A Video Metaphor for the U.S. Health Care System?

Full disclosure: You won't actually learn anything about public policy from OK Go's "This Too Shall Pass" video. But it's the coolest Rube Goldberg machine that I've seen in a long time and made me smile on a rainy Friday in Philadelphia.

Enjoy!

Walgreen’s PBM Bypass Strategy

On Tuesday, Veronica Dagher at Dow Jones broke the story that Delta Air Lines Inc. (DAL) is talking with Walgreen Co. (NYSE:WAG) about a new direct-to-payer arrangement. See Walgreen, Delta In Talks Over Prescription Drug Plan. Such a deal would provide more momentum for cost-plus arrangements a la Caterpillar (NYSE:CAT)/Walmart (NYSE:WMT)/Walgreen.

A WAG-DAL arrangement signals a possible longer-term disintermediation threat to the Pharmacy Benefit Manager (PBM) business model in the large employer market. Walgreens has built the deepest, broadest multi-channel platform for pharmaceutical distribution and has an especially strong position for specialty drugs. An employer doesn’t need an intermediary (PBM) to assemble and manage a network that only has a single pharmacy provider. Notably, Walgreen recently restructured “to offer integrated ‘Pharmacy, Health and Wellness Solutions’ to employers, managed care organizations, pharmacy benefit managers and government clients.” (source)

A couple of years ago, Walmart was the first-mover bogeyman who was going to blow up the PBM industry. But Walmart is playing a much narrower game and may find itself poorly matched against Walgreens broader set of channel assets. The lack of new deals from Walmart makes me wonder they are having trouble closing deals for Employer Solutions, their name for direct-to-payer contracts.

Expect more disruptive moves as the drug channel ecosystem rearranges itself.

Pharmacy Profits and the Uninsured

The New York Public Interest Research Group just released A Bitter Pill, their latest annual review of retail pharmacy prices throughout New York state. The data shed light on our health care system's unfortunate “soak the poor” model, which provides 4X profits for pharmacies from consumers lacking insurance coverage.

As I show below, a retail pharmacy’s usual and customary list prices to the uninsured far exceed the reimbursement levels received from third-party payers. When President Obama was in Philly yesterday bashing insurance companies, he forgot to mention that the uninsured cash-pay customer must pay list price for a prescription while those of us with insurance pay the least.

The extreme vitriol aimed at PBMs by independent pharmacy owners makes sense once you see my pharmacy profit math example below. It’s also a downside of health care reform for pharmacies—fewer uninsured consumers would depress pharmacy margins.

Someday, Walmart (NYSE:WMT) will finally decide to launch a brand drug retail pharmacy price war over the uninsured consumer, especially if the healthcare reform effort fails. The model below shows that it’s a realistic possibility.

Drug Channels News Roundup: March 2010

It’s National Procrastination Week! (Yes, really.) Here’s the news roundup that I never got around to posting last week.

In this edition, we look at acquisition rumors for a European drug wholesaler, details on how much Duane Reade’s private equity owners made on the deal, and the surprising tax hit for manufacturers when their brands go generic.

Transparent Pricing Benchmarks (sponsor)

I am pleased to welcome a new sponsor to Drug Channels--ChainDrugStore.net’s Transparent Pricing Benchmarks Conference. The conference will be held in Washington DC, on May 26-27, 2010, and moderated by Ben Sasse, PhD, U.S. assistant Secretary of Health and Human Services, 2007-2009, currently Public Policy Faculty Member, LBJ School of Public Affairs, University of Texas.

The conference’s goal: “Identify and discuss the emerging strategies for implementing a transparent prescription drug pricing benchmark and motivate attendees to begin to solve the problem together as an industry.”

Great topic! As you all know, this topic is near and dear to my heart. I’ve written extensively about pricing issues, including the post-AWP fallout, cost-plus network models, the flaws in Federal Upper Limit (FUL) computations, and the challenges of introducing Average Manufacturer Price (AMP).

I’m also impressed by ChainDrugStore.net's policy: “In the spirit of transparency, no sponsorships will be available for this event. All registration fees will go toward covering the costs of the event.” Very cool.

For a complete agenda, including additional speakers and breakout sessions, and to register, please visit http://www.kinsleymeetings.com/ChainDrugStore/index.htm. Below you’ll find a more detailed description from ChainDrugStore.net.

Meet me at PCMA’s PBM Summit

I want to let Drug Channels readers know that I will be attending PCMA’s 2010 PBM Summit on March 15 to 17. Send me an email if you’d like to meet in person.

FYI, I am also planning to attend the NACDS 2010 Pharmacy and Technology Conference in August and the NCPA 112th Annual Convention and Trade Exposition in October, where I will be burned in effigy during the President's address. I will send out similar announcements prior to those meetings.

But first, a little bit more about transparency...

Why do pharmacy owners care about PBM transparency?

I have a legitimate, for-real, I’m-not-being-snarky question:

Why do pharmacy owners care so much about PBM transparency?

Seriously. How precisely would pharmacy owners benefit? The issue has become the cause célèbre for independent pharmacists, but I just can’t see how it would directly lead to more money in their pockets. In fact, we already have transparent Pharmacy Benefit Management (PBM) models—and they don’t look too good for independent pharmacies. Be careful what you wish for!

So, here are a few follow-up questions related to yesterday’s blog post and the many negative reader comments from independent pharmacists.

Pay attention: I am not anti-pharmacy. I’m pro-facts and pro-logic. As always, comments welcome.

The Politics of Pharmacy

“Politics is the art of looking for trouble, finding it, misdiagnosing it, and then misapplying the wrong remedies.”—Groucho Marx

Tomorrow’s the big day—the sure-to-bore Bipartisan Meeting on Health Reform. Anyone expecting the spirit of consensus to burst forth magically from Washington? Nope, me either.

Closer to home, The USA Today recently reported that the health industry's political giving rose 14% in 2009. Apparently, the National Community Pharmacists Association (NCPA) had the biggest jump in giving during the past 2 years. News to me, but not really surprising.

Alas, I fear the NCPA’s success signals a pharmacy marketplace that promises to become much less dynamic. The basis of competition is shifting away from innovation, efficiency and value and towards whichever group can curry favor with legislators and regulators. The stakes keep getting higher as government money crowds out private payers. See CMS' New Drug Spending Projections.

Modern Distribution Management (sponsor)

I am pleased to welcome a new sponsor to Drug Channels—Gale Media's Modern Distribution Management newsletter and web site.

I've known Tom Gale, MDM's publisher and executive editor, for many years. He's one of the most committed, thoughtful guys out there. He has assembled a top-notch staff and built a valuable resource for people running distribution companies.

Fair warning: This publication does *not* focus specifically on health care and will only appeal to a segment of the Drug Channels readership. While I don't personally consult with wholesalers, I believe strongly that everyone in the supply chain benefits from well-managed companies in the channel. That's why you'll see an endorsement from yours truly when you click on the MDM Premium banner.

More details below. Check it out!

What's Next for Rite-Aid

Yesterday’s Walgreen-Duane Reade news sent hearts aflutter on Wall Street about potential deals to come—especially for poor ol’ Rite-Aid. Rite-Aid’s stock was up 6.1% yesterday, while Walgreen’s stock only ticked up 0.3%.

But let’s face facts…Rite-Aid remains the turnaround that never turns around. I don’t think the company is “acquirable” given its debt load, business performance, and lease obligations.

So what happens next? I see two basic options, described in detail below:

• Option 1: Limp into the Future
• Option 2: Get Smaller…Fast

If Rite-Aid can slim down, then the company will become the turnaround that it supposedly wants to be. More importantly, they will make it possible to be acquired by another pharmacy chain or even a mass merchant.

Sounds good, but reality is more likely to remind us of a fifth marriage—the triumph of hope over experience.

Walgreen Grabs Duane Reade: What It Means

Hmmm, wasn’t I just saying something about pharmacy industry consolidation?

This morning, Walgreen (NYSE:WAG) announced its acquisition of Duane Reade, the largest regional pharmacy chain and a dominant player in the New York market. Read the official announcement.

The pharmacy industry is becoming a classic barbell market—many small players, a few big ones, and an ever-decreasing number stuck in the middle. The big get bigger while nimble independents survive in their shadow. The regional chains are trying to play the game of the nationals, but without the infrastructure or bargaining ability versus third-party payers.

The deal also portends another customer loss for AmerisourceBergen (NYSE:ABC), while Cardinal Health (NYSE:CAH) picks up incremental volume but at lower profits.

Pharmacy News Roundup: February 2010

Time for a look at news stories about the pharmacy industry that slipped through the cracks.

In this edition, we take a look at Rite-Aid’s (NYSE:RAD) golden goodbye to Mary Sammons, how independent drugstore owners are trying to “cash in on health care reform" (not my words!), the forthcoming windfall (perhaps) from generics at CVS Caremark (NYSE:CVS) and Walgreen (NYSE:WAG), and Wal-Mart’s (NYSE:WMT) plans for cutting as many as 13,000 of what it somehow has the audacity to refer to as "jobs" from its corporate payroll.