Industry looks to Congress, states for Medicaid relief
Unable to stop the new Medicaid average manufacturer’s price-based payment stampede unleashed last month by the Centers for Medicare & Medicaid Services, the retail pharmacy industry has turned for relief to Congress and the states. But despite vocal and even passionate support from pharmacy’s friends on Capitol Hill, community pharmacy still is being called on to shoulder $8.4 billion in Medicaid funding cuts over the next five years, and chances for any legislative rescue from Congress this year remain murky at best.
CMS’ new payment guidelines for generic drugs dispensed under Medicaid are due to take full effect Jan. 30, 2008. In the months-long comment period leading up to release of the final regulations, pharmacy leaders unleashed a torrent of feedback and raised plenty of alarm bells about the potential impact the new rules could have on their already anemic operating margins.
Most of those comments went unheeded. Although CMS’ final guidelines did reflect in small part the industry’s concerns, the final payment model resembles in large part the proposals issued many months earlier. As such, they met with dismay from pharmacy leaders when unveiled July 2.
“This is not fair. It’s penalizing pharmacy,” said Brian Casswell, an independent pharmacy owner in Baxter Springs, Kan. “If we can’t find a way to participate, we’re going to have to close our doors.”
The new reimbursement model reduces the upper limit for what the federal government will pay states in matching funds for generic drugs dispensed to Medicaid patients. The regulations also redefine the price of those drugs, based on what CMS determines is the average manufacturer’s price they command in a broadly defined marketplace.
Both the National Association of Chain Drug Stores and the National Community Pharmacists Association assert the new reimbursement model will force pharmacies to dispense generics to Medicaid patients for significantly less than the cost of those drugs. The result, they contend, will be a loss of local pharmacy services and access for low-income patients in many rural and inner-city areas, as pharmacies either drop out of the Medicaid program or close their doors after operating at a loss.
NCPA called the new AMP-based payment model a calamity. The new rules, pharmacy groups contend, also will eliminate incentives for dispensing generic drugs by basing reimbursements on a broadly defined definition of AMP that includes prices paid by mail-order pharmacies, pharmacy benefit managers and other non-retail entities that generally pay less for prescription drugs.
“The regulatory process has failed to reach an outcome that is fair and reasonable for community pharmacies. It places a severe economic burden on many smaller pharmacies, both chain-operated and independent,” former NACDS chairman Tony Civello testified before members of a House of Representatives committee last month. “We believe that Congress needs to act now to provide a legislative fix that reduces the economic burden on community pharmacies, thereby preserving the broad access to pharmacy services that Medicaid beneficiaries currently enjoy.”
NACDS president and chief executive officer Steven Anderson also called for new legislation to head off the new reimbursement plan. “In the end, congressional action is absolutely necessary to make possible the current level of vital pharmacy services available in low-income communities, including rural and inner-city areas,” he said.
NACDS and NCPA are far from alone in their bitter opposition to the Medicaid reimbursement guidelines. John Motley III, senior vice president of government and public affairs for the Food Marketing Institute, also gave voice to the concerns of supermarket pharmacy operators. “AMP is a flawed model because it calculates Medicaid generic drug reimbursements by including discounts that retailers don’t receive,” Motley said. “By doing this, it ensures that retail pharmacies will be paid less than it costs them to purchase these medications.”
Ironically, CMS acting administrator Leslie Norwalk acknowledged the potential loss in revenue the new rules could spell for community pharmacies, although she and other Bush administration policy advocates insist the impact will amount to “less than 1 percent” of pharmacy revenues. Norwalk also pointed out, in what pharmacy advocates may argue is a clear case of passing the buck, that many states are picking up some of the slack by increasing their own reimbursement rates for Medicaid prescriptions to pharmacies within their state borders.
Indeed, a growing number of states have responded to pharmacy’s concerns about being forced out of Medicaid by money-losing dispensing rates. But the industry’s best hope for legislative relief on the federal level now is a new bill, authored by Reps. Nancy Boyda, D-Kan., and Jo Ann Emerson, R-Mo., and introduced last month in the House.
The bill, known as the Patient Access to Medicaid Generic Prescription Drugs Act of 2007, would replace CMS’ AMP-based formula with a new Medicaid payment model for pharmacies, based on what the bill’s authors called “RAC,” or retail acquisition cost.
“RAC makes much more sense because it’s based on costs at the retail level, instead of the manufacturer level,” Emerson explained.
Grocer sings new tune in community involvement
Meijer is taking another step in community relations, to the tune of promoting and selling CDs of local musicians.
The Michigan-based 176-unit grocery chain launched the Outside the Mainstream promotion in February with a solo CD from Josh Davis, a singer from Lansing, Mich., whose Fool Rooster CD was recognized by Performing Songwriter magazine for its lyric.
Each month, the chain is featuring a new performer in its circulars, which are sent weekly to 7 million households in Ohio, Michigan, Illinois, Indiana and Kentucky, according to company vice president of public affairs Stacie Behler. Meijer purchases 1,000 of the artist’s CDs and offers them for sale in all the chain’s stores for $7.49.
“The goal of the program is to bring some of the talent that we find in our own backyards to a wider audience than they can normally reach by themselves,” Behler said. “And by supporting this with a low price and a feature in our circular, hopefully it will lead people to gamble on the purchase of music that is worthy of discovery.”
Meijer, according to Behler, is trying to create regional loyalty to its stores by promoting local talent.
CDs chosen for promotion, according to the chain, must have a UPC and be professionally duplicated. Submitted CDs are sorted according to state and chosen on the basis of whatever state will be featured that month and how different the music is from the previous month.
Featured in April is Michigan-based Potato Moon with its CD “The Life of The Lonely Jones.”
CVS wins Caremark battles
WOONSOCKET, R.I. —The battle for Caremark Rx has finally come to an end. And, to the dismay of Express Scripts, CVS has emerged the winner, creating a $75 billion pharmacy benefit management powerhouse that is likely to serve as a benchmark for additional mergers within the industry.
“CVS/Caremark will offer end-to-end services, from plan design to prescription fulfillment, as well as the opportunity to improve clinical outcomes, which will result in better control over health care costs for employers and plan providers,” stated Tom Ryan, president and chief executive officer of CVS/Caremark, late last month when the deal closed. “The company will improve the delivery of pharmacy services and health care decision-making, enabling consumers to benefit from unparalleled access, greater convenience and more choice.”
With the close of the transaction—ultimately valued at $27 billion—CVS/Caremark has moved into a strong, competitive position. The combined company will be No. 1 in pharmacy sales, PBM-managed lives, specialty pharmacy sales and retail-based health clinics. It will be No. 2 in mail services.
That adds up to a lot of extra leverage for the retail health care juggernaut with suppliers, as well as insurers and payers.
In terms of synergies, CVS expects to realize between $800 million to $1 billion in revenue synergies in 2008, and significantly more thereafter. The company expects about $500 million in cost savings, largely related to better purchasing.
“We would like to note that every deal that both CVS and Caremark have done historically has yielded synergies significantly in excess of original guidance,” stated Citigroup analyst Deborah Weinswig in a recent research note. “We believe this deal will be no exception.”
Charles Boorady, also of Citigroup, believes that if the company achieves cost savings from the drug-procurement process, it likely will come from a combination of the following: manufacturers accepting the lower price or offering greater rebates, the wholesalers and distributors accepting lower prices and manufacturers bypassing the wholesalers and selling directly to the combined CVS/Caremark entity.
While many industry observers view the merger as a boon for the companies, it undoubtedly will have major implications on the industry, in general, as vertical integration is a new paradigm that—if successful—could clear the way for more mergers moving forward, with Medco and Express Scripts likely being the next targets.
“The fragmentation in the past may be the reason why vertical integration did not work, but the sheer scale of the CVS/Caremark company may be able to make it work,” Boorady said. “The only test will be whether customers buy into the concept or the concerns over the perceived channel conflict will outweigh it.”
Either way, Boorady sees it as a win-win for rival PBMs. “I see Medco and Express Scripts winning either way. If this integration works, they are likely to be the ones that are acquired next. If it doesn’t work then they could stand to gain customers that prefer a standalone [PBM] instead of a vertically integrated model.”
Another issue such a deal brings to the forefront is network restriction. If customers are willing to restrict the retail pharmacy so that employees can get their prescriptions filled at a single chain, or just a few chains in the market, then it will make the synergy from a vertical integration more obvious, according to Boorady.
However, this has been a concern for several years and has yet to materialize.
“I think most employers have concluded, and will continue to conclude, that the sheer hassle factor that you are putting on your employees by making them go to a CVS instead of a Walgreens, or vice versa, isn’t really worth what little savings you can get relative to other things you can do that present less of a hassle to the employee but can save a lot more money,” Boorady said.
However, prior to the deal, CVS Pharmacare controlled a provider network of more than 56,000 retail pharmacies. Meanwhile, Caremark’s network numbered more than 60,000 retail pharmacies, so it is unlikely that the combined company, post-merger, would suddenly pull back the size of its network—particularly, if the end goal is to remain attractive to insurers and payers and competitive with stand-alone PBMs.
According to William Blair & Co. analyst Mark Miller, the combined company is facing its first big test as it expects an announcement on the large Federal Employee Program contract—currently up for negotiation—as early as May. Three years ago, Caremark won this contract from Medco and it is likely that the two PBMs, among others, will bid for this business aggressively.
“While there are many moving parts to these types of negotiations, this will be the first big test for the new CVS/Caremark, and may provide some incremental perspective on the current state of the competitive environment,” Miller stated in a research note.
In related news, CVS/Caremark has announced the members of the company’s board of directors. As previously disclosed, the 14-member board was evenly split among designees from CVS and Caremark.
Former Caremark chairman and chief executive officer Mac Crawford has been elected chairman of the board of the combined company. Ryan will continue to serve as president and chief executive officer.
The following individuals named to the board from CVS are:
Ryan, president and chief executive officer of CVS/Caremark Corp.
David W. Dorman, senior advisor and partner, Warburg Pincus LLC.
Marian L. Heard, president and chief executive officer, Oxen Hill Partners.
William H. Joyce, chairman and chief executive officer, Nalco Co.
Terrence Murray, former chairman and chief executive officer, FleetBoston Financial Corp.
Sheli Z. Rosenberg, former vice chairman, president and chief executive officer, Equity Group Investments LLC.
Richard J. Swift, former chairman, president and chief executive officer, Foster Wheeler Ltd.
The following individuals named to the board from Caremark are:
Mac Crawford, chairman of CVS/Caremark Corp.
Edwin M. Banks, founder, Washington Corner Capital Management LLC.
C. David Brown II, chairman, Broad and Cassel.
Kristen E. Gibney Williams, former executive of Caremark’s Prescription Benefits Management division.
Roger L. Headrick, managing general partner, HMCH Ventures; president and chief executive officer, ProtaTek International
Jean-Pierre Millon, former president and chief executive officer, PCS Health Systems
C.A. Lance Piccolo, chief executive officer of HealthPic Consultants