Healthcare 3.0

Eliminating and reducing costs of healthcare is a common theme debated regularly in the media and on main street today as sky rocketing costs are bankrupting Medicaid and Medicare programs in the United States.  Prescription drug coverage comes from a variety of private and public sources. Employers [i] are the principal source of health insurance in the United States, providing coverage for 58% of Americans in 2008.  About 9% of Americans purchased individual coverage in 2008. Effective January 1, 2006, 47 million eligible Medicare beneficiaries could enroll in private drug plans and it is estimated that as of February 2010, 90% of the eligible Medicare beneficiaries had drug coverage.  Medicaid provides medical assistance to the 60 million low-income individuals and all State Medicaid programs cover prescription drugs for most beneficiary groups. This post will focus on the prescription drug delivery model in the United States and a possible solution to reduce prescription drug costs significantly and help ease the burden on the sky rocketing cost of healthcare.

1. Current Status in the US:

The current prescription drug model in the US is complex. Multiple players drive the system including: retailers, wholesalers, pharmacy benefit managers, insurance companies, benefits management companies and manufacturers. The system appears to be built on adding layers to satisfy intermediaries instead of the patient. As Figure 1 shows, there are multiple entities involved in managing the movement of the pill to the patient. While this type of model may have been necessary historically, as new technology and delivery systems continue to develop, an opportunity to remove excessive costs is beginning to emerge.

Current Model

Figure 1

2. Current Players:

The top pharmacy benefit management companies comprise over 140 billion in revenues and the revenues below are for pharmacy benefit management services.  Pharmacy benefit managers generate profits by consolidating buyers to obtain discounts with pharmaceutical manufacturers, distributors and retail pharmacies.  The top five PBM’s include:

CVS: 2011 PBM Revenue: 51 Billion USD.  CVS Caremark (NYSE:CVS) is the largest U.S. pharmacy services provider.  It operates pharmacies, which sell prescription and Over the Counter drugs, as well as retail merchandise such as cosmetics, convenience foods and photo processing services.

Medco: 2011 PBM Revenues: 19.0 Billion USD.  Medco Health Solutions (NYSE:MHS) is one of the biggest pharmacy benefit managers.  Medco provides services through a network of retail pharmacies and its own mail-order pharmacy.

Express Scripts: 2011 PBM Revenues: 46.1 Billion USD.  Express Scripts  (NASDAQ:EXRX) is one of the top five pharmacy benefits management companies measured by prescriptions sold[ii].  Express Scripts clients are health insurers and employers which hire ESRX to manage prescriptions drug benefit plans for their members and employees[iii].  The new ESI is the classic, old-school PBM model that has come under attack for years. Critics of the model argue that the company is really a one-trick pony, best at driving down pharmacy reimbursements and steering patients into its own mail order business[iv].

UnitedHealth Group: 2011 PBM Revenues: 20 Billion USD. UnitedHealth Group (NYSE: UNH) is the parent company of various other health services organizations and health insurers.  UNH is the second-largest publicly traded health insurance company in the United States[v]. As such, it has significant scale advantages that extend across its major product lines, allowing it to attract new member hospitals as well as negotiate for lower prices

SXC: 2011 PBM Revenues: 5 Billion USD.  SXC/Catamaran Corporation  (NASDAQ: SXCI) is a leading provider of pharmacy benefit management (“PBM”) services and healthcare information technology (“HCIT”) solutions to the healthcare benefit management industry. The Company’s product offerings and solutions combine a wide range of applications and PBM services designed to assist its customers in reducing the cost and managing the complexity of their prescription drug programs. The Company’s customers include many of the largest organizations in the pharmaceutical supply chain, such as pharmacy benefit managers, managed care organizations, self-insured employer groups, unions, third party health care plan administrators, and state and federal government entities.[vi]

Going deeper, and analyzing the market in terms of the number of Rx Covered Lives, Figures 2 and 3 below show that Express Scripts and Medco are the market leader with CVS holding a number two position. This data is as of third quarter 2010. These companies, with a massive numbers of customers have a significant hold on the drug market today.

Figure 2[vii]

Figure 3[viii]

3. Prescription for the Drug Addiction:

Historically, there may have been a need for the PBM. Given technology advancements such as the smartphones, apps for smartphones and generic drugs, now is the time to assess the feasibility of disintermediation.  The need for transparency into the logistical and payment workflow of drug delivery is increasing based on health systems and state governments inability to pay benefits.  Analyzing the accretive value that PBMs provide is paramount.  The changing role of the PBM is upon us as technology such as apps and web-based platforms can now be used to manage PBM workflow seamlessly and easily.  Stakeholders should ask themselves if this infrastructure is still really necessary?

Arguably, technology today makes the ordering, adjudication, fulfillment and payment immediate and seamless.  Combining this with the movement to generic drugs as patents expire, is it now possible to flatten the market?    Market consolidation has happened in real estate, travel, music, entertainment and banking to name a few sectors.  Technology convergence coupled with social media is paving the way for movements in markets and economies and due to the cost pressures facing us all, now is a good time to reassess how medication is delivered.

Leveraging these technology advancements, a model for the future can be designed and key elements are outlined below.  It is based on the following principles.

One market price:  The market is now defined from the consumer perspective.  There is no need for multiple pricing structures as those are designed to maximize profits for PBMs.  Current market segmentation practices (e.g. number of employees in a health plan, number of prescriptions for a given drug in a health plan) are designed to create value for the PBM, not the consumer.  The market is the total number of consumers for a specific drug or treatment and these market constituents should be viewed as a whole not segmented for the benefit of the PBM so that a purported value for negotiated services can be charged.  The result would be that there is one market price.

One wholesale price:  The current market drives pricing based on MAC (maximum allowable cost) and AWP (average wholesale price).   These are mechanisms established to increase or adjust margins based on ‘market conditions’.  Other than driving or affecting margin increases or decreases for the manufacturer, wholesaler, PBM or retailer, these two pricing variables do little for the consumer.  Therefore, one wholesale price would be built into the marketplace based on the drug.

One retail margin:  Dispensing fees vary by state and within a state.  As shown in the table below[ix], there is a large variation in the dispensing fees due to among other things, manufacturer rebates for achieving quantity goals.

Figure 4[x]

With technology, dispensing fees can, and should be standardized and transparent.  Figure 5 highlights the disparity between dispensing fees in Indiana (as one example) by type and distribution method.  Variable dispensing fees do not benefit the consumer and are derived for the purpose of maximizing profit for the PBM and retailer.  Streamlining the dispensing fees will lower costs or administration and overall prescription costs.

Figure 5[xi]

Order online and choose fulfillment method:  Technology enables fulfillment from anywhere.  Consumers can now order from the manufacturer’s website, link their prescription digitally and chooses the manner in which they want to receive their medication.   As shown below, the consumer can order on the brand’s website or application and then choose a delivery method.  The order simultaneously passes through a Patient Benefit Management (PatMan) system that adjudicates the prescription to the health plan, assesses drug interaction compatibility and serves as a data repository for research.  The PatMan system is an open source data network that is an open source public-private partnership linkable to the patient’s electronic health record.

Fulfillment in this model is done in a couple of ways.  First, if the consumer orders today and needs the medication immediately (within forty-eight hours for example), the prescription is pushed to the retailer of choice or retailer closest to the consumer at the time of ordering.  The consumer can either pick up the prescription or have it shipped from the retailer for delivery based on the consumer’s needs.  If the consumer doesn’t need the prescription immediately (after forty-eight hours), they can have the prescription shipped from the manufacturer via USPS, UPS, FEDEX or other delivery service.   Payment, adjudication, logistics, fulfillment and tracking is done from one integrated system that is interconnected with the patient’s health record.

Figure 6

Unattended Devices:  Bank’s do it with ATMs.  Movie rental companies do it with Redbox.  State of California does it for medical marijuana.  Prisons and Indian reservations can do it. However, state pharmacy boards currently don’t permit it. Why?  To protect income for the state?  Dispensing of prescription medication via an unattended device is currently not permitted by state pharmacy boards.  This will change one day.  Unattended devices, interconnected with the prescription management system, makes sense and will eliminate or reduce drug dispensing fees.  In the model above in Figure 6, the retailer can be an unattended device.  The technology for interconnectivity to the prescription, patient identification through bio-metrics and device security exist.  Using unattended devices will decentralize the fulfillment points for medication to locations that are convenient for the consumer.  Workplace fulfillment, economic physician office fulfillment[xii], retail location fulfillment, pharmacy fulfillment after hours are all feasible with the technology enabled unattended devices.

4. Benefits of technology based fulfillment:

Grey Market Reduction:  Consumers ordering directly from manufacturers could reduce the possibility of grey markets since demand generation would be consumer focused versus wholesaler or retailer focused.  Grey markets occur when wholesalers acquire excess quantities of drugs in anticipation of specific medical conditions that would precipitate the need for drugs to treat those medical conditions and then attempt to charge higher prices for the drugs.

Black Market/Counterfeit Reduction:  Closing the loop between the approved manufacturer, the end consumer and the physician’s prescription will facilitate the ability to closely track the distribution of drugs to end users.  This closed loop can lead to lower counterfeiting opportunities since the visibility of the approved manufacturers for specific drugs will be transparent and controllable.

Cost Reduction:  The PBM marketplace in the United States is estimated at 227 billion dollars[xiii].  The estimated gross profit of the top PBM’s is 10%.  Eliminating the PBM could drive over 20 billion dollars today out of the delivery system.  State rebates are another area of inefficiency.  The Medical drug rebate program provides savings to state Medicaid programs through rebates for outpatient prescription drugs that are based on two prices per drug that manufacturers report to CMS: Best price and AMP.  These manufacturer-reported prices are based on the prices that manufacturers receive for their drugs in the private market and are required to reflect certain financial concessions such as discounts.

Complicating the rebate programs for example, Medicaid recouped 45 percent of its spending on outpatient prescription drugs in manufacturers’ rebates, receiving $2.9 billion in rebates for $6.4 billion in expenditures, Medicare Part D sponsors only recouped 19 percent, or $4.5 billion in rebates for $24 billion in expenditures.[xiv] Since 1990, state Medicaid programs have not been able to receive federally allowed prescription drug rebates if they turned over their enrollees’ drug benefit plans to Medicaid managed care organizations.[xv]  The basic rebate component for brand name drugs is the greater of either: (1) 15.1 percent of AMP or (2) the difference between AMP and best price.  The Congressional Budget Office estimated that the average basic rebate for brand drugs at the end of 2007 was 23.1 percent of AMP.  For multi-source generic drugs, the rebate is equal to 11 percent of AMP.   A flat payment structure will have dramatic impact on cash flow of the Medicaid program immediately.  In a 2005 report by the Department of Health and Human Services Office of Inspector General[xvi], audits in 48 States and the District of Columbia found that only 4 states did not have weaknesses in accountability and internal controls over their drug rebate program.  Some of the findings included improper accounting for interest on late rebate payments (27 States), inadequate rebate collection systems (17 States) and unreliable information submitted to CMS on the Medicaid Drub Rebate Schedule (37 States).  Another study by the Lewin Group (Potential Federal and State-by-State Savings if Medicaid Pharmacy Programs were Optimally Managed, February 2011) examined how more efficient pharmacy benefits management-apart from rebates- could save Medicaid an additional 33 billion dollars over the next decade.  The costs associated with inefficiency, lost rebates and cash flow inadequacies disappear with a flattened system at the state level.

Waste: A study conducted in 2001 estimated that the Waste of pharmaceutical drugs represented 2.3% of total medication costs[xvii].  The same study concluded that

The main causes for waste included: resolution of the condition for which the medication was prescribed (37.4%), patient-perceived ineffectiveness (22.6%), prescription change by the physician (15.8%), and patient-perceived adverse effects (14.4%). Individual costs were modest, but if $30 per person represents a low estimate of average annual waste, the US national cost for adults older than 65 years would top $1 billion per year.

On June 30, 2010, in a hearing before the Special Committee on Aging United States Senate, Senator Susan Collins stated the following:

“ An estimated 40 percent of drugs that are dispensed outside of our Nations’ hospitals go unused. That generates approximately 200 million pounds of pharmaceutical waste each year…”[xviii]

Reducing the amount of dispensed drugs to what the actual needs of the patient is, will dramatically reduce the amount of waste.  Let’s set a goal and reassess in two years.  We can get there.

5. Conclusion

One should ask themselves why consumers are not able to benefit from their contribution of taxes or why their employers contribution of dollars to health benefit plans are not lowering prescription benefits?  Waste, pricing schemes, costly logistics and rebate models are adding excessive costs to the current delivery model funded by employees and tax payers.  There are so many layers between the end user and the manufacturer of the products that the intermediaries are driving potential cost savings to themselves.  There is nothing technically “wrong” with this approach as these entities are by design driven to increase their margins.  Since states Medicaid programs are bankrupt or near bankrupt, we can’t wait.  By flattening out the delivery model for prescription medication in the United States, efficiencies will be gained and the direct interconnection between the end-user and the manufacturer will be a paradigm shift that will drive inefficiencies out of the market.  Whether we start now or wait for a legislative mandate doesn’t matter from a macro-economic view.  State or Federal price adjustments will eventually fade away as the markets will move to a place that is sustainable.  Today, robots crawl the internet and bring price transparency to the business or individual in seconds.   Price transparency, technology, smart logistics and new business models will change the way we consume everything including prescription medication.  It is happening everywhere and if the marketplace and stakeholders don’t take steps to eliminate costs with drastic measures, the impact on our healthcare will be significant.  Free markets will cannibalize the weakest links. Can we shift the market for the benefit of the consumer, insurers, providers and government?  Can these stakeholders work together to eliminate inefficiencies?  Whether it will happen with the business model above or some derivative, nobody can deny that it will happen.

 6. References:


[i] Kaiser Family Foundation Prescription Drug Trends May 2010

[iii] http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=ESRX.O

[iv] http://drugstorenews.com/article/keep-eye-out-catamaran and http://drugstorenews.com/node/464306

[vi]http://www.wikinvest.com/stock/SXC_Health_Solutions_Corp._(SXCI)/Filing/10-K/2011/F94407912

[vii] http://georgevanantwerp.com/2011/07/26/largest-pbms-by-covered-lives/

[viii] http://www.pbmi.com/PBMmarketshare1.asp

[ix]http://provider.indianamedicaid.com/media/55179/indispensing%20report_2011_final.pdf

[x]http://provider.indianamedicaid.com/media/55179/indispensing%20report_2011_final.pdf

[xi] Ibid.

[xii] http://www.nytimes.com/2012/07/12/business/some-physicians-making-millions-selling-drugs.html?pagewanted=all

[xiii] http://www.ibisworld.com/industry/pharmacy-benefit-management.html

[xiv] http://oig.hhs.gov/newsroom/spotlight/2011/rebates.asp

[xv] http://www.healthleadersmedia.com/page-1/FIN-269114/States-to-Get-Drug-Rebates-Even-Under-Managed-Care

[xvi] http://oig.hhs.gov/oas/reports/region6/60300048.pdf

[xvii] http://www.jfponline.com/Pages.asp?AID=2323#bib5

[xviii] http://aging.senate.gov/publications/6302010.pdf



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