ABC’s Steve Collis on the Tangled Web of PBM-Wholesaler Relations

The Philadelphia Inquirer’s PhillyPharma blog just posted a fascinating—and unexpectedly revealing—Q&A with AmerisourceBergen CEO Steve Collis.

Collis does a nice job explaining the diverse—and sometimes little-known—services that drug wholesalers now perform within the pharmaceutical industry. He also offers some helpful insights into the recently-acquired World Courier business.

Perhaps inadvertently, his interview also highlights the fascinating conflicts and complexities embedded within today’s drug wholesaling business model. For wholesalers like AmerisourceBergen (NYSE: ABC), pharmacy benefit managers (PBMs) like Express Scripts (NASDAQ: ESRX) are simultaneously:

• Customers
• Negotiating adversaries
• Vendors
• Competitors

Read on as your friendly neighborhood blogger unravels these sticky situations.

SELLING TO PBMS

Most prominently, wholesalers are key vendors supplying brand-name drugs purchased by a PBM’s mail-order pharmacy, as I explain in Will Walgreens bypass Cardinal Health?

Medco Health Solutions' mail pharmacy currently represents about 19% of ABC’s total revenues and about 5% of its operating profits. Medco purchases primarily brand-name drugs from ABC, but purchases specialty and generic drugs directly from manufacturers (per Medco’s 2011 10-K, page 12).

Right now, ABC is vying with competitors Cardinal Health (NYSE: CAH) and McKesson (NYSE: MCK) to supply the needs of the new Express Scripts Holdings mail order pharmacy. As Mr. Collis notes:

“We think we bring a lot of benefits to Express Scripts in these areas and we hope they will choose AmerisourceBergen to be their long term partner… Mail order is part of the market, so we want to service it.”

This arrangement is a delicate balancing act because ABC is also a major supplier to independent pharmacies, which are waging an all-out war against mail pharmacies. The National Community Pharmacists Association (NCPA), which represents independent pharmacy owners, views mail order as an evil green goblin:

Objective, right? See the NCPA’s PBM Resources page for more unbalanced vitriol.

NEGOTIATING WITH PBMS

ABC also operates Good Neighbor Pharmacy Provider Network (GNPPN), a Pharmacy Services Administration Organization (PSAO) that collectively negotiates and administers pharmacy contracts with PBMs.

A PSAO gives a group of smaller pharmacies access to many benefits normally associated with large, multi-location chain pharmacies. Ownership by a multi-billion dollar Fortune 500 corporation like ABC provides further negotiating leverage for smaller drugstores. For a complete list of major PSAOs, see Exhibit 32 in the 2011-12 Economic Report on Retail and Specialty Pharmacies.

When asked if AmerisourceBergen negotiates on behalf of a Good Neighbor Pharmacy, Collis replied:

“Exactly. Many pharmacies would have to negotiate with 40, 50, 60, or 70 payers - pick a number - so this helps give them connectivity. We give them data feeds so they can do all of the electronic adjudication. We also come across problems. If we come across a drug that they are buying for a price higher than they will be reimbursed at, we'll let the insurance companies know and we can see trends across the country. We work with all the insurance companies and I think we have a reputation as an honest broker."

In other words, the estimated 5,000 independent-drugstore owners within GNPNN rely on ABC to negotiate contracts with ABC's largest customer. My spidey-sense is tingling.

BUYING FROM PBMS

Let’s not forget that the big 3 wholesalers are large companies with thousands of employees. As Collis notes:

“At AmerisourceBergen, our 11,000 U.S.-based employees will be carrying Express Scripts cards, going to their pharmacy, and doing a swipe with the card and getting it adjudicated through Express Scripts, in large amounts. We used Medco in the past [as the company's employee health plan pharmacy benefits manager].”

But when it comes to narrow networks, ABC must decline any pharmacy benefit cost savings in favor of loyalty to its community pharmacy customers:

“We're encouraging the networks to be open. Our employees can get a 90-day script at their community pharmacy or through mail order. We support all customers.”

Express Scripts is a fan of narrow pharmacy networks, as evidenced by its Express Advantage Network and dispute with Walgreen.

COMPETING WITH PBMS

The interview skips over an especially tricky competitive dynamic between ABC and Express Scripts. For specialty drugs, each company operates subsidiary businesses that directly compete with subsidiary businesses of the other company, in the following areas:

• Specialty distribution
• Reimbursement hub and patient support services
• Specialty pharmacy
• Community oncology GPO

This competition is heating up. As I note in New Data on Specialty Pharmacy’s Challenge to Buy-and-Bill, white bagging by a PBM-owned pharmacy corresponds to the substitution of the specialty distributor-to-provider distribution channel for a specialty pharmacy-to-provider distribution channel.

THE BOTTOM LINE

Being a free-lance photographer while climbing up walls and having super strength? Amazing.

Running a drug wholesale business while juggling conflicting priorities and keeping everyone satisfied? Incredible.