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.