"a brand-new market for Medco to serve”That’s the view on the Senate’s health reform proposal from David Snow, CEO of Medco Health Solutions (NYSE:MHS) as reported yesterday in CEOs Tally Health-Bill Score.
Right now, it looks like healthcare reform will benefit Pharmacy Benefit Managers (PBMs) by expanding coverage. Retail pharmacies would benefit from increased prescription volume but will likely see gross margins drop as the uninsured get the advantage of third-party bargaining power.
The Bullish Case for PBMs
If you believe the CBO’s October 7 analysis of the America’s Healthy Future Act of 2009, then the total non-elderly insured population will grow by 50 million people by 2019. The number of uninsured will drop by 29 million people while the number covered by Medicaid/CHIP will grow by 14 million.
Here’s the breakdown of coverage that I derived from page 14 of CBO’s letter to Senator Baucus. (Click the chart to enlarge it.)
The net effect will be an overall increase in the number of people covered by prescription drug insurance. I assume that most plans sold through health insurance “exchanges” will include some type of drug coverage. (Click here for a helpful overview of the insurance exchange concept from the Kaiser Family Foundation.)Pharmacy Benefit Managers (PBMs) are the likely administrators of these plans, regardless of coverage guidelines or the government’s involvement. This brand-new market won't appear until 2014, which is when the CBO expects the number of uninsured to start dropping significantly.
The Less-Bullish Case for Retail Pharmacies
Prescription drug insurance is a double-edged estoque for retail pharmacies.
The good news for pharmacies is that overall prescription utilization would grow, benefiting brick-and-mortar pharmacies. This is exactly what happened in 2006 when the Medicare Part D benefit was introduced.
At the same time, greater insurance coverage would also depress pharmacy margins. As I show in Exhibit 13 of my new pharmacy report, pharmacies earn much higher margins from uninsured and underinsured individuals, a.k.a. “cash customers.” In contrast, the pooled negotiating power of third-party payers limits the profitability of pharmacy prescriptions for consumers with third-party insurance.
You may not appreciate that this margin decline also occurred when Part D started. Here’s a quote from CVS Caremark’s 2007 10-K filing:
“The Medicare Drug Benefit became effective on January 1, 2006. Since its inception the program has resulted in increased utilization and decreased pharmacy gross margin rates as higher margin business (such as cash and state Medicaid customers) migrated to the new Medicare Part D coverage.”There are other aspects of the proposal that will benefit pharmacies. Everything could change as the proposal gets turned into law. So, my comments only represent the first stage in the coming bullfight.
