Medicaid relief gathers steam
WASHINGTON —Amid a rising chorus of pharmacy leaders protesting budget cuts and new federal reimbursement rules for prescriptions dispensed under Medicaid, a key leader in the U.S. Senate introduced legislation early this month to reverse what pharmacy leaders say are some of the most damaging policies imposed under government cost-cutting efforts.
Sen. Max Baucus, D-Mont., who chairs the U.S. Senate Committee on Finance, unveiled legislation Aug. 2 that won immediate endorsement from the National Association of Chain Drug Stores. Baucus’ bill, called the Fair Medicaid Drug Payment Act of 2007, would alter several elements of the Deficit Reduction Act of 2005, which imposes a series of budget cuts on federal healthcare programs that pharmacy leaders predict will cost U.S. pharmacies a total of $8.3 billion over the next five years.
“This legislation would repair several damaging policies set by the…DRA and its misapplication by the Centers for Medicare and Medicaid Services, which imposed deep payment cuts on pharmacists,” NACDS stated.
NACDS president and chief executive officer Steve Anderson quickly endorsed Baucus’ initiative. “The introduction of this bill with strong tripartisan support is a critical step in ensuring that much-needed relief is provided to low-income Americans and neighborhood pharmacies across the nation, ” Anderson said.
The Baucus bill would redefine the average manufacturer price provision of CMS’ new Medicaid pharmacy payment plan, replacing the new prescription payment guidelines for multi-source drugs with a new pricing benchmark for generics, based on their average acquisition costs. It also would set federal upper limits on Medicaid drug payments only when there are three or more equivalent drug products on the market.
A number of prominent senators joined Baucus as co-sponsors of the measure, including Democrats Ken Salazar of Colorado and Blanche Lincoln of Arkansas; Republicans Trent Lott and Thad Cochran of Mississippi, Pat Roberts of Kansas and Gordon Smith of Oregon; and Joe Lieberman, who switched parties to become an Independent in his last race for election in Connecticut. “The fact that these six senators, all from different regions of the country, have joined forces on this bill demonstrates the urgency of turning back the unprecedented level of cuts facing community pharmacies and the low-income Americans they serve,” Anderson said. “This new legislation would promote the use of generics, saving the Medicaid program money and ensuring continued beneficiary access to crucial pharmacy services.”
Baucus’ move came two weeks after pharmacy voiced alarm over the new Medicaid policies at a hearing of the House Committee on Small Business. Representatives of NACDS, the National Community Pharmacists Association and the Food Marketing Institute warned lawmakers that the new prescription reimbursement guidelines for Medicaid seriously would hamper the ability of many pharmacies to participate in the Medicaid dispensing program.
Among those testifying was Tony Civello, president and chief executive officer of Kerr Drug. Civello, who capped a two-year term as NACDS chairman in April, called the new CMS payment model “simply unacceptable for community pharmacy and the Medicaid patients they serve,” and said the rule was so flawed that only new legislation could stave off a potentially disastrous situation for many pharmacy operators.
“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,” Civello told House panel members.
CMS’ new model marks a major change in the way the Medicaid program will pay retail pharmacies for dispensing multi-source or generic medications to patients enrolled in the program. In its effort to interpret the cost-saving provisions of the DRA, CMS replaced the old standard for determining generic reimbursement rates, which was based on the average wholesale price of the product, to the new AMP model.
Civello testified that the new model contradicts the DRA because it includes drug prices paid by a broad swath of the pharmaceutical market, rather than just the rates paid by wholesalers for drugs distributed to retail pharmacies. It also requires drug makers to include all transactions in the AMP calculation except for sales and rebates that can be documented as being excluded under the new rule.
Civello predicted that payments for generics under the new guidelines would plummet 30 percent, “a level that will simply be unsustainable for many pharmacies serving low-income communities.”
Also testifying were Charles Sewell, senior vice president of government affairs for NCPA, and Ed Hagan, director of pharmacy for Associated Food Stores and a representative of FMI’s pharmacy department. Sewell painted a stark picture for committee members. “In 2006…1,152 independent pharmacies were sold or permanently closed,” he said. “This net loss of three independents per day is directly attributable to Medicare Part D, chiefly from payment delays, lower reimbursements and patients being unfairly steered into mail order and away from their community pharmacy.”
Sewell cited the concerns many pharmacy retailers have with the AMP-based pricing formula for generics, saying it includes mail-order pharmacies and other pricing categories not available to community drug stores. “Mail-order pharmacies purchase directly from the manufacturer, often at discounts not available to independent retail pharmacies,” he asserted. “These sales deflate AMP, making it further unrepresentative of retail pharmacy acquisition cost.”
Citing a recent study from the accounting firm Grandt Thornton, Sewell noted, “Retail pharmacy’s cost-to-dispense averages $10.50 nationwide…[but] the dispensing fee paid under state Medicaid programs is far lower at an average of $4.50.
Speaking on behalf of supermarket pharmacies, Hagan told panel members that the CMS payment formula also would force FMI member pharmacies to operate at a loss. “This new rule could result in the failure of some of our small business members,” Hagan said. “Pharmacies will find it increasingly difficult to serve Medicaid patients.”
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