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Medicare and Little-Known Company Open Site to Compare Drug Prices
By Milt Freudenheim, the New York Times
April 29, 2004
Medicare plans today to open a Web site designed to help millions of older Americans compare prices of their prescription drugs. The site is the first big-league test for DestinationRx, a little-known company that Medicare hired without competitive bidding to design and run the system.
If it works as advertised, Medicare enrollees will be able to visit the site to find prices of their particular medications at nearby stores that will accept Medicare-certified discount cards. They could then use the information to decide which card would help them most when the discount program starts on June 1.
But the program has attracted a number of skeptics. Many industry experts doubt that price transparency can be achieved in a business famous for spreading a fog of consumer confusion. Others wonder if Medicare's Web price-comparison service is even necessary; several free commercial services are already available online. And even among people who think the Medicare comparison site, www.medicare.gov, is a good idea, some wonder if DestinationRx will prove up to the task.
"It is astounding that a tiny firm got that contract on a noncompete basis," said Dr. Arnold Milstein, a health adviser to California employers, with Mercer Human Resource Consulting. Dr. Milstein, who is based in San Francisco, said that he had not heard of DestinationRx, which has its headquarters in Los Angeles, and that he was having difficulty finding anyone else with knowledge of the company.
Companies that already operate drug price-comparison Web sites, including Drugstore.com and PillBot .com, have complained that Medicare administrators did not seek competitive bids before awarding the $3 million, 18-month contract. But executives at DestinationRx, which operates an online discount pharmacy service, insist they qualify because they already have the computer systems that Medicare needs.
"Because much of the work is in scaling up an existing architecture and system, it would have been difficult, if not impossible,'' for an outside company to come in and do the job under Medicare's tight time frame, said James L. Yocum, executive vice president of DestinationRx. The company said its involvement in the Medicare Web site posed no conflicts because it would not offer a Medicare-certified discount card of its own.
Medicare officials acknowledge that they did not request other bids before picking DestinationRx, but they defend that decision, citing the urgency of the process.
President Bush signed the new Medicare law on Dec. 8 and announced then that the cards would be ready for the public by June 1.
Scheduling the program "in an election year has really turned up the froth,'' Mr. Yocum said. Thirty-nine new national discount drug cards and 33 local and regional cards are being sponsored by organizations that include drug makers, health insurance companies, drugstore groups and managed care firms that specialize in pharmacy benefits. Each sponsor has negotiated discount prices with manufacturers and retail stores.
Using information from the card sponsors and computer programs adapted from those typically used in employer health plans and Internet pharmacies, DestinationRx will help Medicare offer online price comparisons so that people enrolled in the program can determine which card would work best. The government expects seven million Medicare enrollees to sign up for the cards.
Accurate comparisons are important because the short time frame - 19 months - and because in some cases pays a subscription fee of as much as $30 for a card.
DestinationRx, which is privately held and has 18 full-time and 14 part-time employees, said its 2003 revenue was $1.3 million. And so the Medicare contract is a relative bonanza for DestinationRx.
Medicare officials say program can also be a bonanza for consumers, with the cards generating savings of 15 to 35 percent on some brands and even greater for some low-cost generics. They predict that the publicly available comparisons on the Web site will force manufacturers to hold down prices, with repercussions reaching beyond Medicare to all drug purchasers.
But some industry experts say the savings from the cards will probably be no greater than what are currently available at many stores and online pharmacies. That is because the discounts will be based on an index known as average wholesale prices, or A.W.P., which industry experts say can be misleading.
"A.W.P. as a reference price is very common in insurance contracts," said Peter Neupert, chairman of Drugstore.com, an Internet pharmacy. "Fifteen off the index,'' he said, "does not mean you are getting 15 percent off what people would normally pay."
Lawrence C. Marsh, a health care securities analyst at Lehman Brothers expressed similar skepticism of Medicare's discount forecasts. "A standard discount off of A.W.P. is 17 to 35 percent,'' he said. "Twenty-five percent is nothing that unusual."
Drugstore.com says it will publish its comparisons of the Medicare card prices. It promises to offer some drugs at still lower prices, regardless of whether the buyer has a Medicare-certified discount card. "Our standard discount is 20 to 30 percent off A.W.P.,'' said Greg French, a spokesman for Drugstore.com.
PillBot.com, another online drug information company, also expects to undercut the Medicare card discounts, said Gregg James, a PillBot vice president. The company operates an online pharmacy, RxCorps .com, that offers low-cost generic drugs to Medicare enrollees. "We are going to bring our prices low enough that people will not want to have that drug card,'' he said.
Mr. James questioned the need for a government-sponsored price comparison Web site. "Just how much money are they spending to do a program that already exists'' in the marketplace, he asked.
DestinationRx was started in 1999 by San Francisco dot-com investment firm, Brainrush, which was then led by Keith J. Kim. Brainrush has since closed.
Other members of Brainrush replaced Mr. Kim's group at DestinationRx in 2001 after federal regulators accused him of insider trading in the stock of another company. Although those charges were dismissed by a federal judge, Mr. Kim was convicted of lying to Securities and Exchange Commission officials. He is appealing that conviction.
Mr. Kim is no longer a shareholder in DestinationRx, Mr. Yocum said. Two other former employees of Brainrush are now in charge: Michael Y. Cho, who is the president and chief executive; and Michael Chung, the chairman.
The government contract was awarded to DestinationRx last December during a management gap at the Medicare agency - after the departure of the former administrator, Thomas A. Scully, and before the arrival of Dr. Mark B. McClellan, who had been commissioner of the Food and Drug Administration.
Government officials declined to make a copy of the contract available, saying it contained information that was "proprietary" to DestinationRx. Peter Ashkenaz, a Medicare spokesman, said Timothy P. Trysla, a senior official who advised both administrators on the discount card program, would not be made available to explain how DestinationRx was selected.
Bill Pierce, a spokesman for Tommy G. Thompson, the secretary of health and human services, which includes Medicare, said that awarding the contract without seeking other bidders was "allowed under Medicare and federal contracting law."
Christopher Yukins, an expert on government contracts at Georgetown University Law School, said that interpretation was correct but not necessarily reassuring. "The irony here," he added, is that "if the procurement is done without full competition and transparency, it runs directly contrary to the purpose of the Medicare.gov site, which is to encourage competition and transparency in the drug market."
The Medicare card program, which is intended to last through the end of 2005, is a precursor to a program called Medicare Part D, which begins in 2006 and will help enrollees pay for prescription drugs outright.
Bush administration officials say they would want to continue the online price comparisons under Medicare Part D, because many Medicare enrollees will continue to have substantial out-of-pocket drug costs.
"What people are going to want to know is what they pay for the medications, what their co-payments are, what they pay out of pocket," said Dr. McClellan, the Medicare administrator. "I would envision us wanting to continue to make available that information."
DestinationRx, whose current Medicare contract runs through 2005, would like to win the Medicare Part D business, Mr. Yocum said.
But Dr. McClellan indicated that the company did not necessarily have the inside track on the Medicare Part D business. "There are a lot of vendors out there who can provide these services," he said.
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