Progress slow in Medicare reform efforts
Since sweeping back into power with control of both houses of Congress in January, the Democratic Party has learned anew a bitter lesson in politics: Being the majority party doesn’t necessarily translate into legislative success.
The Medicare Part D drug benefit program is a case in point. New House speaker Nancy Pelosi and other prominent Democratic leaders made reforming the Medicare Modernization Act of 2003—the law that created the Part D benefit—a centerpiece of their legislative agenda for the 110th Congress. It hasn’t happened.
When the MMA was passed, it contained a controversial provision that expressly forbids the federal government—or, more specifically, the Centers for Medicare & Medicaid Services division of the Department of Health and Human Services—from negotiating directly with pharmaceutical manufacturers for lower prescription drug prices. House Democrats quickly passed legislation early this year to overturn that provision, but the measure bogged down in the Senate as the powerful pharmaceutical and PBM lobbies, and the Bush administration, swung into action to turn back the challenge.
In issuing a veto threat, the White House argued that giving Medicare the ability to try to wring volume-based discounts from drug companies that supply the Part D program would amount to “government interference” in what is essentially a privately run program. Price negotiation by the government, President Bush noted, “impedes competition, limits access to lifesaving drugs, reduces convenience for beneficiaries and ultimately increases costs to taxpayers, beneficiaries and all American citizens alike.”
Advocates for change point out that direct drug purchasing already is practiced by other government agencies, including the Department. of Defense and the Veterans Administration, and that polls show support for the concept among a majority of Americans.
The Institute for America’s Future, an advocacy group allied with Democratic Party interests in health care, is among many interest groups calling for an overhaul of Medicare reform legislation to allow the government to negotiate directly with drug makers. “Legislation to allow Medicare to use its bulk purchasing power to negotiate for lower prescription drug prices could save American taxpayers and seniors more than $30 billion annually,” the group asserted in a recent report. “About $10 billion of these savings would accrue to American seniors in the form of cheaper prices.”
“In addition to the tremendous savings offered by allowing Medicare to negotiate for lower prices, there is also an opportunity to save more than $5 billion a year in administrative costs by allowing seniors to get their benefit directly from Medicare,” the institute added in its report.
The push for a bulk-purchasing provision in Medicare Part D is likely to emerge again either in the fall or early next year in the Senate. But for pharmacy retailers—particularly independent and small-chain operators running on few cash reserves and tight operating budgets—the Medicare drug benefit program has given rise to another, and far more pressing, worry. That is the issue of low-and-slow reimbursements to pharmacies by the prescription drug plans administering Part D.
Earlier this year, House lawmakers on both sides of the aisle resurrected a bill that would demand speedier payments from the PDPs for prescriptions dispensed under Medicare. Known as the Fair and Speedy Treatment of Medicare Prescription Drug Claims Act of 2007, the measure would require that complete and accurate Medicare prescription drug claims submitted electronically be paid within 14 days by electronic funds transfer. Paper claims would have to be paid within 30 days.
As was the case in the 109th Congress last year, the FAST bill gained plenty of support from members of Congress, and many expressions of sympathy for the plight of family-owned pharmacies stretched to the limit by the slow pace of reimbursements. Those slow payments have put some pharmacies in a severe cash-flow crunch, pharmacy leaders and some lawmakers argue, and have forced some independent drug stores out of business.
“Part D plans are paid each month in advance by Medicare, yet Part D plans are using delaying tactics to enjoy a considerable interest-earning ‘float’ on taxpayer dollars intended to compensate community pharmacies for serving their patients,” said Bruce Roberts, executive vice president and chief executive officer of the National Community Pharmacists Association. “Meanwhile, pharmacies have been forced to deal with payment delays, forcing many of these small businesses to borrow tens of thousands of dollars to cover payroll…and other basic operating costs. Hundreds already have closed, leaving many rural and inner-city areas without these vital community health resources.”
Rep. Marion Berry, D-Ark., one of the bill’s sponsors and the only pharmacist serving in the U.S. House, called the FAST legislation “a simple reform that will make sure pharmacists are treated fairly and not financially held hostage by insurance companies.”
Nevertheless, the bill appears to have bogged down. In a recent rally on Capitol Hill in support of independent pharmacists, Rep. Walter Jones, R-N.C., was among a bipartisan group of lawmakers calling for passage of the bill and denouncing the opposition of both the pharmaceutical and insurance lobbies, and of some members of his own party.
Last year, Jones said, despite the fact that more than 170 members of Congress co-signed a bill to ensure fair and speedy payment to pharmacists in Medicare, “We could not get our leadership to move the legislation.”
According to Paul Kelly, vice president of government affairs for the National Association of Chain Drug Stores, the same outcome is likely this year. “I don’t think there’s going to be much movement on reforming Part D this year,” Kelly told Drug Store News in late July. “It’s the same old story. While there is support and sympathy to pharmacy’s concerns as it relates to Part D, it all boils down to cost.”
Kelly said the Congressional Budget Office is predicting that passage of FAST could add more than $1 billion in eventual costs to the Part D program as the PDPs, deprived of the “float” they now enjoy on the reimbursement funds they pay to pharmacies, charge more from the government for administering the program when contract negotiations come up for renewal.
Ending the war in Iraq “certainly would free up some money,” Kelly added, “but I just don’t know if there’s anything that will break the logjam” in 2007.
“Our hope is that we can continue to apply enough political pressure on Congress to find a few billion dollars to help solve some of pharmacy’s problems.”
NACDS, for its part, submitted a list of recommendations for reforming Part D to the Senate Committee on Finance in the spring. Besides prompt-pay and any-willing-provider provisions, the group is also asking Congress to ensure that beneficiaries are able to obtain 90-day supplies of their medications from any willing retail pharmacy and to “enhance information provided to pharmacies by Part D plans about generic drug reimbursement rates.” NACDS also sought clarification about the medication therapy management provision of the Part D program by requiring PDPs to report to CMS the details of the MTM offerings to 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