outstanding issues with the Florida Department of Health regarding compliance with new state pharmaceutical pedigree regulations.”

From April through December of 2007, PSS incurred total costs of $6.2 million “associated with pedigree law compliance and settlement with the Florida Department of Health.” (I discussed PSS initial disclosure last June in Pedigree and Profits.) On a conference call, the company noted that it spent $800K in the fourth calendar quarter to ship product to its Florida customers from out of state locations.

WHAT ME, WORRY?

Each of these situations was triggered by the specific behavior of a single company. Yet I see a few reasons for manufacturers, wholesalers, and pharmacies to keep a close eye on these developments.

I worry that the California Board of Pharmacy will not provide consistent regulatory and compliance guidance. January’s enforcement committee meeting did not inspire confidence as I note in Pedigree and Obscenity. Despite their meager budget, the BoP could levy plenty of “gotcha” fines on manufacturers and wholesalers. Something makes me think that they’ll continue to give pharmacies a free pass…

Since today is Super Tuesday, let’s also not forget that all three Presidential candidates from the Senate (Clinton, McCain, and Obama) are co-sponsors of the Senate’s importation bill (Pharmaceutical Market Access and Drug Safety Act of 2007 S.242). The bill allows importation by wholesalers, pharmacies, and individuals -- subject to even more government requirements, some of which would conflict or undermine with the California pedigree system.

I won’t rehash the arguments against this bill -- you can scan through my posts in the Importation category at your leisure or just read my comments about Senator McCain’s viewpoints in Crazy Talk from John McCain. But consider the fact that the proposed importation bill explicitly limits the way a manufacturer can structure its distribution agreements and may force a pharmaceutical manufacturer to do business with secondary wholesalers that are known diverters.

My bottom line: multiple agencies are chasing the metaphorical floating Coke bottle of supply chain security. Heaven help us if a Charlie Brown gets his hands on it.

P.S. I was rooting for Underdog.

Wal-Mart's PBM Game Plan

Last week, the Wall Street Journal reported that “Wal-Mart Stores Inc. is stepping into the lucrative pharmacy-benefits arena…” (See Wal-Mart Targets Pharmacy Benefits) Most Wall Street analysts pointed out that the move was not an immediate threat to pharmacy benefits managers (PBMs.) (See Wal-Mart Drug-Benefit Move Isn't Raising Big Alarms.)

In the absence of specific details from Wal-Mart, I’ll use the economics of today’s pharmacy industry to speculate on Wal-Mart’s possible future direction.

As I explain in this post, Wal-Mart could shake up the retail pharmacy market by offering a low-cost alternative that links the PBM operation to fulfillment at a Wal-Mart pharmacy. Wal-Mart could easily deliver the $100 million in savings cited by CEO Lee Scott without a direct frontal assault on PBMs such as Express Scripts (ESRX) or Medco Health Solutions (MHS) or the big chain pharmacies such as Walgreens (WAG) or Rite-Aid (RAD). I also see a link to a possible future strategy for CVS Caremark (CVS).

Pedigree and Obscenity

If you’re like me, you probably don’t recognize Potter Stewart, the 92nd Associate Justice of the United States Supreme Court. But I bet you’ll recognize his famous test for obscenity: “I know it when I see it.”

Unfortunately, the California Board of Pharmacy has apparently adopted Justice Stewart’s highly subjective and now-obsolete test as it evaluates the industry’s progress. Therefore, I predict that you can look forward to a Drug Channels post later in 2008 about either: (a) a delay to 2011, or (b) an injunction against the Board of Pharmacy preventing implementation on January 1, 2009.

VENUS & MARS IN THE SUPPLY CHAIN

Although I didn’t attend the Board of Pharmacy meeting on Wednesday, I have heard from a number of the 400-500 (!) people who were there.

The Board members were adamant about the 2009 implementation date and seemed quite frustrated with the messy, real-world problems associated with putting an interoperable system in place.

Representatives from industry – manufacturers, pharmacies, wholesalers, and technology providers – highlighted their ongoing progress and challenges while trying to (politely) remind the Board that life is not as simple as a PowerPoint slide.

And as I predicted on Tuesday, the Board did not vote on delaying implementation until 2011. Perhaps the board members are enjoying their moment in the sun and want it to last a big longer.

QUESTIONS BUT NOT ANSWERS

On Tuesday night, the Board released Questions and Answers relating To the California Electronic Prescription Drug Pedigree Law(s), which claims that their template “outlines criteria the board will apply to any request for a delay in implementation.” (See question 41 on page 11.)

I’ve reread the template at least 10 times, but I still can’t find a list of the criteria that define “evidence.” The Board received at least 35 written responses (discussed in CA Pedigree: Going to '11?) addressing the questions on the template and providing “specific, articulated evidence” (per item 3). Yet at least one of the board members allegedly stated that “none” of the responses were evidence-based!

And how should we interpret the statement that the Board's decision about 2011 will be “an aggregate rather than an individual determination, pertaining to the industry as a whole rather than to the readiness of any individual industry participant.”

Which companies or individuals are included in the “industry as a whole?” How many of them need to talk personally with the Board of Pharmacy? Will the Board delay if 80% of the (undefined) “industry” is ready? What if only 51% are ready? Would you believe 48.7% and a troop of very angry girl scouts?

I guess they’ll know it when they see it. Yikes!

INJUNCTION TIME?

Here are some facts on the California Board of Pharmacy drawn from the Governator’s proposed budget for 2008-2009:

2007-2008 budget (estimated): $9.7 million; 50.5 positions
2008-2009 budget (proposed): $10.0 million, 50.5 positions

So let me get this straight – the Board of Pharmacy’s budget will increase by 2.5 percent and add no new positions in the fiscal year that it implements e-pedigree?!? (My advice: start selling tickets to the enforcement committee meetings!)

Regular readers will remember that two well-funded, fully staffed Federal agencies were stymied in their attempts to bring drastic change to the pharmaceutical supply chain.

• In December 2006, a preliminary injunction was granted against the FDA to stop implementation of the pedigree requirements of the Prescription Drug Marketing Act (PDMA).
  
• In December 2007, a preliminary injunction was granted against CMS to stop implementation of the Average Manufacturer Price aspects of the Deficit Reduction Act.

Golly, I wonder what will happen in December 2008? Any lawyers out there who can enlighten me on the legal definition of "arbitrary and capricious"?

SOME DISCLOSURE

In the spirit of full disclosure, I want to let you know that I just joined the Advisory Board of Directors of Secure Symbology, a company that sells a cost-effective solution for unit level serialization of prescription drugs.

Don’t worry – I won’t start selling you stuff. Please feel free to contact me directly if you want to know more about why I chose Secure Symbology.

CA Pedigree: Going to '11?

In my opinion, a postponement of California’s e-pedigree requirements to 2011 is now inevitable since the Board of Pharmacy has recently received sufficient evidence to justify a delay.

The California Board of Pharmacy’s Enforcement Committee meets on Wednesday. While e-pedigree is not on the official agenda, the Board has recently received a wave of requests for delaying implementation until 2011. However, I suspect that the Board will postpone their decision until later in 2008 so as to keep the pressure on the industry.

NONE MORE CLEAR

Under California law, the Board has the ability to delay implementation of e-pedigree requirements until 2011 if the board determines that “manufacturers or wholesalers require additional time to implement electronic technology to track the distribution of drugs within the state.” According to the December 5 Report of the Work Group on E-pedigree, a decision to delay must be “based on facts, not statements, and the data must demonstrate that a delay would be in the public interest.”

As a result, an Implementation Submission Statement Template was developed to collect information about e-pedigree progress. And guess what? The Board received 42 responses regarding the industry’s readiness to implement e-pedigree by January 1, 2009.

I found 35 responses online in Letters Regarding Readiness to Implement E-Pedigree (Part 1) and Letters Regarding Readiness to Implement E-Pedigree (Part 2). Warning: These are BIG files -- 282 pages totaling 55 MB.

Here’s a brief rundown of the 35 responses in these files:

• Manufacturers: 24 of 26 letters specifically requested a delay until at least 2011.


• Wholesalers: 2 of 2 letters requested a delay until 2011.


• Pharmacies: 4 of 5 letters requested a delay until at least 2011. The fifth submission was from Wal-Mart and simply listed their serialization requirements for suppliers as of November 9, 2007.

(Note that I combined companies and their trade associations. Thus, PhRMA is counted with manufacturers, HDMA is counted with wholesalers, etc.)

The remaining two letters were from suppliers:

• Catalent, the contract packaging company spun off from Cardinal Health (CAH), argued for a phased approach in 2009 instead of a delay to 2011.


• BA Systems, a provider of RFID technology, recommended a delay to 2010 rather than 2011.

The 35 submissions provide specific facts and data about implementation activities and the intentions of individual companies.

How much more clear could this be? The answer is none. None more clear.

SMELL THE GLOVE

In my opinion, the Board now has sufficient evidence to justify a delay. There are also many sound reasons why enforcing the arbitrary 2009 deadline would be harmful to patient safety. Taken together, the responses cited explain these reasons very thoroughly.

As a negotiating tactic, the Board may choose to keep everyone guessing until late 2008, although posturing for an unrealistic deadline doesn’t sound to me like a very sensible way to ensure patient safety. (I also like the risk-based approach that I discuss in California Dreamin'.)

So, is this the end of the “delay to 2011” discussion? Probably not, so it’s worthwhile to remember the words of supply chain security guru David St. Hubbins, who said:

“Well, I don't really think that the end can be assessed as of itself as being the end because what does the end feel like? It's like saying when you try to extrapolate the end of the universe, you say, if the universe is indeed infinite, then how - what does that mean? How far is all the way, and then if it stops, what's stopping it, and what's behind what's stopping it? So, what's the end, you know, is my question to you.”

I agree completely.

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P.S. If you are like my wife and don't recognize the blokes in the photo above, read this.

AstraZeneca's Direct-to-Pharmacy Model

Following in Pfizer’s footsteps, AstraZeneca UK formally announced that its direct-to-pharmacy distribution arrangement will begin on February 2, 2008.

Click here to read the letter notifying pharmacists of the switch and explaining the new discount structure. As you can see on page 3 of the letter, discounts are determined by AZ based on brand product instead of being set by competition between wholesalers. The Office of Fair Trading (OFT) report on Medicines Distribution worries about the competitive effects of manufacturer-controlled discounts with DTP models, writing:

"Under DTP schemes, manufacturers set the prices paid by pharmacies and pay wholesalers a fee for delivering their medicines according to their required service standards. There is no convention covering the level of discounts to pharmacies in these circumstances."

I wonder if DTP will be sustainable as more manufacturers adopt the model. At some point, it will simply be more efficient for a pharmacy to buy from a traditional, full-line wholesaler. A UK pharmacist lamented the practical realities of DTP after Pfizer's announcement, writing:

"Oh, and spare a thought for us poor overworked pharmacists. At present I only have to deal with one wholesaler, a regional independent wholesaler which is part of the company I work for. If anything is out of stock at the warehouse it is automatically ordered from Unichem or AAH by head office. My life is very simple at present. If Astra Zeneca use AAH as their delivery agent, and Sanofi choose Phoneix, Lilly someone else and Novartis yet another company, then ordering will be made so much more complicated and time consuming. And it's not like I don't have enough things to do as it is."

The Pharmaceutical Services Negotiating Committee (PSNC), a trade group of UK retail pharmacies, has a useful list of recent UK distribution changes by manufacturers. The UK DTP experiment will give us some useful insight into U.S. prospects as more manufacturers launch programs.

Pharmacy Profits & Part D

The OIG released a new study last week on Part D economics for independent pharmacies. The report does a reasonably thorough job of examining actual, audited data on prescriptions filled by independent pharmacies under Part D.

However, the conflicting interpretations of this report illustrate why it’s so hard to understand the reality facing independents. The report is also a good opportunity for me to analyze the unfortunate economic realities facing the owners of lower volume, less efficient independent pharmacies. In my opinion, owners of low-volume independent pharmacies must either Get big, Get lean, or Get out.

As always, I encourage you to read the full report and make up your own mind: Review of the Relationship between Medicare Part D Payments to Local, Community Pharmacies and the Pharmacies’ Drug Acquisition Costs

IS THERE A GLASS?

Don’t be alarmed if you can’t figure out if the new OIG report is good or bad for independent pharmacies.

The Association of Community Pharmacists said that the new report “validates their concerns that payments under the Medicare drug benefit are driving some of them out of business” in Pharmacists decry Medicare drug payments. In contrast, PCMA sees the glass as half full, arguing that the report runs counter to claims from the independent drugstore lobby.

Steve Anderson of NACDS issued a cautious official statement with the intriguing double negative phrase that “pharmacies are not overcompensated.” His wording reminds me of the time my daughter told me that my new shirt “didn’t look totally uncool, for a dad.” (Gee, thanks.)

WHAT THE REPORT ACTUALLY SAYS

The OIG studied actual data for a sample of independent pharmacies to measure two components of Gross Profit per Script under Part D:

• Spread: The difference between (a) the “ingredient cost” reimbursements received by a pharmacy from a Part D Prescription Drug Plan (PDP), minus (b) the pharmacy’s net cost for purchasing the product (including rebates).


• Dispensing fee: The fixed per prescription payment.

Note that OIG expresses the spread as a percent of costs, not as a percent of revenues. Thus, we need to do some math to convert these data into more familiar Gross Margins, which express Gross Profit per Script as a percent of Revenue per Script.

Here are the averages that I calculated from the OIG report:

Brand-name drugs
Part D Revenue per Script = $127.49
Part D Gross Profit per Script = $11.29
Part D Gross Margin per Script = 8.9%

Generic Drugs
Part D Revenue per Script = $23.92
Part D Gross Profit per Script = $11.48
Part D Gross Margin per Script = 48.0%

I suspect that gross margins for the major chains -- CVS Caremark (CVS), Walgreens (WAG), and Rite-Aid (RAD) -- were similar to these figures. Note that generic and brand name scripts had roughly equivalent dollars per script even though gross margins differ by 39 percentage points.

YES, THE AVERAGE INDEPENDENT PHARMACY MADE MONEY WITH PART D

In the comments of Pharmacy Profits & PBM Contracts, I was accused of being misleading because I didn’t consider the cost of dispensing when discussing average revenue per script.

But I’m not a financial fool. I understand that gross profit is nothing more than PBE -- Profits before Expenses. Which brings us to the multi-million dollar question: Does the Part D Gross Profit per Script cover a pharmacy's fully-loaded per script operating expenses (a.k.a. the Cost of Dispensing)?

The OIG cites the National Study to Determine the Cost of Dispensing (COD) Prescriptions in Community Retail Pharmacies, which spawned the oft-repeated $10.50 average dispensing cost per prescription for 2006. Using the OIG data above (also 2006), the average COD leads to the following Return on Sales (Pretax Profit / Revenue) per Script:

Brand-name Drugs = 0.6%
Generic Drugs = 4.1%

While not spectacular, these figures suggest that the average pharmacy did make money at Part D. In addition, ROS only tells part of the profitability story because it ignores the balance sheet assets required to generate the income statement profit. Any wholesale or retail company should measure its true profitability using Return on Investment (Pretax Profit / Owner’s Equity). But I’ll leave it up to you to understand that ROS is only one of the three critical ratios in the Strategic Profit Model.

BUT SIZE MATTERS

However, Table 5 of the full COD study tells a different story when it reports COD for size-based quartiles. You will not be surprised to learn that these size-based differences have been conveniently ignored since publication of the report in January 2007.

Grant Thorton ranked the 23,152 pharmacies in the COD study by volume (number of prescriptions filled) and then grouped them into quartiles based on total prescriptions. Thus, the bottom quartile represented 25% of scripts and 46% of independent pharmacies. The top quartile also represented 25% of scripts but only 11% of independent pharmacies. In other words, the top quartile pharmacies were (by definition) larger.

Grant Thorton found a strong correlation between size and efficiency.

• The bottom size quartile (46% of independents) had average COD of $14.84, implying negative ROS for both brand and generic drugs in Part D.


• The top quartile had average COD of $9.01, implying ROS of 1.8% for brand-name drugs and 10.3% for generic drugs.

In other words, almost half of all independent pharmacies lost money with Part D prescriptions according to the data in the NCPA/NACDS Cost of Dispensing study. Yet the more efficient pharmacies made very respectable profits under Part D.

I can certainly sympathize with NCPA’s awkward position when confronted with these data because the 10,650 smaller, less efficient pharmacies (46% * 23,152) vastly outnumber the 2,547 larger, more efficient pharmacies (11% * 23,152).

MORE CONSOLIDATION TO COME

The Part D profit data hark back to my efficiency question posed last July in Heretical Questions about the AMP War: Does the U.S. retail pharmacy industry simply have too much capacity?

Now before you send me hate mail, I want you to recognize that I am just a messenger who is highlighting the evolutionary dynamics for you. You may not like the data that I present here, but these are the unpleasant facts.

OK, independent pharmacy owners – what do you think?

Pharmacy Profits & PBM Contracts

Here’s a post that should generate some heat.

An expert report filed last month in the FirstDataBank Average Wholesale Price (AWP) settlement case sheds light on the usually hidden economics of retail pharmacies. However, the data also provide a fresh perspective on the rhetoric regarding reimbursement levels to independent pharmacies.

A Treasure Trove of Contracts

The Pharmaceutical Care Management Association (PCMA) and the National Community Pharmacists Association (NCPA) are formally objecting to the proposed class settlement with First DataBank. (See Pharmacies Fight First DataBank Settlement at Pharmalot.) Neither PCMA nor NCPA are parties to the case. Fans of legal documents can read the formal NCPA objection to the Settlement Agreement and Release.

The really interesting data comes from the Declaration of H. Edward Heckman concerning FirstData Bank. Mr. Heckman was hired by NCPA to examine the economic impact of the settlement on independent pharmacies.

As the owner of PAAS National, Mr. Heckman had access to 410 third-party payer contracts offered to independent pharmacies from 1998 through 2005. The complete list of contracts and key financial terms (brand and generic) are listed in Exhibit D of his report. The list includes the Pharmacy Benefit Manager (PBM) contract sponsor – Caremark (CVS), Express Scripts (ESRX), Medco Health Solutions (MHS), et al. Normally, these detailed contract data are not publicly available.

Dollars vs. Margins

Based on these contracts, third-party payers increased the discount off AWP that was offered to pharmacies as reimbursement for the “ingredient cost” of filling a prescription. The Average AWP Brand Discount went from -11.54% in 1998 to -15.62% in 2005 – a drop of 408 basis points. (See Table 3 in Mr. Heckman’s report.) This decline is consistent with the rhetoric about decreasing PBM reimbursements offered to pharmacies.

Yet I can’t help but notice that the average AWP of a brand prescription increased by almost 150% over the same time period (Table 2). As a result, the Average Brand Reimbursement (excluding dispensing fee) to an independent pharmacy rose dramatically from $48.50 in 1998 to $111.69 in 2005.

Put another way, the data in Mr. Heckman’s report imply that a smaller percentage of a bigger number was worth much more to a pharmacy than a bigger percentage of a smaller number. For comparison, $48.50 in 1998 had the same buying power as $58.11 in 2005 according to the Bureau of Labor Statistics Inflation Calculator.

Perhaps I have misinterpreted the data, so please feel free to explain if my calculations are incorrect. Note that I am not claiming a financial windfall for independents from brand drugs. As I've noted in the past, profits on generic drugs subsidize the retail and wholesale distribution of more expensive branded products. (See the comments below.)

Pharmacy Extinction?

The estimated number of independent pharmacies ranges from 17,500 (NACDS) to 24,000 (NCPA).

In his expert report, Mr. Heckman states that the AWP settlement will drive “potentially over 50%” of independent pharmacies out of business. Meanwhile, an expert report prepared in November for the AMP lawsuit estimated that AMP-based FULs would lead to “the loss of 10,000 to 12,000” independent pharmacies.

If my math is right, then the combination of the First DataBank settlement and AMP-based FULs will wipe out every independent pharmacy in the U.S. – except perhaps the one run by Will Smith. (Legend Pharmacy?)

(UPDATED at 10:14 AM EST with clarification about financial windfall.)

Crazy Talk from John McCain

In a particularly lyrical moment last May, I wrote: "To paraphrase Dennis Miller, importation has been declared dead more times than a narcoleptic Jason Voorhees. So expect to see this political crowd-pleaser resurrect itself in time to lurch around Washington during the '08 elections."

Sadly, my forecast came true on Saturday during the Republican debate in New Hampshire when Senator John McCain (R-AZ) spouted a load of nonsense about both drug pricing and importation. I have a lot of respect for the Senator, who is expected to do well in today's New Hampshire primary. But he was waaaaay off base on his knowledge of the pharma industry.

What Senator McCain Said

Senator McCain claimed that the attorney generals of South Carolina and Iowa have “sued the pharmaceutical companies because of overcharging of millions of dollars of Medicaid costs to their patients.” Sen. McCain then added:

“How could that happen? How could pharmaceutical companies be able to cover up the cost to the point where nobody knows? Why shouldn't we be able to reimport drugs from Canada? It's because of the power of the pharmaceutical companies. We should have pharmaceutical companies competing to take care of our Medicare and Medicaid patients.” (from the ABC News transcript)

Pandering to the Uninformed

The typical voter has no idea how much Senator McCain misrepresented the Medicaid lawsuits, which have nothing to do with any top secret cover ups.

In reality, the lawsuits are based on allegedly “excess” spreads between Average Wholesale Price (AWP) and a retail pharmacy’s acquisition price under Medicaid. The problems with AWP are well known and hardly count as a cover up in 2008. (I discuss the Iowa lawsuit in Judge Saris on Fictitious AWPs.)

I also didn’t hear the Senator demonizing the pharmacies that profit from AWP spreads. And as I recall, it was the retail pharmacists (not manufacturers) that successfully sued the government to prevent the publication of actual average price data.

Ignoring National Security

Senator McCain then proceeded to falsely link the AWP lawsuits to importation, although there is no connection and importation legislation won’t save money for consumers anyway.

I guess that I shouldn’t be surprised because Senator McCain has consistently made demonstrably false statements about importation. Consider this chestnut from last November:

"These are drugs being reimported. They go to Canada and then they can come back in. It's a strawman to say that a country like Canada could not be responsible for safe drugs to be brought into our country." (Source: McCain Calls for Drug Reimportation.)

The Senator has spoken eloquently about the foreign enemies of our country. So why does he believe in the fallacy of safe Canadian sourcing? He must know that diverters and criminals will quickly take advantage of a more porous supply chain.

Surprisingly, Rudy Guiliani did not challenge McCain, even though his firm wrote a 2005 report that highlighted how “Organized Criminals, Drug Traffickers and Terrorists” could exploit a U.S. drug importation scheme. (See Examination and Assessment of Prescription Drug Importation from Foreign Sources to the United States.)

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Perhaps my standards are too high, but it certainly looks like straight talk has gone right out the window. On the bright side, the election will be over in only 301 more days!

Catching up with CVS and Cardinal

Happy New Year! I hope you were able to ring in 2008 successfully even in the absence of Average Manufacturer Price (AMP) data.

As you know, I’ve been on vacation and have not been blogging. Unfortunately, there was no wi-fi access on the beach and our hotel did not subscribe to Drug Store News or Pharmaceutical Commerce. Plus, I forgot to pack my back issues of the Federal Register. You can surely see my disappointment in the photo on the right.

I’m now tanned (or perhaps just a bit pinker), rested, and ready for 2008! Let’s get the year started with two interesting stories that I missed:

CVS Caremark Tightens its Network
CVS Caremark closed mail order facilities in Fort Worth and Phoenix as part of the company's plan to tighten up its mail and store distribution network. These moves will provide further cost savings beyond the improved generic purchasing power that I discuss in CVS' Channel Power.

But at the same time, a leaner network will allow the company to extract more margin from its wholesalers and/or credibly shift to direct purchasing of brand drugs. CVS Caremark is now the single largest customer of the two largest drug wholesalers -- McKesson (MCK) and Cardinal Health (CAH). Its wholesaler supply contracts are up in 2009 – I expect some major shifts in drug channels as CVS flexes its buying power.

Get ready for a rumble.

Cardinal Hires a New Investigator?
According to this article, Cardinal Health (CAH) is bringing McGruff the Crime Dog to the Jacksonville, Florida, police department. The company would not comment on rumors that the canine officer will be sniffing out diversion problems at Cardinal’s facilities. (DOH!)

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In upcoming posts, I’ll delve into two new bogus studies on retail pharmacy, discuss developments in direct-to-pharmacy distribution, and take another look at the retail vs. mail debate. In the meantime, I suggest that the many new subscribers from the past two weeks check out my 2007 Year in Review.