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.
Mapping out the next generics wave
From 2012 to 2017, global spending on medicines will increase from $205 billion to $235 billion, according to IMS Health. By 2017, 36% of the spend will be on generics, a number that is 9% more than the percentage in 2013.
As a result of the patent cliff, generic drug manufacturers have thrived while branded pharmaceutical manufacturers have suffered. Branded pharmaceutical manufacturers are expected to suffer even more in the coming years, as many more important patents will lose exclusivity.
A recent paper from the Centers for Medicare and Medicaid Services concluded that plan sponsors have been able to successfully control costs by using tiered co-payment and benefit management practices to encourage the use of generics, and that a “shift toward generic utilization cut in half the rate of increase in the price of a prescription during 2007-2009.” What is less clear, they noted, is how new market entrants with very few competitors — like specialty therapies — will influence future costs.
The patent cliff
Between 2013 and 2016, $73 billion in branded medications are expected to lose patent protection, according to IMS. While many manufacturers dread the loss of patents, patent expiries of traditional drugs generally help contain spending growth across the country. This will be especially important starting in 2014 because increased access to health care via the Affordable Care Act and lower patent expiry levels will cause spending levels to start to rise again during this year. In fact, IMS’s November 2013 report, “The Global Use of Medicines: Outlook through 2017,” estimates that market growth will double in 2014 as a result of these factors.
IMS also predicts that loss of exclusivity, along with slower transitions to new medicines and increased market access issues, will cause absolute spending on brands to decrease $113 billion by 2018, which is considered the end of the patent cliff. In addition, $83 billion in brand spending will shift to generics with lower prices.
Among the most notable products slated to lose patent protection in 2014 alone include: Nexium (esomeprazole magnesium), Cymbalta (duloxetine), Copaxone (glatiramer acetate) and Symbicort (budesonide and formoterol fumarate dihydrate). Although there are varying annual sales numbers on these products depending on the information source, these products represent roughly $16 billion dollars in patent loss.
In 2015, other important patent expiries include, but are not limited to: Abilify (aripiprazole), Gleevec (imatinib), Namenda (memantine) and Celebrex (celecoxib). Many of these drugs were scheduled to lose exclusivity in different years, but court proceedings will prevent the release of generic versions of these drugs until 2015.
Finally, in 2016, blockbusters Crestor (rosuvastatin calcium) and Benicar (olmesartan medocomil) are scheduled to lose patent protection.
The last phase of the generics wave
Just beyond the patent cliff, a huge generic wave will swell. The last big generic wave was around 2011 to 2012, and analysts predict another wave will begin to build over the next 12 months. Small-molecule drugs will increasingly be dispensed as generics, and the loss of patent exclusivity will cause an increase in spend on generics of about $40 billion dollars over the next five years, according to IMS.
This is not to say that the drug market will be devoid of innovation — however, many of the innovative medicines in development will be in the specialty or orphan drug sector. Thus, the age of the traditional small-molecule blockbuster will come to a close, at least temporarily. IMS estimates that more than half of research projects are currently for specialized medications, and nearly one-third of all projects are biologics. In fact, IMS predicts that there will be an average of 35 new molecular entities launched per year for the next five years, for an average total of 175 new products by 2018.
By around 2016, there are expected to be fewer growth opportunities for generic drug makers. However, companies can look into generic biologic manufacturing, or biosimilar production. There will be fewer competitors in this market, specifically because follow-on biologics are so difficult and expensive to produce, and because they follow a different regulatory procedure than do traditional generics. Much more is required in terms of clinical trials, and there are steep regulatory and marketing hurdles with biosimilars. At the pharmacy level, there are issues with substitution depending on a person’s state.