Health Care Reform: Impact on Drug Channels, Post-SCOTUS

"It is not our job to protect the people from the consequences of their political choices."

Hey, did you hear about the Supreme Court’s decision on the Patient Protection and Affordable Care Act (ACA) Yeah, I thought so.

I won’t rehash the constitutional issues. As long-time readers know, I think the ACA is messy, inelegant legislation with enormous unintended consequences. Nonetheless, it’s the law of the land (for now), so let’s review what it means for drug channel participants.

• Pharmacy Benefit Managers (PBMs) will gain from the expanded coverage and the launch of biosmiliars. The “transparency” requirements should not be material.
• Retail pharmacies will benefit from increased prescription volume and various legislative “fixes,” but face margin risk as the uninsured get the advantage of third-party bargaining power.
• Drug wholesalers will benefit from increased volume, although pharmacies’ generic margin pressure will flow up the channel.
• For pharmaceutical manufacturers, the gains from increased prescription volume and expanded coverage are offset by new fees and higher rebates. The impact of biosimilars depends on whether your company is facing biosimilar competition, or planning to become a biosimilar competitor.

Read on for details. And whether we like it or not, the Centers for Medicare and Medicaid Services (CMS) has almost unlimited power to reshape our healthcare system via regulation. Be afraid. Be very afraid.

Will Walgreens bypass Cardinal Health?

On Monday, a Cleveland Research report publicized something that many of us already know: "Walgreen's (NYSE:WAG) may be looking to bypass Cardinal Health (NYSE:CAH) in order to source branded drugs directly and that the Boots acquisition may help support the initiative." (Sorry, the complete report is not available.)

Obviously, this would be a material change for Cardinal as well as the brand-name manufacturers selling through wholesalers. By my estimates, Walgreens accounts for about 25% of Cardinal Health’s drug distribution revenues, but only about 6% of Cardinal’s drug distribution operating profit.

Walgreen’s potential move highlights an apparent drug channel puzzle: Why do the biggest pharmacies (listed here) almost always purchase brand-name drugs—but not generics—via drug wholesalers rather than buying directly from a manufacturer?

Below, I take a brief detour into the arcane world of pharmaceutical pricing to explain the hidden economics that sustain these warehouse sales for wholesalers. At a minimum, Walgreens must convince manufacturers to alter long-standing discount structures, or the math just doesn't work. And as Cleveland notes, "manufacturer support is mixed."

McKesson Downplays European Wholesaling Expansion

Last Tuesday’s Walgreens-Alliance Boots deal creates a $111 billion (pro forma) global pharmacy/wholesale company. About one-quarter of the new company's revenues will come from non-US drug wholesaling, primarily in Europe.

Coincidentally, McKesson held its annual Investor Day meeting on the very same day. Chairman and CEO John Hammergren downplayed any European expansion, implying that McKesson’s capabilities equal or exceed what’s across the pond. He also offered an intriguing rhetorical question about scale. Full quote below.

BTW, many people have asked me to comment further on last week’s Walgreens-Alliance Boots deal. Rather than posting to Drug Channels, I have provided a special report exclusively to Pembroke Consulting's clients. Sorry to disappoint.

Stay Current on State Dispute Resolution in Medicaid

I want to remind you about IIR's 17th Annual Medicaid Drug Rebate Program (MDRP) Summit, a Drug Channels sponsor. The event will be held from September 10 to 12 in Chicago, IL, at the Swissotel Chicago.

Below, IIR highlights challenges in managing Medicaid drug rebates with 50 states plus the District of Columbia. The upcoming MDRP Summit will include opportunities for manufacturers to meet with representatives from multiple states, including Texas, North Carolina, Illinois, Oregon, Connecticut, Florida, New Jersey, and Kansas.

IIR is offering a special 25% discount to Drug Channels readers—up to $850 in savings off the standard rate. Register with VIP code: P1758DRJU. Thanks, IIR!

Who Will Pay for Prescription Drugs in 2021?

In The Outlook for Drug Spending (With or Without ACA), I examine the latest drug spending forecasts from the Centers for Medicare and Medicaid Services (CMS). Today, I look at who will be paying for all of these drugs.

Here are four key insights about the 2021 drug market, assuming that the Patient Protection and Affordable Care Act (ACA) remains in place:

• Public funds, primarily Medicare and Medicaid, will pay for 44% of all drug spending.
• Insurance purchased via exchanges will be 5% of drug spending.
• The employer-sponsored insurance market will keep shrinking.
• Out-of-pocket spending by consumers will account for an even-smaller part of drug spending.

Read on for a look at the past, present, and future of payers. Pharmaceutical manufacturers need to consider how contracting will change as traditional private insurance declines. Meanwhile, PBMs will be gearing up as more people get coverage, although the business will shift to health plans at the expense of self-insured employers.

The Outlook for Drug Spending (With or Without ACA)

Soon, we'll all learn the Supreme Court’s decision about the Patient Protection and Affordable Care Act (ACA). On a bed of nails, they make us wait.

To pass the time, let’s look at the brand-new forecasts for health care spending from the Centers for Medicare and Medicaid Services (CMS). The complete forecast is summarized in the latest Health Affairs: National Health Expenditure Projections: Modest Annual Growth Until Coverage Expands And Economic Growth Accelerates (free download).

My number crunchification uncovered the following data points about drug spending:

• By 2021, annual prescription drug spending will nearly double, to $483.2 billion.

• In 2021, prescription drugs will account for 10.1% of total U.S. health care spending, vs. 10.0% today.

• Health care reform will add an extra $25.9 billion in annual drug spending by 2021.

CMS has reduced its growth forecasts substantially due to ongoing economic weakness. Read on for the factors behind the new forecast, both with or without ACA.

Walgreens Goes Global with Surprise Alliance Boots Acquisition

Five years ago in The British are Coming, I suggested that Drug Channels readers keep an eye on Alliance Boots. Looks like I was right about the outcome, but wrong about the timing.

This morning, Walgreen (NYSE:WAG) announced that it would pay $6.7 billion to purchase a 45% stake in Alliance Boots, with an option to buy the remaining 55% within 3 years. Here’s the official announcement: Walgreens and Alliance Boots Form Strategic Partnership to Create the First Global Pharmacy-Led, Health and Wellbeing Enterprise

Full details are still not out yet, but here’s some background on Alliance Boots along with initial thoughts on what the deal means for the industry.

Drug Channels News Roundup: June 2012

Summer is just around the corner. Time to clean the barbecue, buy a new bathing suit, and pack the kids for camp. In the meantime, enjoy my latest selection of noteworthy news stories from the Drug Channels universe.

In this issue:

• Rethinking health care jobs—More is not better?
• Trust No One—The FDA’s useful primer on supply chain vulnerabilities
• Pharmacist T-1000—Meet your new robot overlords

Plus, Paula Deen sponsors an important .05k walk for diabetes research. You go, girl!

2011 Pharmacy Market Share for Specialty Drugs

As part of my ongoing efforts to illuminate the drug channel, here’s a look at the 2011 specialty pharmacy market.

According to Pembroke Consulting's research, the specialty market boomed last year. In 2011:

• $46.9 billion of specialty drugs were dispensed by retail, mail, and specialty pharmacies.
• Specialty drugs represented about 17% of the pharmacy industry’s total revenues.
• Pharmacy revenues from specialty drugs grew by $7.7 billion (+19.7%).
• Three companies—Express Scripts, CVS Caremark, and Walgreens—generate about two-thirds of revenues from pharmacy-dispensed specialty drugs. The next two largest players had a combined share of less than 4%.

Read on for market share estimates for the top 7 (now top 5) players, along with observations on the market's evolution and implications for manufacturers.

Health Care and the Coming U.S. Fiscal Disaster

This week, the non-partisan Congressional Budget Office (CBO) released their latest look at the U.S. long-term budget outlook. (Links below.)

The news isn’t good. The U.S. is heading for a disaster of biblical proportions. Fire and brimstone coming down from the skies! Rivers and seas boiling! Earthquakes, volcanoes...human sacrifice, dogs and cats living together...mass hysteria!

Pharmaceuticals are less exposed to government spending than overall health care spending. Nonetheless, the numbers should give us all pause. CBO’s baseline scenario shows Federal spending on Medicare and Medicaid almost doubling, from 2011's 5.6% to 10.4% in 2037. National health care spending will rise to about 25% of GDP.

Read on for the grim details. Let’s hope we can sort it out before Gozer the Traveler returns.

Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs

Cost plus reimbursement…the final frontier…

On June 1, CMS officially launched its wagon train to the stars—the National Average Drug Acquisition Cost (NADAC) survey. CMS is now surveying 2,500 pharmacies per month, gathering invoices to compute a public average acquisition cost (AAC) for pharmacy reimbursement.

The plan is unlikely to work. Here’s why:

• The pharmacy industry doesn’t think CMS has the right to collect these data.
• Participation is voluntary, so many pharmacies will simply ignore the survey.
• CMS’ methodology allows the AAC data to be easily inflated, rendering the information useless.

Good luck, CMS. And if you think you have trouble with tribbles, you haven’t seen anything yet.

Top Articles from Drug Channels: May 2012

Today’s post responds to reader requests for a monthly Drug Channels wrap-up. Every month, I’ll highlight the previous month’s five most frequently viewed and/or most interesting articles.

Here are the winners from May 2012. Below, I provide some additional comments and reflections on each article.

• Walgreens is Losing Its Battle with Express Scripts
• Express Scripts' George Paz Opines on Medco, Pharmacists, and Walgreen
• Oral Oncology Channel Battle: Payers vs. Providers
• Armada 2012: Reflections on the Evolving Specialty Marketplace
• Drug Channel Profits in the 2012 Fortune 500

Thanks to everyone who responded to the survey! If you haven’t done so, please take a moment to fill out the 2012 Drug Channels Reader Survey and tell me what you think about the site.

The 2012 Drug Channels Reader Survey

It's time once again to tell me what you think about Drug Channels!

I am conducting a very brief reader survey to learn what you like and dislike about the site. There are just 4 questions, so it should only take you about 5 minutes to complete. You can answer anonymously. Here's the link:

The 2012 Drug Channels Reader Survey

There is also an optional spot to add a testimonial, which I hope you will feel inspired to do.

If you choose to provide an email address, you'll be entered in a drawing to win a free corporate license of either the 2011-12 Economic Report on Retail and Specialty Pharmacies or the 2011-12 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors. If you win, you'll be contacted to choose which report you want.

Thank you in advance for helping me improve Drug Channels.