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Should physicians dispense drugs to their patients?

Sometime around 2007 or 2008, Samantha Jefferies came to her brother Trent with a request: Could he help figure out an easier way for doctors to sell prescription drugs to their patients? Typically, when doctors want their patients to take a drug, they write a prescription, and a pharmacist—generally at a local, unaffiliated pharmacy elsewhere…

Sometime around 2007 or 2008, Samantha Jefferies came to her brother Trent with a request: Could he help figure out an easier way for doctors to sell prescription drugs to their patients? Typically, when doctors want their patients to take a drug, they write a prescription, and a pharmacist—generally at a local, unaffiliated pharmacy elsewhere in a patient’s community—dispenses the medication. But in the 1980s, a rising number of physicians in the US began bypassing pharmacies and selling certain drugs directly to their patients. The practice, often called physician dispensing, is largely prohibited in many high-income countries, including Australia and Germany, but it’s currently legal in 45 US states, and the practice appears to be growing.

Samantha Jefferies works in healthcare management in southern California. After reading an article about how this kind of in-office dispensing can generate new revenue for medical practices, she reached out to her brother for his thoughts.

Trent Jefferies had served in the US Army Corps of Engineers, worked as an engineer for Black & Decker, and managed materials and logistics for a company that builds carbon fiber parts for airplanes. On the venture capital platform F6S, he describes himself as a “mech engineer, six-sigma black belt, lean expert, and supply chain guru.” After hearing from his sister, Jefferies looped in a couple other engineers and began sketching out plans. Their idea was straightforward: to build a pharmaceutical vending machine that would sit directly inside a doctor’s office or clinic.

In 2011, the group received a first round of investor funding and incorporated a company, VendRx. The next year, they filed the first of four patents on a device “for dispensing beneficial products.” To build it, Jefferies and his collaborators hired a firm that takes standard snack vending systems—“just normal candy machines, for lack of a better word,” Jefferies said—and soups them up for other applications. When the relationship with the firm soured, Jefferies says he took the not-yet-completed prototype and enlisted a new engineer, building the rest of the machine in the team’s own warehouse.

The VendRx system dispensed its first bottle of medicine to a patient at the offices of Ross Legacy Medical Group in Mission Viejo, California in 2017. (Samantha Jefferies, executive director of that group, is now on VendRx’s board.)

From the outside, the machine is a tall cabinet of off-white powder-coated steel, fitted with a large touchscreen. Inside, the system stocks up to 500 packages of medication, each nestled in a v-shaped notch. When a doctor prescribes a drug, VendRx software routes a record of the prescription to the machine. On the way out the door, the patient can stop and tap their name and date of birth onto the touchscreen. This sends a mechanical arm whirring to the correct slot, where it grasps a pre-packaged, pre-counted bottle of medicine and shuttles it to a small printer for labeling. The machine then ferries the drug to a delivery slot.

The whole process takes around 70 seconds—and the VendRx machine accepts credit cards. Even a small medical practice, the company says, can make five-figure profits through the machine each year.

Advocates for in-office dispensing argue that it is both more convenient and cheaper for patients, and some say it can also bring in extra revenue to doctors. The arrangement, supporters argue, can also bypass the elaborate and opaque vagaries of retail drug pricing that often leave patients paying far more for drugs at the pharmacy than is necessary. And given that a significant percentage of patients, even with a prescription from a doctor in hand, never end up going to a pharmacy and getting it filled, supporters also say the convenience of getting drugs directly from doctors can help close a crucial compliance gap and improve overall patient health.

“Physicians are human beings, and when you look around, people react on their financial incentives. They do.”

Not everybody buys these arguments—least of all pharmacists. They and other critics argue that pharmacists play an important role in patient education, and that they act as a crucial safety check on doctors’ orders, helping to head-off potentially dangerous drug interactions or other complications. Critics of physician dispensing also say that the arrangement involves an inherent conflict: Doctors who prescribe drugs ought not be in a position to profit off of them.

These critics can cite numerous instances, some of them garnering headlines, where physicians have abused in-office dispensing privileges by selling patients dangerous or wildly overpriced drugs in schemes that have yielded all manner of bad outcomes, from contributing to the opioid crisis to skimming hundreds of millions of dollars off the worker’s compensation system. And while supporters of in-office dispensing may argue that these outcomes have been driven by a minority of bad actors in an otherwise virtuous system that benefits patients, a small body of research from Europe and East Asia suggests that, given a profit motive, many doctors will prescribe drugs differently than their non-dispensing colleagues.

“Physicians are human beings, and when you look around, people react on their financial incentives. They do,” said Christian Schmid, a Swiss economist who studies physician dispensing. “I don’t think that physicians have a switch where you can switch off these incentives.”

Those concerns appear to have done little to dampen enthusiasm for the practice in the US, where VendRx is part of a percolating economy of software vendors, drug repackagers, and other market players seeking to get more doctors in the driver’s seat when it comes to dispensing medication. In June 2020, the editorial board of The Wall Street Journal weighed in on the issue, describing physician dispensing as an “easier and cheaper” option for getting drugs, and calling the pharmacy “a needless middleman.” Sarah Callioras, the director of sales at Datascan, which sells software to dispensing physicians, says that interest among doctors is “definitely, definitely growing.” Some industry sources say that the Covid-19 pandemic, which has put financial strain on many independent medical practices, has also generated new interest. In the past several years, dispensing has also become popular among physicians in the direct primary care movement—a fast-growing clinical model that aims to offer low-cost care without involving insurance companies. This arrangement, some supporters say, has provided particular benefit to low-income communities lacking insurance, because their direct-care doctors can sell them their drugs at or near wholesale prices.

Recently, some advocates of physician dispensing have sought to press their case in court. In 2019, the Institute for Justice, a public interest law firm that backs libertarian causes, sued the state of Texas over its physician dispensing ban. (The law currently allows for some exceptions, including for doctors in certain rural areas.) A similar action in Montana, launched in June 2020, ended this year after the state legislature and governor passed a law legalizing the practice. The Texas complaint alleges that dispensing restrictions stifle competition in the pharmaceuticals market and infringe on doctors’ rights.

Still, the idea of physicians selling drugs at all—let alone doing so via vending machine—troubles some experts, who argue that, whatever the purported benefits, doctors profiting from their own prescriptions creates a situation that’s ripe for abuse. Doctors are experts at diagnosis, said Scott Knoer, the chief executive of the American Pharmacists Association, or APhA, but drug dispensing, he said, is different.

“It’s shocking,” Knoer added, “that anyone would want to take pharmacists out of the medication use process.”

Physician dispensing advocates sometimes argue that they are hearkening back to an older way of doing medicine, when doctors would keep a medicine cabinet in the back and patients could leave the clinic with a tonic in hand. But the history is slightly more complicated—and rife with competition. “The big story here is the turf battles between pharmacists and physicians,” said David Courtwright, a drug historian at the University of North Florida. “There’s always been this rivalry between physicians and pharmacists.”

Before 1900, American physicians commonly sold drugs directly to their patients. But they also relied on local pharmacists to actually mix or compound some of the drugs they prescribed. Starting in 1902, though, federal lawmakers began to tighten control of the drug market. The Pure Food and Drugs Act, passed in 1906, set regulations for labeling medications. It also established the regulatory agency that would evolve into the US Food and Drug Administration. In 1938, legislators moved again, adding new labeling requirements, and mandating that new drugs receive approval before going on the market. They also introduced a requirement that certain dangerous medicines only be given to patients with a prescription from a medical provider.

“The big story here is the turf battles between pharmacists and physicians,” said Courtwright. “There’s always been this rivalry between physicians and pharmacists.”

In the years that followed, some patients continued to buy certain drugs from their doctors, and some pharmacists continued to compound medications. But, as regulation increased, the diverse pharmaceutical market began to consolidate. With that transition, said Lucas Richert, a historian of pharmacy at the University of Wisconsin-Madison, pharmacists began “moving away from this role of compounders, and moving into a role where they are offering pharmaceutical services in their own shops.”

In 1951, Congress passed the Durham-Humphrey Amendment, clarifying the definition of what’s considered a prescription drug. By the middle of the decade, the now-familiar model had crystallized: A small number of pharmaceutical companies had come to dominate drug manufacturing, churning out nearly all medicines in centralized facilities, with oversight from the FDA. To access those drugs, patients would typically take that prescription to a pharmacy—as they still often do today—and buy the medication from a licensed pharmacist.

In the years since that choreography was routinized, prescription drug expenditures have ballooned in the US—to nearly $370 billion in 2019. By the 1980s, some entrepreneurs had begun offering physicians the opportunity to get a cut of the growing market. These firms purchased drugs in bulk, then repackaged them into smaller quantities and sold them to physicians’ offices, which in turn—depending on state regulations—could mark up the drugs and sell them to patients for a profit.

The fast-growing industry alarmed some policymakers. In 1987, Ron Wyden, at the time a young Democratic congressman from Oregon—he’s now a US Senator—sponsored legislation to limit physician dispensing. The repackagers, Wyden told The New York Times that year, are “a bunch of fast-buck artists,” trying to bring doctors into a scheme to make “easy money.” In a congressional hearing, Wyden brought samples of the sales pitches that repackaging companies sent to doctors. “Every time you sign a prescription,” he quoted from one, “it’s like writing a check to the pharmacy.” Another ad he quoted promised to show physicians “how to earn $52,000 this year with no investments.”

According to The Times, lobbyists descended on the Capitol. Nancy Dickey, chairperson of the American Medical Association’s Council on Ethical and Judicial affairs, testified that while the organization felt “physicians should avoid regular dispensing and retail sale of drugs,” it opposed Wyden’s bill because it represented an “inappropriate intrusion” into state affairs. Meanwhile, pharmacy organizations supported Wyden. So did Arnold Relman, an MD and the longtime editor of The New England Journal of Medicine. “Trust in one’s physician is an essential but fragile ingredient of good medical care,” he wrote in an editorial. “It may not withstand the conversion of physicians into vendors of drugs for profit.”

The drug repackagers won. Wyden’s bill died.

Today, just five states—Massachusetts, New Hampshire, New Jersey, New York, and Texas—maintain broad physician dispensing bans. (In a sixth, Utah, legislators recently relaxed a dispensing prohibition, but the practice remains off-limits for most clinics.) Even in those states where the practice is largely prohibited, exceptions are common. In Texas, for example, dispensing is permitted in rural clinics far from the nearest pharmacy. New York makes an exception for drugs “pursuant to an oncological or AIDS protocol.” And in states where dispensing is banned, physicians may still be able to give out free drug samples, or dispense enough medicine to last a patient for 72 hours.

In the rest of the country, dispensing is fully legal. Some states do require physicians to apply for a simple license before dispensing, but most do not. Today, some companies specialize in repackaging drugs for physician dispensers. And large national drug distributors that mostly supply pharmacies, including McKesson and AndaMEDS, also supply drugs to physicians.

Getting a handle on the current size of the industry is difficult, particularly given that no single source tracks the number of doctors who do their own drug sales. One indication comes from MDScripts, a company that builds software for dispensing physicians, and that one industry source described as holding a dominant share of the market. MDScripts says that it serves more than 50,000 providers at more than 17,000 sites across the country. Last fall, the company president, Gary Mounce, suggested MDScripts had more than half the total market share—although, he noted, there are no reliable estimates of the total size of the market.

While traditional insurance plans will reimburse for physician-dispensed medications, rates can vary widely, often making it impractical for clinics. Instead, dispensing tends to thrive outside the umbrella of traditional insurance. It’s especially common at clinics that serve workers’ compensation patients—people injured on the job or who have an illness related to their work whose subsequent care is covered by a special form of insurance. Dispensing is also common in specialties, such as weight-loss medicine and dermatology, where insurance often does not cover common prescriptions if they’re not deemed medically necessary.

Reviews of advertisements and other marketing materials suggest that operations that serve dispensing physicians can come and go quickly. One person who has built a large and lasting business in the space is Brian Ward. A 6’3” offensive guard for the Louisiana State University football team back in the 1990s, Ward began working in pharmaceutical sales soon after graduating. Around 2008, AstraZeneca—the pharmaceutical industry giant where he was then employed—was offering buyouts, so Ward began looking for new business opportunities.

Ward said the answer came to him after his father got injured at work. When his father went to the doctor for a workers’ compensation visit, he was handed the medication before he even left the office. Impressed, Ward said he got the company name off the label from his dad and started searching online. Shortly after, he and his wife, Jennifer, launched a company from their home in Mobile, Alabama, selling physician dispensing services to clinics. The company, DocRx, essentially acts as middleman: They market the idea of dispensing to physicians, manage billing, and comply with regulations. They furnish physicians with software and help connect practices with existing repackagers. DocRx itself does not itself repackage drugs.

“We are the medication experts on the health care team,” said Cost. “We are the only professionals that get four years of targeted medication-related education.”

When they started the company, Ward said, most dispensing practices in the area served workers’ compensation patients. Ward saw an opportunity. “I wanted to capture that insurance and cash-pay patient, that self-insured patient, the ones that have a $30 copay, but I can offer them medication for $10,” he said.

Working a sales beat in Alabama, Mississippi, and Louisiana, Ward said, the company signed up doctors to start dispensing drugs from their offices. When a competing salesman, hoping to discredit the young company, started telling doctors that the Wards didn’t even have an office, they rented a space. (Later, they hired the competing salesman.) Over time, DocRx branched out into other services. Today, along with their dispensing business, they offer diagnostic tests to clinics, sell medical supplies, and even supply products to some pharmacies. As of last fall, Ward and Jane Glover, the company’s director of marketing and communications, said DocRx had grown to around 150 employees, working with some 1,500 physicians, concentrated in the South.

In a phone call, Ward said that he and his colleagues “don’t normally talk about the financial side with physicians.” Doctors, he said, “are doing this for the patient,” and most don’t make a large amount of money. Like others in the industry, the company cites research suggesting that as many as one-third of prescriptions are never even filled. The increased convenience of in-office dispensing, Ward and other advocates argue, boosts compliance and improves care.

Still, in an online pitch to prospective clients, the company stresses that revenue from dispensing can “be quite significant,” explaining that, because of low drug prices, “physicians can easily add a significant markup and still provide them at a lower or equal price to many patients’ co-pays.”

Ward’s company sued a rival firm that used a similar name—DocRx Dispense—for trademark infringement in 2014. Ward won, and the latter company appears to no longer exist. As recently as last fall, however, an animated video outlining the benefits of in-office dispensing—created by the now-defunct rival company—was featured on multiple pages of Ward’s DocRx. In the spot, an animated man energetically extolls the profit potential of physician dispensing, and blames the Affordable Care Act, a sweeping healthcare reform law passed in 2010, for hurting the revenues of private doctors’ practices.

“Yes,” says the cartoon man, wearing a yellow necktie and gesturing with upraised hands, “I can’t emphasize enough that it provides significant profit to your practice.” That profit, he explains, “can be as low as $50,000 a year. It could be as high as a million to $3 million dollars a year, depending on the size of your practice.”

Asked about the video in a phone interview, Ward sounded confused. Later, after viewing it on the website, he said his web manager may have mistakenly posted it. “That will need to be taken down asap as that is not us,” he wrote in an email.

Soon after, the video was gone.

The rise of in-office dispensing in the US comes alongside significant evolution in the pharmacy profession, which has moved towards more expansive and more advanced medical training. In 2000, it became the standard for all new pharmacists to receive a doctorate in pharmacy (called a PharmD), which requires a minimum of two years of “specific, pre-professional coursework” at the undergraduate level, atop four years of professional study in the biological, chemical, and physical properties of medications, according to the American Association of Colleges of Pharmacy.

Some pharmacy schools also require a specialized admissions test, and leaders of the field have pushed for new pharmacists to do post-graduation residencies, as well.

Pharmacists must also pass the North American Pharmacist Licensure Examination, as well as a pharmacy jurisprudence exam, before being able to dispense medications.

It’s a rigorous gauntlet that advocates say allows the pharmacist to take a more active—and clinically important—role in overseeing patients’ complex drug regimens, guarding against potentially harmful drug interactions, and even providing some medical advice. “We are the medication experts on the healthcare team,” said Micah Cost, who at the time of an interview in August 2020 was executive director of the Tennessee Pharmacists Association. “We are the only professionals that get four years of targeted medication-related education. So we really have a unique value in the system.”

Laws that permit doctors to circumvent pharmacists, industry advocates suggest, serve physicians’ bottom lines more than patient health. “This has got to be a revenue thing,” said Knoer, the APhA chief. “There’s no way that any physician in their right mind—and you can quote me on that—that any physician in their right mind would want to take the safety check of a pharmacist out,” he continued.

“It defies logic,” Knoer said. “So this has got to be purely an economic thing, increasing revenue in physicians’ offices.”

Not every pharmacy advocate is staunchly opposed to physician dispensing, and some leaders in the field say they see a place for it. “Our position is that it’s okay on a limited basis,” said Aliyah Horton, executive director of the Maryland Pharmacists Association. “But we are not supportive of full-on physicians just being able to dispense anything and everything, and turning themselves into a practice and a pharmacy at the same time.” Her organization has pushed for more clear regulations to ensure that physicians dispense safely.

During the Covid-19 pandemic, Horton said, she has seen physicians in the state advocating for expanded dispensing. But, she said, pharmacists offer “a little bit of check and balance”—perhaps especially in times of unrest.

For example, early in the pandemic, after then-President Donald Trump began advocating for an unproven Covid-19 treatment, hydroxychloroquine, many doctors rushed to prescribe it for themselves, family, and friends. (Subsequent studies have failed to show the drug treats Covid-19.) As Undark reported in March 2020, the spike in prescriptions led to shortages of the drug for patients who needed it to manage lupus and other unrelated, chronic conditions. In some cases, pharmacies stepped in to push back against the wanton prescribing, and Horton said pharmacists also intervened with doctors who had never dealt with the drug before, and who were unknowingly trying to obtain inappropriately high doses.

Pharmacists, she noted, are sometimes “a barrier for inappropriate prescribing.”

Some dispensing advocates counter such arguments by pointing to recent reports suggesting that overworked pharmacists at chains like CVS are making more errors, potentially endangering patients themselves. A two-year long investigation by The Chicago Tribune, published in 2016, enlisted the help of drug interaction experts and a cooperating physician to send reporters to 255 pharmacies throughout Illinois—Walgreens, CVS, Costco, and other chains, as well as independent pharmacies—seeking to obtain two contraindicated, prescription-only medications. In some cases, the drug combinations arranged would be deadly if a patient were to take them together. In the end, 52% of the pharmacies visited filled the prescriptions without ever mentioning any possible interactions. The newspaper called it “striking evidence of an industrywide failure that places millions of consumers at risk.”

Still, such errors in the real world would begin with doctors, pharmacy experts caution, and Knoer argued that most physicians, at one time or another, have had pharmacists call and alert them to major potential errors. “It’s a team,” he said. “Pharmacists are, by far, more trained in pharmacotherapy.”

His colleague Daniel Zlott, formerly a specialist in oncology pharmacy at the US National Institutes of Health and now an executive at the APhA, echoed the point, suggesting that more than 10% of handwritten prescriptions contain some kind of error. “One of the things that I used to do as a pharmacist,” Zlott said, “was catch those errors, left and right, and stop them from ever reaching a patient.”

In 2014, Geoffrey Joyce, a health policy scholar at the University of Southern California, sent students to 500 pharmacies around Los Angeles with prescriptions for the same set of generic drugs. The prices the pharmacies quoted for them, he recalled, varied from $10 to $200 for a single generic drug. “The uninsured consumer is really vulnerable,” Joyce said.

Indeed, while common wisdom holds that generic drugs ought to represent cost savings for American consumers, the millions of patients who buy their drugs in cash—because they are uninsured or underinsured—are particularly vulnerable to erratic pricing for generics. Meanwhile, physicians have found ways to sell generic drugs directly to patients, sometimes at far lower prices than pharmacies offer.

The lifecycle for most generic drugs begins in China and India, where a vast network of factories produce the base chemicals that feed the global pharmaceutical chain. They then sell those chemicals to other manufacturers—again, often in China and India, but also Europe and the US—who use them to synthesize the actual active pharmaceutical ingredient, or API. Finally, a drug manufacturer measures and mixes that API into a tablet, capsule, or cream that’s ready for the market. For generics sold in the US market, Joyce said, that third stage usually happens in the US.

It’s at this point that the generic drug enters a series of opaque financial arrangements typically modeled with elaborate flowcharts. For many generics, the manufacturers set the average wholesale price, or AWP—but that figure is largely a placeholder. “The sticker price may or may not have any relation to the cost of that drug,” said Antonio Ciaccia, president of 3 Axis Advisors, a consulting firm, and the CEO of 46brooklyn, a nonprofit research shop that studies drug pricing data. (Analysts joke that AWP stands for “ain’t what’s paid.”)

Instead, the price that consumers encounter at the pharmacy has a lot to do with a middleman called a pharmacy benefit manager, or PBM. In theory, the PBM exists to help health insurance providers bargain for lower prices. But in practice, according to a growing chorus of experts, advocates, and policymakers, a handful of PBMs now dominate the pharmaceuticals market, raking in enormous profits while driving up prices. In that byzantine system, said Ciaccia, “everybody in the supply chain,” including pharmacies and PBMs, can sometimes be incentivized to seek out higher priced products from suppliers, knowing that will allow them to capture larger payments down the line.

By the time a drug arrives at the pharmacy, various players in the chain have taken a large share.

A 2017 report from scholars at the University of Southern California Schaeffer Center for Health Policy and Economics found that for every $100 spent on generic drugs, only $18 actually goes toward the manufacturing costs.

Consider cyclobenzaprine. First synthesized by a pair of chemists—one a Merck employee and the other a consultant for the company—in 1956, the drug reached pharmacies in the 1970s as a muscle relaxant and pain reliever, under the brand name Flexeril. It’s often prescribed to people with workplace injuries. In 1989, Merck’s patent on the drug ran out. Today, any FDA-registered drugmaker can apply for approval to manufacture and sell generic cyclobenzaprine. The final drug, according to federal pricing data, tends to be pretty cheap when pharmacies purchase it directly from a generic drug wholesaler—around 2.5 cents per 10 milligram (mg) pill, or 75 cents for 30 tablets.

When patients pay in cash at the pharmacy, however, the average price for a 30-pill bottle, according to the pharmaceutical coupon firm GoodRx, is $18.23. With a coupon, you can pick it up at, say, Walmart, for $12.09—cheaper, but still carrying a hefty markup.

Pharmacies have little control over the final pricing, Ciaccia said. But dispensing physicians operate outside that system, and they have access to low wholesale prices. For example, an internal pricing sheet from a dispensing clinic in Wichita shows a large drug distributor selling cyclobenzaprine directly to the clinic for less than 2 cents per pill in August 2021. A doctor could take that bottle of medication, tack on a $10 markup, and offer it for a cash price that’s still lower than it might be at a local pharmacy—and lower than some insured people’s copays.

Chris Lupold, a family physician in Ronks, Pennsylvania, has been dispensing since 2017. He says he doesn’t mark up the drugs he dispenses to turn a profit, instead advertising low-cost, in-office pharmaceuticals as a service to prospective patients. (Lupold’s practice makes money by charging a monthly membership fee to patients.) During visits, Lupold often walks patients through drug pricing, showing them the wholesale rates for their regular prescriptions. He estimates that he can beat pharmacy prices “probably 97% of the time.”

Some patients find those conversations upsetting. “I’ve heard some foul language,” he said. “‘I paid a $20 copay for that bottle,” patients will say, and “you can get it for me for $2? What are you talking about?’”

Not all dispensing doctors sell their drugs at such low rates, however. Some experts, echoing concerns expressed in the 1980s, worry that physician dispensing could open the door for unscrupulous practices—and warp the decision-making of even well-meaning physicians.

“There is definitely a perverse financial incentive there,” said Matthew McCoy, a medical ethicist at the University of Pennsylvania, after reviewing the details of common physician dispensing arrangements at Undark’s request. McCoy studies conflict of interest in healthcare, and he points out that just because a conflict of interest is present does not mean that a physician necessarily acts on it. “But it’s just objectively true,” he said, “that if you’re one of the practices that’s driving some revenue through the sale of pharmaceuticals, then you have an incentive to prescribe more pharmaceuticals to your patients.”

Ciaccia was more blunt: “You’re essentially granting a physician a printing press for money.”

Physician dispensing advocates point out that there are other situations in which a physician’s medical decision affects their income. “What’s the difference between [dispensing] and a doctor owning an X-ray machine, and making money on the X-ray machine?” asked Trent Jefferies.

McCoy acknowledges that conflicts of interest exist in other realms. But, he argued, that’s not a reason to allow new ones into the doctor’s office. “I think it’s still incumbent upon us to try to eliminate those additional unnecessary conflicts that might be built into the way that the business of medicine is conducte

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