House lawmakers promote new bill to overhaul Medicaid payment rule
WASHINGTON —A bill to overhaul the federal government’s new and controversial Medicaid prescription payment plan for pharmacies is gaining ground in Congress after a strong bipartisan send-off in late July.
The newly authored Patient Access to Medicaid Generic Prescription Drugs Act of 2007 has won the endorsement of the national organizations representing both chain and independent pharmacy. For drug retailers, the bill could represent the last, best hope for legislative relief before the new Medicaid pharmacy payment regulations take full effect on Jan. 30, 2008.
Reps. Nancy Boyda, D-Kan., and Jo Ann Emerson, R-Mo., are acting as cosponsors of the bill. Its aim: to address what its authors contend are unfair disparities in the way the Medicaid program will pay pharmacies for dispensing medications under the program.
The introduction of the Boyda/Emerson bill follows the release of the final rules establishing new Medicaid payment guidelines for generic drugs. The new guidelines, issued July 6 by the Centers for Medicare & Medicaid Services, set a new federal upper limit for what the government will pay states in matching funds for generics dispensed to Medicaid patients. The regulations also redefine the price of those drugs, based on the average manufacturer’s price they command in the open market, as determined by CMS.
As such, the new payment model has met with withering criticism and intense opposition from the National Association of Chain Drug Stores, the National Community Pharmacists Association and the pharmacy division of the Food Marketing Institute. Pharmacy leaders fear the new CMS model will severely undercut profit margins and eliminate incentives for dispensing generics 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. Those lower prices—combined with rebates and other purchasing incentives available to non-retail drug purchasers—will skew the calculations that establish the AMP of a multisource drug, opponents said.
The result, according to retail pharmacy advocates, will be FUL on pharmacy reimbursements that are below the cost of the drugs for many drug store operators.
“This is an absolute disaster,” warned NCPA’s vice president of government affairs, Charles Sewell. He noted that 10 percent of NCPA’s independent pharmacy members—some 2,300 pharmacies—depend on Medicaid for 50 percent or more of their prescription business.
“Obviously, no business can stay in business very long if they’re operating at a loss,” Sewell added.
In a press briefing July 24, Boyda and Emerson joined with Sewell and Paul Kelly, vice president of government affairs for NACDS, to oppose CMS’ new pharmacy reimbursement plan and to promote their alternative payment formula for Medicaid prescriptions. They assert their bill would redefine the AMP-based benchmark to more accurately reflect pharmacy acquisition costs. It also would exclude sales from mail-order facilities and PBM price concessions and rebates that aren’t provided to retail pharmacy, as well as add new incentives to drive generic utilization to boost government savings.
Both lawmakers characterized the new AMP regulations as an assault on community pharmacy and a step backward in the long campaign by federal, state and private health plan sponsors to reduce health costs through the use of generic drugs, which cost far less on average than their branded counterparts. CMS’ payment model, Boyda asserted, also encourages a shift among Medicaid patients to mail-order pharmacies at the expense of the community pharmacist.
“Over my dead body are we going to do this,” Boyda warned. “They’re not going to the root of the problem [of rising health costs in Medicaid] by going after name-brand drugs, but by going after the people dispensing the drugs and taking care of our rural communities.”
Emerson, who represents a rural and generally very poor region in Missouri, characterized the issue of Medicaid pharmacy reimbursement as “critical to the success of our rural counties.”
“For many of my constituents, their health care is their pharmacist,” Emerson said. “Truly their pharmacist is their front-line professional, and it is critical that those pharmacists remain in their job site. This really strikes at the heart of what is right and fair in the health care industry.”
By the time it was introduced, the Boyda/Emerson bill already had drawn some 30 co-sponsors in the House, and many more lawmakers are ready to lend their support, Boyda noted.
Among other things, the legislation 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 the retail level price, instead of the manufacturer level,” Emerson said.
“The CMS rule desperately needs a fix, and a fix requires ideas and committed champions,” noted NACDS president and chief executive officer Steven Anderson. “Rep. Boyda rallied the support of House colleagues in a letter to CMS prior to its release of the final rule. She has worked diligently to craft a remedy for the Deficit Reduction Act and its misapplication by CMS.”
“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,” Anderson added. “Public policy should not expect businesses to sell products below their cost, and should not create disincentives for solutions that reduce overall health care costs, including the dispensing of appropriate generic drugs.”
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