Specialty Pharmacy

Featured Health Business Daily Story February 1, 2008

New Oncology Firm Hopes Online Negotiations for Drugs Will Produce Greater Transparency and Efficiency

Reprinted from SPECIALTY PHARMACY NEWS, a monthly newsletter designed to help health plans, PBMs, providers and employers manage costs more aggressively and deliver biotechs and injectables more effectively.

A new company in the oncology sector is turning to technology in the hopes of bringing efficiency and transparency to the industry — and ultimately better prices to physicians and health plans. And although opinions vary on its chances of success, it has managed to make some waves in a very short amount of time.

Launched in May 2007, OneOncology, Inc. offers distributors the opportunity to bid on provider orders for hundreds of oncology drugs through online reverse auctions (see story, below). Products will be up for negotiation every two months. The company's first electronic negotiation event began on Dec. 11, and the second one is scheduled for February.

For the first electronic negotiation event, 140 practices representing 604 physicians and $1.5 billion in annual purchasing registered to participate.

"We are creating an open, dynamic, competitive marketplace," says Ben Favret, vice president of sales for OneOncology, Inc. "We have seen a large spread in the marketplace. We want to reduce or eliminate this spread so there is one consistent price."

Favret, who has worked in oncology for about 20 years, most recently as the head of sales and marketing for Matrix Oncology, co-founded the company with CEO Steven Kirchof, who has 15 years of oncology experience and also worked at Matrix. They own the company with a small group of investors, none of which are affiliated with any manufacturer, distributor, physician, oncology company, group purchasing organization (GPO) or insurance company, says Favret, who emphasizes that OneOncology is a neutral party.

Favret says that a confluence of events motivated the men to launch OneOncology. Oncology distributors began buying GPOs, and "controlled markets aren't good for any market," he asserts, noting that "two players control almost 90% of the market." With these acquisitions, there was "no objectivity, no transparency" anymore - and "no one represented practices anymore."

The oncology market was gaining in significance due to several factors: more than 650 products in the oncology pipeline, an aging population, and the shift of cancer from an acute to a chronic disease. These factors, says Favret, make community oncologists — who treat approximately 85% of cancer patients — crucial.

At the same time, he says, the 2003 Medicare reform law "virtually crippled a lot of small practices, which were paying above their reimbursement rates for some drugs."

According to Favret, "all of these factors together drive the need for efficiency and reduced costs."

"Four years ago, our business model would not have worked," he maintains.

Favret and Kirchof took their understanding of the oncology sector and "looked for technologies, things that would work in this space." Electronic negotiation technology is "a proven, well-documented technology used in hundreds of other marketplaces," says Favret, with average savings ranging from 3% to 35%. In other industries, he says, it has taken about four to five electronic auctions to bring about significant changes. Still, he says, "even a 1% savings to a community oncologist is substantial when he or she is spending $1 million annually."

Health plans have a "huge stake" in this process, says Favret. "They ultimately are the ones paying for cancer care. Community oncology has saved payers billions and improved the quality of care at the patient level.…The oncology pipeline is massive.…Payers benefit when drugs come to market."

Timing Said to Be Right

A number of factors forecast success for the process of electronic negotiations, says Favret:

(1) The product is easily specifiable. "The FDA has done this for us," he says. "If you're buying Camptosar, you're going to get the exact same drug, no matter who you are buying it from."

(2) The ability exists to aggregate volumes very quickly. In less than seven months, according to Favret, OneOncology was able to sign up oncology practices with more than $1.5 billion in annual purchasing power. This says two things, Favret asserts: "that oncologists spend a lot of money on drugs — about $2.5 to $3 million per physician annually — and that they are looking for solutions."

(3) The supply and demand sides need to be in check. "On the distribution side, you need access to product and excess capacity in the market," he says. There are more than 1,000 distributors in the market and "huge excess capacity." The demand (or physician practice) side must also see the importance in purchasing drugs at better rates. Physicians "were rich on [profit] margins four or five years ago. Now, they have taken about a 35% cut on the drug side" since the 2003 Medicare reform law was enacted, he says. Considering that "70% to 75% of a practice's expense statement is drug buying, and 50% to 60% of a practice's profit comes from their drug business," the demand for purchasing power is there.

(4) The technology must be available. Users need access to the technology, and they got it, he says, when CMS began requiring practices to file claims electronically.

Distributors pay OneOncology a pre-established fee that is revealed to the distributor in a request for a quote prior to the bidding. Although Favret would not reveal any specific amounts, the fees vary based on market conditions.

Practices must complete three steps to be fully registered and able to participate: (1) register online, (2) sign a letter of intent, and (3) submit the practice's user history. As of early January, Favret says that 282 practices representing 1,128 community oncologists have been entered into the registration system. Out of that total, 140 practices representing 604 physicians have gone through all three steps. It is these 140 practices that represent the $1.5 billion in annual purchasing that the company cites. When the 282 practices' purchasing power is considered, "the total is closer to $3 billion," says Favret.

"I certainly think that there is a place for price transparency," says Mark Armstrong, a senior attorney in Houston with Squire, Sanders & Dempsey, LLP. "However, whether a company like OneOncology is successful will depend on its ability to increase competition among distributors to offer lower prices than they would offer through normal distribution channels."

However, according to the OneOncology Web site, "Practices are under no obligation to order anything from OneOncology unless its prices are lower than their current prices."

Nick Opalich, specialty pharmacy consultant for Strategica Health Partners, says, though, that "it's not about the drug cost, other than that only large practices can garner the best price because of volume" and "can also diversify their practice base." He says that "large practices are approximately 38% of overall drug purchases in the buy-and-bill arena. If you do the math, that leaves 62% of the volume within the practice setting of five or less physicians. The reverse-auction angle in the small-practice market doesn't align itself appropriately with other incentives. Why does a distributor want to bid a lower price and then service a small account?"

Still, distributors are participating. Favret says that three Verified-Accredited Wholesale Distributors have registered, and that two others are in the registration process. Since OneOncology is under a pledge of confidentiality, he says that it cannot disclose the identities of participating companies, regardless of whether they are distributors or oncology practices.

Oncology Supply, a unit of AmerisourceBergen Specialty Group that is by all accounts the largest drug distributor in the oncology market, is one company that has said it will not participate. In July 2007, an Oncology Supply account manager sent an e-mail that raised a number of concerns about OneOncology. In August, the company posted a letter on its Web site from President Bill Stickler, who said that business associates "may have been subjected to misinformation regarding our position on OneOncology." He said that the two companies had "discussed at length [OneOncology's] ideas around their business model" but that "we completely reject their notion that they can or will bring value to our relationship with you.…In no way do we support their business model and we have no plans to participate with them in their endeavors."

William Sullivan, principal consultant with Specialty Pharmacy Solutions, LLC, says that "the concept is intriguing" but that "I can also see the resistance to the idea by the well-entrenched distributors like AmerisourceBergen. They have huge share and probably worry about anything that will upset the apple cart. Smaller distributors, however, could look at this as an opportunity. If I were one of them, I'd plow back virtually all my marketing expense (no need to pay sales people a commission) into a deeper discount and try to capture a big order. Do that a couple of times a year, and the year could be made. Or you could go out of business if you continue to lose bids! So much depends on how many practices they can sign up. Time will tell."

In an acknowledgment of specialty pharmacies' roles in the oncology market, OneOncology says on its Web site that it "will launch a specialty pharmacy electronic trading hub that will provide convenience and one point of contact. This will create more time and more efficiency for both the patient and the practice. We expect to launch this service soon."

How Do OneOncology's Electronic Negotiations Work?

Through hosting online reverse auctions, OneOncology, Inc. is trying to bring transparency, efficiency and cost savings to the oncology market. Acting as a neutral party, the company allows registered oncology practices to place orders for oncology drugs, which registered distributors are then able to bid on. The company held its initial electronic negotiation event on Dec. 11, and companies re-bid on contracts every two months. In early January, the company was still evaluating the results of that event.

OneOncology offers 128 product groupings, which include a total of 700 National Drug Codes. The drug categories "are set up to create the most competitive, dynamic marketplace we can," says Ben Favret, co-founder and vice president of sales for OneOncology. Drugs may be grouped by therapeutic class (for example, OneOncology groups taxanes together and 5-hydroxytryptamine3 (5-HT3) receptor antagonists together); by disease state; by manufacturer (the company places all Amgen Inc. products in one category); and by product volume. Not all oncology products are available through reverse auctions, he says, explaining that the company "will use other technology for access to" limited-distribution and limited-allocation drugs.

The auctions vary in their formats. Some might be like an auction on eBay, which would close in a few days at a specified time, while others may be much shorter, perhaps a live event of an hour. Still others may start with OneOncology posting a specific cost for a product, and the first distributor to enter a bid at that amount or below wins.

"We don't place or take orders," says Favret. "We are facilitating a transaction." This process, he says, reduces errors, improves service and provides more transactional efficiency.

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