Pharmacy Industry News: Five questions: Pharmacy specialist touts benefits of competition
Five questions: Pharmacy specialist touts benefits of competition
With his highly technical mind, Ken Schafermeyer is among the local health care experts who seem to grasp the fluid dynamics of the pharmaceutical industry, from patented research to mail order.
Steeped in the world of prescription medicines, he seems to revel in discussing the latest permutations of rebates, discounts, community pharmacies and pharmacy benefits managers. He also has a yen for public policy, eager to size up the strengths and inequities of U.S. health care.
Schafermeyer is a professor of pharmacy administration at St. Louis College of Pharmacy, where he has worked since 1990. He’s also director of the college’s Division of Liberal Arts and Administrative Sciences. He worked previously as a state pharmacy association executive and lobbyist, and also as a consultant for several managed care and Medicaid agencies in Missouri and Indiana.
A licensed pharmacist in Missouri, he earned his bachelor of science degree in pharmacy from the St. Louis College of Pharmacy, a master of science degree in pharmacy administration from the University of Tennessee, and a Ph.D. in pharmacy administration from Purdue University.
He has authored and co-authored 27 books and manuals, written chapters in eight textbooks, as well as articles on various areas of health economics, managed care coverage of pharmaceuticals, and financial management.
Taking a break from his teaching and research, Schafermeyer sat with the Post-Dispatch last week for an interview on topics ranging from pharmacy costs for the average consumer, to the pricing of drugs for the elderly and the poor. What follows is an edited transcript:
Is the health care reform law making prescription medicines any more affordable for the average American?
The average American probably won’t see much change at all, because they already have health insurance. Their health insurance plan is already trying to do what it can to control drug costs, so most people won’t be affected.
The people who will be affected the most will be people with pre-existing conditions who can’t get health insurance. And it will effect those 32 million people who don’t have health insurance now who are expected to obtain health insurance as of 2014. For those people, the cost of prescription drugs is going to go way down because insurance will cover it. At least it will increase access.
People will have opportunities to get affordable health care without going to the emergency room and probably will seek earlier diagnosis and treatment — and that in itself would help reduce costs.
Even with more consumers using generic drugs rather than brand-name drugs, the cost of prescription medicines in the U.S. seems sky high. What can be done to lower or cap the cost of medicines?
About 58 percent of all the prescriptions now are dispensed for generic products. The 42 percent of prescriptions for brand names represent 80 percent of costs. So it’s really disproportionate.
The average brand name prescription is in the range of $140 to $160, and generics are a small fraction of that. A lot of big brand-name drugs are ready to go generically, and everyone predicts year after year that that’s going to save money. What they don’t anticipate is that there are going to be new brand-name products on the market that physicians are going to want to write prescriptions for, and while there are savings in some places, there are new costs of expensive brand name products elsewhere.
So what can the consumer do? They can ask their pharmacist or their physician if a generic is available, and whether a generic could be dispensed. Most physicians really don’t know the cost of these products.
How successful is the federal secretary of Health and Human Services in negotiating good prices for Medicare drugs?
I’d say totally ineffective.
(The 1990 Medicare law) required manufacturers to give rebates, because government saw that hospitals and PBMs (pharmacy benefit managers) and other groups were getting rebates, and they wanted them, too. They claim they are saving all this money, but there’s nothing saying what the original price was.
So look, if my price is $100, and you demand a 15 percent rebate, why don’t I increase the price to $115 or $125? So we all act like we’re saving money by getting rebates, but I think people in the industry know there’s no savings there because a company can charge more money if they want and they can give a discount off of whatever they charge.
So the biggest purchasers of pharmaceuticals (Medicare and Medicaid) aren’t necessarily getting a break on price. But with Medicare D, when that was passed (in 2005), there was a specific provision that said the federal government would not negotiate prices. That was a concession to the pharmaceutical industry.
We’re the only industrialized nation in the world that doesn’t negotiate drug prices with manufacturers.
Are the states any more successful in negotiating good drug prices for Medicaid programs for the poor?
What they can do is give incentives to dispense lower cost products, and they do that by requiring the use of generics when possible.
There are certain things they can’t control, (such as) the reimbursement for brand-name drugs if the drugs are covered. They’re not very effective at controlling the price. They pretty much have to reimburse based on the cost.
And they can certainly create incentives to dispense generics. They can give incentives to find therapeutic alternatives to an expensive product.
But at the end of the day, there’s a limit to how much they can do. And so they’re not all that effective at reducing costs for the high cost branded products.
Should independent family owned pharmacies receive any special protection from the government against large retail pharmacy chains and mail order pharmacies?
No, I don’t think they should have special protection. I think they should have a level playing field. I think they should be able to compete in an open market.
So if there’s a mail order situation, a pharmacy shouldn’t be put at a disadvantage where they can’t meet the same terms as a mail order plan. So if a mail order plan can dispense a 90-day supply, why couldn’t a community pharmacy dispense a 90-day supply? If the co-payment is different for mail-order versus a community pharmacy, why? Why shouldn’t it be the same?
Let a patient decide if mail order is better for them or a community pharmacy is better for them. Don’t put them at an economic disadvantage and force them to do something they may not want to do…
Competition is a good thing. Let it happen.
CVS: Use of Generics Kept Costs Down in 2010
CVS Caremark Corp. said an increasing use of generic drugs by its customers helped keep costs in check last year as the industry copes with pricing pressures and sweeping changes in U.S. health-care policy.
In an annual review of drug and pharmacy trends, the pharmacy-benefits manager and second-largest pharmacy chain in the U.S. said complex specialty pharmaceuticals remained the fastest growth area, up 14% year-to-year, while the use of prescription drugs also was up overall, CVS Caremark expects the trends to continue this year.
“Last year was one of uncertainty and change for our clients as they worked to understand the impact of health-care reform while also dealing with a sluggish economic recovery,” said Per Lofberg, president of CVS Caremark’s pharmacy-benefit management business.
The company’s generics-dispensing rate reached 71.5% in 2010 as more products became available and were more widely accepted for use by physicians and consumers.
About a quarter of CVS Caremark clients’ medication costs fell from a year earlier, the company said.
The company in February reported that its fourth-quarter earnings fell 2.2% on weaker results at its pharmacy-benefits business. The industry has been under pressure amid reduced consumer spending and as Americans have been using fewer health-care services.
PBL’s adventure could have big consequences
OPINION: Pharmacybrands (PBL) is small and easy to miss among stock market giants such as Fletcher Building and Telecom.
The casual observer probably wouldn’t know, but the $45 million-valued PBL now controls about a third of the retail pharmacy industry.
In 2005, PBL was Life Pharmacy. The impetus behind its establishment was a 2003 law change allowing non-pharmacists to own up to 49 per cent of a pharmacy, up from 25 per cent previously. Additionally, pharmacists could now own up to five pharmacies rather than just one.
The path has not been smooth. Life Pharmacy lost $6.6m in 2007 and a further $570,000 in 2008 before achieving a profit of just $61,000 in 2009. But it doggedly pursued the idea of industry consolidation. After a merger with unlisted Pharmacybrands in 2009, Life Pharmacy changed its name to PBL. This month another unlisted company, Radius Pharmacy Group, was acquired.
According to industry figures there are about 900 pharmacies in New Zealand. PBL operates more than 300 franchised stores under the Life Pharmacy, Unichem, Amcal, Care Chemist and Radius brands. It has ownership stakes (mostly of about 49 per cent) in 68 of those stores. The 68 stores collectively have $200m of annual turnover.
For the half-year to September, PBL reported after-tax profits of $2.2m, up from $1.35m for the same period in 2009. The company was cashed-up, with $40.3m of shareholders’ funds against just $45.6m of total assets.
The Radius purchase has changed that. Radius cost $17m to buy, but PBL is also taking on $18m of its debt. To fund the acquisition PBL is using $12m of cash reserves and $23m of bank financing, meaning its debt will rise to $24.5m, though it will still have a debt-to-equity ratio of just 1-to-2.
Its profitability is therefore difficult to gauge. Figures for the March 31, 2010 year supplied by PBL for the Radius acquisition give combined after-tax earnings for the two companies of $7.5m. However, the figures don’t incorporate the extra debt PBL is taking on for the Radius purchase.
Like any retail operation, pharmacies have been doing it tough. Health and beauty product sales are under pressure from other retailers and online competition, while policy changes under the last government saw dispensing fees dropped.
Grouping pharmacies in franchises gives them greater buying and distribution power, so bringing down costs. But for a few years, your columnist did wonder if the overall levels of profitability for PBL would ever match the effort in bringing it all together.
However, something interesting has happened. Big hitters have climbed on board PBL.
First up in 2007 was Andrew Bagnall, a 64-year-old motor sport and franchise enthusiast. He created Gullivers Travel Group back in 1976 and carried away well north of $100m from its sale in the mid-2000s. He has, by Chalkie’s reckoning, pumped about $13m into buying 26.7 per cent of PBL.
Then there was the Zuellig Group. This US$12 billion (NZ$15.3b) turnover, privately- controlled Asian conglomerate owns the C B Norwood Distributors agricultural equipment firm and has had longstanding investments in New Zealand’s healthcare supplies industry. Peter Merton was a senior manager for the company in New Zealand, ending up in a joint venture with Zuellig.
In 2007, Mr Merton and Zuellig sold their wholesale pharmaceutical and medical supplies businesses to Ebos Group for $72m in cash and $14m in Ebos shares, but retained a 67 per cent interest in the then unlisted Pharmacybrands.
When that merged with Life Pharmacy in 2009 they became 26.71 per cent shareholders in the merged PBL entity. Mr Merton is now chairman.
Mr Bagnall, Mr Merton and Zuellig have fabulous investment pedigrees and very deep pockets. They must see much more to PBL than has been shown so far.
The company provides a hint of its true ambitions with a brief reference in the background documentation for the Radius acquisition, sent to shareholders last month. It appears that pharmacy consolidation is merely an entry point for investment in primary health services.
PBL is considering buying into eight medical practices. It would buy one outright and take stakes of between 10 per cent and 50 per cent in seven others. In addition it may buy another company that provides management services to those eight medical practices as well as to another 11 independent practices. No decision has been made on these acquisitions, but Chalkie is prepared to bet they go ahead.
So, PBL’s interest goes far beyond pharmacies. It appears interested in extending franchising right through primary healthcare – creating the one-stop shop and the obvious operational and cash efficiencies this could bring. There would appear no limit to how far this corporatisation of health services might go, if PBL can find the money.
The company is already suggesting it may raise more capital later this year to fund further expansion. And if you look at the major backers’ resources there is plenty of petrol left in the tank.
SURVEYING the wider picture, public health spending, at $12.7b, made up over 15 per cent of total government/ taxpayer expenditure last year. The Government is looking for ways of getting more bang for our buck. Health Minister Tony Ryall has spoken of how demand for health services is expected to double in the next 10 years and how much of this demand needs to be met on a “lower cost platform” out in the community and closer to home.
Pharmacies and GPs are well placed to take up more frontline health duties. Pharmacies, for example, can take responsibility for the monitoring of issue of certain drugs to patients or the keeping of detailed health records.
Government policy will therefore be important for PBL and the strategy its main backers are quietly unfolding.
If primary healthcare providers do indeed receive a greater share of both funding and responsibilities, then the PBL strategy has a fair chance of bearing fruit over time.
And how far might this strategy extend? It is interesting to look at some of the people involved in private sector health services and the associations they have. Mr Merton is a director of healthcare supplies group Ebos. He owns 2 per cent of that company, while Zuellig has 3 per cent. The largest shareholder in Ebos is South Island investor Mark Stewart, with 10 per cent. Mr Stewart also owns nearly 20 per cent of Wakefield Health, the operator of two private hospitals in Wellington and one in Hawke’s Bay. Ebos director Liz Coutts chaired PBL when it was still known as Life Pharmacy. Ebos chairman Rick Christie is also on the Wakefield board. Given these associations, it is not hard to imagine some sort of either informal or official linkage in future between Ebos, Wakefield and PBL. A tie-up would take in all areas of health, from medical supplies wholesaling, to retailing, to GP care and to hospital care. That would be some sort of one- stop shop. Because so much depends on future government policy, the investment being made by the principals in PBL is still somewhat speculative. But the rewards are potentially rich if those backing PBL have correctly anticipated future health policies and direction.
There is no doubt PBL is on an adventurous journey. Where the journey leads is still open. But given the track records of the people in its driving seat, PBL’s little adventure could have big consequences for the healthcare industry.