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.

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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.

Maintenance Choice Update: CVS Gain, Caremark Same

A key theme in my Pharmacy Industry Economic Report and Outlook is the trend toward more restrictive preferred pharmacy networks. CVS Caremark’s (NYSE:CVS) Maintenance Choice program is an example. A consumer can obtain maintenance medications and choose the channel—brick-and-mortar pharmacy or mail pharmacy—but must use either a CVS retail pharmacy or a Caremark mail-order pharmacy.

On Monday, we learned Maintenance Choice is growing rapidly as a benefit design option, demonstrating that payers are willing to accept more restricted pharmacy networks in exchange for savings and control. The Caterpillar-Walgreens-Walmart arrangement provides another compelling data point. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network. The outcome for the pharmacy industry will be more rapid consolidation, especially as these programs increase market share for the “preferred” providers of pharmacy services.

At the same time, I still wonder if Maintenance Choice provides enough competitive differentiation to help Caremark win new Pharmacy Benefit Manager (PBM) business. See Per Lofberg's comments on this point at the bottom of this post.

As always, Pembroke Consulting retainer clients and Gerson Lehrman Group clients can schedule phone calls with me for additional comments beyond what I discuss in this post.

CMS' New Drug Spending Projections

“Prediction is very difficult, especially if it's about the future.” Niels Bohr

The economists at the Centers for Medicare & Medicaid Services (CMS) just released their 2010 projections for U.S. National Health Expenditures (NHE). Here are two key observations about the prescription drug numbers.

• The Government Pays More, Starting Now—Public funds continue to crowd out private payers. CMS now projects that private insurance and public funds will each pay 40% of retail drug spending in 2010. By 2019, public funds will be almost half of outpatient retail prescription spending.
  
  
• Drug Spending Will Look Higher Next Year—Using the stated CMS methodology, I estimate the National Health Expenditure (NHE) data series currently understate actual prescription sales by about $18.5 billion (~8%). Therefore, prescription drug's share of overall health care spending is also underestimated by a full percentage point. Expect an upward revision in headline prescription drug spending in next year’s NHE data. Remember, you read it here first!

Make it to the bottom of the post and you will also be rewarded with a health economics knock knock joke.

Obama's Budget and Wholesaler Inventories

President Obama submitted his fiscal year 2011 budget this week. The Wall Street Journal calls it “one of the greatest spend-while-you-can documents in American history.”

POTUS’ budget wish list once again included the repeal of the Last-In, First-Out (LIFO) inventory valuation method, an apparently obscure accounting change with major implications for the public pharmaceutical wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK).

There is no legitimate business reason to repeal LIFO, so recognize that this proposal is nothing more than a $59 billion attempted cash grab by the government. Nevertheless, I suggest adding the topic to your list of low-probability/high-impact events that could alter the drug wholesaling industry and trigger a restructuring of fee-for-service agreements between pharmaceutical manufacturers and wholesalers.

Won’t get FULed again

List-price based reimbursement took another hit last week in the long-running multi-district litigation concerning allegedly inflated list prices such as Average Wholesale Price (AWP) and Wholesale Acquisition Cost (WAC). The ruling disclosed truly eye-popping (50,000%+) spreads between pharmacy acquisition costs and the published list prices for generic drugs.

Once again, we learn just how flawed Medicaid’s existing Federal Upper Limit (FUL) computations have been for pharmacy reimbursement. The evidence of generic mega-spreads at retail pharmacies also provides a counterpoint to pharmacy owner complaints about Maximum Allowable Cost (MAC) programs and the redefinition of Medicaid’s Federal Upper Limit (FUL).