Statement of National Association of Chain Drug Stores, Alexandria, Virginia

Introduction

Madame Chairman and Members of the Subcommittee. NACDS represents about 170 chain pharmacy companies that operate about 33,000 retail pharmacies all across the United States. Chain pharmacy is the single largest segment of pharmacy practice. We filled about 60 percent of the 3.1 billion prescriptions provided across the nation last year.

NACDS appreciates this opportunity to provide comments today to the subcommittee on important Medicare reform issues. We are particularly interested in sharing with the subcommittee our perspectives on providing prescription drug coverage to seniors. We believe that our experience in delivering and managing pharmacy benefits can be of value to the subcommittee as you begin your important work this year in determining what works, and doesn't work, for seniors in helping them obtain their vital prescription medication and pharmacy services.

Develop a Pharmacy Benefit, not only a "Drug" Benefit

Today, when a patient arrives at their local community pharmacy, be it a chain pharmacy or an independent, they come into contact with one of the most accessible and trusted providers in the entire health care system. It is estimated that 95 percent of Americans live within five miles of a retail community pharmacy.

Thus, the vast majority of Americans are never far from a highly trained health professional that can provide medications or advice on a wide range of health care issues. Convenient access to community pharmacies makes us a critical part of society's health care safety net.

Prescription medications are the most widely used and cost-effective health care interventions used by patients today. Modern prescription drugs have extended and improved the lives of millions of Americans and saved millions of dollars through shortened length of illnesses, increased productivity, and reductions in hospitalization and medical procedures. Community pharmacy is proud of the role we have in assuring the safe and effective use of these therapies.

That is why we believe that any new program to expand prescription drug coverage to seniors should be a pharmacy benefit, not just a prescription drug benefit. Too often, we think of a prescription drug benefit as only providing a "drug product" to seniors. We believe that this is a serious mistake. Seniors take three times more prescription medications than younger individuals. For that reason, seniors need ready access to community-pharmacy-based education, counseling, and medication therapy management, in addition to the drug product, so they can take their medications appropriately to achieve the intended medical outcomes.

We believe that insurers, payors, pharmaceutical manufacturers, and seniors themselves can agree that these important community-based pharmacy services help make better use of prescription products. To play off a popular catch-phrase, "pharmacy doesn't make the drugs, but pharmacy does make the drugs work more effectively."

We applaud forward thinking members of this subcommittee who supported inclusion of medication therapy management services in various prescription drug proposals introduced last year. It is absolutely critical that any Medicare prescription drug benefit that Congress approves includes coverage for these services.

Don't Over Promise Seniors and Understand the Market

Regardless of how seniors obtain their prescription drugs, whether through public or private prescription programs or by paying out of pocket, community retail pharmacies are in a good position to help evaluate for the subcommittee the effectiveness of various options for prescription drug coverage.

When considering approaches to prescription drug coverage, we believe that two good principles for the subcommittee to keep in mind are: first, don't over promise seniors; and second, make sure that you understand how all the pieces fit together in the pharmacy marketplace.

For example, many of you often receive mail from constituents asking the simple question: "Why do my drugs costs so much? Currently, reimbursement for almost 85 to 90 percent of all prescriptions is set by third party plans, such as insurance companies, HMOs or PBMs. Third party plans keep squeezing down reimbursement rates in order to control exploding costs, but these policies do little to control escalating expenditures. Under these plans, most patients simply pay a copay for these prescriptions. Patient copays have been increasing over the last few years also because of the escalating costs of prescription benefit programs.

Having said this, we are concerned about policy approaches, both at the Federal level and the state level, that would seek to target retail prescription prices as the solution to the high cost of prescription drugs for seniors. The subcommittee should be aware that almost 80 percent of the cost of the average retail prescription price represents costs to the pharmacy over which we have absolutely no control. These are predominantly the costs of acquiring the drug product from the manufacturer, which is passed through to the consumer, and thus reflected in the retail price charged.

The remaining 20 percent of the prescription price represents our operating costs, such as heat, light, rent, salaries, computers, counseling, and other overhead expenses. Currently, our salary budgets are experiencing significant upward pressures as a result of the critical pharmacist shortage. We look forward to working with you this year, Madame Chairman, on alleviating this shortage and assuring an adequate supply of pharmacists exists to serve all Americans, including Medicare beneficiaries.

With this as background, we will now provide some of our perspectives and cautions on other approaches that you may consider this year.

Prescription Drug "Cash Discount Cards": Unfulfilled Promise

Retail pharmacies have no upward negotiating leverage with brand name drug manufacturers, so any initiatives that seek to control or limit our retail charges do nothing to affect our cost of buying the drug. For example, so-called prescription "cash discount" card programs essentially require pharmacies to provide a discount on the retail prescription price, without lowering our cost of providing the product. In other words, the pain doesn't flow upstream.

We also believe that these prescription cash discount cards create unfulfilled promises for seniors. If a senior cannot afford a drug at $100, it is very unlikely that the senior can afford it at $90. In addition, as stated above, many of our pharmacies already give senior citizen discounts, which reduce the retail price essentially to the price that the senior would pay under the cash discount card. Finally, many of these cash discount card programs also often use out-of-state mail order as an incentive to steer patients to certain drugs that may be inappropriate for the senior. Mail order also takes the senior out of the neighborhood pharmacy setting.

On this topic, we'd like to draw your attention to a recent report from the Massachusetts Institute of Technology that said, "the individuals who face the greatest burden lack insurance coverage for prescription drugs are in relatively poor health with severe chronic conditions, have relatively low income, and do not qualify for existing state prescription drug coverage programs. These individuals need benefits that far exceed the savings attainable from a pure discount card program."(1)

The Myth of Volume Pharmaceutical Purchasing

Some may say that you can obtain better prescription prices for the elderly by "pooling their purchasing power" so that they can get the same volume discounts obtained by other pharmaceutical purchasers. Be wary of this line of argument, because the pharmaceutical marketplace doesn't work that way. Volume purchasing does not drive pharmaceutical manufacturers to give discounts - you have to move a manufacturer's "market share" to obtain these discounts.

If "volume purchasing" drove manufacturer discounts, then why do the largest pharmaceutical purchasers, such as large chain pharmacies, as well as many of the independent pharmacies that belong to large buying groups, pay higher prices for brand name drugs than smaller pharmaceutical purchasers who buy less volume?

Here's what the proponents of "volume purchasing" for seniors don't and won't tell you. All this really amounts to is simply discounting the retail prescription price that seniors pay at their pharmacy, without affecting retail pharmacy's cost of buying the drug, or without requiring the insurance plan or PBM to "pass through" to the senior any and all of the financial incentives that are given to them by the manufacturer. If these plans were required to pass through all the discounts that they negotiate, both pharmacy discounts and manufacturer discounts, the senior would truly benefit from lower prescription drug prices. Without requiring full "pass throughs", from the manufacturer, the entire burden of so-called "volume purchasing" falls squarely and unfairly on the shoulders of community pharmacies.

We also believe that some of the estimates being made of the size of the discounts that volume pharmaceutical purchasing would attain for seniors are unrealistic and will create serious unfulfilled promises. For example, there were several numbers floating around last year that indicated that private sector entities, or PBMs, would be able to lower retail prescription prices paid by consumers by 25 percent, with some estimates as high as 30 to 39 percent. (2)

We do not know where these numbers come from or how they are calculated. The only remotely conceivable way that this discount size could be attained is if the PBM is required to pass along to the consumer any and all financial incentives (e.g. rebates or discounts) that they negotiate with pharmaceutical manufacturers. This does not happen today in the marketplace and is creating false and unrealistic expectations.

"Drugs Only" Plans and Insurance-Based Models

We recognize that there is support among Members of Congress for creating "drugs only" insurance-based models to provide prescription drug coverage to seniors. Recent experience in the state of Nevada, however, should tell us that, just because you "build it", doesn't mean that "seniors will come." In a genuine effort to help seniors obtain prescription drugs, Nevada embarked upon establishing an insurance-based model to provide prescription drug coverage. After several attempts to finally find a company that wanted to administer the program, reports are that only a handful of seniors have signed up because of the high premiums and significant cost sharing in the program.

We are concerned about a similar fate if such an approach is tried at the Federal level. In general, these programs are subject to significant "risk selection", and tend only to attract those seniors that need protection against high prescription drug bills. Many seniors will not see the benefit in obtaining this coverage because of the significant deductibles and premiums that have to be paid before any benefit is derived from the coverage. Thus, because the cost will keep many seniors out of the "risk pool", premiums will keep increasing for those remaining in the pool, making it less and less affordable for those that need the coverage.

Moreover, the cost of these private-sector insurance plans can also be prohibitive, as was recently reported in the New York Times. The premiums for Medigap plans with prescription drug coverage, the model on which these insurance-based programs are based, will increase 31 percent in New York, 26 percent in Illinois, 24 percent in Wisconsin, 16 percent in Arizona, and 14 percent in Ohio.(3)

Finally, only one entity to date has indicated interest in creating an insurance product in the market that would operate by assuming risk for senior drug coverage. The insurance and PBM industry has demonstrated little enthusiasm for this concept. So, with only one competitor, it is difficult to see how competition would or could actually work under this model. Moreover, we all should be concerned that this one entity is a subsidiary of a drug manufacturer, which increases the likelihood that these manufacturers' drug products, rather than the one that is best for the patient, will be more frequently dispensed than others.

"Premium Support" Models, Risk-Based Capitated Financing, and PBMs

We also believe that the subcommittee should consider the implications for quality of care and cost of using a competition-based "premium support" model for Medicare beneficiaries, financing the benefit through risk-based capitation, and delivering the benefit through pharmaceutical benefit managers, also known as PBMs.

Almost all proposed models, to provide a prescription drug benefit to seniors, use a PBM in some way, shape, or form. For example, some proposals would require that an agency of the Federal government contract with one or more PBMs to provide a pharmacy benefit.

Other proposals would establish "prescription drugs only" insurance policies for Medicare beneficiaries that could be voluntarily purchased in the private marketplace. Many of these proposed insurers would likely partner with PBMs to administer these plans. PBMs can serve several useful functions in the design and delivery of a new pharmacy benefit for seniors. However, NACDS believes that policymakers need to evaluate the implications for quality of care and cost of several management tools current used by PBMs.

PBMs Achieve Savings by Focusing on Squeezing Pharmacy Reimbursement: How effective are PBMs at reducing the cost of drug products? How do PBMs achieve most of their savings? Our experience is that they achieve the overwhelming majority of their savings by squeezing down on pharmacy reimbursement, not by aggressively negotiating rebates and discounts from drug manufacturers.

Evidence suggests that PBMs are relatively ineffective at managing drug costs, and actually add expense to the system that could otherwise be passed along to the consumer. For example, a 1997 GAO study said: "Much of the savings that PBMs achieve appear to come from the lower prices paid to pharmacies rather than from the rebates offered by drug manufacturers." (4) The study found that 50 percent to 70 percent of the drop in the plans' spending on prescription drugs resulted from lower retail prescription prices. Only 2 to 21 percent of the savings resulted from manufacturer rebates that the PBMs shared with the health insurance plans.

This study reflected the experience of the three largest PBMs that manage the 9-million member Federal Employees Health Benefits Program (FEHBP). Members of Congress should be aware that this program, which is being talked about as the basis for a future Medicare "premium support" model, has been experiencing double-digit increases in prescription drug expenditures over the last several years, 22 percent for 1998 alone.

We believe that the experience of FEHBP should be instructive to Members of Congress as they consider the "premium support" model for Medicare. Please note that these prescription drug cost increases are occurring in a population that is not representative of the Medicare population. FEHBP generally serves a younger population that uses fewer prescription drugs than the Medicare population. More significant increases are likely to occur in an older, Medicare-based population.

Risk-Based Financing: Some proposals would finance a senior drug benefit by shifting "full or partial financial risk" to the private sector entity managing the benefit. Under these approaches, a plan would receive a fixed or "capitated" amount to provide all the beneficiaries' prescription drug needs, regardless of the cost of those drugs, or the number of drugs being taken. These "full or partial financial risk" capitation approaches have significant potential negative implications for quality of care.

That is because providers are placed at risk for the cost of purchasing and dispensing drug products and providing pharmacy services, over which they have no control. For example, to stay below the reimbursement "cap", drugs that are less expensive but less effective may be provided to the patient. Ironically, under this model, the drug manufacturers, who are driving the overwhelming majority of the increases in drug spending due to DTC advertising and higher drug prices (5), bear none of the risk.

Because of the unpredictability in prescription drug utilization, there are very few private-sector prescription drug benefit programs that are fully or partially capitated, and there are none for older Americans that uses this type of approach. Past experiences is using capitation models for pharmacy benefits have been unsuccessful. There is no reason to believe that they would be any more successful today, given the impact that manufacturer direct-to-consumer advertising has had on fostering increased prescription drug use.

Of further concern are recent reports that the Congressional Budget Office has sharply increased its estimates of prescription drug spending by the elderly, escalating the cost of potential new Medicare drug benefit by one-third. This phenomenal growth in drug spending by the elderly should give us more pause to really question the impact of a capitated drug benefit on seniors, and whether PBMs really have the ability to manage these exploding costs.

Finally, providing "drugs only" capitated policies results in a serious "disconnect" in the integrated financing of health care. That is because under a capitated drug benefit approach, insurers or PBMs only have incentives to hold down their drug spending, without assessing how increasing (or decreasing) drug spending will impact overall health care spending for a patient. This leads to fragmented and disjointed health care for the patient, and thus could potentially compromise quality of care.

Participation by Pharmacies as "Eligible Entities": It is important to note that many of the bills would allow "networks of pharmacies" or "retail pharmacy delivery systems" to contract directly with a Federal government agency or an insurance company to provide a capitated drug benefit to seniors. While we appreciate the interest in enabling pharmacies participating as "eligible entities", it is highly unlikely that we will do so for two reasons.

First, many retail pharmacies (or retail pharmacy networks or delivery systems) are not licensed in states as "insurers", and would unlikely be willing to assume capitated "risk" for the delivery of a drug benefit. This is especially the case since pharmacies have little ability to control physician prescribing patterns or drug manufacturer advertising.

Second, even though retail pharmacies purchase, at significantly larger volume, greater quantities of pharmaceuticals than most other pharmaceutical purchasers, drug manufacturers charge them much higher prices for the same prescription drugs than other smaller purchasers, such as Medicare+Choice plans. This will place community retail pharmacies at a competitive disadvantage to these other entities that may want to bid to offer a drug benefit.

This market distortion is a fundamental inequity in the system, which belies the whole premise that "competition" actually exists or even works in the pharmaceutical marketplace. If retail pharmacies were given the same access to the discounts that drug manufacturers make available to other, smaller purchasers, the overall cost of the Medicare drug benefit would be reduced by billions of dollars. Prescription drugs would also be more affordable for other private prescription drug plans, as well as millions of uninsured non-elderly Americans.

Medication Therapy Management: Almost all Medicare proposals would require that quality assurance, drug use review, and medication therapy management services be provided to Medicare beneficiaries under these plans. Medication therapy management services include disease state management, medication compliance programs, and drug use review. These programs have been documented to improve prescription use, reduce medication errors, and save money.

Community retail pharmacy believes that the provision of medication therapy management services is an important part of a Medicare pharmaceutical benefit. As prescription medication therapy becomes more potent and complex, the need for these services will only increase. Pharmacists have been performing these functions for many years to improve quality patient care.

However, most PBMs do not incorporate medication therapy management programs into their benefit packages. Pharmacists are usually paid for dispensing pharmaceuticals only, not for the important activities involved in helping to manage the appropriate use of pharmaceuticals by patients. While it is the local community pharmacist that provides these services, insurance companies and PBMs continue to squeeze down on the pharmacist reimbursement for prescriptions - so much so, that it is impossible for them to provide these important patient care services. We have to make sure that Medicare beneficiaries have access to these services, and that pharmacists are compensated for providing them.

So…What Works for Seniors?

What works for seniors in terms of providing them a meaningful pharmacy benefit?

For the short term, we believe that the best course that Congress can take is to provide Federal funds to states to help low income seniors obtain this pharmacy benefit. We know that there are many mixed feelings among Members of Congress about this approach. However, given that almost every state is now considering enacting or developing some form of prescription assistance program for seniors, we believe that states are in a good position, right now, to help those most in need.

And data indicate that 60 percent of those seniors without prescription drug coverage, or about 7.2 million seniors, have incomes of less than 200 percent of poverty.(6) We see many of these seniors in our pharmacies every day, struggling to pay their prescription bills. For them, they just want some help to get them their medications.

For the long term, we want to work with this Committee, the rest of the Congress, and the Administration to achieve long term reform of the Medicare program to provide the type of quality pharmacy benefit that seniors need and deserve.

We believe that this benefit should:

We look forward to working with you and the Committee on these issues, and thank you for the opportunity to submit these comments today for the record.

1. Massachusetts Institute of Technology, The HOPE Plan and the Section 271 Discount Drug Purchase Program for Massachusetts: An Economic Analysis. December 21, 2000.

2. Price Discounting Practices for Pharmaceuticals in the U.S. The Lewin Group, April 2000.

3. Insurers Push Rates Higher for Medicare Supplement. Milt Freudenheim, New York Times, February 8, 2001.

4. Pharmacy Benefit Managers, GAO/HEHS-97-47, US General Accounting Office. February 1997.

5. Drug manufacturer direct to consumer advertising spending increased to $1.9 billion for the period January-September 2000.

6. Kaiser Family Foundation. "The Medicare Program" Issue Brief, October 2000.