The FTC, ReliOn Novolog® and "DRxC"
I spoke to the Federal Trade Commission about monopoly power in pharmacy.
Yesterday, I submitted the following testimony to the Federal Trade Commission’s first public meeting in 20 years. A friend recorded my 1 minute speech here.
Commissioners,
My name is Benjamin Jolley. I am a third-generation pharmacist at a family-owned pharmacy. I call on you to thoroughly investigate the entire pharmacy supply chain which is choked at every level by monopolies. If you examine the Fortune 500, you’ll find that 11 of the top 17 companies are involved at some level of the pharmacy supply chain – the largest pharmacies, wholesalers, and Pharmacy Benefits Managers. The impact of their combined market power can be seen in this weeks’ release of “Reli-On Novolog®.” Because of the rebates that PBMs extract, I can PURCHASE Novolog® for $545 wholesale, while Walmart can SELL an identical product for $86 retail.
I ask you to use your statutory authority as your predecessors have to restructure our economy, starting with my industry, in favor of the mother in my state who “would give anything to just be able to pick up my son’s prescriptions from our local pharmacy.”
Since I was given only 1 minute to speak, I had to compress a lot of thoughts into a short statement. I’d like to expand on my statement here. First, let’s name the 11 of the Fortune 17 I referenced. Pharmacies: CVS, Walgreens, Walmart, United Healthcare, Cigna, Costco, Amazon and Kroger all operate pharmacies. Between them, they capture ~70% of pharmacy dispensing revenue according to Drug Channels. Wholesalers: McKesson, Cardinal Health, and AmeriSource Bergen, who capture ~95% of wholesale pharmacy distribution revenue. Pharmacy Benefits Managers: CVS, Cigna, and United Healthcare operate the largest PBMs who process ~77% of prescription claims.
This week, Walmart unveiled “ReliOn Novolog®,” which is the “same product, same quality, same safety, same efficacy,” as Novolog®. They priced it at $85.88 per box of five 3 mL pens. Regular branded Novolog® bears a WAC of $558.83 per box. Astute readers will note that Novo Nordisk also sells an “authorized generic” of Novolog®, labeled as “insulin aspart” for a WAC of $279.40. Despite this lower cost labeling of the identical product, many PBMs and health plans prefer Novolog® brand over the “generic” on their formularies due to their rebate agreements, so I believe that the price of Novolog® is the appropriate comparator.
Note the insanity of that last paragraph. We live in a world where the system basically forces pharmacists to move around larger dollar figure items. Using Novolog® over insulin aspart (or ReliOn Novolog®) means that 1) patients with deductibles and coinsurance (read: basically everyone) dramatically overpay for their insulin. 2) PBMs and plan sponsors collect larger rebates, reinforcing the status quo addiction to rebates. 3) wholesalers make a larger profit (in my understanding of inventory management agreements, manufacturers generally pay wholesalers to handle their products on a percentage of WAC basis). 4) Pharmacies with favorable spread between their buy and sell side make more money and pharmacies with upside down buy vs. sell agreements lose more money. 5) Pharmacies place more dollars at risk of recoupment in the case of an adverse PBM audit.
I’d like to expand on my points 4 and 5 there, because they probably aren’t obvious to people that don’t live in my world. First I’ll address point 5: Pharmacy benefits managers reserve the right in their standard pharmacy network agreements to audit the records of the pharmacy. This makes sense. There do exist bad actors in the world who actually do outright defraud employers and other payers of pharmacy services. They submit claims for prescriptions which are never actually dispensed. They don’t ever purchase the product that they submit a claim for. While honest pharmacy practice today is a pretty tight margin business (you buy a product for $5000 and sell it for $5050, pocketing $50, for example), fraud in pharmacy can be extremely lucrative (you “sell” a product for $5050 but never buy the $5000 item, pocketing $5050).
However, most audits find no such outright fraud, and audits cost money. So to fund their audits and shareholder profits, most PBMs find inane excuses to claim that a prescription was billed incorrectly or documented wrong or some other excuse to justify recoupment of the entire claim. The audits are also pretty much always requesting documentation on the most expensive items dispensed into the plan over the time frame covered by the audit. The most recent audit I completed was requesting documentation on 30 prescriptions that had a total cost of over $30,000. Somehow the $0.47 lisinopril never gets flagged for an audit. Because of these practices, it may not make sense for a pharmacy to sell a $5050 medication for a 1% margin – if they lose one audit (profit of $50 → loss of $5000), they’ll need to sell 100 identical prescriptions to make up the loss.
Now to discuss the favorable/unfavorable spread: Remember from my earlier posts that pharmacies purchase branded products at a discount to WAC and sell branded products at a discount to AWP. Over the past 40 years or so of the existence of PBMs, typical PBM contracts have contained increasingly large AWP discounts, while wholesale WAC discounts have not kept pace. In 1980, when my dad graduated pharmacy school, a contract might have offered a reimbursment of AWP plus 15%. Each year, however, that contract declined from AWP plus 15, to plus 14, to plus 10 to plus 5 to plus 0% to minus 2% to minus 5% to minus 8% to minus 15% to minus 18% to even worse than that. The transition from AWP plus to AWP minus in most contracts happened in the early 90s, if my memory serves correctly. Pharmacist-owners at the time screamed that they’d never survive. Multiple pharmacies participated in a “Blackout Day” in which they painted their windows black and turned out their lights in a staged effort to show what it would be like if there were no pharmacy left in their location. Their indignation seems utterly quaint today, when starting in about 2018, it is increasingly commonplace for a small pharmacy to see their branded product reimbursements from the largest PBMs literally below their cost of acquisition, let alone covering overhead and staff.
Sidebar here: branded product manufacturers send their sales reps on rounds to physician offices and to pharmacies. When they stop by the pharmacy, they are usually looking for someone who is willing to deal with the hassle of using their “copay coupons” – in which the pharmacy bills the patient’s copayment to a second PBM operating on behalf of the manufacturer in order to reduce the out of pocket expense of the product to the patient in a “Coordination of Benefits” claim. When I first started practicing in 2018, I would happily discuss working with these reps to ensure that physicians could send prescriptions for these products to us and we’d make sure the coupon got processed, reducing the out of pocket cost for their patients to a relatively manageable $5 to $35. After the last 3 years of discount increases/margin erosion, the pharmacy’s interests no longer align with the sales rep’s interests, because there’s no margin left in branded products to compensate the pharmacy for that hassle.
You may be asking “why would you accept those contracts if they’re upside down?” Basically, branded products have become the milk at the back of the grocery store. You lose money on them to make money on TVs. But pharmacy is backwards because with below cost milk, you are supposed to lose money on the LOW dollar items and make it up on the HIGH dollar items. Instead, small pharmacies lose money on the high dollar branded items to make money on the low dollar generics. We’ve already rejected several contracts for being upside down, and I imagine over the next 5 years we’ll be rejecting a lot more as AWP discounts continue to climb and margins continue to erode. You can only lose so many basis points on the $500 milk/insulin before it doesn’t make sense to try to sell the $40 TV/lamotrigine.
I hope and believe that small business pharmacy will still exist in 5 years, but without FTC action, it’ll be a different entity – we’ll be completely forced out of the PBM-controlled insurance billing game by simple mathematics. We’ll probably transition to a focus on selling prescriptions to our patients entirely out of pocket, like Blueberry Pharmacy or Freedom Pharmacy (my proposed terminology for this kind of pharmacy: direct pharmaceutical care, or DRxC in homage to the direct primary care movement). As DRxC grows, PBM pharmacy networks will increasingly be a collection of chains and scam-focused fly-by-night small pharmacies (who will give those auditors a real job!). The good news here is that the startup cost of a DRxC pharmacy is a fraction of the cost of a traditional pharmacy. You stop carrying branded products, your inventory value drops by 80%. You stop accepting third party payments and your cash flow goes from getting paid in 14-30 days to getting paid in 0-3 days, and your audit recoupments go to zero. You regain control of your pricing instead of being at the mercy of a ruthless competitor setting your reimbursements. You can still dispense close to 90% of all of the drug products that your patients need at a reasonable price. If the “cash only”/DRxC model becomes common, it’s possible we’ll see more “ReliOn insulin” type branded products focused on sales to customers without insurance or with high deductibles, but open to any pharmacy that DOESN’T accept assignment from PBMs (so as to avoid dealing with rebates), instead of to WalMart. Also, patents expire. By the end of my career, EVERY patent currently protecting the monopoly market share and pricing power of EVERY branded and “specialty” product will have expired, even of aducanumab. They’ll all be generically available, and while aducanumab and ustekinumab may never reach the point where it makes sense to pay for them out of pocket (barring some revolution in the cost of manufacturing monoclonal antibodies), apixaban, palbociclib and ruxolitinib probably will, if the price history of imatinib and emtricitabine/tenofovir are any indication.
Or maybe, just maybe, with Lina Khan as Chair, the FTC will break up all of the giant PBM/pharmacy/insurer/rebate “GPOs” and the super pharmacies and the wholesalers and the giant manufacturers. Formulary placement rebates will become illegal, branded product prices will come crashing down to earth in the bursting of the “gross-to-net bubble,” PBMs won’t have such market power to dictate terms and small pharmacies will have a seat at the negotiating table, instead of being on the menu. In her closing remarks at the end of the business portion of yesterday’s commission meeting, Chair Khan did call out pharmacy as a concentrated industry. I’m warily hopeful.