A failure of pharmaceutical companies to deliver the quantities of drugs that people need have lead to shortages in 213 separate drugs in 2011, something that has been on the increase since 2004, and caused at least fifteen deaths.
The shortages involve a wide range of medications: cancer chemotherapy agents, anesthetics, antibiotics, electrolytes needed for nutrient solutions, and dozens more. One drug currently in short supply is used in critically ill patients to bring down soaring blood pressure. . . .
Most drugs in short supply have been older generic drugs, which are generally less profitable. Hospitals are most affected, because many scarce drugs are intravenous forms, not pills dispensed in bottles.
But actually, officials at the Food and Drug Administration say only 11 percent of shortages happen because a company decides to stop making an unprofitable drug. Most shortages, they say, occur because something goes wrong in the manufacturing process that halts production.
The problem today is there are fewer companies making essential drugs. So when one manufacturer stops producing, there may be only one other supplier – and it can't keep up with demand. . . . Whatever the tangled causes, all those involved believe drug shortages are the new normal in U.S. medical care.
Needless to say, shortages of essential drugs that cause deaths shouldn't be the new normal.
Just as government intervenes to regulate utitilies not only to prevent them from securing monopoly profits but also to assure the security of the electrical grid, it looks like some sort of efforts needs to be undertaken to insert enough slack into the distribution chain for prescription drugs to prevent a routine stumble in a manufacturing process at a single factory from causing patients to suffer.
The actual impact of a drug going generic, which is that just one or two companies start to produce a generic version and face little or no competition in doing so, in contrary to the intuition that sees the price drop as a drug goes from being protected by patent to losing patent protection as being primarily driven by a shift from a monopoly market to a market with many competitors. Instead, it is largely due to a shift from sales by a company that has to pay drug developers to sales by a company that does not.
The rising tide of drug shortages is also not due to "Obamacare." None of the provisions of the bill that could conceivably apply to this problem have taken effect yet, and the current trend of rising drug shortgages began before President Obama took office. In 91% of the cases, the problem is that drug manufacturers are just screwing up the process of making drugs.
Drug Distribution Doesn't Look Like Econ 101
America's not best in the world private sector dominated health care system is also having trouble getting some of the giants of the industry to play nice with each other when it comes to providing drugs to customers in a convenient way. For example, Anthem Blue Cross and Blue Shield, one of the largest private health insurers in Colorado, and equally important, my health insurer, has decided to cease to do business with Walgreens, one of the largest pharmacy chains in Colorado, and equally important, my pharmacists, effective January 1, 2012.
Actually, the dispute is even more arcane. Individual health insurance companies, like Anthem, don't actually negotiate directly with individual pharamacies. They outsource the job of negotiating with pharmacies on behalf of their insureds to pharmacy benefits managers (PBMs), an industry that is has even fewer competing firms than the health insurance market does. Anthem uses a PBM called Express Scripts as do other some major health insurance companies.
I'm not in a great position to say who is at fault in this breakdown of negotiations. Express Scripts may have a legitimate plan to control health care costs by doing business with fewer vendors and extracting a better deal from the vendors that remain, or may have a legitimate concern about the quality with which Walgreens is filling prescriptions. Then again, it could be that Express Scripts is insisting that Walgreens offer it discounts that prevent it from making a profit while knowing that the fewer vendors its plans to use can't handle the work as a negotiating ploy, or it could be that Walgreens is insisting on making a far above market rate profit knowing that the size of its chain gives it more leverage than pharmacies with First Scripts. Neither company has made any reasonable effort to tell me what issues are driving a failure to reach a deal that will have the effect of imposing a significant inconvenience on me, in addition to no doubt, a higher cost of health care in the coming year.
According to a July 7, 20011 press relief from the pharmacy lobbying organization the National Community Pharmacists Association (NCPA):
Walgreens recently announced that beginning January 2012 it would no longer participate in Express Scripts’ pharmacy networks. Walgreens reportedly made this decision because Express Scripts reimbursements to its national chain of pharmacies are so low under the terms of the proposed new contract that the retail pharmacy giant thought it more reasonable to risk losing an estimated $5.3 billion in annual revenue generated from prescriptions filled by members of health plans that Express Scripts manages. . . . NCPA sees ominous consequences for patients, health plans and community pharmacies in Express Scripts’ windfall profit-driven negotiating position. Regardless of how this impasse is resolved, it should spotlight how small business community pharmacies and their patients are regularly steamrolled by pharmacy benefit managers (PBMs) like Express Scripts. If a provider with the clout of Walgreens can be forced into a virtual contract stalemate that risks disrupting existing patient/pharmacist relationships and reducing patient access to care, it’s easy to see how much more inequitable PBM contracts can be for an independent community pharmacy “negotiating” with a billion-dollar corporation. . . . Express Scripts’ reported posture in these negotiations seems to encapsulate three of the major PBMs’ most egregious business practices that put PBM profits before patients and the pharmacies that provide their care.
First, optimizing PBM profits by squeezing pharmacy reimbursement rates to the point that the viability of small community pharmacies is placed at risk. This practice jeopardizes patient access to close-to-home care and has clinical repercussions such as increased risk of non-adherence (patients not taking medications as prescribed by their doctors). Clearly, if Walgreens concluded that Express Scripts’ pharmacy reimbursements are financially unsustainable, the tipping point has long ago been reached for small pharmacies. Express Scripts and its PBM brethren need to immediately discontinue retail “spread pricing” – the practice of marking-up pharmacy claims filled at retail to generate PBM profits.
Second, scheming on generic drugs. Beyond the reimbursement disagreements with Walgreens, Express Scripts is reportedly seeking the right to unilaterally change the definition of “brands” and “generics.” This is a favorite PBM contracting scheme that is designed to further increase PBM windfall profits. Previously, it was solely inflicted upon unsuspecting health plans and their members. Walgreens obviously sees this scheme for what it is.
If only health plan sponsors were aware of the financial impact these types of PBM schemes have on their potential generic savings, they too would reject them out of hand, opting instead for contract language that precisely defines a brand and generic drug. With so many blockbuster drugs coming off patent over the next two years, health plans have an unprecedented opportunity to leverage huge generic savings – assuming the big PBMs don’t retain those savings as undeserved profit.
Third, pushing restricted pharmacy networks that will increase PBM profits and reduce the number of pharmacies available to provide patient care. Media reports indicate that Express Scripts plans to limit patient access to care by pushing forward with restricted access pharmacy networks. This allows PBMs to reduce the number of pharmacies available to patients so that that the PBMs can squeeze pharmacies for more profit per claim. Of course, this will mean that patients will suffer as a result. Long-standing relationships with local pharmacists would be disrupted and patients may have to drive further to get their prescriptions filled.
There is a financial impact to health plans as well. Restricted access networks, with their associated longer driving distances to obtain medications, help PBMs like Express Scripts sell heath plan sponsors on herding their members into PBM-owned mail order pharmacies that dispense generic drugs 10 to 13 percent less frequently than at community pharmacies. In 2010, Express Scripts’ mail order service had the lowest generic dispensing rate of the three largest PBM-owned mail services – costing its health plan clients millions of dollars in unrealized generic savings. Research finds that for every 1 percent increase in generics utilization, a health plan can save 2 percent.
According to a June 21, 2011 report by New York Times:
If the companies do not settle their dispute, people whose prescription benefits are handled by Express Scripts will not be able to get their prescriptions filled at the biggest drugstore chain in the United States, and Walgreens will give up about 7 percent of its annual revenue.
The announcement on Tuesday follows a similar contract fight a year ago between Walgreens and the CVS Caremark Corporation that was resolved less than two weeks after it became public.
The impasse with Express Scripts overshadowed news that Walgreens’ net income climbed 30 percent in its third quarter.
Express Scripts is the second-largest pharmacy benefits manager in the United States, and it expects to handle at least 750 million prescription claims in 2011. Walgreens said about 90 million of those prescriptions would be filled at its stores.
Express Scripts, which is based in St. Louis, said that it had been preparing for Walgreens’ departure and that more than 50,000 other pharmacies participated in its network.
These accounts appears to suggest, at least, that disputes are pretty much purely over prices and profits. Certainly, if the rant boards on the Internet are any indication, Walgreens, which has a face to face relationship with its customers, is winning the grass roots P.R. war against Express Scripts, which is one reason that they pharmacy lobby is looking for relief from PBM practices in Congress. Customer service is not an Express Scripts forte.
It also worth noting that the customer inconvenience isn't necessarily catastrophic:
There are still many pharmacies that will remain in the network including but not limited to:
a. Walmart
b. Sams Club
c. Costco
d. CVS
e. Target
f. Kroger, etc.
In metro Denver, the average additional drive time for an Anthem customer wouldn't be that great - often the extra drive would be considerably less than a mile.
To a significant extent, it appears that what Express Scripts wants to do, as much as anything else, is to establish that it isn't going to continue the long standing practice of most health insurance companies of including essentially all major providers in the area and the vast majority of doctors who haven't affirmatively gotten cross-wise with health insurers for a specific reason or simply not bothered to get themselves credentialed. Instead, it wants to make the threat of ejection from a network a credible threat for any provider, even one who has done nothing specifically wrong (thereby increasing its bargaining power), and to have more of a restricted network without actually going to the point of full vertical integration a la Kaiser. In other words, these negotiations have broken down because Express Scripts seems to be engaging in strategic behavior that will support a change in its business model, rather than the usual tactical skirmishing over details of a contract that gets renegotiated from time to time in the ordinary course. Walgreens may be an attractive target for the initiative from Express Scripts, because as one of the more profitable chains it does business with, as a whole, and hence may be able to give in, even if the concessions make the pharmacy business in isolation unprofitable or nearly unprofitable.
The success Walgreens had with its grass roots P.R. offensive with CVS Caremark in 2010, had no doubt emboldened it somewhat in this similar negotiation with Express Scripts this year, which is now more than three months old, and is about three months away from the January 1, 2012 drop dead date when the current agreement between Express Scripts and Walgreens expires.
Part of the problem in this situation may be similar to that in the drug manufacturing business. There aren't many pharmacy benefit managers in Colorado, so they face less competition and the industry as a whole is prone to more systemic risks of melt downs.
Retail pharmacies are the closest to the perfect competition ideal of the links in the pharmaceutical deliver and financing chain, although this is still skewed, because most health insurance companies require patients to pay the same amount for the same drug no matter where it is filled, so pharmacy price competition exists only in periodic negotiations with health insurance companies and in the relatively thin market of pharmacy sales to people who don't have health insurance that includes drug coverage.
Also, the potential for price competition between retail pharmacies is somewhat illusory because they all buy the drugs that they sell to customers from a single manufacturer in the case of drugs that are still protected by patents, and from just one or two manufacturers, in many cases, in the case of generic drugs. The way that a pharmacy is run is also quite regulated, so there isn't a huge variation in operating costs, other than costs of good sold, from one pharmacy to another.
As the parties negotiate over what reimbursement rate a PBM will pay to a pharmacy, everybody knows what the only price is town for that same drug is on a wholesale basis, and have a very long timeline of managerial accounting data that inform the costs of the pharmacy business other than cost of goods sold. The price set by the PBM effectively fixes the pharmacy profit, subject to only slight adjustment with managerial innovation by the pharmacy, which is something of a culture shock to a retailer who is used to balancing profit and sales volume tradeoffs when dealing with the general public in other goods and services.
One a one time basis, squeezing pharmacies can reduce drug costs. But, ultimately, excessive profits from pharmacies are a pretty insignificant source of rising prescription drug costs, which are mostly driven by drug makers, mostly for prescription drugs that are under patent, and by the choices that physicians make in what drugs to prescribe. Pharmacies basically compete with each other for market share, not on price.
Thus, pharmacies are squeeze between oligopolies that verge upon being monopolies on both sides. For individual pharmaceutical consumers the amount of choice involved is even more limited. A doctor has prescribed a drug based on medical necessity, that is often made by just a single supplier, or perhaps two or three, and sometimes simply isn't available at any price. An employer has chosen a health insurance company and even if the employee can choose more than one plan option with the employer, it isn't unusual for all of the plans to come from the same health insurance company, or at least from insurance companies that all use the same pharmacy benefit providers. For all but the oldest and least expensive generic drugs it is almost unheard of for a pharmacy to be able to deliver a drug for less than the health insurance set co-pay, because reduced retail drug prices is one of the things that insureds receive in exchange for paying health insurance premiums.
Despite the absence of any substantive government regulation of prices in the health care market, the consumer experience of the prescription drug market is that price fixing is the norm, and that price competition is the rare exception. When was the last time you saw a 15% off sale for cholesterol pills or oral contraceptives?
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