By Sarah Rall, PharmD, and Karen Purgett, MBA
With the arrival of the long-predicted patent cliff, new generic pharmaceuticals are entering the market at a rapid pace. Just this year, six important branded products became available as generics, and additional generic launches are anticipated in 2010 (see Table 1). Expanding use of generic pharmaceuticals brings with it substantial cost savings, and the faster a facility can convert from a brand name product to its generic equivalent, the greater the cost benefits. In many cases it is only a few days after the launch of a new generic when pharmacy benefit managers (PBMs) establish their MAC (maximum allowable cost) on a medication and the MAC applies not just to the generic, but also to the branded product. Therefore, any brand inventory remaining after a launch will not be adequately reimbursed at the full cost of acquisition. On the health system side, when medications are billed as either part of a DRG or on a fee-for-service basis, lowering the cost will increase the margin, as reimbursement often remains fixed for some time after the launch of a generic.
While converting from brand name to generic results in cost savings, it also requires an investment of time and resources to facilitate the change. Being aware of potential challenges and employing strategies to overcome them can help manage the process, maximize savings, and ensure a smooth transition.
In order to take full advantage of cost savings from switching to a new generic, it is important to track and prepare for anticipated launches—particularly for those products on which the pharmacy is spending a lot of money. With the exception of generic drug launches where there is a chance of litigation, it is possible to estimate when a new generic will hit the market with good accuracy. Typically, the year the launch will occur and, in most cases, the quarter or month of the launch can be determined. As the date of the anticipated launch nears, the accuracy of the data will improve. Thus, it is important to continually monitor this data. Some resources for compiling anticipated dates of generic launches include:
- Group purchasing organizations (GPOs)
- Industry representatives
- Pharmacy benefit managers
- DrugStore Management, an annual industry reference publication (www.drugstoremanagement.com)
- American Journal of Health-System Pharmacy’s annual article,
- Projecting Future Drug Expenditures (www.ajhp.org)
- PR Newswire (www.prnewswire.com/news-releases/health-latest-news/pharmaceuticals-list)
- The FDA’s Orange Book (www.accessdata.fda.gov/scripts/cder/ob/default.cfm)
Managing Brand Name Inventory Pre-launch
Prior to a new generic entering the market, track your equivalent brand name product inventory and tailor your purchasing accordingly to minimize the chances of having excess brand name product on hand post launch. Since the exact date of a generic launch is usually unknown, this will require using available data as well as some guesswork. Helpful data sources for determining appropriate inventory levels include wholesaler sales history, pharmacy software utilization data, and current PAR levels. Use this data to establish average usage as well as historical maximum usage. When looking at inventory on hand consider the inventory in the pharmacy, as well as any inventory that may be kept in other areas such as automated dispensing cabinets and floor stock. The amount of time invested in this process should be modified based on the estimated financial impact for any given product.
As part of this advance planning, determine whether the remaining brand name product will continue to be used or returned to the supplier (if that is an option). Anticipated stability of the generic supply and the return policy of your supplier, especially fees or charges associated with returning an item, should be considered when making this decision. For example, if a pharmacy receives credit for 75% of the cost for a brand name medication when it is returned, and the cost of the generic is less than 25% of the branded cost, returning may be the best approach.
Managing Generic Inventory Post-launch
Managing brand name inventory prior to a generic launch is important, but equally important is managing the generic inventory after a launch. In most cases, the first generic manufacturer to market has 180 days of exclusivity. This means that for the first 180 days the generic price will be lower than the brand name product typically only by about 10% to 20%, and this can change significantly once more generic manufacturers enter the market—in some cases, lowering prices to pennies per unit. Much like the management of inventory prior to a launch, you want to do the same post-launch to ensure that there is little to no generic product on hand when a less expensive alternative becomes available or the product gets added to your GPO contract.
Historically, prices drop significantly and quickly at the end of the exclusivity period. For example, the approximate WAC per unit for simvastatin 80 mg (generic Zocor) went from $3.70 to $0.88 after six months (see Table 2). Prices also drop at various points in time as new manufacturers enter the market, which can make determining inventory levels challenging. Looking at usage within your facility, stability of supply, and estimating a final price point can help in making this determination. Estimation of the final potential price point for a generic medication will depend on several factors, including:
- Other manufacturers joining the market (eg, is this a highly used medication, is there significant sales volume, and/or has the FDA granted tentative approval to other manufacturers?)
- The cost of brand and generic therapeutic alternatives for this product
- Manufacturing requirements (eg, biologics or products requiring a special delivery device)
- The price of current generics available in comparison to the generic market in general
Promoting Rapid Uptake of New Generics
One challenge associated with converting from brand name to generic items is switching NDCs in the system. Time and resources needed to make an NDC switch will vary greatly among facilities depending on what technology and systems the pharmacy has in place. It is important to assess how much time is involved in making NDC switches at your facility and the cost to do so. This information can be used to determine when switching from brand name to generic (or from one manufacturer to another) no longer provides a beneficial financial impact to the organization, and it can help inspire staff acceptance when a change does provide value.
Making brand to generic switches can be facilitated by building a function (typically called the Prepare or Bid Check function) into the supplier ordering systems that help in purchasing the least expensive alternative, be it a newly available generic alternative or a manufacturer change. However, keep in mind that using this functionality in the supplier system can be a time consuming process and may not be the most effective use of staff resources as a daily task. Assessing the amount of time this task—or other options within the supplier software that provide similar functionality—requires and comparing it to the savings achieved can be a valuable tool in determining the frequency with which it needs to be performed. Depending on the location and the level of staffing, we perform this task anywhere from daily to once every two weeks.
Auto-ship programs offered by your supplier are yet another way to help promote the rapid uptake of generics. With this approach, a starter supply of a new generic will automatically be shipped as soon as it becomes available. Auto-ship offerings can be valuable as they guarantee that your buyer will always know when a new generic is available. Here are some considerations for enrolling in this type of a program:
- Verify what triggers a product to be shipped
- Are all new generics shipped or only those that meet a certain national sales volume?
- Are they shipped based on previous purchase history, and if so, in what time frame does a purchase need to have occurred?
- Verify how the quantity to be shipped is determined
- Are only a few bottles or packages shipped?
- Or, are shipments based on previous purchase history, and if so, over what time frame, is an average used, and are returns accounted for?
- Verify the return policy (including any applicable conditions) for the auto-shipped product
- Verify any special payment offers or other incentives (eg, will GPO or other contract prices apply?)
Opportunities for Therapeutic Alternatives
New generic launches can provide savings beyond those simply incurred from substituting the generic for its brand name equivalent. Additional savings can be gained when the new generic can be used as a cost effective therapeutic alternative. When bringing a new generic into the system, conduct a clinical review to determine if it can (or will at some point in the future) represent an opportunity to make a formulary adjustment or introduce a new therapeutic interchange program. Make it a part of your process to review formulary changes with every new generic launch.
Making the switch from brand name drugs to their generic equivalents can be time consuming; however, instituting systems and processes to help facilitate the rapid uptake of new generics can help streamline this transition—ultimately saving time and resources. A crucial step to ensuring a successful switch is ensuring that your staff is aware of the switch and that they also buy into the value that can be gained. Changing a product tends to be disruptive to workflow and often creates additional work, but by establishing a system that clearly demonstrates that the benefits outweigh the additional work required, staff will be more receptive. This should ultimately result in faster uptake of new generic products.
Sarah Rall, PharmD, is director of pharmacy purchasing and supply at the Marshfield Clinic Pharmacy in Marshfield, Wisconsin. She supervises the entire pharmaceutical supply chain, collaborates with providers to develop best practice guidelines, and manages Marshfield’s relationship with GPOs, vendors, and manufacturers.
Karen Purgett, MBA, is the pharmacy contracts and analytics manager at the Marshfield Clinic Pharmacy in Marshfield, Wisconsin. She supervises the analytics and reimbursement areas, negotiates contracts with the pharmaceutical industry and third party insurances, and conducts proforma analyses for the pharmacy division.
Tips for Evaluating Pharmacy Buyer Technicians
Institute ordering philosophies for your department
- Will you “cherry pick” from suppliers or not?
- Will you purchase off contract or strictly stay on contract?
- Determine the frequency of price comparisons and other price checking activities
- Establish the frequency of NDC switches, set decision points to determine when an NDC switch will occur, etc.
Evaluate the technician’s adherence to ordering philosophies
- Scan financial reports to see how many suppliers are being used
- Use GPO and wholesaler reports to determine the percentage of on-contract purchases
- Keep in mind that drug shortages and other conditions beyond the control of the buyer do occur and in most cases are not accounted for in these types of reports
Set a goal for inventory turns
- Work with buyers to ensure they have the data and resources to meet this goal
- Measure the number of actual turns against the goal
Monitor and track inventory stock outs
- Ascertain whether each stock out was avoidable
- Work with buyers to prevent stock outs from occurring
Monitor and track generic launch uptake
- Check for date of first purchase of a new generic – generic launch dates can be estimated based on the NDC effective date
- Monitor purchase history for purchases of brand name product after a generic launch
- Monitor for appropriate inventory management both pre- and post-launch by looking at purchase history and usage reports
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