Kevin Piper summarizes the good, the bad, the ugly, the winners and losers from the new Medicare Part D program in his blog “the Piper Report”. As more information has become available, it is clear that there will be substantial changes to the pharma supply chain, with most entities seeking to better understand utilization and price drivers and squeeze margins wherever possible.
Piper notes winners will include:
–low income Medicare recipients without Rx coverage today
—private employers with generous retirement medical plans will reap a multi-billion dollar windfall, although legislation may reduce this.
—large national insurers seeking to expand market share in this rapidly growing market of seniors
–lobbyists actuaries and consultants.
That may be true, but the fundamental problem of adverse selection still exists. It is getting lonelier by the day out here in the “but the business model just does not make sense” woods, but I have yet to hear anything that makes it sound like Part D providers will be protected from adverse selection.
What does this mean for you?
I’d be very careful of Part D; just because others seem to believe in this does not mean you should not carefully assess the risks.

Legislation has been introduced in the US Senate that would prevent pharmaceutical companies from including the cost of advertising in calculating drug prices for governmental programs. Moreover, the legislation also requires that the HHS and Veterans Affairs Departments “negotiate reduced prices on drugs that are advertised directly to consumers in other programs” (quote from California HealthLine).
The legislation is sponsored by John Sununu (R NH) and Ron Wyden (D OR), senators that are not exactly on the same philosophical plane on many other issues.
According to Wyden, since companies’ advertising expenses are already a tax deduction, “[t]axpayers shouldn’t have to further subsidize the drug companies’ marketing efforts through Medicare and Medicaid.”
My sense is this is a backdoor way for Congress to encourage HHS to negotiate prices with pharma. The Medicare Reform Act specifically prohibits HHS from negotiating prices, a situation that rankles many legislators and taxpayers. Of course, Sununu et al are quick to claim this is not the intent. Regardless, it is a clear indication that some in Congress are looking for creative ways to reduce the cost of pharmaceuticals to the government, and taxpayers as well. With the present budget deficit and focus on same, look for this motivation to result in some meaningful price discussions.
What does this mean to you?
Watch pharma pricing carefully; due to the “flexible” nature of Average Wholesale Price (AWP), (sometimes referred to as “Ain’t What’s Paid”) price reductions in one sector can often be offset by increases to other payers. And as we have noted before, price is but one component of the pharma cost equation of price X utilization X frequency = total cost.

Several readers have noted that there are other reasons for getting involved in the new Medicare drug program, citing the government’s “loss prevention” financial arrangements, the sophistication of PBMs in managing formularies, and the desire to enter what will be a growing and eventually huge market.
The Piper Report has an excellent summary of th program and pays particular attention to a partnership between Cigna and NationsHealth. The post also has numerous links to other sources that further explain part D.
While all this is interesting, I sense a “bleeding edge” aspect to these programs. For most entrants into this market, this will be their first large-scale initiative into senior drugs management. The challenges they face will include:
–inexperience about seniors and their drug-consuming habits
–the inherent problems with adverse selection noted in previous posts here
–their inability to control, or even impact, the treating physician, widely acknowledged as the primary driver of pharmaceutical utilization
This last may be the most significant. At the end of the day, PBMs are transactions processors, administering (in large part) what physicians order. If they can’t intelligently address and positively impact prescribing behavior in a way that does not put the beneficiary in the middle, they will find themselves caught between the doc and the patient – a very uncomfortable position.
What does this mean for you?
It is highly likely that early adopters will get burned in this deal, and slower movers will glean vital knowledge from observing without entering the fray. This is one of those rare circumstances where I would advise caution.

The growing popularity of Medicare Part D (the Medicare Drug program) among health plans pharmacy benefit managers (PBMs), is a mystery. As I have noted before, the program as presently conceived is guaranteed to drive adverse selection with only the seniors who will get more from the program than they will pay in likely to subscribe.
I asked national health policy expert Bob Laszewski of Health Policy and Strategy Associates (not affiliated with my firm) if I’m missing something, if there is a good reason why PBMs and health plans are jumping into this business. Bob pointed to a Brandeis University study that indicated those seniors who purchased the drug discount card tended to he high users of drugs. No surprise there – what is revealing is the underlying statistics. Drug card purchasers saved 20% (on average) but used the card twice as often as seniors who received a card automatically from their health plan.
Defenders of the Part D program cite PBMs’ expertise in formulary management, bulk pricing arrangements, cost-sharing with seniors (co-pays etc.) as evidence of their ability to control costs.
Perhaps most telling is the Federal government’s announcement that they will protect PBMs and health plans from excessive losses incurred as a result of their Part D drug programs.
The net – this is one of those “if everyone else is doing it, we better too” businesses. It is reminiscent of the pricing cycles in property and casualty insurance, where as soon as carriers start losing money they raise prices, and as soon as they start making money they cut prices to capture volume. This pattern has been as consistent as the tides, and likely as inevitable.
What does this mean for you?
For those of us on the sidelines, observing the outcome of the rush into Medicare Part D drug cards will be instructive. It is possible that I am missing something here, that PBM programs actually can address utilization (although I have never seen evidence that they do, and because they traditionally make money only when prescriptions are filled, utilization management is not in their DNA).
But I doubt it.

Back to the detailers v. doctors, if only just for a moment. Dr. Gary Schwitzer of the U. of Minnesota has posted an interesting piece on Rep Henry Waxman’s indictment (figurative, not literal) of Merck’s behavior related to misleading MDs about Vioxx.
Another blog has a highly entertaining review of some highly embarassing marketing training literature ostensibly used by Merck. Suffice it to say that they are using anatomy as well as physiology in their efforts to “reach” docs…
What does this mean to you?
The dollars pharmas have to spend on convincing MDs to order their drugs are much larger than the dollars managed care firms have to “counter-detail”. If managed care firms, insurers, and employers want to stand any chance in this battle, they need to figure out how to do a much better job of educating docs than they have to date.

The latest casualty among drugs falling victim to over-promotion and under-testing is Bextra, Pfizer’s COX-2 inhibitor. This time around it is not just cardiovascular issues that are the problem.
Bextra appears to be linked to a significantly higher incidence of a serious skin reaction, a problem not found in the other COX-2s. This skin condition is what led the FDA to “request” that Pfizer pull the drug last week. Earlier, Pfizer was asked to add additional safety warnings to Bextra’s labeling, a move that fell short of a withdrawal request.
Reactions ran the gamut from shock and disbelief to “I told you so”; perhaps the most telling appeared in the New York Times:
Thalia Segal, a pain specialist at New York University, said, “We used to just put people on these drugs for life and not think about it, but we can no longer commit them to lifelong therapy with impunity. We have to use these medications judiciously and follow people more closely. We have to rely on a much more individualized approach” (O’Connor, New York Times, 4/8).
It is becoming painfully (no pun intended) obvious that the “side effects” of various medications can not only be quite serious, to the point where people die or suffer debilitating conditions, but also have been under-considered by administrators and big pharma alike. And, the treatment expense and other liability associated with these side effects will contribute to our rising health care costs. Over the short term, financial results of the pharmas will suffer (“Pfizer, which on Wednesday announced plans to reduce costs by $4 billion annually and restated 2005 earnings estimates, might have to make additional cost reductions to return to double-digit earnings growth by 2006