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.

Close call...for now

Senate Blocks Bid to Allow Drug Imports, reports the Washington Post this evening.

"On a 49-40 vote, the Senate required the administration to certify the safety and effectiveness of imported drugs before they can be imported, a requirement that officials have said they cannot meet."

Well done, Senator Cochran.

But it's not time to relax yet. To paraphrase Dennis Miller, importation has been declared dead more times than a narcoleptic Jason Voorhees. So expect to see this political crowd-pleaser resurrect itself in time to lurch around Washington during the '08 elections.

Consistent Inconsistency

Oscar Wilde once said: “We are never more true to ourselves than when we are inconsistent.” By that rule, Senator Byron Dorgan (D-ND) is a man of rare self-awareness.

As you know, Senator Dorgan has been pushing open borders for prescription drugs. He successfully tacked his importation legislation onto the Senate’s drug safety bill last week. (See Importation Acceleration.)

So let’s play fill-in-the blanks. Here’s an actual quote from the Senator’s own May 3, 2007, press release regarding Country of Origin Labeling (COOL):

“Consumers have the right to know where their [product] is coming from, and to make their own decision - fully informed decisions - about whether they want to be [consuming products from country], under the current circumstances.”

Product
(a) meat
(b) drugs

Consuming products from country
(a) putting beef from Canada on their table
(b) swallowing drugs diverted from Bulgaria, which is #84 on the Corruption Perceptions Index

Alas, the correct answer is (a).

May I humbly suggest the following magnet for the Senator's fridge?

Importation Acceleration

Importation may be here sooner than I expected.

LEGAL MOVES

Senator Dorgan, who wants to save us from beef imports but open our borders to counterfeiters, tacked S.242 Pharmaceutical Market Access and Drug Safety Act of 2007 onto the Senate’s drug safety bill.

And guess what? The Senate voted 63-28 to allow the newly revised bill to proceed! (See Senate OKs Reimportation, Safety Delayed from Ed at Pharmalot.) A full vote is likely next week. The Washington Post claims that the Senate is likely to back drug reimportation.

The dangers of importation are well known to anyone familiar with our convoluted system of drug distribution. Plus, importation won’t even save much money although it will add significant safety risks for patients. But the unfortunate political reality is that 80% of U.S. adults support importation along with all three Presidential candidates from the Senate (McCain, Clinton, and Obama).

CHANNEL IMPACTS

The proposed importation bill (S.242) explicitly limits the way a manufacturer can structure its distribution agreements. A manufacturer may have little choice about whether it does business with secondary wholesalers that are known US importers or non-US exporters, regardless of ADR status.

I believe that importation legislation will also create a viable profit stream for wholesalers from parallel trade. These new profits will not be directly controlled by manufacturers, creating a new degree of independence from manufacturer-led fees/discounts for U.S. wholesalers - and potentially more channel conflict.

And if you read the fine print (I did!), the legislation contains significant pedigree and track-and-trace requirements. Hmm, I wonder what magic bullet technology Dorgan will consider?

More to come as the debate heats up next week...

P.S. Yep, that's me as a kid in the photo at the top of the post!