Health-Care Exchanges Will Need the Young Invincibles: A Response

In “Health-Care Exchanges Will Need the Young Invincibles,” Dr. Ezekiel Emanuel describes how youth participation in insurance exchanges will be essential.  These exchanges, mandated by the Affordable Care Act, are to begin enrolling citizens on October 1st.  Dr. Emanuel doesn’t mention the significant logistical and monetary obstacles remaining in getting these exchanges off the ground, particularly for the twenty-six states who have opted to have HHS implement a “federally-facilitated exchange.”  

But let’s assume that some form of exchange, convoluted or not, will be ready to accept enrollees. Will people attempting to enroll through these online insurance markets have various plans to choose from, as they expect?  Insurance industry publications, such as Insurance Journal, and health policy organizations like the the Pew Charitable Trusts have written about the reluctance of insurance companies to jump into uncharted waters.  It seems that states which already have competitive insurance markets will, unsurprisingly, have more plans offered on their exchanges, while states who have few insurers presently selling plans may find only tumbleweeds.  UnitedHealth Group CEO Stephen Hemsley, head of the nation’s largest insurer, has stated the business plans to participate in only ten to twenty-five of the exchanges.  This lack of competition isn’t a good sign for young people like myself already concerned about the rising cost of insurance premiums.  

Oh, yes, I am one of those “young invincibles” that Dr. Emanuel is worried about attracting  As a mid-twenties male with no medical conditions, I am likely the kind of enrollee that plans would covet in order to offset the costs of those older and less healthy.  Unfortunately, my good health won’t win me major discounts from an insurance plan.  Instead, new rules about how much insurance companies can charge older enrollees as well as new, mandated benefits, result in a shift of costs onto younger, healthy members.  Those young, healthy premium-payers make up the difference between what insurance companies can charge older or unhealthy patients and what those patients actually cost.  The Society of Actuaries, an organization of the number-crunchers responsible for pricing insurance, expect individual insurance rates to increase by as much as 32% due to high risk patients entering the exchanges.

Even with federal subsidies, the most enticing options for many of the under-30 cohort like myself will be to choose catastrophic coverage, which won’t be available to all, or forego coverage rather than enroll in an expensive, exchange based plan as Dr. Emanuel hopes.  In an average year, my health-care costs will be minimal, so the only appeal of insurance is financial security from extreme situations.  Even if you do qualify for a catastrophic coverage plan, and particularly if you don’t, paying the small has-no-health-insurance tax for 2014 looks mighty appealing.  

Ignoring the fact that some simple financial calculations make the decision clear for many, Dr. Emanuel hopes that Obama’s appeal to young voters and some savvy marketing will convince young people to sign up in droves.  Such guile may have an effect, but I’m not convinced that young people won’t be more persuaded by their limited bank account.  Dr. Emanuel’s final approach is to shame people by equating the rational decision to forego an insurance product with irresponsibility.  While a relatively rare diagnosis such as cancer may lead to large debts that are defaulted upon, most health-care expenditures don’t result in such extreme scenarios, including an emergency room visit, his other example of reckless uninsured-ness.  Dr. Emanuel’s reproach ignores the implicit free-riding in any insurance product where the insured does not pay a price commensurate with their risk.

Every individual, regardless of age, will have to take a look at the options available to them this fall and decide what makes the most sense for their situation.  If relying on browbeating groups into making financially irrational decisions for themselves is essential to the ACA’s exchanges operation, then the illogical nature of the exchange structure is clear.

LIBOR and Pharmacy Reimbursement

The LIBOR scandal has died down in the news cycle, but, before the world forgets about the esoteric rate, I'll tie it into some pharmacy commentary.

The London Interbank Offer Rate is an interest rate that an enormous quantity of  loans and financial products around the world use as a proxy for extremely good credit.  The rate is determined by a survey of major, global banks, asking them what they think they would have to pay in order to borrow money for different periods of time.  These results, with the top and bottom quartiles thrown out, are then averaged, and that is the LIBOR for each time period.  LIBOR was in the news because, it turns out, people at some of the banks involved in setting LIBOR attempted to influence the rate by providing fudged estimates.  How does influencing the rate help them?  It produces gains or minimizes losses on investments that are affected by or otherwise tied to LIBOR. So, we have a rate susceptible to manipulation by the people involved in setting it, and these people had a profit motive to do so.  LIBOR is supposed to be a benchmark rate for very secure credit, but it seems, since there was no way to check on whether or not banks were actually lending at that rate, it wasn't a very useful benchmark.

Now to switch gears:  Pharmacies are reimbursed by payers, government or commercial, for the product and service provided.  How do the payers determine appropriate reimbursement?  They pick a benchmark, such as AWP (Average Wholesale Price) and stipulate that pharmacies will be reimbursed at "AWP -15%" or some such.  Where does AWP come from?  Vendors such as Medi-Span and Elselvier publish it in drug price compendia; the numbers come from the manufacturers, who provide either the suggested wholesale price or the wholesale list price (which can differ, similar to how other products are rarely sold at MSRP).

This article does a good job explaining the pros and cons of different pricing benchmarks (http://www.amcp.org/data/jmcp/492-501.pdf), but the main problem with AWP as a payment benchmark from a payer or pharmacy perspective is it often does not reflect what a pharmacy actually paid for a drug product, due to inflated price reporting, rebates, and other forms of discounts.  In addition, the same drug can have many different AWPs as there may be multiple manufacturers, and thus multiple NDCs, each with a unique AWP.  There are numerous other payment benchmarks being used by private and government payers, such as AMP and MAC, but the point is payers use these since they don't know what pharmacies actually pay for drugs.  It's a reimbursement guessing game.

The government in particular wants a more accurate reimbursement benchmark due to the large amount of Medicaid and Medicare drug spending.  AAC, or Actual Acquisition Cost (what the pharmacy actually paid for the drug product), is the goal.  Alabama's state Medicaid agency was the first to collect pharmacy acquisition cost data and use that as the basis for reimbursement (Alabama AAC List).  Note that, being Medicaid, they may be able to compel pharmacies who accept Medicaid to submit the required cost data.  CMS has decided to attempt this on a national scale (Medicaid Survey of Retail Prices) in order to "provide State Medicaid agencies with an array of covered outpatient drug prices concerning acquisition costs and consumer purchase prices.  The State agencies can use this information to compare their own pricing methodologies and payments to those derived from these surveys."  One can assume that Medicare Part D payers and really all commercial providers would enjoy this information as well.  However, CMS may not quite have the same footing as state Medicaid agencies (conjecture on my part), so the surveys used to determine the actual acquisition cost (which CMS is calling NADAC or National Average Drug Acquisition Cost) will be entirely voluntary.  The draft methodology for NADAC is here.

A good Drug Channels post addresses how pharmacies certainly have little incentive to participate as well as a structural problem in the survey: no information about rebates.  Why do rebates matter?  Well, if I sell you something at $100 invoice price but then give you back $50 in rebates at the end of the quarter, the invoice price is $100, but your acquisition cost is $50 + time value of money and other quibbles.  The NADAC survey will thus really be a collection of information about invoice prices.

So, you have voluntary reporting of a benchmark that will be used to determine payments, and there isn't any way to see if the benchmark truly reflects what it is supposed to represent.  See the connection with LIBOR?  In addition, the NADAC survey will be susceptible to gamesmanship such as inflating the acquisition costs on certain or all drugs, not responding, and/or negotiating with your wholesaler to increase invoice prices as well as rebates.  Now I don't know what pharmacies will actually do nor whether or not the NADAC will be a success or failure.  But, based on the experience with LIBOR, there sure are a lot of holes in CMS's plan.

WAGS Gets the Boot(s)

I hate to harp on another misstep by Walgreen Co., but I'll throw in my take on Walgreens' June purchase of a ~45% stake in Alliance Boots, a European retail and pharmacy chain.  Alliance Boots has a retail/pharmacy line of business and a pharmaceutical wholesale side.  On its face, this buy looks like it might have some pluses for Walgreens:  acquiring a stake in a large European chain, economies of scale through larger purchasing power with manufacturers, negotiating leverage with PBMs, and access to a distribution network in Europe.  Lets look at those one by one.  

Is overseas expansion a good thing?  Well, if you can buy into any business at the right price then it is a smart investment.  Did they get a good deal on Alliance Boots?  At nearly 7 billion dollars for a minority stake, the markets didn't think so.  WAGS dropped on the deal and is currently trading at about 10% below the price before the deal was announced.  Another take:  Alliance Boots is owned by private equity firm KKR and Stefano Pessina, the combination of a well-regarded investment firm and an extremely successful businessman and entrepreneur.  Not very likely those two entities let something go for a price that isn't attractive from the seller's point of view.  

Economies of scale in negotiating with both manufacturers will likely be difficult to reconcile with the different pharmaceutical pricing practices in the U.S. versus Europe.  Europe, to generalize, doesn't have as free a market as the U.S. does in terms of how pharmaceutical manufacturers price their products to wholesalers.  Moreover, drugs approved in the EU may not be approved in the U.S. and vice versa, complicating matters.  Negotiating firm wide, i.e. leveraging both Alliance Boots and Walgreen's pharmacy business when dealing with manufacturers, if at all feasible, seems likely to prove quite cumbersome

The investment in Alliance Boots does absolutely nothing to address Walgreens' problems at home with Express Scripts and falling prescription volume.  The pharmacy benefit model is another example of U.S. practice different in other countries.  I can't imagine the large U.S. PBMs seeing any value in Walgreen's new global network.  The purchase also does nothing to address what I consider the elephant in the room with regards to the standoff between Walgreens and Express Scripts:  what is happening with all the Medco covered patients whose employers’ benefits contracts are expiring?  My early guess is that Walgreens is losing these patients, just at a slower, less noticeable pace than the January Express Scripts exodus.  

Walgreens, like all major chains, uses their own wholesale warehouse for some medications their retail pharmacies stock.  Thus, there may be some possible knowledge exchange and trade tips to learn from Alliance's wholesale division.  However, any major synergies would have to come from establishing a global supply chain.  This simply isn't possible due to the differences in approved drug entities as mentioned earlier, as well as laws governing the sale of pharmaceuticals in the U.S., particularly with respect to reimportation.

In my view, the major positive of the deal is that it has made it look like Walgreen Co. is at least taking action to turn their business around from the slide it has been in.  However, real, substantive action that addresses their core market will be required to justify a higher stock price, not just headline grabbing acquisitions.

The DEA and Oxy Madness

With the ongoing Oxycontin (a brand name version of oxycodone, a narcotic painkiller) madness continuing in Georgia and nationwide, now seems as good a time as any to write about the DEA's newsmaking efforts this year.  Eariler this year (http://www.reuters.com/article/2012/02/06/us-dea-raids-idUSTRE8151NA20120206) two CVS pharmacies were raided for filling an exorbitant number of oxycodone prescriptions, and the article also mentions briefly the Cardinal distribution center the DEA had shut down earlier that week.  I don't have a problem with the DEA attempting to rein in pharmacies that are ignoring obvious forgeries and otherwise not making any effort to assure prescriptions are legitimate.  However, I do think it is a slippery slope to expect pharmacists to be able to spot whether each and every prescription is somehow justified beyond being a legal prescription drug order.

More than just checking with the physician and documenting these steps to confirm a legitimate prescription, it seems the DEA would like pharmacies to second-guess prescribers and patients as to whether they actually need the medication.  Well, actually, the DEA would like pharmacies to simply voluntarily cut the supply of painkillers, particularly Oxy, because then the DEA wouldn't look as foolish for their inability to control Oxy's widespread abuse.  So far, the DEA has proven incapable of stopping the flow of Oxy at its source, the physicians running the pain clinics and pill mills.  Moving downstream and targeting pharmacies won't have much of an impact if the dam's gates are still open.  The Oxy scripts are still out there, so they will just move to a different pharmacy.  And who gets left out in the cold in this ambush?  Those with actual chronic or acute pain that would be well served by the strong pain control an opiate like oxycodone provides.

A Cardinal distribution center in Florida (Cardinal being one of the major pharmaceutical drug distributors in the US) was raided and, at present, cannot ship controlled substances.  Perhaps the DEA viewed this as moving up the supply chain: going from the corner dealer (retail pharmacy, e.g. the raided CVS's) to their supplier.  However, the pharmacies that this distribution center supplied will now have to be served by another distributor in order to even fill their elderly patients' sleeping pills.  Another distributor will step in to fill the legitimate need for controlled medications, even if they are wary of the DEA with regards to narcotics.

But won't the distributors heed the message and simply drastically cut down deliveries of Oxy to pharmacies?  Possibly. Oxycontin/oxycodone does typically get filled initially at retail pharmacies before entering the black market; so you can theoretically cut off the black market by either shrinking the Oxycontin/oxycodone supply to pharmacies.  Or, you can reduce the amount of prescriptions written for Oxy by quack prescibers in pill mills.  But the first option harms actual patients and drug abusers indiscriminately.  The second option, targeting prescribers with harsh actions such as revoking medical licenses for proven abuses, disproportionately affects those attempting to fill prescriptions to resell illegally.  Which option do you think the DEA should be focusing on?

Express Scripts and Walgreens: One Year Later

     Around a year ago, the ongoing contract negotiation between Express Scripts (ESRX) and Walgreens (WAGS) promptly ended when Walgreens issued a press release stating that they would not accept Express Scripts prescription coverage after the end of 2011.  Walgreens was insisting the reimbursement offered was insufficient.  As far as I know, Walgreens never actually said the contract Express Scripts proposed would be unprofitable; I believe they characterized the contract as providing “below market” reimbursement while attempting to imply that Express Scripts was low-balling them.   Express Scripts, of course, stated the contract had standard terms.  In rejecting the contract and saying they would leave the Express Scripts pharmacy network, Walgreens may have thought other pharmacies would join them in a protest against the ever-declining reimbursement rates in retail pharmacy.  That notion obviously did not play out, and, instead, a massive exodus of customers flew out of Walgreen’s doors.

     WAGS was alone among major pharmacy chains in declining to fill Express Scripts prescriptions; the campaign to encourage patients to demand Walgreens be in their pharmacy network produced little effect.  There has been a widely reported number that come January 1st, Walgreens lost 85% of their Express Scripts covered prescriptions.  Walgreens attempted to downplay the loss of these prescriptions throughout the negotiations, stating they expected prescription volume to be only slightly less in 2012 versus 2011. Express Scripts processes about 750 million prescriptions a year; with Walgreens handling about 90 million ESRX prescriptions a year, Walgreens is looking at a lot of lost revenue: over $4B.  That’s over 5% of the company’s total revenue right there just in lost prescription reimbursement. 

     Looking at WAGS first fiscal quarter filings, which cover the quarter ending Feb. 29 thus including the month of December when the Express Scripts contract was still in effect, WAGS has lost over 7% in prescription volume compared to the previous year.  Operating income for the quarter was down as well.  A recent press released showed comparable store prescription numbers for May were down nearly 8% year over year, and one can assume this was highlighted because it is a brighter outlook than recent months.  Taking these numbers into account, it doesn’t seem likely Walgreens can come within a couple percentage points of last year’s total prescription numbers. 

     For those in retail pharmacy, Walgreens actions during the negotiations with Express Scripts seemed quite peculiar.  It is obvious to almost everyone that PBMs hold the bargaining power in today’s pharmacy landscape.  How did the stock market react to Walgreens’ bravado?  Well, WAGS is down nearly 28% in the past year.  After the initial summer drop surrounding the Express Scripts news, WAGS traded in the low $30s for much of the latter half of 2011.  Since then, it has slipped to $30.98, dropping over 6% in 2012 alone.

     Express Scripts seems to have handled things a bit better.  ESRX was also trading lower in the latter half of 2011 versus summer 2011, down from the mid $50s to just under $36.  The key point here is that ESRX is currently trading at ~$53.  The current price point is slightly below last year’s high, but the stock has been on a mostly steady march upward since the lows of early October.  Due to a recent pullback and last summer‘s fall, the year over year return is about -7%, but the stock is up ~12.5% in 2012.

     So who gained from those millions of Express Scripts prescriptions that Walgreens used to process?  Well, CVS Caremark (CVS) is up 20% in the past year.  Rite Aid (RAD) is up nearly 14% in the same period.  One man’s loss is another man’s gain.

CVS/Caremark Takes Aim at Discount Cards' Hidden Side Effects

     Jon Kamp’s recent WSJ article focused on CVS/Caremark’s attempts to stanch the flow of pharmacy discount cards and their negative effects on prescription spending.  We aren't talking about the random cards that people receive in the mail that promise discounts on all medications (those are a subject for another day); CVS/Caremark is fighting against the discount cards disbursed by manufacturers.  Many people have seen or used these cards.  You get a prescription for a brand name medication that will be expensive, such as Solodyn.  Solodyn is a brand name, extended release formulation of minocycline, an antibiotic commonly used to treat acne.  Since Solodyn is expensive, your provider gives you a discount card to reduce your co-pay on the medication to an affordable level.  Now, in a perfect world, these cards would be a major benefit to patients, helping them afford needed medicines that would otherwise not be taken due to cost.  And there are certainly some cases where that is what happens.  

     Often, in my experience, the discount card is for a brand-name medication that provides little benefit over a cheaper alternative in the same class.  Generic Solodyn is available, so brand name is typically only filled by patients with coupon cards or other forms of reduced co-pays.  Generic Solodyn, extended release minocycline, is ~5-10 bucks a tablet.  Brand name Solodyn is ~$20-30 a tablet.  So why does anyone pay for Solodyn?  Because they have a coupon card that reduces their co-pay down to twenty bucks, not much more than the co-pay for generic minocycline.  No harm, no foul though right?  Patient is happy and the pharmacy will get reimbursed from the Pharmacy Benefit Manager (PBM) and the manufacturer/card processor.  

     Not exactly.  The pharmacy has the extra fun of dealing with split billing the medication, holding another expensive inventory item on the shelf, as well as an additional accounts receivable to wait on.  But that isn't the real story.  Why CVS/Caremark is attempting to head off these cards at the pass is because they take advantage of the way benefit plans are commonly designed and change the way the co-pay structure incentivizes patients to use cheaper, effective alternatives where possible.  Though benefit structures can be complicated, co-pays are commonly in tier systems.  

     One basic example would be a first tier with an initial price for preferred generics, a second, higher co-pay tier for non-preferred generics and preferred brands, and a third, still higher co-pay for non-preferred brands or very expensive medications.  Some drugs may not be covered by the plan at all, such as over-the-counter items or lifestyle drugs.  For drugs that are covered, the pharmacy will electronically send a claim to the PBM, and the PBM will reimburse the pharmacy a contractually agreed amount meant to cover the cost of the medicine and dispensing.  Then the pharmacy will charge the patient the copay amount that the PBM returned in the claim (pharmacies also contractually agree to charge the copay).  

     For our Solodyn example, it may fall in a higher tier, such as Tier 3, since there is a comparable generic minocycline available.  A patient's hypothetical co-pay might be $50 for Tier 3 medicines.  With a coupon card, the co-pay may come down to, say, $20 with the manufacturer/coupon processor paying $30.  This is acceptable to many patients, even if the generic Tier 1 copay is a little lower, say $10.  The patient has the Solodyn filled and begins treatment.  

     But the money for the Solodyn has to come from somewhere; remember a 30 day supply is over $700 just for the pharmacy to order.  If the medication is covered, as it was in this hypothetical example where it fell in Tier 3, then the PBM will reimburse the pharmacy something close to that cost.  Hundreds of dollars are spent on the drug, but the patient bears very little of the cost burden.  PBMs have plenty of money you say?  Well, who ultimately pays for the medicine is the plan sponsor, typically an employer or federal agency.  

     So money that could have been used for raises, hiring additional people, paying dividends, reducing operating deficits, whatever, is instead an additional benefits expense.  CVS/Caremark is taking a step in the right direction by not covering many of these coupon card products, thereby placing the cost burden elsewhere.  If the manufacturer wants to subsidize the product to a large enough degree that patients will pay for it, or if patients want to pay full price, that is their business. 

     Of course that won't be the case, and these prescriptions will get changed to a viable, less expensive alternative or go unfilled.  Now, CVS/Caremark is also discontinuing coverage for medications that wouldn’t agree to rebates CVS/Caremark asked for, and both of these steps have the main objective of increasing that bottom line profit number.  But realigning patient’s economic incentives with the most cost-effective treatments also saves the plan sponsor, patient, pharmacy, and healthcare system as a whole money.  In a system that wantonly spends money without evidence-based justification, steps like this by CVS/Caremark are a move in the right direction.

No Surprise Retail Traders Lose on Facebook IPO

     Facebook's IPO has been criticized roundly, and the lawsuits are now starting to fly.  In the days leading up to the offering, both the amount of shares being sold and the offering price were increased significantly.  While this might make sense on the back of some good news about Facebook, the only recent developments in their business were negative: the difficulty in monetizing mobile, slowing growth, and a quarter over quarter revenue decrease.  Of course, given the unbridled optimism and enthusiasm some people have for Facebook, the IPO might have succeeded in spite of such warning signs.  I assume that is what the underwriters were hoping for.

     Not only was demand lacking above, or possibly even at, the IPO price, significant problems with NASDAQ's handling of trades caused delays and unconfirmed trades left and right.  The media pointed out that some analysts for underwriters such as Morgan Stanley had communicated misgivings about Facebook's IPO valuation to important clients of the firms.  This is an area of legal contention, but it seems that there is likely nothing technically illegal that occurred during the week of the IPO; analysts may have been allowed to share new opinions verbally without running afoul of disclosure rules. 
   
     This brings us to my favorite complaint heard throughout the coverage of Facebook: the IPO showed how Wall Street wasn't fair to the little guy because of information sophisticated investors might have been privy to compared to your retail John Doe.  The naivete of the assumption that Wall Street should be "fair" in this regard is astounding.  Of course a retail trader doesn't have as much information as financial professionals; they never do. 

     Regardless of whether or not analysts involved in the IPO may have quietly revised price targets down or expressed concerns to clients, retail guys don't have the same knowledge and understanding of Facebook's finances nor analyst research.  Even the most well-informed retail traders who can break down accounting statements and dissect a stock's story don't have access to the amount and depth of analyst research that professionals do unless the retail investor is willing to pay large sums for it.  Just because an analyst might have disclosed their new opinion on a stock doesn't mean John Doe ever sees this report.  It isn't free disclosure. 

     Retail traders also don't have the market knowledge of professionals who spend every day around the markets and are plugged in.  Is the rumor across trading floors that this IPO price will have a hard time being justifiable?  What kind of volumes and order flow are coming across the tape right now?  What are the derivatives markets telling us, and how will external or global events effect prices today? Most retail guys wouldn't know, as they don't have access to such information flow. 

     So, your average individual who traded this IPO doesn't understand the business all that well and doesn't have the market knowledge to see warning signs about a lack of price support or interest if such signs did exist.  And people are upset and surprised they lost money?  I'm more surprised John Doe ever makes money on a trade, but I chalk that up to the laws of probability.