AdvancePCS Retail “Access Fee” Mirrors Pharmacy Choice In House Bill

AdvancePCS is developing a preferred pharmacy program that would allow health plan beneficiaries to pay an "access fee" in exchange for using retail pharmacies outside the approved network.

The access fee surcharge for going outside the network "would introduce the concept similar to a three-tier copay into retail," CEO David Halbert told analysts on a year-end earnings conference call May 16.

"If one retail pharmacy, for example, felt like they were providing better services, they were more well-lit, or better locations, it would create the opportunity for the patient to choose that, and they could charge more," Halbert explained.

"That additional charge would be passed on to the member, and so it would... involve the member in the selection process, thereby introducing competition, not only into the therapeutic selection, which we do in three-tier copay," but also into the retail pharmacy, Halbert said.

The PBM program embodies an approach under consideration by House Republicans for the Medicare prescription drug bill (¹ (Also see "House Medicare Rx Bill Authorizes Tiered Co-Pays, De-Emphasizes Mail" - Pink Sheet, 6 May, 2002.), p. 3).

Bill sponsors are contemplating a "Preferred Provider Organization" option, which would allow a sponsor to charge an up-front fee for "providing access to any or all pharmacies that are non-preferred providers or otherwise participating in the plan."

The House language would also allow a "Point-Of-Service" system, which would increase the plan premium in exchange for "access to any or all pharmacies that are not participating providers."

Halbert also used the conference call to discuss the impact on the PBM competitive environment of the Merck-Medco separation.

AdvancePCS sees the Merck product protection agreements outlined in the spin-off registration statement as an attractive point of differentiation for Medco's competitors. Medco must maintain a market share for Merck drugs at specific target levels related to 2001 levels or pay Merck liquidated damages (² (Also see "Zocor To Get Special Medco Attention: Market Share Protections Set In IPO" - Pink Sheet, 29 Apr, 2002.), p. 12).

"We've been contending for some time that the only reason that Merck owned Medco was pretty obvious... to promote Merck product. Now it's in black and white, any client or prospect can read that," Halbert declared.

Halbert's comments are characteristic of the industry's response to the disclosures in the separation agreement. Some PBMs are using the IPO filing as part of a PR campaign by photocopying - and, in at least one case, laminating - relevant pages for clients and investors.

Express Scripts has also used the S-1 to differentiate its business practices from those of Medco, telling Deutsche Bank conference attendees the IPO filing confirms its long-standing assertion that it can offer better prices by remaining independent.

The Medco spin-off may also change the environment for risk-sharing in the PBM sector. With Merck's strong balance sheet as ballast, Medco has been the strongest advocate of more risk-oriented contracts, including legislatively mandated risk proposals.

After the spin-off, Medco may have less tolerance for risk. Medco's stand-alone balance sheet would have put about $86 mil. in cash and short-term investments on hand at the end of December 2001, down slightly from $95 mil. the year before. However, after a $15 mil. initiation cost for a debt issuance associated with a spin-off payment of $1.5 bil. to Merck, Medco's cash will be reduced to $1.3 mil. Cash and short term investments will be adjusted to $71 mil.

Medco has delved into specific risk-based contracts with several clients and owns three insurance companies, allowing it to offer stop-loss coverage.

Medco says that it treats projected risk losses from risk-contracts as deductions to revenue. Medco manages its risk by restricting these types of contracts to "limited instances" and setting caps on its responsibility.

In its SEC filing, however, Medco notes that Merck has "historically provided credit support arrangements and guarantees for the company's performance under certain client contracts. After the spin-off, Medco will attempt to extract Merck from those guarantees.