Wal-Mart Explains Its Healthcare Strategy

The latest issue of Health Affairs has a fascinating insider’s view on how Wal-Mart views healthcare services (including pharmacy dispensing). Read it here: Removing Costs From The Health Care Supply Chain: Lessons From Mass Retail

The article's subtitle says it all: “Many standard health care products and services should be ‘commoditized’—and priced accordingly.”

Translation: Pharmacies should be ready to compete on price, not just customer satisfaction.

It’s important to understand Wal-Mart's message although I doubt many pharmacy owners (and even some PBM executives) will agree with it.

PBM Consolidation Ahead (redux)

In early June, I laid out the five reasons why I expect PBM Consolidation Ahead.

The prospects for more consolidation seem even higher now, especially in light of recent news about CVS Caremark (CVS) and Medco Health Solutions (MHS). I also think that health care reform will end up being a net positive for the PBM industry, increasing the need for more scale.

I estimate that the big three PBMs – CVS Caremark (Pharmacy Services), Express Scripts, and Medco Health Solutions – will process about 45% of all prescriptions filled in a retail drug store in 2009. I would not be surprised if that figure hits 60% by 2014.

Pharmacists Can't Get No Satisfaction from Mail

Hot on the heels of Walmart’s mail pharmacy announcement, the National Association of Community Pharmacists (NCPA) issued a statement highlighting the purported dangers of using any type of mail pharmacy: Despite Wal-Mart's Assertion, New Mail Order Program Will Not Benefit Patients.

But at the risk of further annoying the irate independent pharmacists who post comments on this blog, I regret to inform you (and NCPA) that the facts do not show mail pharmacy to be an inconvenient, patient-killing scam.

Baucus Bill: Weighted AMP+75%

Senate Finance Committee Chairman Max Baucus officially released the text of a massive health care reform bill. Read the full text of the Baucus plan – 223 pages of wonky goodness.

The “Changes to Medicaid Payment for Prescription Drugs” (page 55) sets the Federal Upper Limit (FUL) to the weighted Average Manufacturer Price (WAMP?) x 175%, i.e., WAMP+75%.

Quick reaction: While 175% is less than 250%, I expect WAMP to be greater than AMP, especially since the proposal excludes mail order pharmacies. Seems like a victory for the pharmacy groups that lobbied for an increase, although I predict they will still ask for more.

The Impact of Walmart's National Mail Pharmacy

Walmart just went national with its mail pharmacy program, an outcome that I had predicted in May when the company launched its initial trial in Michigan. Details here: Walmart Expands Access to Affordable Prescriptions Nationwide. Walmart is offering 300 generic prescriptions for $10 each and more than 3,000 other brand and generic prescriptions with free mail delivery.

This announcement expands the retail pharmacy price war over generic drugs, puts further pressure on pharmacy margins from cash-pay customers, and sets the stage for more cost-plus deals. More intriguingly, it portends an emerging strategic convergence between Walmart and CVS Caremark. Yes, you read that correctly.

Pharmacies Sued for Making Money on Generic Drugs

Here’s an unusual case that I haven't seen reported anywhere else.

Two small health plans in Minnesota are suing pharmacies for making higher profits on generic drugs than on brand name drugs. Perhaps the attorneys went to the Lake Wobegon School for Pharmacy Management. (“All the pharmacists are strong, all the technicians are good-looking, and all the profits are above average.”)

While I have no idea whether the legal claims have any merit, the case again highlights the risks to the superior profitability of generic drugs for pharmacies and Pharmacy Benefit Managers (PBMs).

Two Great New Resources on Pharmacy Economics

Last August was not just a time for rioting about health care reform in a town hall meeting. It was also the month in which two great new resources on pharmacy economics were released.

Sure, the release of these reports was perhaps not comparable to the excitement surrounding Wednesday's release of The Beatles: Rock Band. Nevertheless, this self-confessed pharmacy economics geek (but in a good way!) suggests you check out both reports.

What Happens When AWP Goes Boom?

Enough about Obamacare -- let's talk about something closer to home.

In just 12 days, the Great 4% AWP Rollback begins. From what I hear, many pharmacies, PBMs, and health plans are adopting (or are negotiating) contractual “equivalency formulas” that will maintain constant dollar reimbursements to pharmacies. So I'll offer you a few thoughts on the post-September 26 situation.

Medicaid is another story and will likely mean real cuts. Unfortunately, this episode shows that it’s never too late to exaggerate the impact of a reimbursement cut.

THE LONG GOODBYE

I'm sure almost everyone is familiar with the circumstances here, but if not, read Farewell, AWP.

Briefly, the settlement of the New England Carpenters Health Benefits Fund, et al., v. First DataBank, Inc. and McKesson Corporation case requires First DataBank (FDB) to reduce the AWP mark-up from 1.25 to 1.20 times the Wholesale Acquisition Cost (WAC) for approximately 1,400 NDCs identified in the litigation.

Although the settlement doesn't require it, FDB plans to set the mark-up at 1.20 for all drugs independent of the litigation on September 26, 2009. This roll back of the WAC-to-AWP spread translates mathematically into a 4% reduction in their AWP.

FDB also intends to stop publishing AWP data no later than two years following the date that the rollback adjustments are implemented, i.e., no later than September 26, 2011. First DataBank has stated that it will continue to publish non-AWP drug pricing information, including WAC, Direct Price, and suggested wholesale price. Visit http://www.firstdatabank.com/Support/awp-communications.aspx for more details.

Since payers still widely use AWP as a drug reimbursement benchmark for pharmacies, the settlement affects the economics of providers that were not directly involved in the lawsuit or settlement. Many pharmacy groups have been strenuously objecting to the settlement. In June 2009, NACDS and FMI filed another legal brief challenging the settlements that reduce AWPs. However, the United States Court of Appeals for the First Circuit upheld the settlement, paving the way for the 4% rollback will occur on September 26.

BTW, there’s still some dispute about how much pharmacies have benefited from the initial mark-up change back in 2002. Judge Saris was withering in her March decision, writing that “[T]hese pharmacies … were unjustly enriched when drug prices were fraudulently inflated during the scheme, yet they have not been asked to disgorge their profits.” (See Farewell, AWP.) Many pharmacists disagree with this statement, although I have not seen any hard evidence one way or the other.

WHAT MIGHT HAPPEN AFTER SEPTEMBER 26?

Here are a few thoughts on the near-term outcomes.

• The market will adapt and pharmacies will be OK. Despite any alleged “enrichment,” many participants in the private market seem to be recomputing so that there will be a limited impact on pharmacies. This should not be news to anyone. Don’t believe me? Then take the wayback machine to my October 2006 post Additional Comments on the AWP settlement, when CVS (among others) seemed confident of its ability to renegotiate. At the time, the plaintiff’s expert argued that market participants would *not* be able to renegotiate, although that view now seems incorrect.


• AWP is not dead yet. AWP continues to be the most widely used benchmark for brand drug reimbursement. I presume that other publishers will step in to fill the gap left by First DataBank and Medi-Span. Thomson Reuters, which publishes the Redbook, already uses a 1.20 WAC-to-AWP mark-up in their AWP Policy. A source there told me that Thomson Reuters has no plans to change the methodology or stop publishing AWP.


• We’ll always have WAC. Some public payers have already begun to shift to the alternative list price benchmark of WAC, such as the Department of Defense (Big WAC Attack). Nine state Medicaid programs already incorporate WAC into the ingredient cost reimbursement formula. Of course, WAC doesn’t necessarily represent the price paid by any entity within the distribution system either, so shifting to WAC just kicks the can down the road.


• We still need a credible alternative. Personally, I think that dissatisfaction with list-price benchmarks will ultimately lead to reimbursement models based on actual transactional pricing data, such as the Caterpillar-Walgreens agreement. However, there is not yet a viable published “average price” available for payers to use in computations. Stay tuned for more on this topic.

WOULD YOU BELIEVE …. ?

Now we come at last to Medicaid, which consistently provides the most generous reimbursements to retail pharmacies for generic drugs. See this February 2009 OIG report or Pharmacy Profits and Wal-Mart for some evidence. (Hey, I don't make this stuff up.)

The government doesn’t move quite as fast as the private sector, so there’s little time to adjust the various state Medicaid prescription reimbursement methods. Also, states aren’t particularly motivated to act quickly given the potential budget savings.

How much is at risk? Well, I guess that depends on how close we get to the deadline.

• At the August NACDS meeting, NACDS Senior Vice President and General Counsel Don L. Bell II estimated a $68 million reduction per year from Medicaid. (See page 3 of his presentation.)


• In a letter this week to CMS head honcho Kathleen Sebelius, NCPA and NACDS cite a “conservatively-estimated loss of more than $350 million each year.” (See page 2 of their letter.)

Gosh, one month makes a big difference, doesn’t it? Good thing that it's only taxpayer's (our) money, right?

Regardless of whether CMS reacts, I hope that the OIG looks into whether pharmacies gained from the initial 2002 increase or would have lost (or did lose) from the 2009 rollback. Facts never hurt anyone.

CAT + WAG = More Momentum for Cost Plus

What is Caterpillar smokin’? It must be strong because the company is trying hard to transform the economic reality of the pharmacy industry.

Two weeks ago, Walgreens announced a direct-to-payer agreement with Caterpillar that would use a cost-plus pricing model for prescriptions filled at Walgreens’ pharmacies starting in January 2010. See Walgreen to Provide Prescription Drugs for Caterpillar Workers.

This deal provides further momentum for cost-plus pharmacy reimbursement. Maybe the industry is falling down the rabbit hole into a fantasy world…or maybe the future is arriving sooner than expected. Here’s my take on what direct-to-payer, cost-plus deals could mean for drug channels along with some cautionary words on the longer-term impact.

Drug Channels XR: New and Improved!

Welcome back! Drug Channels is now back in session.

As you can see, I spent time over the summer fixin' up the joint. In the spirit of the pharmaceutical industry, let's call it Drug Channels XR – a new formulation that will keep you away from those pesky copycats.

Here's a quick rundown on some new features, coming attractions, and an explanation of why I won't be twittering (or tweeting) anytime soon.

A QUICK TOUR

I have redesigned and updated the entire Drug Channels site. All of the content is still here, but you should find it much easier to access and share everything. Notable new features:

1. Two Sidebars = Twice the fun!

2. Social media: The button at the bottom of each post will allow you to easily email any article or post it to your favorite social networking site (Twitter, Facebook, LinkedIn, et al). I hope you find my posts worthy of sharing.

3. LinkedIn? Yup, I've jumped on the bandwagon and have an account at http://www.linkedin.com/in/adamjfein. I accept almost all invitations, so please feel free to connect with me.

4. Print this Post: When online just isn't good enough, you can now efficiently deforest the planet (but now with better formatting).

5. Improved search: DC now has an integrated Google blog search engine, which is much faster and more comprehensive than the old search feature.

I've tested the site with multiple browsers and operating systems, but please let me know if you encounter any problems using the new site.

COMING ATTRACTIONS

Despite what you might believe about my glamorous life as a surfer, I was actually working all summer. I'll hit a few developments from summer 2009 in upcoming posts. You may find this summary list to be a helpful guide:

• Inglourious Basterds (An update on the rational, reasonable health care reform debate)

• The Hurt Locker (Defusing the AWP time bomb)

• Star Trek (Walgreens boldly goes into a cost-plus deal)
  

• Transformers 2: Revenge of the Fallen (Pharmacies push anti-PBM legislation)

• District 9 (Relocating that pesky AMP problem)

• The Hangover (Huh? How did I get here? Walmart is doing what?!?)

• Julie & Julia (Cooking up some online counterfeit drug fun)

The number one most requested item from my April reader survey (91% of respondents) was "A downloadable report written by Dr. Fein on future trends for the retail pharmacy industry." As you wish! Stay tuned for the official announcement in a few weeks.

WHAT, NO TWITTER?

So far, I have resisted the siren chirp of this new platform, especially when I learned that MC Hammer has 1.4 million followers. (Really.) I'm not opposed to it, I'm just too darn busy to be interrupting you (and me) all the time. (Insert "MC Hammer must have time on his hands" joke here.)

Nevertheless, you can follow me http://www.twitter.com/adamjfein, although I have not tweeted yet. Maybe I never will. (UPDATE: You can now follow the blog at http://www.twitter.com/DrugChannels.)

In the meantime, please enjoy this very revealing interview of Twitter co-founder Biz Stone by pundit Stephen Colbert. A familiar business strategy for pharma?

Stone: "It's the messaging service we didn't know we needed until we had it."

Colbert: "That sounds like the answer to a problem that we didn't have until I invented the answer."

FYI, I monitor the twitterverse using a clever little application called TweetDeck. Caveat tweetor.

Blogcation! See you at NACDS?

Well, it is that time of year again. I am taking my usual two-month break from blogging, a.k.a, a blogcation. Yes, I'm sorry to report that your subscription fees only covers 10 months of Drug Channels.

Drug Channels is now read by almost 5,000 people each month (and gets almost 12,000 unique visits monthly). Obviously, I only know only a small fraction of you. If you haven't done so, please send me a message if you'd like to chat on the phone or even meet in person at the NACDS meeting in August. (I'll be working during most of July and August despite the blog's summer hiatus.) I'd be pleased to discuss how I help people understand this evolving industry and develop strategies to deal with it. Plus, meeting me in person at NACDS may convince you that I am not just a computer generated avatar.

My summer reading list from 2008 is still worthwhile if you are looking for something wonky to bring to the beach. See Summer Reading. If those books are not enticing enough, you can always revisit some of the most popular and controversial Drug Channels posts from 2009 (in chronological order):

• Who Will Pay for Prescription Drugs?
  
  
• Drug Channel Profits in 2009's Fortune 500 list
  
  
• Is Walgreens planning a direct-to-payer deal?
  
  
• Wal-Mart Aims at PBM Mail Profits
  
  
• Reality Check on Mail Economics
  
  
• The Odd Economics of Maintenance Choice
  
  
• Profit Headwinds for Cardinal Health
  
  
• PBM Consolidation Ahead
  
  
• 2008 Pharmacy Market Share Data

I'll be back to blogging after Labor Day. Have a great summer!

Adam

Frequently Asked Questions (FAQs)

THE QUESTIONS

1. What are “Drug Channels”?
2. What topics do you cover on Drug Channels?
3. Why do you write this blog?
4. Who reads Drug Channels?
5. Who are your clients?
6. Do you discuss confidential or non-public information on Drug Channels?
7. I’m an investor. How can I schedule a call with you?
8. Do you invest or own stock in the public companies that you mention?
9. Aren’t you just a shill for…?
10. Can you suggest some good books about the pharmaceutical industry?

THE ANSWERS

1. What are “Drug Channels”?

This blog is about marketing channels for pharmaceuticals (aka drugs). Marketing channels are the routes to market used to sell every product and service that consumers and business buyers purchase everywhere in the world. A channel is a set of interdependent organizations involved in the process of making a product or service available for sale. (Source: Marketing Channels.)

The companies and organizations in the channel successfully ensure that prescription drugs manufactured in truck-load quantities ultimately end up being delivered and dispensed in an appropriate quantity – say, a bottle with 30 pills – to an individual patient. There are three primary channel flows within the U.S. pharmacy distribution and reimbursement system:

• Product movement, which covers bulk distribution from pharmaceutical manufacturers to the drug wholesalers that supply pharmacies. A pharmacy marks the final step when a prescription is dispensed to a patient.
  
  
• Financial flows, which transfer money from third-party payers to Pharmacy Benefit Managers (PBMS), who in turn reimburse pharmacies. Funds flow to manufacturers via pharmacies, which purchase drugs from wholesalers.
  
  
• Contractual relationships, which govern the relationships between payers and PBMs; PBMs and pharmacies; pharmacies and wholesalers; wholesalers and manufacturers; and manufacturers and PBMs.

Hence, Drug Channels.

2. What topics do you cover on Drug Channels?

Every year, Americans fill nearly four billion prescriptions. The companies that facilitate the supply, dispensing and payment of our drugs – pharmacies, insurance companies, pharmacy benefit managers (PBMs), supermarkets, mass merchandisers, and drug wholesalers – absorb more than one-quarter of the $250 billion spent in the U.S. on outpatient prescription drugs.

Drug Channels provides an accessible behind-the-scenes look at this highly dynamic part of our health care system. I also examine the ways in which these companies affect – and are affected by – brand and generic pharmaceutical manufacturers.

Given the regulatory and financial role of the government, I also spend a considerable amount of time looking at regulations and legislation that deal with issues such as pharmacy reimbursement, pedigree, Part D, etc. You can see a list of topics on the left hand side of the page.

You should also check out my occasionally updated Best Of list.

3. Why do you write this blog?

The traditional drugstore has evolved into a complex network of multi-billion-dollar public corporations that manage the distribution, dispensing, and payment of our prescriptions. The strategies and decisions of the companies in the pharmacy industry affect us all: which drugs our insurance plans cover; where we will fill our prescriptions; how much we will pay out of our own pockets; and our likelihood of choosing a generic drug.

I make Drug Channels freely available as part of my mission to educate, inform, and challenge people about this system. I feel fortunate to have been similarly educated in many private emails and conversations that were sparked by the blog.

The discipline of writing a blog also forces me to stay current with new developments, which helps keep me energized and engaged. I have fun thinking about ways to use Spinal Tap or Monty Python references!

Of course, the blog has turned out to be an unexpectedly valuable tool to build my practice. Existing clients read the blog and contact me for “the inside scoop” and specific application to their business. I have also “expanded the envelope” by writing about a wide range of topics, allowing me to generate new conversations with existing clients and add new types of clients.

So, as long as a few readers hire me for consulting work or speaking engagements, then I can afford to pay my mortgage and keep this site free for everyone else.

4. Who reads Drug Channels?

Drug Channels is written for anyone who wants to understand how the pharmaceutical industry works. Based on domain names from web traffic logs, the blog is widely read by people at companies throughout the healthcare industry, including (but not limited to):

• Manufacturers
• Drug wholesalers
• Pharmacies (all types)
• Investors
• Insurers
• PBMs
• Providers
• Payors
• Government agencies
• Law firms

Click here to see a list of domain names that visited Drug Channels. As you can see, it's a Who's Who of the industry. You can view summary traffic stats at the bottom of the right hand sidebar.

5. Who are your clients?

Pembroke Consulting's clients are senior executives seeking to make better strategic and tactical decisions for their companies. My clients are executives at manufacturers of pharmaceuticals, biopharmaceuticals, or medical devices. I also work with trade associations, technology companies, law firms, institutional investors (via Gerson Lehrman Group), private equity firms, and other participants in the healthcare value chain.

Check out my corporate site for more info.

Was that a shameless plug?

Yes.

6. Do you discuss confidential or non-public information on Drug Channels?

No. The analyses on this website are based on information and data that is in the public domain. I NEVER (a) disclose material, nonpublic information about a public company; (b) disclose information that I have a duty to keep confidential (e.g., by agreement, fiduciary duty, etc.); or (c) disclose information that I obtained from any person who expects me to keep it confidential.

Whenever possible, I provide links to the original source material so that you read it for yourself and make up your own mind.

7. I’m an investor. How can I schedule a call with you?

I currently consult with institutional investors via an exclusive relationship with Gerson Lehrman Group (GLG), where I am a Leader in their Health Care Network. If you are a GLG client, then you can contact your representative to schedule a consultation or make a web request at my GLG home page.

8. Do you invest or own stock in the public companies that you mention?

No. I do not invest or own stock in any individual public companies. I only own stock through general mutual funds. Please note that Pembroke Consulting, Inc. does not make investment recommendations, on this website or otherwise.

9. Aren’t you just a shill for [Big Pharma / PBMs / Insurers / Knights Templar / Hollow Earth theorists / Birthers /blah blah blah]?

Nope. My philosophy in writing this blog can be summed up with a quote from the late Senator Patrick Moniyhan: “Everyone is entitled to his own opinion, but not his own facts.” In my own way, I want to bring facts and balance to subjects that don't get sufficient or accurate coverage from traditional media outlets.

I am opposed to unsupported accusations, overwrought hyperbole, or just plain misrepresentation. One of my consulting advisory clients told me that he values my opinions because I’m a “tough, cynical hard-ass.” Believe it or not, I took his comment as a compliment.

My job (on the blog and elsewhere) is to tell people the hard facts and help them figure out what it means.

10. Can you suggest some good books about the pharmaceutical industry?

Sure. Check out this post from July 2008.