Here's a Switch: Pharmacies Prepare to Push Brands First in Medicaid

Pfizer's Lipitor is taking a beating as payors push use of generic statins wherever possible. But Lipitor and many other blockbuster brands may get some unexpected relief when Medicaid changes its payment rules for generics next year.

Pfizer’s Lipitor is taking a beating as payors push use of generic statins wherever possible. But Lipitor and many other blockbuster brands may get some unexpected relief when Medicaid changes its payment rules for generics next year.

Michael McCaughan

If Brahmaji Valiveti is right, Pfizer Inc. ’s top-selling cholesterol therapy atorvastatin (Lipitor) is about to get a much-needed boost in its fight to maintain market share against generic versions of other statin products.

Valiveti, who operates the Lenox Terrace Pharmacy in Harlem, may seem like an unlikely candidate to ride to the rescue of Pfizer and its $12 billion Lipitor franchise. But, thanks to Medicaid pharmacy payment rules scheduled to take effect in January, Valiveti and thousands of other independent pharmacy owners say they may have no choice but to try to switch as many Medicaid patients as possible from generic statin drugs to Lipitor or other branded medications.

Valiveti cited the incentive to dispense Lipitor during a July 11 conference call hosted by the National Community Pharmacists Association as part of a campaign to undo the proposed payment changes.

Independent pharmacies will undoubtedly take a big hit from the new formula for calculating generic drug payments. Congress enacted legislation in 2005 designed to reduce payments for multisource drugs based on numerous studies showing the government was paying a highly inflated rate. (See "Penny-Wise Payment for Generics," The RPM Report, March 2006 (Also see "Penny-Wise Payment for Generics" - Pink Sheet, 1 Mar, 2006.).)

The Centers for Medicare & Medicaid Services says that the picture is not as dire as NCPA says. In the final rule implementing the 2005 Deficit Reduction Act, CMS insists that it is not creating a system that will drive generic-to-brand switches.

But two analyses by other government agencies—and even CMS’ own data on the new payment methodology—indicate that at least in some therapeutic classes, pharmacies will find themselves losing money when they dispense generics to Medicaid patients.

NCPA is making an all-out push for legislation to stop the new payment methodology, but getting Congress to reverse itself is a long shot at best. CMS could also reconsider; the agency set a six-month delayed effective date for the final rule. But even if CMS does everything in its power to revise the rules, there will probably be at least a handful of therapeutic classes where brands are suddenly much more attractive for pharmacies serving the Medicaid market.

Assuming the rule takes effect as written, thousands of pharmacies will have every incentive to push for reverse therapeutic substitution, like trying to move a patient off of a generic statin drug and onto Lipitor. Even if retailers like Valiveti are able to make switches happen, that will not by itself change the overall picture of therapeutic substitution in the pharmaceutical industry.

But, with Medicaid representing about 15% of the total US pharmaceutical market, the brand industry could find itself receiving some much-needed relief from pro-generic pressure from payors.

Payment in "FUL"

The independent pharmacies are up in arms over an issue that involves the arcane payment system for multisource drugs under Medicaid. It entails an alphabet soup of acronyms, but ultimately boils down to an effort to ensure that state Medicaid programs do not pay excessive mark-ups for generic drugs.

The new CMS rules define the Medicaid "federal upper limit" (FUL) for multi-source prescription drugs. The FUL defines the maximum amount a state can pay for a generic drug dispensed under the Medicaid program.

Prior to enactment of the Deficit Reduction Act in 2005, the FUL was defined based on published list prices of drugs, a notoriously inaccurate benchmark for the actual acquisition cost of drugs. The new law stipulates that the FUL should be based instead on the average manufacturers price (AMP), the same benchmark used as the basis for Medicaid rebate payments by manufacturers.

AMP is intended to reflect something closer to a true average selling price of a drug, so that seems to make sense. And Congress built in a big margin to protect pharmacies that may not be able to purchase at AMP: the FUL is set at 250% of the AMP of the least costly generic in the market. Last but not least, CMS is not requiring states to apply the new FUL to all drugs; merely to demonstrate that in aggregate its payments are under the new limit for all multisource medicines.

But, pharmacies point to three elements of the new formula implemented by CMS that may make many generics become money losers:

(1) FUL will apply as soon as a product goes off patent; the current rules apply FUL only when there is more than one generic in the market;

(2) The calculation is based on the lowest AMP in the marketplace, even if the product available at the price is not available for purchase nationally; and

(3) CMS is redefining AMP to include sales to mail order pharmacies, which means in many cases that AMPs will be much lower than the price that any retailer—especially an independent pharmacy—can access.

There is plenty of dispute over exactly how deep the payment cuts will be: for now CMS has not published the data on which actual reimbursement rates will be calculated, and in any event, the rates don’t take effect until January when the benchmark prices will have changed.

Declaration of Independents

But NCPA thinks the picture is clear enough. The rule "is an absolute disaster," NCPA SVP-government affairs Charles Sewell says. The trade association estimates that about 10% of the 23,000 independent pharmacies in the US derive half of their revenues from Medicaid. Thanks to the payment cuts, it "will be very difficult for any of those pharmacies to stay in business." NCPA predicts that many Medicaid patients will face significant loss of access to prescription drugs as pharmacies shut their doors or, at the very least, drop out of the Medicaid program.

CMS doesn’t see it that way. "Reimbursement will be sufficient to meet acquisition costs," the agency says. While the payment cuts are projected to save $8 billion over the next five years, that has to be viewed in context of the overall prescription drug market, CMS says. In that light, "the effect of this rule will be to reduce retail prescription drug revenues by less than one percent, on average. Actual revenue losses will be even smaller because pharmacies have the ability to mitigate the effects of the rule by changing purchasing practices."

But there is little doubt that, in many cases, reimbursement for generics will be below cost for some pharmacies. An HHS Inspector General report estimated that under the new methodology, 19 of the 25 highest-volume Medicaid prescriptions would be reimbursed at below a pharmacy’s average acquisition cost. CMS questioned that finding—but its own analysis offered in response to the IG shows that 14 of the 25 would be reimbursed below the average pharmacy cost. (See Exhibit 1.)

Pharmacies maintain the picture is worse than that, since they believe that typical dispensing fees do not cover their costs. So, even if the new reimbursement is more or less at cost, the transaction will still be a money-loser for the pharmacy. CMS says it is encouraging state Medicaid agencies to pay appropriate dispensing fees, but the agency declined to require some specific dollar amount.

One other fact everyone agrees on: independent retailers will feel the payment pinch the deepest. Not only do independents lack the buying power of large chains—and hence the ability to buy at the lower end of the pricing spectrum that generates the new payment—they also disproportionately serve the Medicaid market.

It is not that chains won’t take a hit. Indeed, the National Association of Chain Drug Stores lobbied hard against the bill in 2005 and continues to urge Congress to reverse what VP-government affairs Paul Kelly calls a "ridiculous" payment policy. But chains hope to mitigate the impact by getting deeper discounts from generic suppliers—and they may see an opportunity for growth if the rules do cause independents to shut their doors.

Reverse Therapeutic Substitution

NCPA believes it has found a solution to the problem: the association is endorsing legislation that would replace the AMP model with a new benchmark—Retail Acquisition Cost, or RAC—and pay for the increased cost by encouraging greater use of generic drugs overall.

But retail pharmacy owners aren’t counting on a legislative fix. So they are preparing to fight back by encouraging doctors to switch patients from money losing multisource drugs to single-source brands in the same class.

NCPA’s Sewell is diplomatic in describing the situation. CMS has "created a perverse incentive to dispense brands….They are still allowing community pharmacies to make a little money dispensing brand name drugs but we are being asked to lose money on almost every generic that we dispense. That is certainly not in the taxpayers’ best interest."

Pharmacists on the NCPA call were blunter. Shelley Bailey, who manages Central Pharmacy in Portland, Oregon, said she has already developed a target list of drugs to focus on trying to convert prescriptions from generics to single-source brands. She noted that the pharmacy has to focus its efforts on areas where there may be a payoff from those efforts, since there is a cost to implementing any switch program.

Valiveti illustrated the market dynamics with two examples. First, he said, imagine a prescription for the off-patent antibiotic ciprofloxacin (branded as Cipro). He suggested that the generic might be reimbursed at about $10 today, allowing him a profit of $4. With the new AMP reimbursement, he says, he might be reimbursed at $2, a loss of $4.

"So I won’t dispense" ciprofloxacin, Valiveti says. Instead, he would contact the physician and say, "why don’t you give them Levaquin," Johnson & Johnson ’s still-patented levofloxacin brand. That would cost $110 for 10 days of therapy, Valiveti says. So, for "the same $4, the government might end up paying $100 more."

The second example: the statin class. The reimbursement for generic simvastatin (Zocor) 80 mg is currently about $10, about double the $5 acquisition cost, Valiveti says. "If they pay $3 [under the new system], it costs me $5 to acquire it, the doctor will switch to Lipitor, which is $145." That means that one successful switch by the pharmacy "will wipe out the savings of 30 prescriptions."

Every Little Bit Helps—Even for Lipitor

But how much of a difference can small independent pharmacists like Valiveti really make for a product as big as Lipitor? More than you might think.

Consider how Pfizer described the performance of Lipitor during the second quarter. The top-line data paints a dismal picture: US sales of the brand fell 25% in the quarter to $1.4 billion. Pfizer says half of the decline reflects quarterly fluctuation in inventory patterns, but that still leaves a double-digit decline primarily due to commercial factors. Declining scripts are one piece, as are increased rebates. Both are due to one overarching factor: the emphasis by payors on encouraging the use of generic statins rather than Lipitor wherever possible.

Ian Read, Pfizer’s president of worldwide pharmaceutical operations, acknowledged that net switches of patients to generics were higher than expected during the quarter, triggered by the launch of multiple versions of simvastatin and an associated drop in prices for the generic.

According to Read, patient switches to generics jumped to about 24,000 per week following the new generic launches, but have now returned to a baseline of about 13,000 per month. That is about the same pace of switches that Pfizer saw when the first generic versions of Zocor came to market.

Read says that patient switches to other brands like Merck & Co. Inc./Schering-Plough Corp. ’s ezetimibe/simvastatin (Vytorin) or AstraZeneca PLC ’s rosuvastatin (Crestor), are negligible.

Read describes the 13,000 switches a week as a manageable rate. But the company is concerned about a continued erosion in new patient starts on Lipitor. That is an area where Vytorin and Crestor are making inroads.

Pfizer is obviously doing everything it can to regain new prescription share. But, Read says, patient switches are actually more valuable to the company.

Now think about the potential impact that independent pharmacies could have. If each of the 2,400 or so independents most exposed to the Medicaid market are able to switch just one patient a week off of generics and back to Lipitor, that would mean a 20% reduction in the switch rate Pfizer is currently experiencing. That would certainly help smooth over any ongoing difficulties in the new patient start area.

Worth Looking Into

There are plenty of other products that could get a boost, although the IG analysis suggests the incentives to pharmacies will vary tremendously by class.

Looking at the top 25 Medicaid-dispensed products, there look to be several classes where brands may have an opportunity to add share.

SSRI antidepressants: Based on the potential cut in reimbursement for generic paroxetine, branded antidepressants could be one group that benefits when the new rules take effect.

CNS epilepsy: Similarly, steep cuts in payment for gabapentin could help branded epilepsy/neurology drugs.

Diabetes: Cuts for several high-volume diabetes treatments are another area of opportunity.

GI drugs and PPIs: The cuts in payment for ranitidine and omeprazole could be an opening for branded proton pump inhibitors—or for OTC stomach remedies.

In contrast, payment for respiratory agents and pain therapies still make generics look attractive.

The picture will become clearer as the implementation date approaches. The January payment rates will be based on prices reported this fall, so there is at this point quite literally no way to know for sure which products and classes will offer the most opportunity for brands.

But it clearly behooves any sponsor with a product facing generic competition in the same class to review the new payment rates carefully when they are released by CMS.

Turning the Focus to Brands?

So Pfizer better not get too excited about a Lipitor boost just yet. By the time the new rules take effect, the payment system for generic statins may be attractive enough for pharmacies to continue filling simvastatin and other generics.

Even if pharmacists still have an incentive to switch patients to Lipitor, there is no guarantee they will be able to make the switches happen. Doctors receive many therapeutic substitution requests from plans, and the overwhelming trend is toward pushing choice of generics in classes where they are an option. It will be difficult, to say the least, for small-volume retailers to get through with the counter-intuitive message to switch to a brand. (See "Formulary 101," The RPM Report, January 2006 (Also see "Formulary 101: The Medicare Program Hosts A Cash Course In Therapeutic Alternatives" - Pink Sheet, 1 Jan, 2006.).)

And if the pharmacies are successful, brand companies may end up worse off than they started.

Legislation to revise the generic payment formula may not have much of a chance of enactment this year. But if NCPA is right and the Medicaid payment rules lead to higher Medicaid spending, you can bet a legislative fix will move very quickly. And you can bet it won’t count on taking all of the money out of generics.

Indeed, one goal of the legislation would be to drive higher generic drug utilization rates in the Medicaid program to help offset the cost of the higher reimbursement rates for pharmacies. Because the truth is that Medicaid already has a relatively low generic utilization rate—about 55% of all scripts in the program are dispensed with generics, compared to rates well in excess of 60% for the new Medicare Part D program.

The lead Democratic sponsor of NCPA’s preferred vehicle to fix the formula, Kansas freshman Rep. Nancy Boyda, expressed outrage that the Republican Congress sought savings in Medicaid from generics, instead of "going at the root of the problem, the name brand drugs." Boyda was formerly an executive with Marion Labs, which makes her a particularly appealing spokesperson for critics of the brand industry.

The Democratic health bill introduced in the House the week of July 25 already includes a proposal to increase the minimum Medicaid rebate by five percentage points, from 15.1% to 20.1%. Those are the types of Medicaid payment fixes likely to move through this Congress.

So the brand name industry has a lot to lose in the fight over the new payment methodology for Medicaid. But, despite those caveats, some companies may find themselves presented with an intriguing opportunity to regain share against generics once January rolls around.