The Evolving Landscape Of Pharmacy Reimbursement

Presenter:
Welcome to TD Cowen Insights, a space that brings leading thinkers together to share insights and ideas shaping the world around us. Join us as we converse with the top minds who are influencing our global sectors.
Charles Rhyee:
Hello. My name is Charles Rhyee, TD Cowen's Healthcare Technology Analyst, and welcome to the TD Cowen FeatureHealth podcast. Today's podcast is part of our monthly series that continues TD Cowen's efforts to bring together thought leaders, innovators and investors to discuss how the convergence of healthcare, technology, consumerism and policy is changing the way we look at health, healthcare and the healthcare system.
Charles Rhyee:
Over the last few decades, growth in the pharmaceutical utilization and an increasing mix of specialty drugs has helped drive strong performance for many participants in the pharma supply chain. As the largest channel for prescriptions, retail pharmacies have been an important part of helping drive growth in the industry. However, pharmacies have faced years of margin pressure and have not seen the same degree of benefit as others in the supply chain. For many years, pharmacies have dealt with the lack of transparency in how drugs are priced, as well as uncertainty about whether reimbursement will adequately cover the cost of drugs and the time associated with counseling patients.
Charles Rhyee:
For the last decade, with increasing levels of generic substitution, retail pharmacies were able to manage their margins by cross-subsidizing potential losses they would see on brand drugs with the profits they would gain on generics. But now with generics making up over 90% of prescriptions, the benefit from generic conversions and the abilities cross-subsidize has been maxed out and the pharmacy reimbursement model is clearly in need of change.
Charles Rhyee:
To help us discuss this topic, I'm joined by Michael Rothrock. Michael brings over 20 years of experience within both managed care as well as the PBM industry. Before creating Allegheny Strategic Partners, Michael was the VP of pharma strategy and contracting at Express Scripts where he was responsible for leading commercial and Medicare formulary contracting strategy. Prior to his time at Express Scripts, Michael worked at Aetna and Coventry Healthcare in a variety of areas including retail network, formulary management, manufacturing contracting and specialty drug management.
Charles Rhyee:
Michael, thanks for joining us today.
Michael Rothrock:
Thank you, Charles. Happy to be here.
Charles Rhyee:
Obviously, a little bit of a longer preamble than I usually do, but want to lay out a little bit of where we're at. We'd love to start out by hearing how you think about the current state of retail pharmacies, a little bit how we got here, where we're at and maybe what do you think led to CVS introducing CostVantage?
Michael Rothrock:
Charles, let's start from a little while ago with how we got here with retail pharmacies. PBMs, national payers, whenever we've done direct contracting with retail facilities, retail pharmacies for distribution of drugs, every year we would go out and try to negotiate improved, more enhanced, more aggressive, more competitive rates to deliver value and unit cost savings to our downstream clients and patients.
Michael Rothrock:
As a result of this, brand discounts became competitive, generic macro rates migrated over to generic effective rates with very aggressive all-in discounts collectively for all generics, whether it's a single-source or a multi-source, dispensing fees, we squeezed those. We got to the point where some pharmacies were trying to find value, whether it was through cross-subsidization giving up value on brands in order to make profitability on generics.
Michael Rothrock:
Generics now make up a significant percentage of the overall pharmacy benefit utilization. Over time, we have to find ways as payers and PBMs to still extract value on a cyclical annual basis, which drove these prices down. What we've recently seen is some retail pharmacies unfortunately not able to stay afloat. We've seen FTC PBM transparency investigations, political pressures on how do we as PBMs and payers make sure clients are paying the lowest possible price, whether that's in a commercial environment or specifically in a Medicare Part D environment.
Michael Rothrock:
Do all the headwinds associated with delivering savings to clients, whether that's employer groups, health plans, Medicare Part D plans, collectively we as PBMs and/or health plans who did direct retail network contracts, whether that's for a 30-day fill or a 90-day fill because we've become very agnostic on omnichannel, whether it's home delivery or pick up 90 days at retail, the rates have continued to push these pharmacies to the brink of minimizing profitability.
Charles Rhyee:
Obviously, we see here then with Rite Aid declaring bankruptcy, independent pharmacies shutting down, it seems like maybe a tipping point here we are in the retail pharmacy industry. You see CVS step forward and announce, just a few months back, it's desire to move to a cost-plus model. If we think about that, maybe in your words, describe how a cost-plus model might work, because obviously the details from CVS are still a little bit, it hasn't really been fleshed out yet. But in your mind, what does a cost-plus model look like?
Michael Rothrock:
Well, Charles, as you alluded, the devil's in the details as to how this is going to operationally work, what a retail pharmacy is going to experience through their algorithm of payment and what this means to overall drug cost and/or the patient.
Michael Rothrock:
When you think about a cost-plus model, there has to be a basis of the word cost. What is true cost? Is it WAC price, wholesale acquisition cost from the manufacturer? Is it NADAC, which is the national average drug acquisition cost? Is it PAC, predictive acquisition cost, or as CVS is alluding, it's their own internal algorithm. Due to the lack of that definition of the word cost, it's difficult to predict how a retail pharmacy is going to potentially survive in this new model.
Michael Rothrock:
Now, the CostVantage program is specifically for their own retail pharmacies right now. A little over 9,000 plus CVS stores, they are going to migrate every PBM and payer contract over to this CostVantage program. What we don't know is the algorithm they're going to utilize to define the word cost. Until we know that it's going to be hard for both sides of the table to come up with a negotiated markup and an impact to the overall healthcare system.
Charles Rhyee:
You mentioned NADAC, for example, and if I'm not mistaken, Medicaid prices off of NADAC. There are acquisition costs lists that are available publicly. Not to say that CVS has to follow that necessarily, but has that model worked in Medicaid, would you say?
Michael Rothrock:
Well, I think anytime you understand the playing field both sides are experiencing, you can model out the financial impact. If you know NADAC should be the list pricing or the acquisition where your algorithm's going to be based off of, we know what rules we're playing with. Has it been successful in Medicaid? For certain pharmacies, yes, and for certain pharmacies, probably not. The independents in rural areas may still struggle with that, no doubt, because of the limitations on their acquisition or buying power. But at least we all know the rules we're playing with. We understand the calculations, we understand what we're going to get reimbursed and we're understand how we're going to be reimbursed based on that definition of cost. When it is a subjective calculation that is yet to be finalized or publicized, we're all swimming in the dark here.
Charles Rhyee:
Maybe, obviously to your point, the devil's in the details, but if we step back for a second though and just broadly look at it, what would you think are the primary benefits for retail pharmacies to convert to a cost-plus model?
Michael Rothrock:
Well, I think the overall benefit for the healthcare system is to try to encourage more transparency. By that I mean between employer client, health plan client, PBM and retailer, everyone plays what gets reimbursed. There's no more gamesmanship, there's no more spread pricing. It's fully transparent and you know what you're walking into getting paid if you're a pharmacy or what you're paying as a payer without any type of spread being maintained by a certain PBM or health plan based on the adjudicated price of the drug.
Michael Rothrock:
Again, back to the retail pharmacy's perspective, if I'm on an AWP minus reimbursement algorithm plus a dispensing fee for brands, and I'm on a generic effective rate algorithm plus a dispensing fee for generics today, I know how I'm performing because those are public prices, you know what your GER is. When we go to a cost-plus model, it's going to be really dependent upon what algorithm and reimbursement listing the payer or PBM is going to use for the word acquisition cost and what is my buying power through my wholesale or direct with manufacturer components to make sure I maximize my return.
Charles Rhyee:
Going back to an earlier part that we mentioned, this cross-subsidization, you are willing to give up discounts on brands, for example, to capture greater profitability on generics. One of the things that CVS had noted was that they face a billion dollars of reimbursement pressure annually, but half of that they're usually able to make back through better purchasing, so through acquisition costs. The other half they have to find elsewhere in their operations to make up for that.
Charles Rhyee:
In that sense, going to a cost-plus model would in theory push that other half. Assuming acquisition costs has passed through and we ignore the markup for a second, the other half in theory would get pushed up back towards to the PBMs. Of the reimbursement pressure, if they're saying, "If we can go to a cost-plus model, we're going to give you our acquisition cost." But in theory they're going to recapture, in a sense, the other half which they're not going to have to face because they're not taking the loss on the brand drugs, for example.
Michael Rothrock:
That may or may not be 100% true. It's going to come down to, again, some drugs will be better for the retailers and some may not be under this new cost-plus model. There's always going to be certain products or certain classes, whether it's brand, generic, high-cost drugs, low-cost drugs or there's going to be some winners for them and some losers for them, just like in brand generics today.
Michael Rothrock:
At the end of the day, holistically, we hope that we're at a much more transparent and reputable favorable reimbursement that everybody can stay in this game, make sure they participate, stay profitable. They know they're going to have to still work on efficiencies and SG and A, that's for both sides of the table. But as long as the algorithm keeps them at or above water, they should be able to find other ways to extract savings out of their own system.
Charles Rhyee:
If we think about what the details could look like, what kind of pricing framework do you think could work for a cost-plus model in order to give both pharmacies some visibility that they can cover acquisition costs and overhead costs, while from a PBM standpoint, keeping them incentivized to always seek the lowest acquisition costs?
Michael Rothrock:
Well, there's going to be a couple factors. I'm encouraged by these new concepts of cost-plus models, whether that is the CostVantage model at CVS or even Express Scripts ClearNetwork component. But I'm going to go back to what I said earlier, as long as we know what rules we're playing with for the definition of the word cost, we can all play off of it. Manufacturers set WAC. We know that's a public and publicly available list price. If we need to use that from a certain perspective, that's one option.
Michael Rothrock:
If it's NADAC or PAC, those are other options. When we talk about other algorithms that get added onto it, there's going to be a shared savings type of component. There'll be a reimbursement fee, like a dispensing fee, not based on the price of the drug. There'll be a shared markup percentage between retailer and client, what's passed back or kept through the PBM.
Michael Rothrock:
But there also has to be a stop gap or a fail-safe. There needs to be a cap. Because if acquisition cost is subjective and a pharmacy's markup is based on a higher acquisition cost, that could force reimbursement higher. There needs to be a fail-safe cap placed on certain buckets of drugs that say, "We will pay cost-plus, but no more than this max per 30 days," to make sure you keep pharmacies hungry to negotiate the best acquisition power pricing they can.
Charles Rhyee:
Do you think putting these kind of caps, a global cap on classes of drugs, would that make it more palatable for PBMs to move towards a cost-plus model?
Michael Rothrock:
Absolutely it would, because that's the unknown. Again, if the PBM is at risk of saying, "Well, if it's cost-plus and there's some form of shared savings of a service fee based on a percentage, we know in a market where list prices, acquisition prices, drug prices inflate as prices go higher for these reimbursement algorithms, we need to make sure we cap out the maximum payment on a per 30 or per 90-day fill." We used to call these back when we first did networks therapeutic max, where we would max a class of drugs at different levels to pay no more than X or pay one price for the bucket of drugs that treat this condition.
Charles Rhyee:
We've seen suggestions, and sorry, just to maybe jump back to this when you said that what we don't know is the acquisition cost algorithm that CVS, in this example, is thinking of using, we've seen some suggestions that they're looking to use an internally computed acquisition cost index and they would place groups of drugs into these cost buckets. Everything under a dollar would be in the $1 bucket and then the markups would all be computed off that $1 level. Is this something novel or is this actually they're using something that's already in existence today?
Michael Rothrock:
From my understanding and my experience, Charles, I have not seen this before. Again, anytime you come back and create an internally created algorithm that assesses acquisition costs into different buckets, whether it's the here's the dollar per 30 day bucket, $5, $10, $100, just as examples in illustrative purposes here, CVS is going to be the one that's going to be creating these buckets.
Michael Rothrock:
The PBM or the payer who's contracting with CVS to reimburse at those levels will have to now do their own assessment on the financial impact. They will basically do a simple, here's what time zero was under the current algorithm that we pay net. Here's what the new model would look like, net Y in calculation Y. Is it a wash? Is it a win? Are we losing? I would believe, even if there are buckets created and it's fully transparent as to which drugs get put in which bucket, you can negotiate that markup. Maybe it's at a bucket level, maybe it's at a holistic client level, maybe it's a combination of both, to ensure that PBMs are not paying more than they would be paying today and hopefully less.
Charles Rhyee:
How are PBMs viewing this push by retail pharmacies, this push to a cost-plus model?
Michael Rothrock:
Well, Charles, that's a really good question. I'm not sure if it's coming directly from the retail pharmacies on its own or if it's a collective push due to transparency pressure, PBM FTC investigation pressure, retail pharmacy profitability pressure, network consolidation and bankruptcy. It could be all five of them because some of these programs were not created by the retailers. Some of these were created by the PBM themselves as a way to respond to better transparency.
Michael Rothrock:
Now again, PBMs have multiple different pharmacy network reimbursement algorithms for clients. This in the short term, I believe will be an option. CVS, on the other hand, is going to ensure that all PBMs for their own pharmacies move towards a CostVantage program.
Charles Rhyee:
To that extent, you mentioned earlier the PBM, so let's say someone like CVS or any pharmacy really will say, "Here is our internally generated algorithm for our costs, and then these are the negotiated markups we would like to put in place." The PBM will do their own analysis and try to figure out is it a wash? Do we gain, do we lose? To your point, ideally, we'd like to also save money as well.
Michael Rothrock:
Sure.
Charles Rhyee:
I think everyone looks at this as a zero-sum game that if someone wins, someone has to lose. Is that the case or are there scenarios where both parties can walk out gaining something?
Michael Rothrock:
That's the 800-pound gorilla question there, Charles. At the end of the day, both sides want to win. Both sides want to show they're delivering value, whether it's to shareholders, whether it's to clients, whether it's to patients or all three. I would envision that the entities that have created these programs are doing this to not lose, they're doing this to win or at least stay neutral, but maybe win on the optic side of the table. If it doesn't cost them anything more, but they're doing something optically for the right reasons, absolutely it's a win.
Michael Rothrock:
Now what we don't know in any of these algorithms, CostVantage, ClearNetwork, internally created cost measures that CVS might be creating, how often do these get adjusted? We know when AWP goes up based on WAC price increases for brands, we don't know when cost-plus model factors may get adjusted. Is it going to be quarterly, semi-annually, annually? Every contract is probably going to be looked at on a regular basis on how reimbursement is going to impact both sides of the table. We have to believe these are not going to be static numbers for an extended period of time.
Charles Rhyee:
If we have that in mind then, obviously we can see the clear incentive for Caremark as part of CVS to push through with this. What is the incentive for Express or Optum or any other big PBM?
Michael Rothrock:
Well, a lot of the PBMs are copycats amongst each other. They usually create programs or concepts, and then very shortly thereafter, number two and number three, we'll do the same and you can just flip-flop who's first. The advantage, again, goes back to what we talked about. It's another alternative option. You're building a network that provides better transparency, optically provides them air cover in moving towards a new PBM transformation and/or reform model and helps their clients have more credibility in their PBM is working on their behalf. But PBMs are also going to be cognizant of the making sure that they're doing the right thing for their customers, but also not jeopardizing their margin and/or profitability they need to achieve out of these networks.
Charles Rhyee:
You brought up a little bit earlier that PBMs could be doing it for any number of reasons or any number of reasons can be pushing us towards this move towards greater transparency, let's say, broadly speaking. How does the regulatory scrutiny that PBMs have faced over the past years, and are continuing to face, how might that influence how the PBMs will react to the demand of the demand for more cost-plus models?
Michael Rothrock:
I think that's one of the main reasons these are starting to be launched in the marketplace. The political FTC regulatory pressure on PBM reform is the loudest it's ever been in the past 12 to 18 months. You're seeing certain clients, whether that's Blue Cross Blue Shield of California, who has divided and conquered out and piecemealed their pharmacy benefit services across multiple entities. You're seeing large employers leaving big box PBMs to some of those second tier models recently. It all comes down to trust, credibility, transparency, and the ability to have more likelihood, or I should say the ability to have better optics into how the pharmacy reimbursement model works for them as a customer.
Charles Rhyee:
In that sense, they're going to analyze these programs and make an assessment on really what that impact could be. In the scenario where PBMs are negatively impacted by a cost-plus model, obviously it's hard to assess what that impact could be, but if they view that they could make it back elsewhere in their business, does that make it more palatable for them to consider it? Or when they're viewing the net impact, it's in isolation of just some core functions?
Michael Rothrock:
Well, there's always going to be an evaluation of will this program be break-even, profitable or a lose. No doubt. If there is some form of a negative impact to a PBM moving to a cost-plus model through reimbursement based on what they have to pay the pharmacy and versus what they have to charge to client, there's other ways to potentially evaluate revenue opportunities within the PBM.
Michael Rothrock:
Specialty drug margin is at an all-time high because it's the growing market and it's over 50% of all scripts and all the big PBMs usually have an affiliation with one integrated and owned SP. They could be looking at maybe fair market value fee-for-service based structures with their clients as an alternative to margin-based business, but per member per month fee structure business in order to pay for the services and the savings opportunities that the PBMs provide.
Michael Rothrock:
There are alternative ways to help offset some downside, if there is downside. PBMs are competing on a regular basis with themselves to in order to win and retain customers. These clients continue to ask and demand for more savings on an annual basis to renew and/or to win them, so they're going to have to provide value back, but also make sure that they are charging for services and value that is commensurate with the product they offer.
Charles Rhyee:
Is there the potential where moving to a cost-plus model though could have an impact on other parts of the PBM business, because maybe we can make it back elsewhere. But one of the arguments that have been made is that you haven't seen much use of pass-through models in the specialty pharmacy side. One of the arguments has been, well, there's no real use of pass-throughs on the retail side. But if we start moving to a cost-plus model, which effectively we start moving to a pass-through type model, if you move to a past-through model especially, could that have a more damaging effect on the PBM model, particularly on the specialty pharmacy side?
Michael Rothrock:
Charles, that's a really interesting question. I'm going to take it in a couple of different components when I respond to this. Let's take CVS, the retail arm and their CostVantage model. They do have the ability to dispense certain specialty medications at a retail facility today, whether those are self-administered injectable autoimmune drugs to even some oral products and MS agents, oncology, et cetera. If cost-plus is truly cost-plus at a CVS retailer, you would have to believe that those drugs will be part of that assessment and that algorithm when they negotiate with their PBMs.
Michael Rothrock:
When we talk about true specialty drugs, whether those are orphan, rare disease, gene therapy, cell-based therapies, going to a cost-plus structure there, it's going to take a little bit more time, be a little bit more challenging because there are costs associated for that SP to manage and administer that product and that patient experience. There might be REMS requirements for certain products that they have to fill out and complete on manufacturer's behalf. There could be benefit verification, patient assistance programs, data services, special shipping and handling, cold refrigeration, cold shipping, logistical concerns. If we were to ever get to a cost-plus model there, not impossible, but it would be almost negotiated on an individual drug basis as to what the markup or the fee structure would be on top of the traditional drug costs on its own.
Charles Rhyee:
Yeah, I see. That's interesting. We've laid things out, where we're at, some of the pros and cons of what are the challenges in putting something like this through and some of the implications from the payer side of the equation. Want to explore a little bit about, so what happens now, what happens next? I think the question is, to start with, does CVS with roughly almost 30% share of the retail market, the retail pharmacy market, do they have the market share necessary to push this through to PBMs on their own because to get the Express Scripts of the world and the Optums of the world to sign on?
Michael Rothrock:
Yeah, I think they do. Now, a PBM tries to accommodate every big chain we can in order to make sure we have network adequacy for our clients and patients. Now, there are multiple different network size opportunities within the PBM. There's the 60-plus pharmacy network. There might be one or two large chain pharmacy networks. There may be one pharmacy chain, grocers and PSAO pharmacy networks based on different levels of how much access you as a client want and the type of savings you want to achieve.
Michael Rothrock:
CVS though is one of the biggest, if not the biggest chains out there. So yes, I do believe they can make this work with all of their payers as long as the PBMs believe and see, based on the calculations of this new model, that they're neutral or better on an annual basis. Because if there's going to be a cost to them or their clients, then that's going to be problematic. Then there will be some tension and some negotiation, pushback. If we get to the point where they aren't able to resolve that difference, you could see one of the big three, or big two now, ESI and Optum because CVS will have themselves in their own network, maybe choose a network preference without CVS where WAG or Walgreens could benefit from that market event jumble.
Charles Rhyee:
Which I think brings us to the next question. What do you think Walgreens' role is in all of this? I think there's an argument to be made that Walgreens, even more than CVS, would be interested in also a cost-plus model. If both of them were to advocate for this shift, would that really push PBMs to have to accommodate?
Michael Rothrock:
Yes. Absolutely, Charles. If both of them to pretty much demand a cost-plus reimbursement algorithm as their go-forward contractual reimbursement, then the PBMs and payers would have to accommodate that type of demand. Both of them together would be difficult to not have in a network.
Charles Rhyee:
You talked about network adequacy. My understanding is that within Medicare, you only need about 40,000, 45,000 pharmacies to meet that network adequacy standard, yet we still have 60 something thousand pharmacies in the US. In that sense, we have an oversupply of pharmacies. CVS has over a little over 9,000 stores, Walgreens 8,600 stores. I mean, in theory, you could build a network without both of them and still meet the Medicare requirement.
Michael Rothrock:
Charles, that's a great question. We're going to take it in two different parts.
Charles Rhyee:
Sure.
Michael Rothrock:
In a commercial environment, absolutely, you can build it without them. There aren't any requirements for network adequacy, just any willing provider laws in certain states where if that pharmacy is participating in the state with any willing provider, they have to have the right to participate in the network.
Michael Rothrock:
But in a Medicare space, it's really dependent upon urban, rural and suburban network adequacy requirements. I haven't looked at a network adequacy report under the Medicare statute in quite some time. Could you get away without one of the chains? Probably because of the urban, rural and suburban distances. But getting rid of both of them, you may have some gaps in certain CMS regions or Medicare Advantage regions and counties where you may not meet the network adequacy. That's the evaluation you would have to make as a Medicare entity if both of them were not to be in the network. Would there be certain regions where you cannot participate?
Charles Rhyee:
But you made the point, in commercial you can do anything you want. But I mean, have you seen anyone build one without both?
Michael Rothrock:
No, that I have not.
Charles Rhyee:
Right. You bring up that point when Walgreens was out of the network for a bit, what were the lessons learned out of that? Because I recall obviously it was impactful to Walgreens. I did think, if I recall correctly, it had some impact on Express in that selling season as well, so I don't feel like maybe Walgreens took the worst of it, but if I recall correctly, nobody really won at the end of the day.
Michael Rothrock:
Well, the word winning is again up to the interpretation of that definition. We do know Walgreens suffered from that removal from the Express Scripts network. Anytime a patient leaves a pharmacy and goes to a different pharmacy to fill it and they're comfortable with that new pharmacy, they're usually not going back, so that's a lost patient.
Michael Rothrock:
Now, could a PBM in this instance potentially lose some client renewals or even new business as a result of not having a certain pharmacy chain in their network? It's definitely possible. I don't know the specifics of what happened, that predated me there, but if you're a client and you want broad network and Walgreens is, in this example, a key decision point for you to ensure adequacy for your own employees and their patients, then yes, it could have hurt them from a selling season, but I can't comment on the true financial impact if there was any.
Charles Rhyee:
With that in mind, that would almost suggest that Walgreens and CVS this time around maybe don't have as much leverage as people think unless they actually both advocated at the same time.
Michael Rothrock:
It takes a collective voice to impact the pharmacy ecosystem. One chain on its own may not deliver exactly what they want across 100% of their contracts, but someone like a CVS or a Walgreens should have a fairly high success rate if the math works. If both of them are swimming in the same direction with the amount of stores they both have, then you would believe that their success rates would be a lot higher.
Charles Rhyee:
How do you see this playing out then over the next couple years? Do you think it's feasible for retail pharmacies to really move towards this in the next year or two, or do you think it's going to take longer?
Michael Rothrock:
Well, I think the CVS one, the initiative is to get it done within the next 12 to 24 months. I think they're going to start that concept and that algorithm very quickly.
Michael Rothrock:
The ESI ClearNetwork component, again, that's a network offering for clients. Definitely they will build it out. Clients will have a right to choose. If they can help promote clients to move in there earlier, that would be fantastic.
Michael Rothrock:
Let me say it this way, Charles. With any transition on a fundamental shift in how reimbursement occurs, this is not a flip of the switch. It's not going to happen overnight. This is probably a 12 to 36 month transition. Because anytime we're resetting the baseline in how things are calculated on a drug pricing model that may be new, novel or different, it takes time for the vendor and the PBM to align on the financials, and then the true purchaser of healthcare, your employers and health plans, to migrate to that new model.
Charles Rhyee:
Can I ask, you brought up Express' ClearNetwork and I think that's more analogous to CVS's true cost, so that's your transparent offering to your employer customers. Do those really intersect though with what you're paying the pharmacies separately?
Michael Rothrock:
Well, I think one thing I want to clarify with you, Charles. The ClearNetwork is their cost-based reimbursement algorithm for pharmacies.
Charles Rhyee:
Oh, it is. Okay. Maybe I got [inaudible 00:34:49]-
Michael Rothrock:
The true cost incorporates rebates at the point of sale to put the lowest possible price to the consumer at the point of sale. Now, PBMs have had the ability to do rebates at the point of sale for years, but very few clients have chosen to do so. There is still, again, that public pressure, that PBM reform, that investigation, that transparency component. Patient demands due to high deductibles that are now encouraging these new type of point of sale models to become a little bit more prevalent as a product offering. It still takes the client's decision to choose to move to that, but it has been available and ready for multiple PBMs for years.
Charles Rhyee:
Got it. If we do get more widespread adoption of cost-plus models, what would you imagine some of the impacts could be to the rest of the pharma supply chain? I guess, for example, how would that change, they negotiate an acquisition of generic drugs, but does that change the way Red Oak works for CVS or WBAD does for Walgreens? Do you think that would change how distributors price to them? Maybe walk through some of that with us, maybe to think through it. Are there any knock down effects that might happen as a result of this?
Michael Rothrock:
Anytime there's a new algorithm that provides pricing pressures to maximize profitability, you would have to believe, whether you're a retailer, an independent, a group purchasing organization, a PSAO, you're going to put pressure on your downstream components to extract better unit pricing, better acquisition costs. Because if you lock in your buckets, like we talked about earlier of here's the buckets for each individual therapeutic class or drug offering, and you're able to maximize better cost-effectiveness through acquisition pricing, purchasing power, unit pricing, you have the ability to maintain better profitability until the next time we go around and reset what a cost-plus structure looks like. That's why I said earlier, how often are these cost-plus structures going to be reevaluated to reset what the true cost is at this point in time?
Charles Rhyee:
Can you envision a scenario where cost-plus actually leads to higher prices for patients?
Michael Rothrock:
It's an interesting question. If a pharmacy's incentive is to buy the most expensive product in a choice of five different alternative generics because they have a higher margin capability, then yes, that could force unit pricing up. But that's why there needs to be a fail-safe or a global cap max to make sure that doesn't happen or now we're just feeding perverse incentive that we should not be seeing in this new model.
Charles Rhyee:
I think all of this in the end of the day where we're talking about clearly there's been a push towards, or a desire from multiple industry participants, for greater transparency. The opaqueness of the way drugs are paid for is I think is one of the great challenges in US healthcare. What you've seen is that. You mentioned earlier you've seen plan sponsors like Blue Shield of California decide, "Hey, we're going to disaggregate this whole model, even though probably it's more complex for us, probably harder to manage for us, but at least we can see the pieces now in greater clarity." Do you think that's a real fix to the issues or do you think that's a trend that will continue and maybe does that allow cost-plus to really flourish more?
Michael Rothrock:
Well, the Blue Shield of California model where they did piecemeal their different components allows them the ability to have the optics into everything you just discussed. They're not tied to one PBM. They're forecasting hundreds and millions dollars of savings. What we don't know is will that be achieved?
Michael Rothrock:
Now, there's a lot of management oversight, vendor requirements that they're going to have to monitor on a regular basis. We have to believe the entire US health plans and employers are looking at them to see if this is a successful model. They were pioneers on this. They decentralized it. They went with different algorithms, different vendors, cost-plus, Amazon, et cetera, to ensure that they are getting the best of the best of the best that they believe is going to provide them the transparency they need and the dollar cost savings they want to achieve.
Michael Rothrock:
But there is a price for that. The price of that is oversight, vendor management, data and benefit integration, talking amongst IT systems, and hopefully the patient experience is seamless. If it is successful, then you may see others divide and conquer just like Blue Shield of California did, but time will tell. It's too soon to make that prediction.
Charles Rhyee:
We'll see. Hey, just wanted to maybe close out here. Do you envision cost-plus really becoming the dominant form of reimbursement for retail pharmacies?
Michael Rothrock:
I do. I do. I believe in the next three years, that will be the primary reimbursement algorithm based on the fact that we need time to finalize negotiated contracts between retailers and PBMs, and then we need client renewals or acceptance based on their cycles of their agreements with the PBMs to migrate over to these new models due to transparency and to minimize discrepancies between who pays what and how.
Charles Rhyee:
I think we'll leave it there. Michael, so glad to have you here with us today and really enjoyed this discussion and want to thank everyone for joining us listening on this podcast and stay tuned for feature podcasts. Thank you, everyone.
Michael Rothrock:
Thank you very much, Charles.
Presenter:
Thanks for joining us. Stay tuned for the next episode of TD Cowen Insights.

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