Pfizer questions RFID

At this year's HDMA DMC meeting, I was pleasantly surprised by how many manufacturers and wholesalers actively read this blog. I got a lot of questions about my RFID posts: RFID Un-Hype and More RFID Un-Hype.

One individual vehemently argued that Pfizer's RFID trial "proves" the viability of RFID technology for the pharmacy supply chain. (Perhaps unsurprisingly, he worked for a technology vendor.)

Therefore, I was especially interested in a just-published interview with John Theriault, Pfizer's vice president of global security. (See Pfizer security exec offers status report on counterfeiting - note that this link is only free for 14 days.) Check out these statements:

• "RFID is a long way from being deployable. It's very expensive and, for it to work, you have to have the technology deployed at every point along the supply chain."
• "As long as repackaging is legal in the United States and actually encouraged in the E.U., whatever anti-tampering or anti-counterfeiting placed on the packaging is lost as soon as it changes hands."
• "The technology solution is not a solution. It's an interesting area to explore, but I don't see it solving the counterfeit problem any time soon."

'nuff said.

States vs. CMS: No One Loses

The Average Manufacturer Price (AMP) issue made it all the way to page A6 in today's Wall Street Journal with States Are Taking Steps To Offset Medicaid Cuts.

The articles provides a concise summary of the legislative issues, highlighting the attempts by States to raise dispensing fees to offset the reimbursement cuts from the Deficit Reduction Act. I highlighted Iowa and Kansas last month in Topping Off AMP.

The article notes that CMS must approve any increases in state dispensing fees. I did not consider this point in my earlier posts, but it makes sense given the Federal government's role in financing and overseeing Medicaid.

So, let's see if I understand the situation. Elected officials in the states can pass laws to increase dispensing fees, earning the votes of pharmacists. But these same officials can then claim that the big bad Federal government will not approve the increases, leaving state budgets intact and reducing the Federal deficit as planned.

No one loses -- except retail pharmacists, of course.

Hmmm...that's quite a cynical thought. Perhaps I'd better stop watching The Daily Show every night.

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Resources

1) CMS publishes a useful summary of reimbursement methodologies and co-pays for each state on its web site. Here is the most recent one: Medicaid Pharmacy Reimbursement by State (Quarter Ending March 2007).

2) I added "Average Manufacturer Price (AMP)" to the topic list on the right hand side of the page so you can easily find previous posts.

Comments on the AWP Decision

Judge Saris issued her ruling on the AWP lawsuit yesterday, finding that AstraZeneca, Schering-Plough, and Bristol-Myers Squibb engaged in deceptive and unfair practices. Read Ed Silverman’s coverage on Pharmalot in Drugmakers Lose AWP Lawsuit (with a great graphic) or in Ruling on Drug Pricing Faults Three Companies from the Wall Street Journal.

The decision, which is written in unexpectedly clear English, is available online here. Here are a few initial observations along with some questions for you to ponder:

Yes, Virginia, reimbursement drives behavior. Read pages 7 to 38 in the Findings of Fact, which succinctly summarizes the origin and usage of AWP (average wholesale price) for outpatient drug treatments. It provides a nice primer on how distributors and (especially) doctors responded to the various incentives within the AWP system. Another childhood illusion shattered.

Don't ignore the pharmacy supply chain's impact on sales. Some pharma executives have argued to me that the pharmacy supply chain -- their outbound distribution channels -- have no impact on sales. As a counterpoint, read about the (presumably discontinued) strategies of manufacturers that “marketed the spread” as a way to grow product revenues. Industry growth is coming from single-source large molecule drugs, so the pharmacy supply chain's incentives will become more (not less) important over the next ten years.

CMS is the government pit bull today. AWP faded away for Medicare Part B when the government switched to an ASP (average sales price) model. Be sure to read Judge Saris’ description of the OIG’s role as “the government pit bull” in pushing CMS -- then called HCFA -- for a change in reimbursement methodology (pages 28-24). Ironically, CMS is more aggressive than OIG today.

Did we save money? Total spending for Part B drugs went down for the first time (ever?) last year and many physicians are getting out of the business. Yet I note that product sales did not decline for the biotech companies with products reimbursed under Part B. Did care shift to inpatient settings? Are patients getting products reimbursed under Part D at a retail pharmacy and “brown bagging” the product to a provider? No one really knows.

Third-party payors were (are?) “stuck” on AWP. Judge Saris chastises third-party payors (TPPs) for not adopting cost-plus reimbursement models. On page 38, she writes that third-party payors “…were not proactive in adjusting to cost data once Medicare did the legwork for them in devising more reasonable drug pricing and service fees. Medicare provided the TPPs with cover, by insulating them from protests by the network of providers.” Note that Judge Saris is also handling the First Databank case that I covered here two weeks ago.

And this makes me ask...

Will TPPs remain "stuck?" On Tuesday, I argued that list minus pricing models will be under pressure throughout the industry, especially as more evidence of large spreads on generic dispensing come to light. Will TPPs be “stuck” on reimbursement models this time, or will they take a more serious look at AMP after this ruling?

An AMP Timeline Appears

In an apparent bid to make my email go crazy this morning, CMS snuck out a revised timeline for Average Manufacturer Price (AMP) last night. (Click here to see the email that was sent last night.) Dinah Brin at Dow Jones provides a broader overview in Pharmacies Get Reprieve On Medicaid Drug-Pricing Change.

Here are the key dates:

• July 2, 2007: Final regulation published (as I predicted last month)
• September 1, 2007: Regulation becomes effective
• September 1-30 2007: First monthly AMP reporting period
• October 30, 2007: Manufacturers report September AMPs
• November 30, 2007: FULs (Federal Upper Limits) published based on September AMPs. Manufacturers report October AMPs
• December 30, 2007: FULs based on September AMPs take effect (after 30 day period for states to implement). Manufacturers report November AMPs. FULs published on October AMPs.
• January 30, 2008: Manufacturers report October – December AMPs. Manufacturers report December AMPs. October FULs take effect.

SHORT-TERM EFFECTS

In the short term, independent pharmacies will be hit hardest by AMP. Today, they subsidize brand dispensing with generics and are the most dependent on Medicaid.

Wholesalers will only feel second-order effects from the impact on independents, especially as some of their most profitable customers start shutting their doors.

PBMs are mostly insulated from any near-term effects because they have relatively little Medicaid exposure.

Any public data on AMP will merely provide incremental transparency into the PBM profit model. As I discussed in November, PBM’s success reflects many individual business decisions by payers and insurers. There are myriad ways for payers and insurers to compensate PBMs beyond allowing superior profits on mail-dispensed generic prescriptions.

Manufacturers will have to do a lot more work for price reporting. (Contract management software companies and IT consultants are dancing a jig over AMP, by the way.)

LONGER TERM EFFECTS

The definition and publication of AMP will not magically change the pharmacy supply chain. But over the next few years, the true impact of AMP will become clear in a few predictable ways.

• List minus pricing models, such as AWP-x%, will continue to be under tremendous pressure among private payers. Government reimbursement for pharmaceuticals is migrating toward methods that use actual transaction prices plus a pharmacy supply chain cost factor. Cost-plus models are certainly not perfect and can warp incentives, but they do allow payers to gain better control over the costs of the pharmacy supply chain. In health care, private payors have historically followed government pricing models.
• It will begin shifting the landscape as savvy entrepreneurs take advantage of new compensation models, potentially arbitraging differences between AMP and ASP.
• Retail pharmacy consolidation will accelerate. The shakeout in pharmacy will benefit the large pharmacy chains and mass merchants. Today, I estimate that the largest 10 pharmacies already control 60% of retail pharmacy dollars.
• Manufacturers will pay much more attention to the proper accounting of fees and discounts, affecting the role and compensation of wholesalers. Almost two years ago, I speculated that AMP could increase incentives for manufacturers to contract directly with large self-warehousing chains. Still could happen, with follow-on effects for wholesaler market structure.
• A related wild card is the Supreme Court’s upcoming decision in Leegin Creative Leather Products, Inc. v. PSKS, Inc. If overturned, manufacturers would be able to better control their reported AMP by legally limiting the amount of fees or discount passed on by wholesalers to their large retail chain customers.

And who knows? AMP may even reduce the total cost of pharmaceuticals in the U.S. – but I doubt it.

Lots more to consider, but I must start returning phone calls and emails.

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Thanks to Ed Silverman at the always-informative Pharmalot for writing about yesterday's post on the OIG report.

OIG's AMP Smackdown

Fans of the AMP battle (hey, who isn’t?) will surely want to read the OIG's just-released report Deficit Reduction Act of 2005: Impact on the Medicaid Federal Upper Limit Program. Hard for a guy like me to resist a report with such a captivating title!

Table 1 (page 9) will show you why the DRA was passed. For example, the average pharmacy acquisition cost for Lorazepam was 4 cents per tablet. Reimbursement to the pharmacy at the Federal Upper Limit (FUL) in the second quarter of 2006 was 57 cents – a mere (!) 13X mark-up. In case you didn’t know, there were 20 million Lorazepam prescriptions written in 2006, making it the 19th most prescribed generic drug in 2006.

As expected, OIG found that FUL amounts will decrease sharply under the new calculation method, in some cases dipping below acquisition cost. The new FUL amount for Lorazepam will drop to 3.3 cents, giving the pharmacy a gross margin of negative 21% (versus +93% under the old calculations). That’s gotta hurt!

CMS issued an unusually long rebuttal (attached to the OIG report), correctly pointing out that OIG should wait until the final regulations come out before running these numbers. Returning to the Lorazepam example, CMS estimates that the FUL in February 2007 is 6 cents, which provides a pharmacy with a gross margin of 33%.

Even so, a 30 day supply will only yield 60 cents of profit to a retail pharmacy. Hence, states may undo DRA savings by topping off AMP.

What’s Next?

No matter how you slice the data, the new rules for Medicaid's generic drug reimbursement will reduce pharmacy profits and change the distribution policies for manufacturers. Higher generic profits have encouraged everyone in the pharmacy supply chain to accelerate generic substitution. Will attacking inflated profits on generics start to tilt the balance back to branded manufacturers? Perhaps we should be careful what we wish for.

From what I hear, the AMP rule is currently being reviewed at the OMB. All signs indicate a release on or before July 1. Two big issues to watch: (1) the treatment of PBM rebates and (2) whether mail order is part of the retail class of trade. I personally predict that AMP will exclude PBM Rebates due to political pressure.

But much like the Sopranos so-called finale last week, I think we should all prepare for a definition of AMP that satisfies no one. Frankly, CMS will probably just

(cue Steve Perry and pass the onion rings)

Creative Destruction in the Pharmacy Supply Chain

In case you missed it, the First Databank AWP case continues to move forward.
The Wall Street Journal reports that "U.S. District Judge Patti B. Saris gave preliminary approval to the recently amended agreement between plaintiffs and First Databank, and scheduled a fairness hearing on a final settlement for Nov. 14." (See Settlement May Cut Drug Prices.)

This lawsuit really signals the beginning of the end for List Minus pricing models, such as AWP-x%. Government reimbursement for pharmaceuticals is migrating toward methods that use actual transaction prices, such as the Average Manufacturer Price (AMP) benchmark being established by CMS for Medicaid or the Average Sales Price (ASP) model used in Medicare Part B. I think private payers will follow.

But don't be gloomy -- the end of AWP also marks the start of new period of entrepreneurial activity in the pharmacy supply chain.

Ain’t What’s Saved

When this situation first came to light last October, pharma industry critic Barbara Martinez crowed on the front page of the Wall Street Journal that the settlement "...could reduce annual drug costs by billions of dollars." Actually, the estimate was $4 billion in savings.

Hmm, $4 billion sounds like a lot, right? After all, it's more than half of the $7.7 billion that Stephen Schwarzman will personally collect from Blackstone's upcoming IPO. (No, I'm not jealous. Having a mortgage is fun!)

In reality, these "savings" will be hard to find. Fans of expert reports (yours truly) should read Impact and Cost Savings of the First DataBank Settlement Agreement, which describes the assumptions behind the headline. Pay particular attention to footnote 19 on page 6, which provides Dr. Hartman’s reasons for believing that market participants will not be able to easily reverse the effect of the settlement with renegotiations.

Alas, a one-time adjustment to AWP will have a limited real-world impact because contracts can be renegotiated or adjusted to preserve the original dollar-cost economic arrangements. Those of us in the pharma industry know that AWP (Average Wholesale Price) is a published price sometimes called "Ain't What's Paid." Now everyone else does, too.

In fact, most PBMs and retail pharmacies publicly state that the impact will be minimal. For example, CVS' most recent 10-K states that over 90% of Caremark's client relationships and retail contracts have terms that will limit the fall-out. Plus, many contracts are based on WAC (wholesale acquisition cost), a published price that is not affected by the proposed settlement.

New Payments = New Models

An “average price plus” model does not claim to measure actual pharmacy or provider acquisition costs for drugs. Instead, these models use actual manufacturer transaction prices plus a drug channel cost factor.

We know that reimbursement drives dispensing and prescribing behavior. But reimbursement also creates new opportunities for savvy entrepreneurs, especially those who realize that drug cost is only a portion of the cost of therapy. The gales of creative destruction will blow harder as private payers also migrate to AMP-based pharmacy reimbursement.

So as we bid a farewell to AWPs, read New 'Infusion Clinics' for Cheaper, Easier Biologics Delivery from Pharmaceutical Executive magazine and ponder your future strategies for contracts, sales, pedigree, dispensing, etc.

Attack on the Big Three

Russ Britt, LA Bureau Chief for MarketWatch, has just published a fascinating series of articles on drug wholesalers. These are "must read" articles if you want to anticipate key forces shaping the future wholesale channel. Here are the links:

Growing share of 'Big Three' gets federal attention (Main Story)

Big drug wholesalers may get bigger, with FDA help

Wholesalers' trade group loses half its members

Spitzer pact could expand Big Three's market clout

A plethora of purchases in wholesalers' history

I commend Russ for his thorough look at a wide range of issues facing the wholesale drug channel. He clearly did a lot of research and spent time trying to understand the real issues. He also was kind enough to include my comments in the main story. (Thanks, Russ!)

Conflict in the channel

The articles accurately portray the channel conflict that I predicted in October. Nevertheless, Russ paints a surprisingly favorable portrait of the secondary wholesale market, based in part on ample quotes from familiar companies such as RxUSA and QK Healthcare. (‘nuff said.)

Given the checkered history of secondary wholesalers (especially in Florida), honest secondary wholesalers should expect additional scrutiny and be willing to clearly and unequivocally demonstrate how they differ from the unsavory wholesalers that traffic in potentially counterfeit product. Smaller wholesalers seem strangely bothered by this idea.

I was quite puzzled by many other statements, too. For example, the articles imply that the FDA wants to help the Big Three at the expense of smaller wholesalers, although I find this notion a bit far-fetched based on my own research. Sentences such as “the average price of a prescription drug has nearly tripled since 1990, as the number of major wholesalers has dropped” imply a cause-and-effect relationship at odds with the historical evidence.

Three Clarifications

I want to clarify three factual points from the main story.

1. “[D]rugmakers prefer to deal with the Big Three.” More accurately, manufacturers prefer to deal with a relatively small number of customers. Contrary to popular belief, most pharma companies have many authorized distributors beyond the big 3. The largest eight manufacturers had an average of 79 authorized distributors prior to the PDMA injunction on December 1. Like manufacturers in other industries, drug makers can and do legitimately limit the number of intermediaries that are authorized to sell their products. (See The Impact of the PDMA Injunction for more.)

2. “Anecdotal evidence suggests these wholesalers could add as much as 25% to the price of drugs.” False. The big 3 added $6.4 billion (2.3%) to 2006’s total prescription drug spending of $275 billion. This figure represents the total wholesaler gross profit (mark-up), computed using wholesaler gross margins for drug distribution (about 3%) on $213 billion in total big 3 drug revenues.

3. “Recent efforts to quash the reimportation of drugs probably have strengthened the position of the Big Three.” Not necessarily. Widespread importation would give secondary wholesalers access to products and, under S.242, the legitimacy of FDA registration. Pharmacy customers will likely embrace importers as a legitimate source of supply. Don’t forget that wholesalers are the prime beneficiaries of parallel trade in Europe. The big 3 will then face a tough strategic choice: If they remain loyal to suppliers and refuse to import, then they will be at a competitive disadvantage and will lose market share. I note that the HDMA officially opposes importation.

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Regular readers of my blog know that I often put forth strong opinions on the business practices and strategies of the big 3 wholesalers. However, I must refrain from posting any further public comments on these stories.

I’ll be at the HDMA DMC meeting in Boston starting on June 11. If you see me there, I’d be happy to share some further thoughts.

Hillary, AMP, and the Supply Chain

Why do I spend so much time writing about pharmacy reimbursement using Average Manufacturer Price (AMP)? After all, it deals primarily with Medicaid, which now accounts for less than 10% of drug spending.

Here’s why: The outcome of the AMP debate will reshape marketing and distribution policies for both brand and generic manufacturers, while also changing business models within the pharmacy supply chain. The political environment also looks increasingly unfavorable for the pharma industry, judging by Senator Clinton’s (D-NY) recent speech on health care costs.

Reimbursement drives behavior

A core premise of my research and consulting is that reimbursement drives behavior in the pharmacy supply chain – the network of providers, pharmacies, wholesalers, and PBMs that sit between drug makers and patients.

Need proof? Read Some Doctors Quit Injecting Drugs Over Costs from last week’s Wall Street Journal. The article describes how many small physician offices are “…getting out of the business of administering drugs for conditions ranging from anemia and cancer to arthritis and infections, forcing hundreds of thousands of patients to get the drugs elsewhere. It is an unintended consequence of a change in the way Medicare reimburses doctors for a class of drugs that are most often injected or infused.”

In other words, the Average Sales Price plus 6% methodology adopted by Medicare Part B is changing behavior at small providers. As I have pointed out many times before, average price methodologies expose cross-subsidies within the pharmacy supply chain.

AMP will drive behavior

The Deficit Reduction Act (DRA) will trigger even more dramatic changes. Jill Weschler at Pharmaceutical Executive provides a nice summary of the key issues in Medicaid Sets the Pace for Pharma Pricing. A few key points:

• “CMS proposes that AMP calculations specifically include discounts to Medicare Part D plans, PBMs, mail-order pharmacies, state pharmacy-assistance plans, and several other entities. PBMs are up in arms because manufacturers would have little incentive to grant them discounts if it means reducing prices for everyone.” (I personally predict that AMP will exclude PBM Rebates due to political pressure.)
• “While pharmacists don't like the AMP revisions, they are most upset about rule changes that would lower Medicaid reimbursement for generic drugs significantly.” (Very true, although many states are blunting the impact by topping off AMP.)
• “…CMS plan to publicly disclose AMP data, which the agency collects from manufacturers but previously kept confidential.”
• Rebates paid by manufacturers have declined as patients switched from Medicaid to Part D. (See “Duals create policy duel” pop-up box.)

Last June, I made a number of predictions regarding the impact of AMP. These predictions still appear relevant one year later.

Reimbursement is also a club

Don’t forget that reimbursement can also be used as a club to punish drug manufacturers and the pharmacy supply chain that supports them. IMHO, the political heat around spending will make reimbursement structure even more important to commercial strategy. Is it good to force small providers out of the infusion business? I’m not sure, but I doubt the issue will get a fair hearing in today’s political climate.

Just take a look at Senator Clinton’s (D-NY) recent speech on health care costs. She highlighted prescription drugs as a major contributor to health care costs. This scores political points regardless of the evidence, such as the fact that total U.S. spending on prescription drugs is roughly the same as the additional health care costs incurred because obesity levels have doubled in the past twenty years.

Too bad that “More drugs -- Fewer Twinkies” is not a viable campaign platform.

AMP will exclude PBM Rebates

The treatment of PBM rebates is one of the most contentious issues in the calculation and reporting of Average Manufacturer Price (AMP).

IMHO, the political winds are now signaling that CMS will modify AMP to exclude PBM rebates. This change will neutralize a key concern of the 3000+ highly critical comments received by CMS in response to its proposed rule.

For non-AMP geeks, PBM rebates, discounts, or other price concessions provided by manufacturers will be included in the calculation of AMP under CMS’ proposed rules. Obviously, this will lower the computed AMP. Critics of CMS’ proposal -- basically everybody -- argue that these rebates do not get passed on to retail pharmacies, so that AMP will end up being an inaccurate (and artificially low) indicator of ingredient acquisition cost for a retail pharmacy.

Last week, Senator Grassley (R-IA), the Ranking Republican on the Senate Finance committee, wrote a letter to Leslie Norwalk, the current administrator of CMS. Note that Grassley is from one of the two states that have proposed topping off AMP to pharmacies.

Here is the key paragraph from Senator’s Grassley’s letter:
“For the final rule to remain consistent with congressional intent, CMS should remove PBM rebates from the calculation of the Average Manufacturer Price. Congress devoted significant time and energy to creating a reimbursement for pharmaceuticals in Medicaid reflective of actual acquisition costs. CMS should use the same standard in implementing the law. Inclusion of PBM rebates is not consistent with that standard and I urge you to act accordingly.” (emphasis added)

The wording "congressional intent” is very significant. CMS’ proposed rule states: “[H]owever, in light of our understanding of congressional intent, we believe that the definition is meant to capture discounts and other price adjustments, regardless of whether such discounts or adjustments are provided directly or indirectly by the manufacturer.” (emphasis added) Thus, Grassley’s letter is an important and unambiguous signal to CMS.

When the facts change, I change my mind. After some off-the-record conversations last week, I now believe that July 1 will be the actual implementation date, in contrast to my comments a few weeks ago. Don't worry -- I'll be sure to remind you if my prediction is accurate.

The Anti-RFID Amendment

My good friend Senator Byron Dorgan tacked S.242 Pharmaceutical Market Access and Drug Safety Act of 2007 onto the Senate’s reauthorization of the drug safety bill. Fortunately, an amendment inserted by Senator Cochran neutralized the importation aspect.

In an interesting twist, the RFID Law Blog reports that the Senate’s reauthorization of the PDUFA also includes another amendment that specifically excludes anti-counterfeiting technologies such as RFID or barcodes. According to US Senate Passes Amendment That Bypasses RFID on Pharmaceuticals:

“Buried in the legislation was a provision -- posted earlier on this blog site -- authored by Senator Judd Gregg of New Hampshire, that would require Internet pharmacies selling to US citizens to use tracking technology to minimize the risk of counterfeiting. An amendment to that language, offered by Senator Michael Enzi of Wyoming, legislates a specific technology solution - and it's not RFID. Indeed, it specifically excludes anti-counterfeiting technologies like RFID or barcodes that require readers, scanners or other devices to verify authenticity -- replacing the FDA's preferred tools with anti-counterfeiting technologies akin to those used on US currency.”

Personally, I don’t see how this would anything because it sounds like nothing more than package design security, which has not been a big barrier to counterfeiters. It also becomes irrelevant when products are repackaged or packaging is altered, a persistent concern of Pfizer about parallel trade.

Such a solution also “solves” the authentication challenge facing all anti-counterfeiting system by simply eliminating the need for authentication and serialization.

Whatever -- sounds like I should spend more time in Washington. In the meantime, check out the many comments on RFID Un-Hype. Very lively debate!

Topping Off AMP

Drug Store News is reporting that Iowa and Kansas are restoring some payments to pharmacies that will lose reimbursement dollars when the new Average Manufacturer Price (AMP) system is finally implemented.

Expect more state-level action over the next few months. I am also skeptical that the July 1 implementation for AMP will actually happen, especially with a new leader at CMS.

By way of background, the new AMP methodology will reduce pharmacy profits by capping reimbursement for dispensing generic drugs. Keep in mind that this solution was endorsed by the Medicaid Commission in 2005 to control state spending, especially in light of data that filling a generic Medicaid prescription earned a pharmacy $18.30 more per script. The practical outcome will be trouble for independent pharmacies and the wholesalers that supply them.

The moves by Iowa and Kansa are especially notable since both states have a relatively high number of retail prescriptions per capita. (Source: www.statehealthfacts.org):

Retail Prescription Drugs Filled at Pharmacies per Capita in 2005
U.S. Average = 10.8
Iowa = 13.9 (#8)
Kansas = 12.3 (#14)

Independent pharmacies have done an impressive job lobbying to slow or modify CMS’ implementation of the Deficit Reduction Act. They have superior PR, solid grassroots organizing, and are BOILING MAD. Just consider that CMS received an unprecedented 3,000 responses to its Dec. 22 Proposed Rule. At least two-thirds of the responses came from individual pharmacists. Browse this set of comments to feel the outrage -- Comment #7 (p. 11) is particularly good!

Every major company and trade association also wrote to CMS with viewpoints – a mere 120 MB of reading material. You can peruse all of the comments yourself on the CMS site: Electronic Comments on CMS-2238-P. If the link doesn't work, go to CMS' main electronic comments page and search for Docket ID CMS-2238-P.

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P.S. Today's Wall Street Journal reports that bloggers are getting loads of free stuff -- called "blogola" -- from TV networks looking for favorable publicity. If you feel like emulating CBS, please send any appropriate blogola -- RFID chips, unexpired drug samples, pharmacy automation equipment, etc. -- to my office address. Thanks!

More RFID Un-Hype

Wow! I just read a truly thought-provoking and powerful article about RFID – in CIO magazine, no less! Think of it as a counterpart to RFID Un-Hype from last month.

Read it here:
RFID as an Answer to Pharmaceutical Drug Counterfeiting

Sarah Scalet, a senior editor at CSO (a sister publication to CIO magazine), took the time to analyze how RFID technology might actually be used in the pharmaceutical industry. In other words, she ignores trivial technology battles over transmission standards and read rates in favor of objectivity and skepticism -- hallmarks of top-notch journalism.

Here is a quick summary of the five myths she exposes about RFID along with some of my own editorial commentary.

Myth 1: RFID tags are anti-counterfeiting devices.
Nope, they are inventory control devices. The most effective applications to date have been inside individual companies. One typical review article from Supply Chain Management Review notes "...retail efforts focus on backroom inventory-management practices at the case/pallet tagging level." To date, Wal-Mart has used RFID most successfully for reducing stock-outs.

Myth 2: RFID technology is necessary to track the movement of drugs.
Not true. The key to supply chain is authentication at the point of dispensing, which can be done using older technology such as 2D bar codes. Demand-side problems will limit authentication, a topic I will explore in more depth in an upcoming post.

Myth 3: RFID technology can be used to mark pills, tablets, and elixirs themselves.
Again, not true. At the Pharmaceutical Supply Chain Security conference, I heard an executive from Nanoink describe how they can encrypt individual pills and tablets using nanotechnology. Very cool! Of course, this technology still has the exact same authentication challenges facing every labeling/packaging/tagging solution, including RFID.

Myth 4: RFID technology will let consumers verify that they have purchased legitimate products.
Not even close to reality for many, many years, if ever. Besides, 1 out of 9 U.S. adults has ordered drugs from another country to save money, so at least some consumers do not actually care about validation.

Myth 5: The pharmaceutical industry is this close to widespread adoption.
As I pointed out in January, Senator Dorgan would dearly love for everyone to believe this myth so that he can ram through import legislation. But alas, it's also not really true, despite the fervent hopes and occasional misrepresentations of RFID technology vendors.

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Unfortunately, articles like this one need to be written because there is still so much misinformation being put forth. Last month, I received an email from a leading industry publication with these (verbatim) statements, each of which is inaccurate and/or untrue:

• “Like other CPG producers, pharmaceutical manufacturers must meet retail or government mandates for RFID tagging at the pallet and case levels.” [Opening paragraph in email]
• “The U.S. Food and Drug Administration is actively promoting the use of RFID to improve the safety and security of the drug supply.” [vendor statement]
• “Fight Phonies: Send Counterfeits and Generics to The Jailhouse With [vendor’s name] RFID” [vendor headline]

I have heard many journalists quote Finley Peter Dunne, who said: "The business of a newspaper is to comfort the afflicted and afflict the comfortable." Ms. Scalet's article will make you uncomfortable, but in a good way. Well done!

P.S. CIO has enlisted the help of the always enlightening Jayne Juvan of Juvan's Health Law Update blog to help answer questions about the legal requirements behind RFID and e-pedigree. Another nice touch by CIO.