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AIS's Health Business Daily
Featured Story November 5, 2008 Caterpillar/Wal-Mart Rx Drug Pilot Scraps Use of Average Wholesale Price, Uses Drug Cost-Plus Pricing Reprinted from DRUG BENEFIT NEWS, biweekly news, data and business strategies for health plans, PBMs and pharmaceutical companies. By Neal Learner, Managing Editor, (nlearner@aispub.com) A new pharmacy benefit pilot program involving Caterpillar Inc. and Wal-Mart Stores, Inc. cuts "significant waste" out of the pharmaceutical supply chain and scraps the long-maligned average wholesale price (AWP) discount methodology in favor of an Rx cost-plus model, say those involved in the program. Both Caterpillar and Wal-Mart tell DBN that the program is attracting the attention of other large employers, and has the potential to change the rules of the game of the pharmacy benefit industry. And already Caterpillar's PBM, RESTAT, says the Wal-Mart pilot has prompted other pharmacy operators to offer their own innovative solutions on how to lower Rx costs. Under the pharmacy benefit program, launched this month, more than 70,000 Caterpillar employees, retirees and dependents can fill more than 25,000 generic drugs at zero copayments. The program is voluntary, and members may fill their prescriptions at other pharmacies for the normal $5 generic copay. Todd Bisping, pharmacy benefit manager at Caterpillar, declined to say how much the company stands to save through the Wal-Mart deal versus other pharmacy providers. But, he adds, "You can look and see that we're able to waive our copays to all of our members on those drugs, and we're still saving money." Generic drugs account for roughly 70% of the overall utilization by Caterpillar members, he says. The Wal-Mart program also includes discounts to Caterpillar on brand drugs. Caterpillar members have a normal copay for brands at Wal-Mart. The program stemmed from Caterpillar's desire to maintain its Rx benefit at existing levels, Bisping explains. The company conducted a thorough analysis of its pharmacy spending and uncovered "significant waste in the supply chain," he says. "That is what got us off looking at ways that could make this better." When Caterpillar approached Wal-Mart, the first thing the parties did was address the question of AWP, which Bisping describes as a "flawed methodology." Typically, PBMs negotiate discounts off AWP, which can be wildly inflated and bear little resemblance to the true cost of the drug. To address this concern, Caterpillar developed a new pricing methodology based on Wal-Mart's actual invoice prices on drugs, Bisping says, adding that AWP doesn't appear at all in the contract. "For all of the drugs that we purchase now from Wal-Mart, the core basis is on the real invoice price, of course, plus some money for their overhead and any margin they have to make," he explains. In addition, the program addresses the issue of rewarding pharmacy providers that offer better prices and performance. This is generally not happening under traditional PBM contracting, Bisping explains. "Employers rely almost exclusively on PBMs to negotiate with the network pharmacies," he says. "And those pharmacies that do the best job managing their supply chain, controlling cost, etc., don't really have any way to differentiate themselves in this environment." Pilot May Prompt PBM Innovation "It really doesn't create an incentive for price to matter to employers or plan sponsors, or to our members," Bisping asserts of typical PBM contracting with pharmacies. "We felt that by negotiating directly with the pharmacy, that we could make price matter as well as choosing the pharmacy that we think will provide the best service for our employees." For their part, RESTAT executives say they are more than happy to assist Caterpillar with the program. The Wal-Mart agreement doesn't do anything to change RESTAT's basic relationship with Caterpillar, except for some negotiating relationships on acquisition costs at the pharmacy level, says David Kwasny, vice president of sales and marketing. "We're very flexible," he tells DBN, adding that RESTAT is a highly transparent PBM that doesn't make any spread on pharmacy utilization. "It's not a conflict for us." Still, the PBM did have to work through some contracting challenges "because it wasn't a process that existed," adds Pat McComis, Restat's director of clinical services. "Typically you have a contract between a pharmacy and the PBM and [between] the PBM and the client," McComis explains. "In this case, there was a different level of contracting that occurred between the pharmacy provider [and] the client as well." Both Kwasny and McComis acknowledge that this arrangement may not be suitable for other PBMs, particularly those that run their own mail-order pharmacies. But the Wal-Mart/Caterpillar program may already have served as a catalyst for change. McComis says he has had multiple discussions with other pharmacy providers that are interested in presenting their own proposals to lower pharmacy spending. "What has definitely happened in the last several months is that I've had more discussions about out-of-the-box opportunities and abilities to find new solutions than I've had in the last several years," McComis says. Kwasny also points out that pressure for change is coming from the expected demise of AWP, which is facing legal challenges. "It seems there is a critical mass that is building that is putting some impetus in the marketplace that says, 'If we're going to have to rebuild this mousetrap, is there a better way to do it?'" he asserts. Wal-Mart Offers Program to Other Employers Wal-Mart spokeswoman Christi Gallagher says the firm is speaking with other companies about its pharmacy benefit model. She declined to give details of the Caterpillar program because it is in a pilot phase. "But I can tell you that Wal-Mart has developed this direct-to-employer pharmacy benefit solution to enable employers to negotiate prescription drug prices for their plans directly with Wal-Mart Pharmacy," Gallagher tells DBN. "We believe we can use our strengths to streamline the pharmacy supply chain between pharmaceutical manufacturers on one end and employers on the other." Wal-Mart in September 2006 sent shudders through the pharmacy benefit world with its $4 generic program. While that program didn't change the Rx benefit landscape as dramatically as some had expected, it did lead to a slew of other $4 generic programs offered by retailers. Adam Fein, Ph.D., president of Pembroke Consulting, Inc., said in his blog, Drug Channels, late last month that restricting a network to Wal-Mart pharmacies won't work in many places. There are, however, 12 Wal-Mart stores near the Peoria, Ill., headquarters of Caterpillar, making it a more realistic option for the firm, Fein said. He also asserted that Wal-Mart is subtly undermining the PBM's economic model, which he said is overly dependent on generic drugs by mail. "Wal-Mart's program highlights these 'excess' margins by offering an alternative channel choice," Fein said. Still, the outcome of the Caterpillar/Wal-Mart program remains to be seen, says Sean Brandle, national pharmacy practice leader at The Segal Co., a consulting firm. "It's a big deal just because of who the players are, but whether it will have any real traction, I'm not sure," he tells DBN. He says the model presents an adversarial front to PBMs, which would seek to make up lost revenue on generics through other means. "They won't take kindly to this being done frequently," Brandle says. But Bisping says that he can envision other larger employers, like Caterpillar, that would begin to negotiate direct contracts with pharmacies, including chains other than Wal-Mart. "What we developed
was a process that has allowed us to waive copays on basically all of
our generic drugs…while still saving the enterprise money,"
he says. "I have to believe other employers or plan sponsors are
going to be interested in something like that. So that's why we think:
Yeah, it could potentially change the game. Yeah, it could potentially
cause people to say, 'Why are we using AWP? It just doesn't make sense.'
Cost-plus does make sense."
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