Managed Medicaid boom could mean more generics
Now that most generics have declined in cost, plans will look for new ways to control health spend and ensure that generics are being used whenever possible. Prescription drug spending is down, and generic drugs made up 77% of all 2012 prescriptions, according to the Centers for Medicare and Medicaid Services. Could this generic utilization percentage go even higher as a result of recent healthcare legislation?
Medicaid is increasingly becoming a managed care program, and states are looking to entities like pharmacy benefit managers to help them manage their drug spend.
The coming boom in managed Medicaid
The market growth in government-based health care is likely to drive managed care organizations to utilize more generics. As more Medicaid enrollees gain access to coverage as a result of the Affordable Care Act, these patients may need to increasingly be managed by outside entities to keep costs low. The Centers for Medicare and Medicaid has estimated that Medicaid expansion could add 8.8 million more people by 2016.
Managed Medicaid is essentially an arrangement between a state Medicaid program and a managed care organization, or MCO. The program began in the 1980s as states were first moving Medicaid patients into MCOs for better care and fewer unnecessary services and costs. Under managed Medicaid, the MCO provides services to Medicaid enrollees for a fixed, per capita payment. These services are similar to those that the MCO provides to their commercial customers enrolled in private plans. There are two prevailing types of managed care models: 1) a risk-based MCO and 2) a fee-for-service primary care case management model, PCCM.
Before the 2010 passage of the Affordable Care Act, states were forbidden from collecting rebates on medications that MCOs purchased for Medicaid beneficiaries. In April 2010, the ACA expanded the Drug Equalization Act to managed Medicaid enrollees. This allowed CMS to get the same drug discounts under the managed Medicaid program as it did under a fee-for-service PCCM.
The shift from a fee-for-service to a capitated model has more than doubled the share of Medicaid prescriptions handled by managed Medicaid plans. IMS has calculated that from September 2011 to June 2012, the amount rose from 19% to 46%. Over the same period, the number of monthly prescriptions these plans dispensed rose from 4.9 million to 12.5 million. In their study, IMS determined that states using managed Medicaid had generic utilization rates of 3% to 14% higher than in states using fee-for-service. This could be indicative of future generic usage as states enroll more Medicaid patients into managed care plans.
States became eligible for drug rebates in 2010. Before then, many would carve out the pharmacy benefit from managed Medicaid contracts to maximize their reimbursement returns. States with capitated managed care contracts can “carve out” certain services from capitation rates and continue to provide them on a fee-for-service basis, meaning that the prescription drug benefit plan is managed separately from the other benefits in a health plan. But now that rebates are allowed, the number of states with carve-outs has declined.
A wrinkle in the new managed Medicaid equation is that now these plans are not required to provide access to all of the drugs from manufacturers that participate in drug-rebate programs. This may mean that fewer brand-name drugs will be given to enrollees, and more generics will be provided instead.
CVS Caremark is the managed Medicaid leader
States have a strong incentive to manage the cost growth associated with managed Medicaid. This is due partly to the previously mentioned expansion of drug rebates. New drug rebates will contribute to savings, but the management of capitation costs also will be essential.
It appears that PBMs, which also are large supporters of the use of generic and biosimilar medications, will drive managed Medicaid control. CVS Caremark recently revealed in its 2013 analyst day report that its PBM alone controlled 28% of the lives enrolled in managed Medicaid in 2013, making the company the leading PBM in the managed Medicaid market. The three biggest PBMs — CVS Caremark, Express Scripts and OptumRx — control half of managed Medicaid, versus 67% of the overall market, according to a report from Pembroke Consulting.
In addition, overall managed Medicaid enrollment is expected to grow by 42% by 2016, according to CVS Caremark. By that year, PBMs will therefore be managing more than 8 million new lives. CVS executives say this growth will come from two main sources: 1) members transitioning from fee-for-service Medicaid to managed Medicaid and 2) new enrollees from Medicaid-eligibility expansion.
Thanks to a recent deal with Cardinal Health, CVS also will benefit from improved generic sourcing. As a result, CVS will add critical scale at a critical time when the company has the most number of lives in its hands.
Medicare pushing for open pharmacy networks, spelling big changes for pharmacy providers
The federal agency in charge of Medicare is pushing for a major overhaul of its Medicare Part D drug benefit program for seniors. Those changes, if adopted, could help level the competitive playing field for pharmacy retailers in Part D plan networks, reduce competitive advantages for preferred pharmacy networks and mail-order pharmacies, and put a tighter squeeze on pharmacy benefit managers.
Thus, the proposals by the Centers for Medicare and Medicaid Services for the 2015 federal fiscal year could spell big changes for retail pharmacies. Among the most far-reaching are:
- A proposed move by CMS to scrap the current system of tiered pharmacy networks, under which many Part D prescription drug plans, or PDPs, set up preferred pharmacy networks that offer patients lower out-of-pocket costs. Under the current system, PDPs lower Medicare patients’ share of the cost of their prescriptions by reducing drug reimbursements and fees to pharmacies that agree to participate in the preferred networks and sacrifice higher per-prescription gross margins in exchange for higher patient volumes. The pharmacy benefit management industry is squarely behind the move to preferred pharmacy networks and touts the savings that are passed on to Medicare, but CMS has raised concerns over the impact those limited networks are having on patient access and overall cost of care;
- A related proposal to open any Part D plan’s “preferred” provider network to any pharmacy willing to offer the same prescription prices and fees as a preferred pharmacy; and
- A move to eliminate the cost-sharing incentives by which some plans steer Medicare patients into mail-order pharmacy, based on CMS’ concerns about the extra time it takes for patients to receive their prescriptions and doubts about the ultimate cost-saving benefits of mail to Medicare and taxpayers. “We have no reason to discourage [beneficiaries’] continued use of these [mail] services,” CMS noted. “However, due to the difficulties reported to CMS with consistently and effectively filling short-time-frame supplies through mail order, we do not believe that Medicare beneficiaries in general should be incentivized through lower-cost sharing to utilize mail-order pharmacies for initial prescriptions or 30-day supplies.”
Medicare administrators put forth the new recommendations after a lengthy review of Part D reimbursement patterns and costs, and gave interested stakeholders until March 7, 2014, to comment on the proposals before issuing final regulations. The recommendations are part of a massive, 678-page document published Jan. 10, titled “Medicare Program; Contract Year 2015 Policy and Technical Changes to the Medicare Advantage and the Medicare Prescription Drug Benefit Programs.”Among other goals, CMS said, the newly proposed rules were intended to “strengthen beneficiary protections; exclude plans that perform poorly; improve program efficiencies; … clarify program requirements;” and “improve payment accuracy.” But the changes mark a sea of change in the agency’s approach to reimbursing the managed care plans that administrate the drug benefit program for seniors.
“CMS wants to shake up the current model for preferred pharmacy networks, which would be required to explicitly save money for both the government and the Part D beneficiaries,” noted pharmacy industry expert Adam Fein, president of Pembroke Consulting and CEO of Drug Channels Institute. “CMS also wants to open up these networks to any pharmacy willing to cut prices.”
What’s more, Fein said, “under the proposed rules, plan sponsors and pharmacy benefit managers would face intense scrutiny over cost savings, pharmacy network design and generic prescription reimbursement using maximum allowable cost. CMS also wants to remove certain cost-sharing advantages for mail pharmacies, which would be another big negative for PBMs.”
There’s no disputing that preferred pharmacy networks have steadily captured a growing share of the prescription dollar for Medicare beneficiaries since Walmart and Humana joined forces to launch a Part D prescription drug plan and preferred network in 2011. Last year, some 42% of all seniors were enrolled in a PDP that offered a preferred network, according to CMS.
“Preferred pharmacy networks dominate the 2014 PDP landscape,” Fein said. “There are 56 plans with preferred networks, up from only 16 plans in 2013. These plans operate 841 regional PDPs, which account for 72% of the total regional PDPs for 2014.”
Despite their rapid growth — and CMS’ own data from 2012 indicating that preferred networks yield average prescription cost savings of roughly 6% — the agency concluded that limited networks don’t always lower costs to Medicare.
Indeed, in some cases, the agency noted, “a few sponsors have actually offered little or no savings in aggregate in their preferred pharmacy pricing, particularly in mail-order claims for generic drugs. Instead of passing through lower costs available through economies of scale or steeper discounts, a few sponsors are actually charging the program higher negotiated prices.”
CMS called such findings “troubling.”
The agency also was concerned about the inconsistency it found in the cost sharing and cost savings of limited networks. “In some cases, pharmacies extending high discounts are ones that have been excluded from limited networks offering preferred cost sharing, while some pharmacies within the limited networks offer effectively no discounts compared to the rest of the network,” CMS noted. “Therefore, we believe that opening up these limited networks to any pharmacy willing to charge no more than the contract’s ceiling price to qualify for offering the lower preferred cost sharing is necessary to restore price competition in these networks.”
Also troubling, noted the agency, “even assuming that preferred pharmacies were to offer lower negotiated prices than those available in the rest of the network, failure to allow access to any pharmacy willing to meet the pricing terms necessary to be included in the preferred network could mean that fewer beneficiaries would have convenient access to both lower cost sharing and lower negotiated prices than they would otherwise obtain. We seek to not only ensure that preferred cost sharing is aligned with lower drug costs, but also to maximize the number of beneficiaries who can take advantage of such savings.”
Behind that declaration, CMS added drily, is the fact that “most PBMs own their mail-order pharmacies, and we believe their business strategy is to move as much volume as possible to these related-party pharmacies to maximize profits from their ability to buy low and sell as high as the market will bear.”
In its sweeping bid to revamp the Part D provider system, CMS handed a major victory to the community pharmacy industry, and particularly to the independent pharmacy segment, in its long-simmering dispute with the pharmacy benefit management industry. “On almost all issues, CMS granted the wishes of independent pharmacy owners,” Fein said.
Both the National Community Pharmacists Association and its chain pharmacy counterpart, the National Association of Chain Drug Stores have long argued for open pharmacy provider networks and patient access in the implementation of both the Part D program and the more recent Accountable Care Act. In a joint letter to deputy CMS administrator and director Jonathan Blum in November, both groups argued that “maintaining beneficiary access” was critical to the success of the program, and they called assumptions about preferred networks cost savings “questionable.”
“Patients should be free to choose whether to participate in a preferred or open pharmacy network,” said Carol Kelly, NACDS SVP government affairs and public policy, and Steve Pfister, SVP government affairs for NCPA, in their letter. “Maintaining this patient choice allows individuals to select a health plan that best fits their personal health needs and provides accessible pharmacy locations. Additionally, community pharmacies meet patients’ needs for convenient access through a highly competitive environment.”
Separately, NCPA CEO Doug Hoey noted that the independent pharmacy group “has opposed these preferred pharmacy plans because they are not in the best interest of many patients, they have been deceptively marketed and they amount to government-sanctioned bias against small business community pharmacies since they do not require plans to offer participation to all pharmacies.”
Collaborative sourcing: Leveraging massive generic discounts
Recent strategic business initiatives are granting wholesalers more generic drug purchasing power than ever before.
Over the last few years, some major deals in the world of drug wholesaling have taken shape. While the business arrangements among the three top wholesalers differ slightly in terms of ownership, benefits and risks, one thing is for certain: all of the agreements will translate into growth opportunities for the companies involved and will help them improve their generic drug sourcing practices.
McKesson, Cardinal and AmerisourceBergen, also known as the “Big Three,” reportedly distribute more than 80% of all of the drugs in the United States. Below, DSN takes a look at the structure of their recent financial agreements and how the terms of the deals affect both wholesalers and pharmaceutical distribution. All of the deals appear to be centered on the tenet that the higher the purchasing volume, the better the price concessions.
Walgreens Boots Alliance Development (WBAD) with AmerisourceBergen (ABC)
Walgreens entered into an internationally advantageous partnership in 2012 with Alliance Boots and AmerisourceBergen. As a result of the deal, Walgreens earned a 7% stake in ABC, with the option to own up to 30% in the next few years, and can help ABC score lower drug prices from generic manufacturers. Typically, large pharmacies buy brand-name drugs directly from manufacturers, but get their generics from wholesalers. If ABC and Walgreens are combined, both may enjoy lower generic pricing and better contract savings.
The partnership will help all of the groups involved focus more on proprietary generics. In addition, ABC will be granted a 10-year contract and will get the opportunity to expand its specialty business both in Europe through Alliance and in the United States through Walgreens. ABC will be well-positioned on a number of fronts — adding Walgreens distribution will provide opportunities in the coming years.
One major caveat with the WBAD-ABC agreement is that ABC risks potentially alienating its other customer. Although the lower generic pricing points obtained through stronger contracting deals may appeal to ABC’s smaller pharmacy clients, some may feel uncomfortable with the idea that by supporting ABC, they are indirectly financially supporting a competitor, Walgreens.
McKesson and Celesio
Whereas ABC and Walgreens are buying into a transaction, McKesson is gaining full control of drug company Celesio, which operates a wholesaling business in 13 European countries and Brazil. The arrangement would allow McKesson to benefit through international generic expansion, while Celesio would benefit from the sales of McKesson’s proprietary generic brand, NorthStarRx.
Cardinal and CVS Caremark
Unlike the other two deals, Cardinal and CVS Caremark have an equal level of control within their agreement, which was signed in December 2013. Cardinal will pay a fixed fee — $100 million per year — to CVS, and in return will receive the same absolute drug prices. Although Cardinal’s presence overseas in China is steadily growing on its own, the partnership with CVS Caremark also will allow Cardinal to enjoy an enhanced focus on U.S.-based purchasing. Through one buyer, Cardinal believes they can more efficiently negotiate generic prices for both companies.
So, aren’t lower prices better for everyone? Not necessarily. Over time, margin compression could be a potential consequence of these business deals. The better these wholesalers are able to buy, the more they will drive the average manufacturer price down. This makes it harder for independent pharmacy members to compete with the Big Three, and could have perverse market effects.