The $48 gross margin on an $800 order roughly covers the vendor's cost to pick, pack, and ship a product (including standard
second-day delivery). In other words, $48 approximates the CAP vendors' breakeven point before considering CMS denials, payment
reductions based on Least Costly Alternative (LCA) policies, vendors' unused drugs in physicians' office inventory, collection
delays, or co-pay-related bad debt. Depending on the size of the CAP vendor and the shipping zone of the parcel, freight
charges and next-day-delivery costs could reduce profit margins even more.
Now, take into account that CAP vendors must pay for emergency deliveries and other urgent shipments without additional compensation
from CMS. The IFR states that in an emergency, the CAP vendor must supply the prescribed CAP drug by 5 p.m. provider local
time the following day, if it receives an order by 3 p.m. vendor local time.
Ordinarily, a large national vendor could approach its suppliers and demand discounts. This does not look like an option for
CAP vendors for two reasons. First, if a pharmaceutical manufacturer reduces a price for a CAP vendor, the company must report
the price reduction to CMS, which in turn will factor the reduction into subsequent ASP calculations. This erodes pharma's
incentive for granting discounts, since any discount will contribute to a lower ASP. The more pharma discounts drugs, the
further ASP drops.
Smaller doctor groups that don't elect CAP will get hurt if they are reimbursed ASP plus six percent, since they probably
need to pay more than ASP to acquire the drug. ASP is an average price, after all, so some physicians will pay more than the
average. CMS has yet to address this issue. Second, CMS recalibrates the vendor's reimbursement each year to maintain a weighted
six-percent margin. So any price reductions CAP vendors achieve this year will benefit CMS—not the vendors—next year. CMS
changes reimbursement levels for vendors each year based on the average price charged by pharma the year before.
CMS has stated that CAP vendors may not implement a formulary. Thus, CAP vendors may not limit coverage to preferred drugs,
and may not implement enforcement tools, such as prior authorization or step-therapy protocols, which often encourage doctors
to prescribe the least expensive option first. From a CAP physician's point of view, this means that the vendor will supply
CAP drugs as prescribed. However, from a manufacturer's point of view, this is one more reason not to discount a drug. If
vendors have no formulary to encourage prescribing one medication over another, they also have no leverage to change doctors'
prescribing and to move market share from one drug to another. So manufacturers have no reason to make their products more
financially attractive than their competitors'.
Vendors may also take a loss if a drug is only available through manufacturer-designated distribution channels. For example,
Xolair (omalizumab) is currently only available through Genentech's Specialty Pharmacy Network, which consists of five specialty
pharmacies—Caremark, Curascript, NovaFactor, OptionCare, and Priority Healthcare. CAP vendors are obligated by their CMS contract
to supply all CAP drugs, but manufacturer-authorized distributors have no incentive to adjust their prices to accommodate
CAP's ASP pricing or the vendors' six-percent gross margins. As the only source of these products, such specialty pharmacies
can afford to drive hard bargains—further driving down vendors' profits.
Seeds of Conflict
Some of the CAP rules seem destined to create friction between vendors, doctors, and the government. Drugs that are supplied
to doctors but not administered cannot be billed. They may stay in the doctor's medicine closet, but they remain the property
of the vendor. At best, this results in logistics problems both for CAP vendors and CAP physicians. Doctors have little incentive
to use the drug immediately, and they may worry about a drug diversion violation if they administer it to a patient for whom
it was not ordered. Meanwhile, the CAP vendor sustains minor losses due to delay in payment, or potentially larger ones from
misplaced inventory or spoilage. And then come the vendors' headaches associated with tracking, repurposing, returning, or
disposing of CAP drugs that are wasted or unused.