Maintenance Choice Update: CVS Gain, Caremark Same

A key theme in my Pharmacy Industry Economic Report and Outlook is the trend toward more restrictive preferred pharmacy networks. CVS Caremark’s (NYSE:CVS) Maintenance Choice program is an example. A consumer can obtain maintenance medications and choose the channel—brick-and-mortar pharmacy or mail pharmacy—but must use either a CVS retail pharmacy or a Caremark mail-order pharmacy.

On Monday, we learned Maintenance Choice is growing rapidly as a benefit design option, demonstrating that payers are willing to accept more restricted pharmacy networks in exchange for savings and control. The Caterpillar-Walgreens-Walmart arrangement provides another compelling data point. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network. The outcome for the pharmacy industry will be more rapid consolidation, especially as these programs increase market share for the “preferred” providers of pharmacy services.

At the same time, I still wonder if Maintenance Choice provides enough competitive differentiation to help Caremark win new Pharmacy Benefit Manager (PBM) business. See Per Lofberg's comments on this point at the bottom of this post.

As always, Pembroke Consulting retainer clients and Gerson Lehrman Group clients can schedule phone calls with me for additional comments beyond what I discuss in this post.

CMS' New Drug Spending Projections

“Prediction is very difficult, especially if it's about the future.” Niels Bohr

The economists at the Centers for Medicare & Medicaid Services (CMS) just released their 2010 projections for U.S. National Health Expenditures (NHE). Here are two key observations about the prescription drug numbers.

• The Government Pays More, Starting Now—Public funds continue to crowd out private payers. CMS now projects that private insurance and public funds will each pay 40% of retail drug spending in 2010. By 2019, public funds will be almost half of outpatient retail prescription spending.
  
  
• Drug Spending Will Look Higher Next Year—Using the stated CMS methodology, I estimate the National Health Expenditure (NHE) data series currently understate actual prescription sales by about $18.5 billion (~8%). Therefore, prescription drug's share of overall health care spending is also underestimated by a full percentage point. Expect an upward revision in headline prescription drug spending in next year’s NHE data. Remember, you read it here first!

Make it to the bottom of the post and you will also be rewarded with a health economics knock knock joke.

Obama's Budget and Wholesaler Inventories

President Obama submitted his fiscal year 2011 budget this week. The Wall Street Journal calls it “one of the greatest spend-while-you-can documents in American history.”

POTUS’ budget wish list once again included the repeal of the Last-In, First-Out (LIFO) inventory valuation method, an apparently obscure accounting change with major implications for the public pharmaceutical wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK).

There is no legitimate business reason to repeal LIFO, so recognize that this proposal is nothing more than a $59 billion attempted cash grab by the government. Nevertheless, I suggest adding the topic to your list of low-probability/high-impact events that could alter the drug wholesaling industry and trigger a restructuring of fee-for-service agreements between pharmaceutical manufacturers and wholesalers.

Won’t get FULed again

List-price based reimbursement took another hit last week in the long-running multi-district litigation concerning allegedly inflated list prices such as Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC). The ruling disclosed truly eye-popping (50,000%+) spreads between pharmacy acquisition costs and the published list prices for generic drugs.

Once again, we learn just how flawed Medicaid’s existing Federal Upper Limit (FUL) computations have been for pharmacy reimbursement. The evidence of generic mega-spreads at retail pharmacies also provides a counterpoint to pharmacy owner complaints about Maximum Allowable Cost (MAC) programs and the redefinition of Medicaid’s Federal Upper Limit (FUL).

My Macroeconomic Outlook for 2010

And now for something completely different.

You can download my new free report called the 2010 Economic Outlook For Wholesale Distributors, courtesy of IBM. You will have register on the IBM site to download the report.

Fair warning: This report is not about the pharmaceutical industry or about drug wholesalers. In this report, I explain today's macroeconomic dynamics and provide forecasts for major distribution sectors. I also examine employment, channel inventory levels, consumer spending, and the outlook for markets such as construction and industrial manufacturing.

Allow me to explain...

Drug Wholesaler Earnings Preview: 2009Q4

This week, the big 3 drug wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK)—will all report their financial results from the fourth calendar quarter of 2009. These financial reports and accompanying conference calls provide invaluable insights into the strategies and economics of companies within U.S. drug channels.

Below are my thoughts on general business issues that you should listen for in these reports. As a service to Drug Channels readers, I am also including links to the earnings conference call webcasts for each company. If you don’t have time to listen to the calls, free transcripts show up on Seeking Alpha within a few days.

Stay tuned in early February for my new report reviewing each company’s financial and business results for the quarter.

Fixing AMP: A Post-Brown Analysis

AMPs on the ground
AMPs on the ground
Lookin’ like a fool with your AMPs on the ground…

Average Manufacturer Price (AMP) may not be on the ground yet, but it certainly won’t be on the floor of the House or Senate anytime soon. Senator-elect Scott Brown’s surprise win has cast serious doubt on the current health care reform effort.

So, what’s next? I think the pharmacy associations will keep on fighting because they have invested too much political capital on the AMP issue. So, an AMP fix will move forward somehow, with the pharmacy lobby successfully redefining AMP, increasing the mark-up, and perhaps also blocking publication of AMP data.

Nonetheless, marketplace changes and state Medicaid programs actions have made the fix much less important to the pharmacy industry than many people believe, as a just-released OIG study confirms. The latest evidence even suggests that AMP-based FULs are comparable to Part D MAC lists, suggesting overly generous Medicaid reimbursements remain. Facts sure are stubborn things, aren't they?

Health Reform & the PBM Industry

I am pleased to welcome our second sponsor—PCMA’s industry relations web briefing on “Health Reform & the PBM Industry.” This live, online event will be held on Thursday, February 11, 2010, at 2:00 PM EST.

The Pharmaceutical Care Management Association (PCMA) is the national association representing America’s pharmacy benefit managers (PBMs), so this event will be a good opportunity to get a timely update directly from the folks involved in Washington. I have speculated that healthcare reform will be generally positive for PBMs. See Healthcare Reform: Bullish for PBMs, but Not Pharmacies.

Drug Channels News Roundup: January 2010

Time once again for my semi-regular round up of intriguing and noteworthy news stories from the Drug Channels universe.

This edition features AmerisourceBergen’s expanded generic program, Walgreens latest battle with Washington state, good legal news for pharmacies, and advice for savvy prescription shoppers.

Enjoy!

Colbert Takes on Cephalon’s Nuvigil

In this brief video clip, Dr. Stephen T. Colbert discusses alternatives to Cephalon’s (NASDAQ: CEPH) Nuvigil, including potential competitor VaxaStare from Prescott Pharmaceuticals. Funny.

Prescott Pharmaceuticals stands by its Hippocratic Oath: First, do no harm. Second, get a good lawyer.

Drug Forecasts: Oops!...They Missed It Again

The boffins at the Centers for Medicare & Medicaid Services (CMS) just released their annual computations of National Health Expenditures (NHE), including the latest figures for prescription drugs.

Two notable highlights that I haven't seen mentioned elsewhere:

• CMS’ projections for the growth of drug spending have been much, much higher than actual growth rates—even for forecasts made only two years ago. As someone who makes his living from the crystal ball, I understand that sometimes you need to eat broken glass. But the disparity is quite striking and so far unexplained by CMS.
  
  
• The data confirm last year’s projection that Federal and state governments are becoming the primary payers of outpatient prescriptions. A major downside to this government takeover is the risk that budget pressures could encourage the government to dictate or mandate lower payment levels for pharmacies. Be careful what you wish for, health reform fans!

Buh-Bye, Byron!

Senator Byron Dorgan (D-ND) just announced that he will not seek re-election. Read his official statement. Today's Wall Street Journal reports Health-Care Views Hurt Dorgan's Bid. I guess the drug importation thing wasn't so good for your political career after all.

Good luck in retirement, Byron! Our country will be safer without your fanatical pursuit of dangerous legislation.

I presume that Dorgan’s retirement will lower the threat of importation legislation—at least until another zealot takes up the cause. Ominously, the White House recently signaled continuing support for importation, but I think it’s a bluff (for now).