Tag Archives: PBM / Pharmacy

Kroger Expansion – Digital, Physical, Strategic, and Specialty Pharma … Oh My!

Since one of my first jobs was at Kroger, I’ve always been intrigued to see what happens with them. (I can even still go back almost 30 years later and still have some of the General Managers at my old store come out and remember me.) So, I was initially intrigued a few weeks ago when the story came out in Drug Store News about their expansion plans.

“Over the course of a day-long investor conference Tuesday, Kroger outlined its future growth strategy. Across its physical store base, Kroger plans to enter one or two as-yet-to-be-named new markets along with boosting presence in existing markets. But Kroger also has significant designs on the multichannel consumer, and outlined for analysts the grocer’s plan to grow its marketshare across the digital landscape as well.”

Kroger has several interesting assets to leverage:

Now, with today’s announcement, they’ve made a jump into the Specialty Pharmacy Space with their acquisition of Axium. It begs the question of what they want to be – a grocer with a pharmacy, a pharmacy with groceries, a health destination, or something new.

Looking at some JD Powers data from 2010, they are positioned in the middle of the pack from a pharmacy satisfaction perspective.

On the other hand, if I look at their positioning from Bruce Tempkin’s analysis, they score well.

I have to believe there’s some great opportunity here. I’m a big believer that the retail assets create large opportunities for them to play in the broader healthcare market.

  • They have broad hours (in some cases 24/7).
  • They are natural destinations for people.
  • They can host clinics.
  • They already have pharmacies.
  • They have food which is a critical part of addressing obesity and for certain conditions like hypertension and diabetes.
  • They have patient specific data around things like home monitoring tests, food products, OTCs, and other products.
  • They are generally located in easy access locations.
  • They have good brand equity.

For example, just look at this press release from Target from a few years ago. This is a broad vision (that I’ve never heard or seen in the market). On the flipside, we know that CVS, Walgreens, and WalMart are spending considerable efforts trying to really “own” this space with their teams. We also know that specialty pharmacy (and even pharma in general) is trying to see how it gets out of its box and become broader players in the health continuum looking beyond just drugs to actual outcomes. (This is why healthcare is so exciting right now!)

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Medco Tour of Champions

I was surprised to see a full-page advertisement yesterday by Medco in USA Today about their Tour of Champions.  I knew they were focusing on therapeutic resource centers (i.e., pharmacies dedicated to specific disease states like diabetes).  It seems like a great idea.

tourofchampions.png

It was interesting to go to the website – www.tourofchampions.com.  One of my biggest surprises was the fact that they have made their therapeutic alternative tool called My Rx Choices (i.e., telling you lower cost options based on your current drugs) available to the general public.  Now, obviously, it can’t tell you your copay savings, but it may help you identify options.  For example, I put in Lipitor to see what it would offer me.  (see below)

myrxchoices-lipitor.png

From the website, this is what it says the specialist pharmacists do:

  • Cross-check your current medications with your health history and available lab work to help you stay safe.
  • Understand your overall health, not just treat your condition.
  • Let your doctor’s office know how your pharmacy program works so your doctor can help you save.

What is a PBM?

I realized yesterday that many consumers might not even know what a PBM is. PBM stands for pharmacy benefit manager. The market is dominated by 3 large players – Medco, Caremark, and Express Scripts. After that, you have several mid-sized players – Walgreens, Pharmacare (which is now being integrated into CVS/Caremark), Prime Therapeutics, MedImpact – and lots of captive (i.e., part of a managed care company) PBMs – Wellpoint, Aetna, Cigna. And, finally, you have PBMs like Argus that primarily process claims for companies like Humana. (Here is a directory of most of the PBMs.)

Typically, a PBM has the following functions:

  • Process pharmacy claims (i.e., when you go to your retail pharmacy, the pharmacist enters your prescription and electronically submits it for adjudication. The claim is routed to the PBM where it is checked for eligibility and then to see if it pays and what copayment you owe)
  • Set up pharmacy benefits (i.e., based on the plan selected by your employer or payor, the PBM codes what drugs are covered and the copayment structure)
  • Administer rebates…since large pharma companies (e.g., Pfizer) pay rebates for having their drugs on formulary (aka preferred drug list), someone has to manage the negotiations and billing of this.
  • Set up clinical programs (i.e., most PBMs have a clinical committee which evaluates new drugs and looks at market data to help employers choose coverage options)
  • Establish a retail pharmacy network (i.e., work with retailers to get them to agree to discounts on drugs)
  • Communicate with patients and physicians (i.e., look at pharmacy claims data and help find ways to save money or identify clinical issues to inform the patient or physician about)
  • Provide cross pharmacy data for drug-drug interactions…this is a critical function since many people use more than one pharmacy for claims
  • And, last but not least, most PBMs provide a mail order and often specialty pharmacy where they ship prescriptions to patients.

The PBM’s clients are employers who are self-insured, government entities (i.e., state employees, DoD), unions, TPAs (third party administrators), and managed care companies (i.e., BCBS of). Since healthcare has not traditionally been a consumer focused business especially in the PBM world, many of you might not know who your PBM is. In some cases, the managed care company may make it basically invisible to you.

The only people that likely have good awareness of their PBM are high utilizers who run into lots of claims questions and/or people who use the mail order service.

WilsonRx does surveys around PBMs Learn More. Here are two charts from their website about who people name as their PBM and satisfaction with their PBM.

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PBM / Pharmacy Benefits Data (Takeda)

Takeda publishes The Prescription Drug Benefit Cost and Plan Design Survey Report (free to order here). I read the 2006 edition last night. It is full of great data that I would want if I were a consultant, a HR representative, or responsible for my companies PBM relationship.

The document also points you to the American College of Occupational And Environmental Medicine for other information.

Here are some of the facts (based on respondents to their survey):

  • 69% of employers less that 5,000 employees are self-insured
  • 97% of plan sponsors chose to be self-insured so that they had the ability to customize their health plan to meet workforce needs
  • 68% of employers use separate vendors for medical and pharmacy of which 53% use a PBM
  • Average pricing was:
    • $1.88 in retail brand dispensing fees
    • 84.7% AWP reimbursement for retail brands (or AWP – 15.3%)
    • $0.24 in mail brand dispensing fees
    • 78.1% AWP reimbursement for mail brands (or AWP – 21.9%)
  • Formularies were used by almost everyone – 92%
  • Mail copayments were roughly 2x the retail copayment (for 3x the supply of medication)
  • Employer size appeared to matter for price negotiations (no kidding) and they showed that employers w/ over 20,000 members achieved a retail rate of 0.8% less that employers with less than 2,000 members
  • Sponsors who use mandatory mail got a lower reimbursement rate (77.1%) than those without mandatory mail (78.4%)
  • Only 2% of sponsors use a closed formulary where drugs not listed are not covered and the patient pays the cash price
  • It cites research on adherence (The Importance of Medication Adherence, Stambaugh, April 2006) which showed the following reasons for poor medication adherence:
    • 1% don’t know how to use the drug
    • 10% can’t get the Rx filled, picked up or delivered
    • 14% don’t think they need the drug
    • 17% said the drug costs too much
    • 20% don’t want the side effects
    • 24% sometimes forget to use or refill the prescription
    • 10% cited other reasons
  • 40% of employers who design their own plans use co-insurance as opposed to 13% of people who use other parties (i.e., consultant or managed care)
  • Mail service utilization ranged from 0.2% to 62% with 18.3% being the average
  • If a company had mandatory mail, their mail use was 32% versus 14% if voluntary mail
  • Generic dispensing rates ranged from 33% to 71% (51% average) at retail and 12% to 65% (39% average) at mail – which is due to the different mix of acute versus maintenance drugs typically
  • Talked about specialty drugs quoting cost to treat MS at $12K per year and hemophilia at $120K per year (Rx only)

Lots of good information to have.

Confusing Stock Market Reaction

So, Walgreens announced that they were going to miss earnings because of generics (oh and higher expenses).   All of a sudden, the PBM stocks (e.g., Medco and Express Scripts) took a hit which makes no sense to me.  [BTW – I own none of these individual stocks although they may be in mutual funds that I own.]

Walgreen Co., one of the nation’s biggest drugstore chain operators, said Monday its fourth-quarter profit dropped nearly 4 percent because of lower reimbursements for some popular generic drugs and increased store and staff costs.  (See all)

“If Walgreen is receiving lower reimbursement for some generics, it means that PBMs are paying the company less for generic drugs,” Wachovia analyst Matt Perry surmised on Tuesday. “In other words, the PBMs’ drug purchasing costs have gone down. We think the selloff in shares of Medco and Express Scripts is unwarranted.” (see entire article)

At least one analyst understood.  But, why would the market response this way.  There are only a few reasons that these could be correlated positively.  My hypothesis would have been that if Walgreens is getting less than the PBMs are making more or are neutral.  This would make sense because if the PBMs paid Walgreens less they wouldn’t immediately pass that on to their clients assuming they make spread on those claims and have multi-year contracts with employers and managed care companies.  And, if they simply passed on the retail costs to their clients, it would have no impact on them.

How could it be true that Walgreens and the PBMs made less?

  1. The acquisition cost of generics could have gone up which would likely only happen if the wholesalers (e.g., McKesson or Cardinal) changed their prices dramatically or the generic manufacturers increased their prices (not likely).
  2. A significant number of PBM clients (or major managed care companies with their own PBMs like Aetna, Cigna, Wellpoint, Humana) requested price concessions on generics which forced the reimbursement rates down for the retail pharmacies and the mail order pharmacies.  (possible, but clearly not what you hear from the other players)
  3. Costs for a specific generic (with material marketshare) changed dramatically from what was forecasted (shame on the planner).  The worse case here would be if they struck a sweetheart deal (i.e., guaranteed supply at a lower than market price) and then saw the price drop out with a new manufacturer come to the table.

Generics are definitely a key profit driver for the pharmacy industry.  The average AWP (average wholesale price) is $40 (for a 30-day supply).  Companies pay less than 50% of this.  The actual costs are typically less than 80%.  And cash customers pay greater than 100%.  Lots of spread.

Now, of course, there are costs to fill each prescription so it is not that simple.


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