Global Insight Perspective | |
Significance | Blue Cross Blue Shield of Michigan has come under fire for offering doctors US$100 every time they switch a patient to generic statins. The American Medical Association now views the financial incentive as questionable. |
Implications | While this specific programme has ended, there are other incentives that health insurers use to promote greater use of cheaper generics in the United States. |
Outlook | Health insurers are expected to continue offering doctors incentives to undertake more generic switches. Meanwhile, weaker-than-expected sales results from several U.S. retail chains suggest that pharmacies remain under pressure on the pricing front, both from new generics entering the market and a shorter "guaranteed returns" period for new generics. |
US$100 Reward Criticised
A programme designed to encourage doctors to switch patients to generics has come under fire in the United States. Last year Blue Care Network, a health management organisation (HMO) owned by Blue Cross Blue Shield of Michigan, ran a three-month programme offering primary care physicians a US$100 reward every time they switched a patient from branded statins to generic ones, reports the Wall Street Journal. As part of the programme, doctors were sent a list with insured patients who were currently taking branded Lipitor (atorvastatin; Pfizer, U.S.) or Lescol (fluvastatin sodium; Novartis, Switzerland). The insurer paid US$2 million in awards to doctors and saved US$5 million in drug costs, according to the report.
The programme lasted for a short time and was clearly designed to take advantage of the availability of generic copies of Zocor (simvastatin; Merck, U.S.). Unsurprisingly, it drew significant criticism from Pfizer, which reportedly contacted medical associations to question the legality of these incentives. The American Medical Association (AMA) said in a letter on its website that "accepting payment for moving a patient from a brand name to a generic could be viewed as an anti-kickback statute violation".
As Drug Store Chains Feel the Heat
As a result of the switch to generics, plan members are thought to have saved as much as US$1 million in prescription co-payments. In addition to the availability of generic simvastatin, a number of other generics have entered the market in recent months. Generic entry typically erodes pharmacy revenues, particularly for high volume drugs, but there are other factors at play as well.
Reuters reports that revenue data from Walgreen Co, CVS Caremark and smaller competitor Rite Aid Corp (all U.S.) indicate that December sales have been particularly weak. Walgreen reported a 2.6% increase in sales of stores open for at least a year, while pharmacy same-store sales rose by only 3.3% year-on-year (y/y) in December. The slow growth occurred despite the fact that 1.8 million more prescriptions were filed compared to December 2006. Slow growth was partly attributed to a weak influenza season, which cut the prescriptions increase by 2.6 percentage points.
CVS posted a 1.8% y/y increase in same-store sales and a 2.4% y/y increase in pharmacy same-store sales in the five weeks ending on 29 December. According to the report, generic launches undermined sales growth by 4.7 percentage points. Meanwhile, smaller pharmacy retail chain Rite Aid posted a 0.5% y/y decline in same-store sales, flat prescription same-store sales and a 1.2% decline in front-end same-store sales for the month of December.
Outlook and Implications
Health insurers will undoubtedly continue efforts to encourage doctors to switch patients to generics whenever possible. These efforts may sometimes struggle in the face of a brand-oriented U.S. prescribing culture and traditional physician independence. As seen in the Blue Cross Blue Shield of Michigan case, medical associations will generally err on the side of safety and advise doctors not to take direct financial rewards in exchange for making a specific prescribing decision for a specific patient. However, financial incentives of a more general type will continue to be used. For example, so called pay-for-performance bonuses to doctors (which often come in the form of 2-8% higher reimbursement) typically include a requirement to prescribe more generics. A 2006 pilot programme by Excellus Blue Cross Blue Shield in New York state, for example, provided doctors with higher reimbursement for patient visits if they increased their ratio of generic prescriptions compared to branded ones by five percentage points. As long as the doctor is not being paid to make a specific prescribing decision for a particular patient, it seems that such incentives will be viewed as legal and ethical.
Meanwhile, retail pharmacy sales are expected to remain under pressure, and generics switches are not the only reason for this. The writing was on the wall earlier in 2007 when Global Insight indicated that falling reimbursement for generics was the main reason behind the decline in Walgreen's profit (see United States: 2 October 2007: Lower Generics Reimbursement Takes Its Toll on Walgreen). Walgreen's decline in profit per prescription indicated that for simvastatin at least, the reimbursement decline (which typically comes a few months after generics enter the market) was faster and steeper than in the past. Retail pharmacies, which enjoy higher margins on generics compared with branded drugs, traditionally rely on a period of "guaranteed" high margins lasting at least six months after generics are launched. We believe that this period may be getting shorter, partly because of retailers such as Wal-Mart, Kmart, and Target, which have recently launched cheap generics plans. Such plans initially only offered older and cheaper generics for a low monthly co-payment, but are now increasingly including generic copies of a few drugs that have just come off patent (see United States: 28 September 2007: Wal-Mart's US$4 Generics Save U.S. Consumers US$610 mil. in First Year). The other major threat to retail pharmacies is the proposed new Federal Upper Limits (FULs) reimbursement for generics under Medicaid, which is based on a new calculation of the average manufacturer price (AMP). However, this has at least been postponed for now.