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PBMs: Caremark sneaking out at the top? with UPDATE

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CVS has noticed that big PBMs are now making all their money on mail-order pharmacy, particularly from dumb clients who can’t be bothered to cross check what the PBM is charging for mail-oder generics with the price they can get at (say) Drugstore.com. So the chain stores “logical” next step is to buy the second biggest mail order pharmacy — Caremark —and get the attached smoke screening benefits management organization thrown in with the deal. The NY Times (surprise surprise) is focused on the wrong end of the deal, thinking that Caremark is a “middleman”. But the key is that all the profitability of PBMs comes from their mail order pharmacies, now that the rebating game is drying up.

And that profit comes from selling generics with huge mark-ups. So when Wal-mart puts CVS’ margins on their retail store cash business under threat, it’s not a stupid defensive move to acquire a big mail order house. On the other hand they’d better hope for better luck than the last time (part of) Caremark — the then PCS— was bought by a drug store. Rite-Aid bought PCS in 1998 for $1.5 billion, and sold it for $1 billion to Advance Paradigm in 2000.

But the Medpartners/Caremark guys, ten years after their disastrous foray into physician management, aren’t dumb. The generic mark-ups are about the last place the PBMs have to run to maintain their incredibly profitable business. And that party will end too, when the employers wake up.

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Given what the stock has done since they changed their focus to the small PBM they found that they owned by accident in the late 1990s, it looks to me that they’re sneaking out at the top.

UPDATE: Apparently the top wasnt quite as high as some punters this morning thought it was. Caremark opened at 54 spent most of the day at 51 and then fell when the final offer was revealed at 48 and change.

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QUALITY: Does DM save money? The old chestnut rears its ugly head

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Poor Chris Selecky of Lifemasters. I had a brief chat with her at a DM conference in August and she was heading to the beach (happily) after selling the company to Healthways. Or so she thought. But then that merger fell apart, mainly because LifeMasters was making less money on a contract than it thought it would.

Now things have gotten much worse. As reported by Vince Kuratis at Better Health Technologies. Selecky announced that Lifemasters has pulled out of its Medicare Health Support project in Oklahoma.

A central factor in their decision was the unexpected medical needs of the Oklahoma project population. These are "really, really sick patients. It takes a lot more to get them under control." She explained that the Oklahoma population included many patients with five or more comorbidities. She pointed out that the rural nature of the population led to unexpected results. Lifemasters found that the population was significantly medically underserved — people had not been receiving appropriate medical care in the past. Arranging for needed care would lead to higher medical costs for Medicare and would prevent Lifemasters from achieving required cost savings.

The entire DM industry is hanging on Medicare Health Support and has really been talking it up. More importantly an even bigger industry is sitting behind MHS expecting that Medicare will start paying for in home monitoring as a consequence. Remember that Forrester thinks that’s going to be a $35bn market in less than 10 years, with Medicare paying most of the freight.

But several studies over the years have suggested that DM improves quality but has found it hard to prove that it saves much money. The response of the DM industry has been, to quote Al Lewis, “let’s go surfing”. in other words, do it anyway and let the academics worry about the savings.  And they’ve convinced some health plans that this works.

But to get Medicare, the big kahuna to pay for DM , they’re going to have to persuade the taxpayers’ agent that spending money on DM will reduce the amount spent elsewhere in the system. If the answer is that we’re not spending enough on health care, and we should spend more, and DM will help us do that, then it’s hard to imagine that DM will get the positive response it’s looking for in a world in which everyone’s budget in Medicare is under pressure.

(Hat tip to the ever wonderful Jane Sarasohn Kahn for pointing this one out to me!)

THCB: It’s a big month here!

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Judging by my sitemeter October will blow any other month out of the water for traffic here on THCB with more than 25,000 visits and on the way to 50,000 page views. Part of the reason is the exposure we got on ABCNews and EzraKlein’s site, but hopefully some of it is more people realizing that there’s good stuff about the intricacies of health care on this blog! I’d like to thank John, who keeps the buses running on time, my contributors, my commenters, and my advertisers.

Next week we’re going to start with another podcast from Don Kemper, CEO of Healthwise and doyen of the information therapy movement, and later I’ll be doing a podcast with three leaders of “Health2.0” companies.

Talking of podcasts you’ll see a new ads this week from Vimo, and some new sponsored links from GSK and Health1to1. Please go check them out. I’m nowhere close to making any money off this blog, but at lease these folks are putting in enough to ensure that we can keep the lights on, and enough to afford that the podcasts can be transcribed! (Speaking of Vimo, their study on the costs of setting up an HSA account is very interesting indeed!)

And of course I want to thank my readers for coming! Please keep coming back!

POLICY/POITICS: A Grim Anniversary

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A Grim Anniversary: 20 years ago today possibly the worst single bill ever passed by the US Congress went into law. In the the hysteria over crack cocaine and the death of basketball star Len Bias (not from crack by the way), Tip O’Neill decided to get tough on drugs. In 3 days law left committees and was voted on with no one stopping to think.

The result is long long mandatory minimums for low level drug users and dealers—which far exceed those for murders and rapists— and massive costs for the taxpayer. The consequence has been the general corruption of our entire criminal justice system and civil liberties.

POLICY/THE INDUSTRY/HEALTH PLANS: Employers trying to be not so dumb

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This is definitely one to watch. With help from THCB buddy Brian Klepper, the employers in Reno are interested in becoming smarter purchasers, and they held a forum without letting any plans or providers in the room. The results suggest that they’re pretty serious about pooling their data instituting P4P & transparency, and basically doing what their health plans should but don’t do. The employers account for about 25% of the population in northern Nevada.

All employer groups have had this clout potentially. None of them have ever used it. And usually they’ve been too chummy with the delivery system or have been bamboozeld by their “agents” the health plans and PBMs. It’s possible that in some places the worm is turning.

PHARMA/POLICY/POLITICS: More rational behavior from big Pharma

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Exactly as happened in 2000, and 2002 a late surge of money is coming to help Republicans from the PACs of New Jersey’s finest.

According to a report published Wednesday in the Wall Street Journal, drug-industry dollars are helping to fuel the campaigns of Republican candidates like embattled incumbent Sen. Rick Santorum, R-Pa., who faces a tight race against Democratic challenger Bob Casey Jr., who calls the Part D program a “giveaway to Big Pharma.” The Santorum re-election bid has drawn $454,500 in contributions from pharmaceutical companies, WSJ said.Part D has drawn fire from Democrats in congressional races in part because it doesn’t permit the federal government to negotiate with drug companies on drug prices, and Democratic challengers have vowed to change that if elected, the report said.

While the concept of science-based companies backing Rick Santorum (the one who took his stillborn child home to meet his kids, and thinks that the earth is 6,000 years old) may be odd, it’s completely rational. Essentially now that there is a Medicare drug benefit, eventually price controls will be introduced. It’s in Pharma’s interest to delay that day as long as possible. Anyone can see that including big Pharma, who as Joe Paduda reminds us have seen profits rise with their volume now that Part D has cut in

However, it therefore exposes the whole McClellan/Ignagni line about how the private market in Medicare Part D has lowered drug costs more than direct negotiations would have done for the lie it is. After all, if Part D as written is so much worse for big Pharma than government negotiations/price controls, why would they be fighting so hard to protect it?

POLICY/POLITICS: Uwe gets a job

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Apparently New Jersey is going to rationalize its health care system. Well at least they put the best guy in charge.

New Jersey Governor Jon Corzine has announced that Uwe Reinhardt, the Woodrow Wilson School’s James Madison Professor of Political Economy and an authority on health care economics, will head the New Jersey Commission on Rationalizing Health Care Resources. According to an official announcement from the governor’s office, the Commission is charged with ensuring that New Jersey’s supply of hospital and other health care services is best configured to appropriately respond to community needs for high-quality, affordable and accessible care. In addition, the Commission will ensure that there is proper oversight and accountability of limited public funds.

This is of course the state of which the biggest AMC was run by a bunch of crooks and is now having another big academic name, Bruce Vladeck, oversee its rehabilitation. I’m not sure how much Uwe will like it out there in the real world, but I’m sure that the Commission won’t have much power,and I look forward to what it’s going to say!

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