Who Pays For Specialty Drugs? (And Why It Matters)

My consulting assignments and speaking engagements increasingly focus on specialty pharmaceuticals—the high-cost drugs for patients who are undergoing intensive therapies for illnesses that are generally chronic, complex, relatively rare, and potentially life-threatening.

In my conversations, I’ve discovered that many people don’t fully appreciate the role of the government as a payer.

As I show below for 10 specialty drugs, Part D and Medicaid are very important payers for specialty drugs covered under a pharmacy benefit. The influence of Part D will grow because the PPACA-mandated closing of the coverage gap (donut hole) will take full effect in 2020 and give patients better coverage for specialty drugs.

Why does this matter?

• Entrepreneurial independent pharmacy owners are acquiring patients who take specialty drugs and rely on Medicare Part D or Medicaid coverage. Any Willing Provider laws require that these pharmacies be permitted into the specialty network of a Part D provider.

• Manufacturers that lack a well-designed channel strategy and use sloppy class-of-trade guidelines will discover that their specialty products are being dispensed from a much broader set of pharmacies than they expected.

PBM and Drug Benefit Trends from PBMI

Last week, I delivered the keynote address at the Pharmacy Benefit Management Institute (PBMI) Drug Benefit conference. The attendees came from health plans, self-funded employers, and PBMs.

Eugene Goldenberg, an analyst at BB&T Capital Markets, was also there and highlighted three themes:

• Drug manufacturer co-payment coupon programs are raising eyebrows across the industry.

• Restricted networks chatter is picking up steam.

• Behavioral economics is going mobile.

I enjoyed his observations, so I’m sharing Eugene’s full comments below. You can add your own thoughts by posting a comment below.

Importation is back? Really?!?

Yes, you read the headline correctly. U.S. Senator Olympia Snowe (R-ME) has just re-re-re-re-re-introduced the misnamed Pharmaceutical Market Access and Drug Safety Act (S.319). It has 18 co-sponsors.

There must be some bizarre advanced political calculus behind this move, because it makes no logical economic or public safety sense. A weak dollar and a high generic dispensing rate imply that even the theoretical financial benefits are minuscule, so the diversion dangers from this bill would never justify the risk. The chart below tells the story.

I don’t see this legislation moving forward, but then again, drug importation has been declared dead more times than an orange parka clad Kenny McCormick. So here’s a brief review of the economic and safety issues. You can also revisit previous Drug Channels articles tagged with Importation.

California Medi-Cal Joins the Cost-Plus Revolution

Ladies and gentlemen, the third horseman of the AAC-pocalypse has arrived!

California Governor Gerry Brown just proposed legislation that would shift the pricing benchmark for Medi-Cal pharmacy reimbursement to average acquisition cost (AAC). Fans of transparency will be pleased to know that the AAC data will be deemed non-confidential. Click here to read the proposal (where AAC is confusingly referred to as “average acquisition price.”)

How much longer before the commercial market starts to incorporate these new data into their pharmacy benefit manager (PBM) and pharmacy contracts? How much profit pressure will transparency create for the pharmacy, wholesaler, and PBM industries? And how soon until a certain large pharmacy chain threatens to pull out of Medi-Cal?

FYI, Cost-Plus Pharmacy Reimbursement is one of the major trends that I analyze in The 2010-11 Economic Report on Retail and Specialty Pharmacies. If you haven’t already done so, may I humbly suggest that you make a small investment in your own professional development and download it today?

Surprising Data on the Mail vs. Retail Choice

Both foes and fans of mail pharmacy will find something to crow about in newly public data about CVS Caremark’s (NYSE:CVS) Maintenance Choice program. The data appear in the latest Journal of the American Pharmacists Association.

CVS Caremark’s Maintenance Choice program makes mail and retail dispensing channels economically equal (“channel neutral”) for consumers by eliminating the out-of-pocket cost difference for a consumer between mail and retail for 90-day maintenance prescriptions.

As far as I know, this peer-reviewed academic article contains the most complete public disclosure about the actual operations of the MC program. These data go far beyond satisfaction surveys by showing the actual choices in a channel neutral situation.

Read on to find out what happened in a sample of 325,000 people with this benefit design. Then ask, how can you incorporate these real-world behavioral insights into your marketing plans?

Walgreens Rx for Growth: Beer!

"Ah, beer. The cause of and the solution to all of life's problems."—Homer Simpson.

Walgreens (NYSE:WAG) has expanded the definition of "medicine" once again with the introduction of its own private label beer called Big Flats 1901. A six-pack sells for $2.99—less than the cost of a $4 prescription!

The beer's tagline: "It’s the water that makes it." (Legal disclaimer: It does not say "...makes it good.")

Dr. Stephen T. Colbert, DFA, provides his review of this important industry development in the video clip below.

Question: Could this be revenge for CVS Caremark's (NYSE:CVS) first-mover advantage in the drugstore industry's Chia Obama wars?

A Neutral POV on Medicaid Drug Savings

The battle over Medicaid pharmaceutical spending is getting uglier.

Both the NCPA and NACDS challenged some of HHS Secretary Kathleen Sebelius’ suggestions on how states can better manage Medicaid pharmacy spending. Over the weekend, Steve Anderson, President and CEO of NACDS, went further by quoting Winston Churchill and calling on the pharmacy industry to “fight for victory” on reimbursement issues at the federal and state levels. Meanwhile, the PCMA coyly cites a need to Focus on Patients, Not Profits, in Medicaid Pharmacy.

I invited Mike Winkelman, the principal of Winkelman Management Consulting, to write the guest editorial below because he offers a frank assessment of today’s reality from a non-partisan, objective perspective. He recently delivered an intriguing presentation to the National Legislative Association on Prescription Drug Prices (NLARX): Medicaid Pharmacy Reimbursement Reform: Trends and Recommendations.

Mike argues that states can and should take the initiative to reduce excessive pharmacy reimbursements in the Medicaid program. His conclusions echo the findings of a recent Lewin Group study that I highlight in How to Stop Medicaid from Overpaying for Drugs.

Many comments on the original Drug Channels post criticized Lewin’s conclusions because the study was funded by the PCMA, which represents PBMs. In contrast, Mike often finds himself conducting audits of PBMs on behalf of his plan sponsor clients. However, he concurs with Lewin's general message about savings opportunities.

CVS Caremark: Still Searching for Synergy

Last Thursday, CVS Caremark (NYSE:CVS) reported another disappointing performance by its pharmacy benefit management (PBM) business.

I last checked in on CVS Caremark after their October 2010 investor day in More Happy Talk, But Hard Work Remains. In its latest results, the company was not even able to meet the lowered expectations for its PBM business that the company had set for itself just three months ago.

There were also some unexpected surprises. Caremark now has negative revenue synergy for CVS retail pharmacies, which is a reversal of previous trends. At the same time, a combined pharmacy chain/PBM apparently does not seem to generate enough value for plan sponsors, so Caremark has resorted to more aggressive price competition for PBM business. Details below.

The company has now lowered the bar further for its long-promised turnaround. Unless there is major progress, I still predict a 2012 Caremark spin off for the reasons outlined in When will CVS and Caremark split up? Comments by new CEO Larry Merlo suggest that this scenario is now under active consideration.

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

HHS Wants States to Control Medicaid Pharmacy Spending

Here's some fun weekend reading.

In a letter to state Governors, Secretary of Health and Human Services Kathleen Sebelius laid out a long list of options on how states can control Medicaid spending. She notes that "states have substantial flexibility to design benefits, service delivery systems, and payment strategies, without a waiver." Read the full letter.

Take note of her comments under the heading "Purchasing Drugs More Efficiently." (Text excerpted below.) Secretary Sebelius highlights some of the items that I have covered extensively on Drug Channels, including:

• Better management of pharmacy benefits including "generic drugs, mail order, management relating to over-prescribed high cost drugs" (How to Stop Medicaid from Overpaying for Drugs)
• Alabama's cost-plus pharmacy reimbursement model (Alabama: More Momentum for Cost-Plus)
• A national survey to create a database of actual acquisition costs (CMS Wants Public Transparency to Pharmacy Profits)

This letter is a welcome (albeit belated) statement of principles given how little attention was paid to cost-control in the Patient Protection and Affordable Care Act.

Profits from Generic Injectables: Too High or Just Right?

A new report from the Office of Inspector General (OIG) argues that physicians and providers earn too much from generic injectable drugs in Medicare’s Part B program. OIG claims that Medicare could have saved $111 million by updating Average Sales Price (ASP) data more frequently. Download the report here: Medicare Payments for Newly Available Generic Drugs

The report is a worthwhile resource because it contains a lot of previously unreleased data on specialty drug expenditures in the Medicare Part B program. And while its conclusions are flawed, the report sheds light on how average-price benchmarks work. My take:

• The OIG is completely off their rocker in this report. Their savings estimates presume virtually instant reporting of Average Sales Price (ASP) data, which is both unrealistic and impractical. OIG also seems smugly content to eliminate any positive incentives for generic substitution. The Centers for Medicare & Medicaid Services (CMS) disagrees with the OIG's conclusions, although perhaps CMS just doesn’t want to do the extra work required for more frequent reporting.
  
• An average price benchmark can guarantee channel profits. As I illustrate below using actual ASP data, the use of an average-price reimbursement benchmark creates guaranteed profits during the period of generic substitution for the channel (wholesaler, provider, or pharmacy). This is a clear counterpoint to more judgmental and variable Maximum Allowable Cost (MAC) methods.
  
• The OIG skirts the real issue for payers. At what level of provider/wholesaler/pharmacy profits does a payer encourage rapid generic substitution while not “overpaying” for generics? A two-month lag might be too long, but perhaps a shorter lag would lead to slower substitution and therefore be self-defeating. OIG won’t go near that question.

As always, I encourage you to read the report and make up your own mind.

Drug Wholesaler Outlook: Revenues Down, Profits Up

Larry Marsh and his team at Barclays Capital have just published a very creative analysis of how the upcoming generic wave will affect the big three drug wholesalers—AmerisourceBergen (NYSE:ABC), Cardinal Health (NYSE:CAH), and McKesson (NYSE:MCK). He’s given me permission to share the high level results with the Drug Channels audience.

Their conclusions:

• Wholesalers’ revenues will decline year-over-year in FY2013. This will be the first ever decline in top-line revenues for these companies. Note that the analysis doesn’t include any potential future acquisitions.
  
  
• Operating profit will grow dramatically. Wholesalers will benefit as more-profitable generic drugs replace brand-name drugs. See the chart below.

The overall profitability story will be even better than Barclays estimates. As I discuss below, metrics such as Return on Invested Capital (ROIC) will also get a boost as wholesaler inventories shift to lower-cost generic drugs. You can learn more about pharmaceutical wholesalers and their business models in The 2010-11 Economic Report on Pharmaceutical Wholesalers.