Looks like the PBM stocks are now taking a downward move . Express Scripts’ stock (ESRX) is under pressure partly following some comments from a short-seller in Barrons. Meanwhile, Medco (MHS)continues upwards. Some of this is probably caused by institutions re-allocating their PBM portfolio. Medco has added about a billion in market cap since it started trading last week, and is now finally worth a little more than what Merck paid for it back in 1994–not bad when you condsider that PCS (ADVP) has still not come close to being worth the $4 billion Eli Lilly paid McKesson for it back then!
Tenet changed management at its Redding, CA hospital on Friday. As discussed in an earlier blog, that hospital is where significant amounts of unnecessary surgery took place. This article from thestreet.com even goes as far as to suggest that Tenet might get the death penalty of being kicked out of the Medicare and Medicaid programs. If that’s true, they would have to give up and go home, but bear in mind that they’ve already settled the worst of the charges, and that thestreet.com is a haven of short-sellers.
So Medco has officially split off from Merck as of this week, and is trading separately on NYSE, ticker is MHS. The stock actually rose 10% its first day adding over $600m to Medco’s market cap and (after accounting for the value of Medco shares issued to shareholders) Merck rose too! This indicates partially that institutions like the future of the PBMS, all of which have rallied slightly along with Medco. It’s worth noting that Medco’s market cap is 80% greater than that of AdvancePCS.
Meanwhile Medco has been at pains to say that it will be totally separate from Merck, and the market may be taking this to mean that it will be able to get the best deal, rather than the best deal after Merck’s need have been considered. It may also be indicative that the market believes that Medicare reform will be good for PBMs. As I mentioned in an earlier post, that is likely but by no means certain.
When I got into health care one of the big fusses was whether Genentech’s Activase (TPA) was more effective than Streptokinase in clot-busting immediately after heart attacks. You may recall that in the late 1980s Genetech made its name and fortune on the back of the fact that a huge clinical trial evidenced that Activase saved 2 more lives per thousand incidentsat a cost of ten times the amount. While the health service researchers amongst us thought that this was a huge price to pay for a few incremental lives saved, a combination of aggressive marketing by Genentech, ER docs wanting the best outcomes (and being fearful of malpractice lawyers, some of whom showed up on briefings from Genentech detailers) and insurers OKing the bills mean that it became the treatment of choice and a $250m drug by the early 1990s. It’s still around that level of sales ten years later.
NEJM has a danish study this morning that shows that acute angioplasty has better outcomes than clot-busting drugs by a factor of more than 2:1 and nearly 4:1 for stopping repeat MIs within 30 days. So can we expect a massive increase in angioplasty and a decrease in clot-buster use? And if not, can we not also expect an increase in suits against hospitals using clot-busters instead of angioplasty?
Today’s NYT has an article (Reg Reqd) pointing out how vulnerable the PPI (ant–ulcer/anti-heartburn) drug market is to the oncoming generic versions of Prilosec. Prilosec has been about the most successful drug in history (somewhere around $6 bn a year at its height) and catapulted Astra-Zeneca into the first rank of pharma companies. They’ve also successfully switched their marketing focus to consumers and doctors over to its successor drug, Nexium, including moving the "purplepill" website. The Times reports that generic makers including division of Novartis and of P&G are going to come after the markets of Nexium, Protonix and the rest with generic Prilosec, and it’ll cost 1/5th the price. Wellpoint, the health plan which successfully got the FDA to agree to move Claritin and its allergy competitors to OTC status, is already planning to move as many of its members as it can to the generic Prilosec.
This is beginning to remind me of the early 1990s when there were few new blockbusters, and many old ones, including the first PPIs Zantac and Tagamet, were coming off patent. Some companies then tried to manage a "brand to OTC" strategy, such as Syntex with the brand (Naproxen) that is now the OTC drug Alleve. Syntex found that the sales for the brand fell off a cliff rather than rolled down a slope (and part of the result was their being swallowed by Roche). Then as now drug companies were concerned about the impact of a big new government program, and their stock prices were at bigtime lows. Look at this chart of Merck’s historic price and compare the 1992-94 dip to the one in the last 2 years)
However, overall drug companies have continued to be remarkably successful in both delaying the introduction of generics, albeit by using loopholes that have been partially closed, and at convincing doctors not to bite the hand that feeds them, even though some say they want to. What really will make the difference in their future is the next set of blockbusters.
You can historically look at parts of health care where drugs have replaced hospitalization. For instance anti-biotics replaced TB Sanatoriums, which represented some 30% of health care spending in the 1920s and 1930s, and indeed the first PPIs essentially replaced ulcer surgery. You can also argue that the statins are doing a pre-emptive strike on heart surgery rates in 10-20 years time. But with no imminent blockbuster class on the near horizon, big pharma is scrambling to discover which part of today’s health care system they’re going to replace with a pill, or which unrecognized "disease" they can convince people they can cure (think Viagra). Because that’s the road to another stock run-up as we saw in the late 1990s. I don’t think it will be as easy for them this time, but don’t write this industry off!
I’ve mentioned the quality issue a couple of times, and have somewhat denigrated the quality movement as being made irrelevant by the backlash against managed care. However, given the IOM’s "To Err is Human" report on medical errors and more recent "Crossing the Quality Chasm" (note: scroll down for exec sum), it would be unfair to ignore those who are trying to raise its public visibility, such as the CHCF promoting a series on it. This video about the "Hospitalization from Hell" mostly by Paul Cleary (from Harvard — Here’s the article), is long (50 mins) but if you have a good connection and Realplayer, it’s well worth watching. Clearly suggests that the application of known quality processes used in most industries are still very limited in health care, and that the case he uses as an example is very applicable to most health care organizations. One of his solutions is that local units and individuals must take responsibility for organizing their own quality process improvement, collect good and useful data, and engage the operations research specialists. This is not unlike the strategy that the German Army used to overrun the French in 1945 — command was decentralized to small units working with knowledge of wider goals (as argued in James Q. Wilson’s book "Bureaucracy"). There are also serious efforts funded by several Foundations to improve quality processes, such as this one in Washington state, funded by RWJ and "blogged" by many of its participants including Marcus Pierson, MD.
The problem here is that I heard all this in 1989, and Don Berwick, the guru of TQM in hospitals wrote the same stuff then as he is writing now. Every other industry has been forced into using quality improvement techniques. So this morning I heard about 2 examples of patients I know in the SF Bay Area who were served very badly. One was not called back as promised about a potentially very serious test result. After calling the medical group, no one could locate the result or the file. And then they couldn’t do anything other than give the patient another appointment. The other concerns a new patient who was left on hold for 25 minutes by the medical group. Let’s face it, none of us would put up with this from any other type of consumer service organization. Why do we expect it from health care orgs, and is it our fault for doing so?
Given some off-this-stage politicking I’ve been involved in, the Medicare drug coverage argument, and the recent "Physicians" plan in JAMA proposing single-payer, this Forbes article caught my attention. I subscribed to Forbes for a while and they never ceased to amaze me with how captured they were by new Internet business models while they decried any attempt to reform old-world fee-for-service medicine. Now even Forbes is coming out in limited favor of some type of pay for performance linked to basic quality guidelines. Back in 1997 my IFTF colleagues (especially Greg Schmidt) and I forecast that insurers paying some type of reward for performance would account for a sizable minority of the health care system by 2010. In the RWJ-sponsored "Health & Health Care in America: A Ten year Forecast" we wrote:
"…a separate type of payment system will develop. Plans and intermediaries will devise reimbursement programmes that give providers incentives to deliver care in a manner that improves quality, customer satisfaction, patient tenure in the plan, and outcomes, as well as productivity and cost-effectiveness. We dub this system ‘performance-based reimbursement’, as payments will depend on the providers’ performance on a strung of relevant algorithms. By the latter part of the next decade this system will be the single most important way of paying provider organizations, although the old methods will still be a part of the system."
Well on re-reading this section I note that the accompanying chart had Performance-based pay at only 15% of all dollars by 2010, with the rest evenly split between prospective payment (DRGs and capitation) and FFS land. So when you’re busting to get out a big report not every word will be internally consistent. And this change (should it happen) would certainly seem revolutionary compared to what has happened in the first five years of our 13 year forecast. At the time the report was written there were already HMOs paying some limited amount to medical groups based on quality metrics. Since then the quality movement seems to have somewhat been the baby thrown out with the bathwater of the managed care backlash. But I think that as the initial foregin policy concerns of the first Bush administration fade, and even if it doesn’t pass Drug Coverage this year, Congress will return to the future of Medicare as a whole. And if the political right (as represented by Forbes) is starting to think about the possiblity of performance based-pay, then the mainstream private health payers will start to introduce it too. When that happens, we’ll be on for another round of changes in care delivery and provider organization.
Pity the poor PBM industry. Hailed in the early 1990s as the solution to manage health care costs, bought up by the drug industry for far, far too much money in the mid-1990s, and investigated on again/off again by various attorney generals ever since over their relationships with drug manufacturers. In early 2000 due to another investigation, their stock price tumbles and one of the biggest (PCS) gets bought by one of the smallest (Advance Paradigm) at a fire sale price. So ends the decade, but a funny thing has been happening. Remember that PBMs are supposed to be working on behalf of health plans and employers to get drug costs down. But overall drug costs have gone up massively all this time (as have brand prices mostly due to the new blockbusters of the 1990s.). But so have the PBMs’ profits and their stock prices.
There are four main lines of revenue for a PBM. 1) Claims processing/transactions with all the formulary stuff and presumably price discounting that goes with it 2) Switching people between different drugs based on rebates from the manufacturers, and doing other drug promotions, 3) mail-order pharmacies, and 4) a loose bunch of activities some companies call health promotion, which also includes DSM, data analysis, etc. Buried somewhere in there is the level of risk they take on from their clients, although the answer seems to be "not too much". No one will give you a straight answer about what proportion of their revenue comes from which activity, which makes Sen. Cantwell (D-WA) suspicious enough to ask them to disclose their deals in the new Medicare legislation. Until now their mail-order piece was very profitable (and supposedly is why Express Scripts’ market cap is around $5bn, Caremark’s around $6bn but AdvancePCS’ only at $4.5bn although it has far more covered lives than the other two.) Medco is being spun off by Merck next week and it also has a strong mail-order side. Now they are also under what looks like a pre-emptive strike from the pharmacists who for some reason believe that the PBMs are using their formulary management techniques to steer business to their mail-order divisions — imagine that!
This presages the main question of what role PBMs will play in whatever eventually comes out of Congress on Medicare drug coverage. Are they going to get the biggest bonanza in their history (all those lovely seniors signing up)? Or are they going to lose all their abilities to make money the way they’ve do now, and be turned into government data processing agencies with PE ratios to match? With their stocks recently close to their all time highs, this is a space to be watched.