David G. Stevenson

Haiden A. Huskamp

Joseph P. Newhouse

Harvard Medical School

180 Longwood Avenue

Boston, MA 02115

MedPAC

601 New Jersey Avenue, NW

Suite 9000

Washington, DC 20001

(202) 220-3700

Fax: (202) 220-3759

www.medpac.gov

•

•

The views expressed in this report

are those of the authors.

No endorsement by MedPAC

is intended or should be inferred.

Medicare Part D,

Nursing Homes, and

Long-Term Care Pharmacies

A study conducted by staff from Harvard Medical School 

for the Medicare Payment Advisory Commission

June 2007 • No. 07–2
Medicare Part D, Nursing Homes, and Long-Term Care Pharmacies 

FINAL REPORT 

David G. Stevenson, Haiden A. Huskamp, and Joseph P. Newhouse 

David G. Stevenson, Ph.D. 

Assistant Professor of Health Policy 

Harvard Medical School 

Department of Health Care Policy 

180 Longwood Avenue 

Boston, MA 02115 

(617)432-3905 (phone) 

(617)432-3435 (fax) 

stevenson@hcp.med.harvard.edu 

Haiden A. Huskamp, Ph.D. 

Associate Professor of Health Economics 

Harvard Medical School 

Department of Health Care Policy 

180 Longwood Avenue 

Boston, MA 02115 

(617)432-0838 (phone) 

(617)432-0173 (fax) 

huskamp@hcp.med.harvard.edu

Joseph P. Newhouse, Ph.D. 

John D. MacArthur Professor of Health Policy and Management 

Harvard University 

180 Longwood Avenue 

Boston, MA 02115 

 (617)432-1325 (phone) 

(617)432-3503 (fax) 

newhouse@hcp.med.harvard.edu 

Submitted: February 2, 2007; Revision: March 27, 2007 
Medicare Part D, Nursing Homes, and Long-Term Care Pharmacies 

Table of Contents 

Executive Summary i

Project and Methods 2

Background 3

Part D Enrollment and Plan Selection 8 

Working across PDPs 12

Clinical Impact of Part D 17

Financial and Administrative Impact of Part D 21

Competitive Impact of Part D in the LTCP Sector 29

Conclusions 37

References 42

Exhibit 1 45

Exhibit 2 46

Exhibit 3 47

Exhibit 4 48

Appendix A-1

Exhibit A-1 A-8

Exhibit A-2 A-9
Executive Summary 

The Medicare Modernization, Improvement, and Prescription Drug Act of 2003 

(MMA) extended voluntary prescription drug coverage to all Medicare beneficiaries, 

including individuals who reside in nursing homes. Although the program includes some 

special protections for nursing home residents, Part D’s core reliance on private plans to 

administer the benefit and its emphasis on consumer choice is the same for 

institutionalized and community-based beneficiaries. 

But because of their health needs and the setting in which they receive services, 

nursing home residents differ from community-dwelling beneficiaries in important ways. 

Nursing home residents suffer disproportionately from chronic conditions, have higher 

levels of cognitive impairment, and typically take a higher number of medications than 

beneficiaries in the community. The nursing home pharmacy market also differs from 

the community market in its regulatory environment, the important role of long-term care 

pharmacies (LTCPs), and the prominence of Medicaid financing. 

The Medicare Payment Advisory Commission contracted with Harvard Medical 

School to explore how the introduction of Part D is changing the operations of LTCPs 

and nursing homes, as well as the implications of those changes for beneficiaries and the 

Medicare program. Based primarily on stakeholder interviews, the aims of the study 

were to obtain an early indication of how the Part D benefit is working for nursing home 

residents and to identify areas for further empirical study. 

By some accounts, the transition to Medicare Part D has been a challenging one in 

the long-term care sector. Although LTCPs, nursing homes and their clinicians, and Part 

i
D plans will gain experience with the benefit, its structure, and how it works in the 

nursing home setting over time, stakeholders whom we interviewed identified a range of 

longer-term issues and questions that merit attention as the benefit proceeds. 

In sum: 

• The overall fit between Part D and the nursing home pharmacy sector is a matter of 

contention among the stakeholders we interviewed. Many stakeholders characterized 

the Part D benefit as being a better fit for community-based beneficiaries who access 

medications in retail pharmacies than for institutionalized beneficiaries. 

• Medicare beneficiaries in nursing homes have the same freedom to choose plans as 

community-based beneficiaries; however, stakeholder interviews highlighted a 

tension between balancing this freedom-of-choice and allowing nursing home 

providers to encourage enrollment into plans they perceive to be a better fit with 

residents’ medication needs and that minimize facility and pharmacy administrative 

burden. 

• Part D increased the variation around formularies and drug management processes for 

residents at the facility level. In general, stakeholder interviews highlighted the 

tension between cost-saving strategies used by PDPs such as utilization management 

and the burden these processes can place on clinical and pharmacy staff. 

• Formulary coverage appears adequate for many medications used by nursing facility 

residents, and the special protections required for six medication classes plus Part D 

transition coverage requirements helped to shield residents from any coverage 

limitations. However, stakeholders noted what they consider to be important 

exceptions to overall formulary adequacy for the institutionalized population and 

ii
instances where the application of utilization management policies were particularly 

problematic. 

• Empirical analyses are needed to assess the impact of Part D on utilization patterns, 

outcomes, and quality of care. Noting this important caveat, stakeholders pointed to 

within-class drug utilization shifts but did not report a change in gross drug 

utilization. To date, stakeholders have not perceived any adverse impact on resident 

outcomes or quality of care attributable to Part D. 

• Stakeholders indicated that Part D’s financial impact on nursing homes is still 

evolving. Part D altered the relationship between nursing homes and their LTCPs, 

introducing a tension between facilities’ need to dispense medications quickly and 

LTCPs assuring coverage for those drugs. Nursing homes and LTCPs both have an 

incentive to minimize prescriptions for non-covered drugs, but how the financial 

impacts of these costs will be shared by these entities depends on nursing homeLTCP contracting, which will likely continue to vary across providers. 

• The impact of Part D on the future competitiveness of the LTCP sector is also 

evolving. Although the LTCP sector is concentrated, financial analysts with whom 

we spoke characterized the sector as competitive, with few barriers to entry. The 

prominent role of Group Purchasing Organizations (GPOs) and LTCP network 

organizations in particular has helped smaller LTCPs access more favorable pricing 

from manufacturers and PDPs such that most small LTCPs have joined these 

organizations. 

• Consensus among stakeholders was that LTCP rebates –which seem to have 

continued to date – would likely decline in future years. CMS has not disallowed 

iii
LTCP rebates under Part D, but it has expressed strong reservations about them, 

raising the possibility that they could constitute fraud and abuse. 

• If LTCP rebates decline or disappear, these changes could lead to increased 

transparency of pricing and perhaps increased price competition. Although reduced 

rebates would likely have a greater negative impact on larger LTCPs, these entities 

would still likely maintain certain economies of scale that might be advantageous in 

terms of service pricing, dispensing costs, and negotiating power. 

• A reduction or elimination of rebates also could result in LTCPs passing increased 

administrative costs or a greater share of costs for items like consultant pharmacist 

services onto the nursing homes with which they contract. 

• PDPs generally did not express a reluctance to have institutionalized enrollees in their 

plans; however, there seemed to be a level of uncertainty among PDPs about the 

adequacy of payment and risk adjustment going forward as risk corridors widen. 

Reassessing the methodology of risk adjustment and possibly making future 

refinements could be important to ensure adequate availability of plans for dual 

eligible beneficiaries. 

iv
Medicare Part D, Nursing Homes, and Long-Term Care Pharmacies 

The Medicare Modernization, Improvement, and Prescription Drug Act of 2003 

(MMA) extended voluntary prescription drug coverage to all Medicare beneficiaries, 

including individuals who reside in nursing homes. Although the program includes some 

special protections for nursing home residents, Part D’s core reliance on private plans to 

administer the benefit and its emphasis on consumer choice is the same for 

institutionalized and community-based beneficiaries. 

But because of their health needs and the setting in which they receive services, 

nursing home residents differ from community-dwelling beneficiaries in important ways. 

Nursing home residents are one of the most vulnerable subgroups in the Medicare 

program. They are frail, suffer disproportionately from multiple chronic conditions, have 

higher levels of cognitive impairment, and typically take 6-10 different medications.1-3

Most have low incomes, and the majority have their nursing home care financed by 

Medicaid.4 In addition to these differences at the individual level, the nursing home 

pharmacy market differs from the community market in its regulatory environment, the 

important role of long-term care pharmacies (LTCPs), and the prominence of Medicaid 

financing.2, 5-8

Medicare Part D represents a substantial departure from how prescription drugs 

were previously financed and administered in the nursing home setting. The following 

report discusses these changes and their implications for nursing home residents, nursing 

homes and LTCPs. Based primarily on stakeholder interviews, the paper presents an 

1
early snapshot of Part D’s financial and clinical impacts and raises issues for further 

empirical study. 

Project and Methods

 The Medicare Payment Advisory Commission (MedPAC) contracted with 

Harvard Medical School to explore how the introduction of Part D is changing the 

operations of long-term care pharmacies (LTCPs) and nursing homes, as well as the 

implications of those changes for beneficiaries and the Medicare program. The aims of 

the study were to obtain an early indication of how the Part D benefit is working for 

nursing home residents and to identify areas for further empirical study. To achieve these 

aims, we interviewed stakeholders across a variety of relevant perspectives and reviewed 

existing sources of information. Unless otherwise noted, qualitative data collected from 

these interviews provide the basis for the information we present. 

A total of 31 semi-structured, telephone interviews were conducted between 

November 2006 and January 2007. Stakeholder groups from which we collected 

information included nursing homes (n=6 interviews), LTCPs (n=6), group purchasing 

organizations/ LTCP networks (n=2), Part D plans (PDPs) (n=4), financial analysts 

covering the long-term care pharmacy sector (n=3), physicians working in nursing homes 

(n=4), consultant pharmacists (n=2), state and federal policymakers (n=2), and advocates 

for nursing home residents (n=2). In many instances, multiple stakeholders participated in 

the individual interviews. Separate protocols were developed for each of the stakeholder 

groups, and interviews were generally 30-60 minutes in length. Selection of stakeholders 

was systematic and, where relevant, sought to maximize representation among Medicare 

beneficiaries (e.g., efforts were made to interview the larger nursing home chains, long2
term care pharmacies, and PDPs). To examine whether and how perspectives and 

experience may differ for smaller providers and pharmacies, interviews were also 

conducted with these types of organizations; however, the findings may be less 

representative of the range of experience across these smaller entities. In a written 

consent form distributed prior to each interview and reviewed verbally at each 

interview’s start, interviewees were assured the information provided would not be 

identified with them individually or organizationally. The study design, protocols, and 

consent form were all approved by the Committee on Human Subjects at Harvard 

Medical School. 

The report begins with a brief background on the nursing home pharmacy 

environment and the changes instituted under the MMA. Although this section includes 

general information about the LTCP sector, the composition and profitability of this 

sector are covered in more depth in a companion report (see, Appendix, “Overview of the 

Long Term Care Pharmacy Industry”). Relying primarily on stakeholder interviews, this 

report goes on to describe the impact of Part D in the nursing home and long-term care 

pharmacy sectors, focusing on plan selection, pharmacy practice across multiple PDPs, 

and the clinical, administrative, and financial impacts of Part D thus far. 

Background

The Nursing Home Pharmacy Market Pre-MMA. Over the last few decades, the 

nursing home pharmacy environment has been shaped by the extensive drug needs of 

residents and the complex regulatory environment in which nursing homes operate. 

Historically, nursing homes have struggled to manage resident drug needs effectively.5-7

3
Recent research suggests that preventable adverse drug events still constitute a substantial 

problem for nursing homes residents.9 Reducing medication errors and improving 

prescription practices have been a focus of previous nursing home reforms, such as the 

Omnibus Budget Reconciliation Acts (OBRA) of 1987 and 1990. Among other 

provisions, these reforms established requirements for drug regimen review and the role 

of consultant pharmacists, documentation of medication errors and adverse drug events, 

and delivery of pharmacy services to nursing homes more generally. 

In part because of these regulatory standards, LTCPs have come to dominate the 

nursing home pharmacy market. LTCPs not only offer specialized supplies and services 

mandated by federal law – such as unit-dose packaging, 24-hour drug delivery, 

emergency drug supplies, and handling unused medications – they have become 

integrally involved in nursing home pharmacy practice. 

Through their consultant pharmacists, LTCPs offer comprehensive drug 

management services and often coordinate related quality assurance and improvement 

activities. These services include prospective review of resident drug orders and 

coordination of prior authorization and medical necessity documentation, in-service 

trainings for nursing home staff (e.g., on monitoring residents on complex drug regimens, 

using infusion pumps, and administering IVs), and drug regimen review (e.g., 

formulating and monitoring medication treatment plans and identifying potential 

contraindications). While nursing homes can pay retail pharmacies for such specialized 

services, LTCPs serve more than 80% of all nursing home beds nationwide.10 

The LTCP market is highly concentrated. Three companies, Omnicare, 

PharMerica, and Kindred Pharmacy Services (KPS), account for around 60% of the 

4
sector’s revenues.11 Of the three, Omnicare is by far the largest, covering around 850,000 

of the nation’s 1.7 million nursing home beds (compared to around 220,000 and 100,000 

for PharMerica and Kindred, respectively). The remaining nursing home beds are served 

by smaller local or regional pharmacies (both LTCPs and retail pharmacies). (Exhibit 1) 

Historically, most nursing homes – at the facility and chain levels – relied on a 

single vendor for all pharmacy-related services. Nursing home providers cited several 

advantages to using a single pharmacy, including increased efficiency, predictability, and 

standardization. For instance, since LTCPs and their consultant pharmacists typically 

maintained compliance with a single LTCP formulary, nurses managed fewer 

medications across residents. Because of this compliance, LTCPs have traditionally 

secured manufacturer rebates in exchange for preferred placement of drugs on their 

formulary.8

 

Prior to Part D, residents’ drug coverage varied by their payer status. Not 

surprisingly, Medicaid played a substantial role, financing drugs for the almost two-thirds 

of residents eligible for Medicaid. State Medicaid programs typically paid LTCPs on a 

discounted fee-for-service (FFS) basis over and above the nursing home’s daily rate.12 By 

contrast, for Medicare-covered Skilled Nursing Facility (SNF) care financed by Part A, 

covered drugs were bundled into the prospective per-diem rate, and nursing homes 

typically paid LTCPs from this inclusive rate. Private paying residents paid LTCPs outof-pocket or through existing coverage (e.g., retiree benefits). 

As mentioned above, LTCPs provide services to nursing homes beyond 

dispensing drugs. Prior to Part D, LTCPs reportedly provided many of these services to 

nursing homes at little or no additional charge (i.e., were bundled with charges for other 

5
goods and services). A 2004 report on the LTCP industry found that LTCPs usually 

charge nursing homes a small fee for consultant pharmacy services, occasionally charge 

for maintaining medication records, and provide a number of other services at no 

additional charge.2

 The report further noted that LTCP charges to facilities were often 

bundled such that assessing distinct service pricing (and costs) was difficult. 

Part D Changes. Medicare’s new drug benefit fundamentally altered the nursing 

home pharmacy market (Exhibit 2). The most significant changes center on the majority 

of residents who are dually eligible for Medicare and Medicaid (“duals”), because the 

new benefit shifts their drug coverage from Medicaid to Medicare and requires that they 

enroll in private prescription drug plans (PDPs). In contrast, those covered by Medicare 

for a post-acute SNF stay are unaffected, and the impact on private-pay residents depends 

on whether they enroll in PDPs. 

The new benefit relies on private plans for its administration. The underlying 

expectation is that informed consumers will choose the plan that best suits their needs and 

that price competition among plans will avoid the government’s paying too much – or too 

little – for drugs. Within limits, private plans have flexibility in structuring formularies 

and cost-sharing. Although policymakers had concerns about whether plans would enter, 

the number of stand-alone PDPs in the 34 regions ranged from 27 to 52 at the program’s 

start. Duals initially were assigned randomly to PDPs with monthly premiums at or below 

regional benchmarks; however, they can switch to a different plan at or below the 

benchmark up to once per month. If the plan into which a dual enrolls is no longer 

offered or if its premium increases to more than the regional benchmark plus a de 

minimis amount ($2.00 for 2007), the dual is enrolled into another below-benchmark plan 

6
offering from the same company or – if there is no such plan – is enrolled randomly in 

another below-benchmark plan. Non-dual nursing home residents were not auto-enrolled 

(like other Medicare beneficiaries, they initially had until May 15, 2006 to select a PDP), 

and they can switch to any plan up once per month. 

In creating PDPs and removing Medicaid as the dominant payer, the MMA 

reconfigured the nursing home pharmacy market. Nursing homes and their LTCPs no 

longer function primarily under a single state’s Medicaid policies, including its preferred 

drug list. Instead, they must work across multiple plans, each of which generally has 

different coverage, cost-sharing, formulary design, and utilization management. Under 

the new law, however, because of CMS requirements that PDPs contract with any 

qualified pharmacy, nursing homes can keep their current institutional pharmacy 

arrangement, and most have maintained a relationship with a single LTCP. The 

legislation does not have a direct impact on nursing home-LTCP contracting; however, as 

we discuss below, the law could impact service and drug pricing that facilities receive 

from their pharmacies, including the transparency of such pricing. PDPs contract with 

LTCPs – not nursing homes – and are required to offer standard contracts to any qualified 

pharmacy provider. 

According to the MMA legislation, PDPs, rather than LTCPs, have the authority 

to create and maintain Part D formularies. Although LTCPs still maintain formularies, 

these Part D changes could have substantial implications for a revenue source of many 

LTCPs – rebates from drug manufacturers. Apart from the open question of whether 

manufacturers will continue to negotiate rebates with LTCPs, which we discuss below, 

CMS has emphasized that price concessions obtained by LTCPs must be reported to the 

7
PDPs with which they contract and, in turn, to CMS beginning in 2007. Finally, unlike 

Medicaid payment rates, Part D payments to LTCPs (e.g., dispensing fees) are not set 

administratively but instead are negotiated between LTCPs and plans.13 

Part D Enrollment and Plan Selection 

Most of the nation’s 1.6 million nursing home residents moved to the new drug 

benefit on January 1, 2006, a shift spurred by the necessary transition of dual eligibles to 

Medicare – rather than Medicaid – drug coverage. To ensure continuity of coverage and 

to mitigate the potential for adverse selection at the plan level, duals’ initial plan 

assignment was required by the MMA to be automatic and random and occurred into 

plans with premiums at or below regional benchmark values, as described above. Some 

advocates, nursing home providers, and pharmacists with whom we spoke questioned the 

wisdom of randomly assigning nursing home residents to drug plans, reasoning that some 

individuals will inevitably be enrolled in less generous plans and/or plans that are less 

able to meet their medication needs than alternative below-benchmark plans. Indeed, our 

own analysis of CMS formulary data found that a minority of below-benchmark plans 

provide less generous coverage and have more stringent prior authorization requirements 

compared to the relatively broad coverage we found overall.14 Some advocates have 

argued for an alternative assignment process that would consider medications that the 

beneficiary currently takes in making plan assignments, attempting to match a beneficiary 

to a plan with relatively generous coverage of those medications (e.g., see: 

http://waysandmeans.house.gov/hearings.asp?formmode=view&id=4930). Although 

such processes can vary considerably, a few states (e.g., New York, New Jersey, and 

8
Maine) are currently either using or considering an approach allowed by CMS referred to 

as “intelligent random assignment” to assign state pharmacy assistance program enrollees 

to Part D plans. 

Although duals may switch to a different plan at or below the benchmark once per 

month (and non-dual residents may switch to any participating plan ), Part D’s emphasis 

on consumer choice could be considered a poor fit with the characteristics of the nursing 

home population. In particular, the high prevalence of cognitive impairment in this 

setting undermines the potential for informed decision making. Even for cognitively 

intact residents, it could be difficult for them to access comparative plan information 

(e.g., via telephone or internet). Of course, many residents have actively engaged 

children, spouses, and legal guardians who help with medical decisions and who can help 

select plans. However, as a policy matter, it is a relatively safer assumption that few 

residents have the means and the ability to assess plan options on their own. 

Importantly, MMA guidance includes restrictions on the ability of providers 

serving nursing home residents (including nursing homes, physicians, and pharmacies) to 

direct residents to particular plans. Providers are able to provide objective information to 

residents, including how well drug plans cover medications of interest, but they are 

restricted from directing residents more broadly to a smaller number of plans and from 

distributing information that could be construed as having this aim.15 These restrictions 

are intended to minimize nursing home providers’ ability to steer residents in financially 

beneficial ways (e.g., if LTCPs had favorable deals with specific PDPs), but they also 

could reduce the likelihood that some residents will enroll in plans that cover their current 

medications. Some nursing home and pharmacy providers expressed frustration at the 

9
limits, positing that marketing restrictions undercut an advisory role that many residents 

and families want them to play and potentially jeopardized medication access for the 

subset that enrolled in plans that may be less appropriate for their medication needs. The 

CMS marketing guidelines are currently the subject of a first amendment lawsuit filed by 

the Washington Legal Foundation (http://www.wlf.org/upload/070706rotunda.pdf; 

(http://www.nasmd.org/WLF%20v.%20Leavitt%20lawsuit.pdf), and have been 

questioned by some members of Congress as well (e.g., Senator Schumer introduced 

S.2184 in the 109th Congress, facilitating nursing home-provided assistance in plan 

selection). Yet, at the same time, other nursing home providers supported the marketing 

restrictions, stating that such a role could pose a conflict of interest and open providers to 

the liability related to recommending particular plans. Other than emphasizing that 

random assignment did not seem ideal, the advocates with whom we spoke did not have a 

strong view on the matter, in part because they’ve heard little about Part D difficulties 

from residents and their families, a point to which we return below. 

In practice, providers seem to take different approaches – and even seem to have 

somewhat differing views on what activities are allowed – around educating and 

communicating with residents about their Part D plan options. Although several LTCPs 

indicated their Part D role included providing nursing home clients with assessments of 

PDPs’ coverage, utilization management, and overall flexibility, there seems to be 

variation in the extent and the manner in which nursing home clinical staff use this 

information based on our interviews with nursing homes, physicians, and LTCP 

providers. In particular, some LTCP respondents characterized clear differences across 

their nursing home clients in the extent to which they directed residents to particular 

10
plans. While some nursing home providers viewed it as their responsibility to advise 

residents and their families on plan choice, others expressed greater concern about 

repercussions from survey agencies or the Office of the Inspector General. Importantly, 

at this point, it is unclear how and to what extent restrictions on steering will be enforced. 

Provider level enrollment data are not yet available to assess plan switching at the 

nursing home or chain level; thus, it is difficult to describe whether and to what extent 

individuals have re-sorted from their originally-assigned plans (whether driven by 

steering on the part of nursing facilities or LTCPs or other factors). Most of the larger 

nursing home providers with whom we spoke stated that the majority of duals remained 

in their originally-assigned plans (according to some, this inertia exists in the face of 

efforts to provide objective information about plans). In contrast, however, one PDP with 

whom we spoke cited fluctuations in the plan’s institutional enrollment over the course of 

2006, attributing it, in part, to coordinated enrollment efforts on the part of nursing homes 

and their pharmacy providers. Similarly, one interviewee provided correspondence sent 

by one LTCP early in 2006 encouraging a client nursing home to consider changing 

residents from non-preferred PDPs in order to minimize charges to the facility that result 

from rejected claims. 

Ultimately, discussion of plan selection, assignment, and steering turns on 

beneficiary freedom of choice. One LTCP provider with whom we spoke posed a 

fundamental question about the extent to which long-stay nursing home residents should 

be allowed/expected to choose among plans, pointing to Medicare Part A stays in 

hospitals and nursing homes. Unlike Part A, where providers deliver medications and 

other prospectively-reimbursed services at their discretion, long-stay nursing home 

11
residents access medications through their PDP of choice. As established by the MMA, 

Medicare beneficiaries who are nursing home residents enjoy similar choices and 

flexibility under Part D as beneficiaries in the community (with the caveat that nursing 

homes typically choose the pharmacy with which they work). This freedom of choice is 

ensured by Section 1860D-1 of the Social Security Act and implementing regulations at 

42 C.F.R. 423.32, and – unless changed – nursing homes and LTCPs are required to 

facilitate this choice in the Part D program (e.g., see following letter to state survey 

directors from CMS Survey and Certification Group: 

http://www.cms.hhs.gov/SurveyCertificationGenInfo/downloads/SCLetter06-16.pdf). 

Working across PDPs

Part D introduced more variation into the nursing home pharmacy environment. 

Within a facility, residents may be enrolled in as many plans as are offered on the market, 

each with different formularies and utilization management policies. Although nursing 

homes worked across different coverage types prior to Part D, including Medicaid, 

Medicare Part A, and private coverage (e.g., managed care and retiree coverage), the 

number of plans is almost certainly greater under Part D and the enrollment of individuals 

will be more evenly distributed (i.e., the majority of individuals will not be enrolled in a 

single plan, as with Medicaid). With duals randomly assigned across below-benchmark 

plans, for example, it would not be unusual for a 100-bed facility to have duals spread 

across a dozen different plans. These changes have sparked concerns about quality of 

care problems resulting from potential gaps/restrictions in PDP formularies and the 

increased complexity and burden of working across multiple plans. 

12
Prescribing in nursing homes depends on a series of communications between 

four parties – the prescribing physician, the nursing home, the LTCP, and the PDP. First, 

the attending physician or, in some cases, the facility’s medical director writes an order 

for a medication, notifying the resident or responsible party of the order. Typically, a 

licensed nurse from the facility then faxes the order to the pharmacy, at which point the 

pharmacy reviews the order for coverage against the PDP formulary. If covered, the 

medication order is processed and sent to the facility by the pharmacy. If covered with 

prior authorization or step therapy requirements, the pharmacy or facility contacts the 

physician to initiate this process. If a medication is not covered, the pharmacy or facility 

contacts the physician to inquire about the possibility of an alternate medication. If there 

isn’t an appropriate substitute for a non-covered drug, the pharmacy or facility will 

contact the physician to begin the appeals process. To address appeals and PDP 

utilization management, the physician typically shepherds the process from off-site, 

possibly with input or assistance from the LTCP and facility. When a resolution is 

achieved, PDPs communicate this back to physicians, who in turn contact facilities or the 

pharmacy. Throughout these processes, consultant pharmacists – typically employed by 

the LTCP – review drug regimens, oversee dispensing, and potentially suggest 

therapeutic substitutions. 

When asked to describe the communication behind these processes, some 

clinicians characterized it as tenuous, with multiple points where the flow of information 

could break down. Clinical staff noted potential difficulty in determining particular 

individuals’ coverage at the point of prescribing. Communicating PDP-physician 

interactions (e.g., PDP decisions on prior authorization or appeals) back to nursing 

13
homes, LTCPs, and consultant pharmacists was described as especially challenging and 

important in relation to the timely delivery of medications. A related point is that our 

conversations identified variation across PDPs in the parties able to call on residents’ 

behalf, with some allowing nurses and pharmacies to play this role and others limiting 

these interactions to physicians. One stakeholder mentioned the use of collaborative 

practice agreements as a model for allowing non-physicians to participate in utilization 

management processes or to make therapeutically equivalent substitutions within a drug 

class. Under a collaborative practice agreement, allowed in various forms in the majority 

of states, a physician agrees to allow a pharmacist to make particular types of changes (as 

specified in the agreement) to medication orders without seeking approval on a case by 

case basis. Although the physicians with whom we spoke characterized themselves as 

particularly aggressive and diligent in working through PDP requirements, they 

wondered whether doctors who have less direct involvement with particular nursing 

homes – such as many attending physicians – would do the same. 

In speaking with nursing homes, physicians, and LTCPs, it was clear that they 

perceived PDPs as widely variable in how “friendly” they were to long-term care. 

Several elements contributed to these perceptions, the first of which was coverage of 

drugs important to the nursing home population. Although several stakeholders pointed 

to particular drugs where coverage was perceived to be problematic, the general – though 

not universal – view seemed to be that coverage per se was not the most problematic 

issue. To this end, CMS requirements such as establishing protected classes of 

medications16 and guaranteeing transition coverage of medications during an enrollee’s 

first 90 days of enrollment were cited as important safeguards for residents. (There do 

14
not appear to be any plans to discontinue these protections; however, it is not certain that 

these safeguards will remain in place indefinitely.) Importantly, as we discuss below, 

medication access depends on factors beyond coverage, including prior authorization and 

step therapy requirements. Other elements that contributed to LTCP perceptions of PDP 

friendliness toward long term care included the proportion of drugs that require prior 

authorization and step therapy edits, the speed in paying claims, and rules regarding the 

emergency supply of medications (e.g., number of days supplied during the appeals 

process, number of days supplied upfront for a new order). 

Compared to coverage issues, pharmacy and clinical providers in the nursing 

home setting were more vocal about the variation in utilization management requirements 

across PDPs (prior authorization especially) and the variation in PDPs’ flexibility in 

addressing what were perceived to be nursing home-specific needs. Among nursing 

home-based clinicians, dealing with the burden of prior authorization and, to a lesser 

extent, appeals or exceptions processes was universally raised as an important and 

problematic issue. In particular, nursing home physicians described the challenges of 

completing numerous and different prior authorization forms, providing medical records 

and lab results from off-site (i.e., without access to residents’ medical records), 

navigating help desks not attuned to the nursing home setting, and struggling with what 

were perceived to be relatively unfriendly processes that had variable results. Nursing 

homes and pharmacies noted that prior authorizations typically were approved in the end, 

but – for some plans – this outcome only came after considerable effort. Although some 

noted that nursing homes and physicians dealt with prior authorization in the past under 

Medicaid, physicians and nursing homes characterized these processes as much more 

15
challenging under Part D, something detailed by the American Medical Director’s 

Association in a recent survey of members.17 

CMS has instituted steps to ease the burden of prior authorization, exceptions (to 

formulary coverage or tier), and appeals, developing a standard coverage determination 

request form that can be used to request approval for non-formulary drugs, for exceptions 

to a formulary tier, and for giving information to meet prior authorization requirements 

(http://www.cms.hhs.gov/MLNProducts/Downloads/Form_Exceptions_final.pdf). CMS 

regulations require PDPs to accept these forms, but most nursing home and pharmacy 

providers stated that PDPs generally require completion of the PDP-specific forms as 

well. CMS indicated that it has begun the process of developing more detailed, classspecific forms for prior authorization, something representatives characterized as a much 

more involved process. Although standardization of utilization management forms could 

help to reduce the administrative burden associated with working across multiple PDPs, 

enforcement of standardization requirements may be needed to achieve this goal. 

With few exceptions, PDP carriers had little experience working with LTCPs and 

nursing home residents prior to Part D (and vice versa). Even under Part D, only a small 

minority of PDP enrollees are nursing home residents. To put PDPs’ nursing home 

business into context, most plans with whom we spoke indicated that nursing home 

residents accounted for 3-5% of total enrollees. Since the advent of Part D, some PDPs 

have made strides to become more knowledgeable and attuned to the long-term care 

setting, both to manage their own risk and to work effectively in meeting the needs of 

their nursing home members. For instance, one large PDP hired high-level staff familiar 

with the LTCP industry, engaged in a dialogue with its LTCP contractors, and made 

16
changes in the way it administers claims to account for those originating from the nursing 

home setting (e.g., instituting prior authorization codes specific to the long-term care 

setting and waiving prior authorization requirements to ensure expedient delivery of 

drugs). Other PDPs have initiated practices such as 24-hour/7-day-a-week availability 

for prior authorization calls, coverage of injectables and other alternate routes of 

medication administration for nursing home residents, and flexible coverage of 

emergency medicines required to be onsite in nursing homes. 

Over time, nursing homes and their pharmacies will gain more experience 

working across PDPs, lessening the initial level of uncertainty. Similarly, PDPs will 

become more familiar with LTCPs and the nursing home pharmacy environment 

generally. At this point, most PDPs we interviewed did not express a desire to avoid 

these beneficiaries as enrollees, although one PDP representative noted that the PDP was 

offering fewer below-benchmark plans for 2007 than they did for 2006. The availability 

of below-benchmark plan options will need to be monitored as risk corridors widen and 

as plans gain more experience in the sector. Importantly, stakeholder interactions will be 

shaped by the financial, administrative, and clinical implications of Part D, topics to 

which we now turn. 

Clinical Impact of Part D 

Assessing the clinical impact of Part D in the nursing home sector is one of the 

more difficult areas to evaluate without quantitative data describing drug utilization and 

other related processes and outcomes for nursing home residents. As the benefit 

progresses, additional empirical work will be needed to illuminate these issues further. 

17
With this caveat, our conversations with stakeholders in this area centered on three broad 

topics – Part D’s impact on clinical and prescribing processes, its impact on drug 

utilization, and its overall impact on resident outcomes and quality of care. 

As described above, nursing homes and their LTCPs must now work across 

multiple PDPs to deliver medications. In addition to the administrative, clinical, and 

operational burden detailed elsewhere in this report, we heard about related changes in 

how drugs are dispensed by LTCPs. In particular, a tension seems to have emerged 

between timely provision of medications from LTCPs and obtaining determinations of 

coverage from the PDP (or guarantees of payment from the nursing home). Although 

CMS’s “transition fill” policy should help alleviate this tension (plans are directed to fill 

a transition supply of prescriptions within the first 90 days of enrollment, and nursing 

home residents may receive multiple refills if necessary, see 

http://www.cms.hhs.gov/PrescriptionDrugCovContra/Downloads/CY07TransitionGuidan

ce.pdf), some physicians still expressed concern about potential delays in medication 

access if LTCPs and/or nursing homes wish to verify coverage or prior approval before 

dispensing a drug. We heard about varying approaches to this issue from nursing homes 

and LTCPs, with some dispensing medications in advance of determining payment, and 

others being more hesitant to do so. One large nursing home provider indicated that 

pharmacies have gotten more aggressive over time and as non-covered medications have 

grown in magnitude about verifying coverage before dispensing. Another strategy we 

heard about from LTCPs in response to this challenge is to dispense shorter supplies of 

medications in anticipation of resolving PDP-specific administrative issues before the 

prescription is refilled. 

18
As raised above, medication access depends on several factors, including 

coverage and utilization management requirements. Based on data from one large LTCP, 

Exhibit 3 conveys information about 20 drugs with the most claims in rejected status at 

the end of the 2006 calendar year. For each of the drugs listed, the distribution of claims 

rejections across various categories is given, including the drug not being covered; no 

(medical) history record on file (e.g., to fulfill step therapy or diagnostic requirements); 

the refill being requested too soon (e.g., if the plan doesn’t think the prescription should 

be depleted yet); and prior authorization requirements. At the bottom of the Exhibit, this 

information is also given for all the LTCP’s Part D claims in rejected status at this time. 

Importantly, the data are not adjusted for prescribing volume, meaning that one should 

not make inferences about relative probabilities of submitted claims being rejected across 

listed (or unlisted) medications. 

Although these data are not necessarily representative of other LTCPs’ 

experience, they generally seem consistent with information obtained in stakeholder 

interviews. In particular, nursing home and LTCP stakeholders highlighted access 

challenges under Part D for Alzheimer’s drugs, selected antibiotics, erythropoetin (EPO) 

drugs, and some alternate formulations of medications (e.g., injectable, inhalation, 

topical, and infusion solutions) relative to coverage under Medicaid and LTCP 

formularies before Part D implementation. The Exhibit highlights how access challenges 

may stem from different limitations. Some claims rejections (e.g., Lexapro and Prevacid) 

primarily stem from lack of coverage; others (e.g., Namenda and Procrit) primarily from 

prior authorization requirements not being met; and still others (e.g., warfarin sodium and 

Seroquel) primarily from having no (medical) history records on file. 

19
Importantly, the clinical impact of limited coverage or extensive prior 

authorization requirements depends on a number of factors, including prevalence of use, 

available alternatives, and the efficacy of specific medications. For instance, if a drug is 

seldom used because there are clinically superior alternatives, low coverage levels may 

be appropriate and cause minimal burden clinically. Similarly, high levels of prior 

authorization might add valuable safeguards in cases where prescribing could be 

questionable or inappropriate, either due to controversy about efficacy or concerns about 

risks or side effects. 

With the caveat that empirical data are not yet available to assess the impact of 

Part D on utilization, nursing home and LTCP providers have noticed a shift in drug 

utilization within classes (e.g., from an uncovered to a covered statin), but almost none of 

the stakeholders whom we interviewed reported a change in the overall utilization of 

drugs by nursing home residents. [The one exception to this sentiment was a consultant 

pharmacist in a state where the Medicaid program has opted to drop its coverage for 

benzodiazepines, which are excluded from Part D coverage. It was noted that the use of 

benzodiazepines has plummeted, a change the pharmacist described as positive overall.] 

This is a relevant point not only in terms of ensuring adequate access to medications for 

residents but also because some policymakers characterized drug utilization prior to Part 

D as excessive and expected it to decline as manufacturer rebates – and incentives for 

LTCPs to move market share – diminished. In detailing concerns in this area, CMS 

emphasized the importance of reducing incentives to over-prescribe,18 something it 

argues could not only lead to higher drug costs but also to increased health costs and 

20
burden (e.g., through adverse drug events). It clearly will be important to monitor drug 

utilization and resident health outcomes with empirical data as the benefit proceeds. 

 Finally, we asked stakeholders whether they felt Part D has had any impact on 

resident outcomes or quality of care. Despite a great deal of concern among some 

stakeholders, we did not hear about instances where quality of care was perceived to be 

suffering. One state representative indicated that the survey agency had not noticed any 

problematic trends or outcomes subsequent to Part D’s introduction. Advocates with 

whom we spoke indicated that – somewhat to their disbelief – they have heard little from 

residents and families about problems with the benefit. Despite the lack of specific 

concerns, however, advocates still expressed a general concern about whether nursing 

homes could absorb the added burden that Part D places on staff. When asked about 

whether residents have been impacted by Part D (negatively or positively), nursing 

homes, LTCPs, and physicians concurred that residents and their families have been 

largely shielded from Part D’s changes thus far and likely have noticed little or no 

difference between the pre- and post-Part D clinical environment. 

Financial and Administrative Impact of Part D

 Our discussions of the financial and administrative impacts of Part D in the 

nursing home pharmacy sector centered primarily on the experiences of LTCPs and 

nursing homes. As noted above, PDPs must contract broadly with LTCPs, while nursing 

homes typically contract with a single LTCP. Importantly, nursing homes are the entities 

held responsible by regulators for ensuring residents’ freedom of choice under Part D 

and, more broadly, as defined by the Nursing Home Reform Act, for meeting residents’ 

21
prescription drug needs. The LTCP-PDP interaction is the locus of Part D claims 

administration and payment issues; as we describe below, however, these interactions 

affect and are often mediated by LTCP-nursing home interactions. We first discuss the 

operational impact of Part D on LTCPs and nursing homes, before moving to a broader 

discussion about the impact of Part D on the competitiveness of the LTCP sector. 

LTCPs. Part D represented a fundamental shift in how LTCPs get paid for the 

majority of their business. Under the new benefit, a LTCP receives negotiated dispensing 

fees from multiple PDPs and functions, at least for its Part D business, under the 

formularies of these plans. Not only do these changes have implications at the level of 

pharmacy-PDP interactions, such as claims processing and systems compatibility issues, 

but the structure of Part D also has broader financial implications for a traditionally 

important revenue source for LTCPs, rebates (discussed below). 

LTCPs perceive PDPs to vary widely in the ease or difficulty of working with 

them under Part D. Many of the relevant considerations of this assessment relate directly 

to issues with financial consequences for LTCPs. The first and perhaps most visible 

issue discussed by LTCPs was that of rejected claims. Although pharmacies were 

reluctant to describe the magnitude of the problem in detail, one large LTCP estimated 

that 4% of all submitted Part D claims were rejected in a recent time period and that it 

had hundreds of thousands of claims in a “rejected status” at the end of 2006. Rejected 

claims not only can imply delayed payments for LTCPs (which may be particularly 

problematic for smaller pharmacies19) but they could also imply a loss if the drug in 

question has already been dispensed by the LTCP, pushing the issue of payment to be 

between the pharmacy and its client nursing home. 

22
Showing data from one LTCP, Exhibit 4 details rejected claims across 16 PDPs in 

2006. The Exhibit shows that claims can be rejected by PDPs for a variety of reasons, 

including non-coverage of a drug (identified by a particular National Drug Code (NDC)) 

in question (20% of rejected claims, on average across the 16 PDPs); no history record on 

file (16%); and refill too soon (14%). According to LTCPs, some rejected claims result 

from the fact that individuals transition in and out of nursing homes and that coverage 

and institutional status may not be reflected in eligibility data immediately. Importantly, 

the data on which the table is based only include claims that were in a rejected status as 

of the end of 2006; in other words, claims that were initially rejected and then resolved 

do not appear in the data. This feature might explain why prior authorization seems 

relatively low (6% of rejected claims) compared to what had been communicated to us 

about its relative burden. 

Exhibit 4 also details “reject ratios” across PDPs, providing a sense of the 

variation in claims rejection rates across plans. The reject ratios convey the relative 

portion of claims rejections by each plan. For example, the reject ratio of Plan A implies 

that, relative to its claims volume, its share of rejected claims is 0.39 times the average 

rate. This share varies substantially across the listed plans (from 0.23 to 3.54). If a 

LTCP has an average Part D claims rejection rate of around 4% (an estimate consistent 

with LTCP interviews), the corresponding rejection rates would vary between 1-14% 

across plans. 

Even in the context of empirical data such as those detailed above, stakeholders 

have differing views on the factors driving claims rejections. For instance, on 

documenting previously administered therapies, LTCPs pointed to instances where 

23
residents had tried and failed medications before admission to the nursing home, but with 

no documented medical history on the patient, plans wanted such residents to try 

inappropriate medications first. In contrast, some PDP representatives questioned 

whether LTCPs could focus more energy moving individuals to alternate therapies within 

what they perceived to be relatively generous formularies. 

Like other aspects of the Part D benefit, LTCPs and PDPs have struggled with 

numerous administrative complexities associated with transitioning to the new benefit. 

Many of these issues have improved over the course of the program, but others have 

remained. One matter LTCPs claim still to be hampered by is questionably withheld copayments and other difficulties emanating from PDPs’ inability to identify reliably when 

individuals are (a) full benefit duals and (b) nursing home residents. In addition, CMS 

guidance requires that medication copayments be charged for dually-eligible nursing 

home residents in the first calendar month of institutionalization 

(http://questions.cms.hhs.gov, Answers 7907 and 7042). Not all LTCPs pointed to this as 

a major financial liability, although several raised the issue as a persistent and growing 

financial burden. Both LTCPs and PDPs pointed to lag times between state and CMS 

reporting and the speed with which CMS’s information system is updated as a major 

contributing factor to the problem. 

Finally, meshing LTCP and PDP administrative practices has been challenging 

simply because of the distinct approaches each entity traditionally has used for billing 

and dispensing. A common refrain from almost every nursing home, LTCP, and nursing 

home clinician with whom we spoke was that PDPs (and, indeed, Part D more broadly) 

were oriented to the retail community setting. In response, some PDPs expressed 

24
frustration about LTCPs’ willingness and preparedness to deal with basic traits of the 

commercial insurance world. A typical example of such a disjuncture pertains to the 

practice of post-consumption or retrospective billing (i.e., billing that occurs after a drug 

is dispensed, usually at the end of the month or at the first of the next month), common 

among LTCPs under retrospective Medicaid payment. PDPs, used to real-time billing 

practices in the commercial setting, are required to accommodate post-consumption 

billing under Part D guidelines, but some noted that the practice increases the possibility 

for safety issues (e.g., if prior authorization is not received prior to dispensing) and 

disputes over rejected claims for drugs already dispensed. Many interviewees described 

Part D as a poor fit for the nursing home setting. A physician suggested having a few 

PDPs that served only the LTC market as one option; alternatively, the nursing home 

sector could be “carved out” from the rest of Part D, with PDPs competing to serve 

institutional beneficiaries in a given area. A nursing home representative suggested 

requiring a single formulary for nursing home patients. 

Nursing homes. The initial transition to Part D was likely the most difficult 

period for nursing homes, with the majority of residents-and all duals-switching within a 

short time period. Beyond the initial transition costs of moving to Part D (e.g., educating 

staff about how the new benefit worked, educating residents and families about plans, 

and identifying the plans into which residents were enrolled), the financial impact of Part 

D on nursing homes seems to center in two areas, the indirect costs of coordinating drug 

provision across multiple PDPs and the direct costs of non-covered medications. Our 

focus is primarily on the latter of these concerns. 

25
Similar to LTCPs, nursing home providers complained about the increased 

administrative burden of Part D that has fallen primarily on nursing home physicians and 

nurses who help coordinate paperwork on prior authorizations, exceptions processes, and 

appeals. Providers were unable to estimate the cost of the additional burden on staff 

financially, and most stated that they dealt with the challenge through existing personnel 

(e.g., claiming that Medicaid reimbursement levels were insufficient to pay for additional 

staff). Not surprisingly, nursing home chain providers pointed to variation across 

member facilities in the ability to absorb and perform these additional responsibilities. 

The long-term administrative and financial burden of the MMA on nursing homes 

depends largely on their contractual relationships with LTCPs. Most nursing homes will 

rely on LTCPs for assistance in working across PDP formularies, prior authorization, and 

appeals processes. In characterizing LTCPs role under Part D, nursing homes expressed a 

general expectation that LTCPs would help ensure that residents’ prescription drug needs 

are met, that facilities’ prescription practices and documentation were in compliance with 

state and federal requirements, and that exposure to non-covered drugs was minimized. 

Most nursing homes expressed satisfaction with their LTCPs on their core responsibility 

of dispensing medications and ensuring compliance with survey regulations; however, 

some expressed frustration in how well their LTCPs anticipated challenges under Part D 

and how well they have navigated PDP requirements and coverage variations. Peripheral 

to Part D but relating to the matter of survey compliance, nursing home representatives 

pointed to the likely need for LTCPs and consultant pharmacists to play an expanded role 

in meeting newly revised survey guidelines on unnecessary drugs, pharmacy services, 

26
and drug regimen review (commonly referred to as “the new pharmacy F-tags”) that were 

effective December 18, 2006. 

As discussed above, non-covered drugs have been a concern for LTCPs in the 

first year of Part D. Nursing homes are also attuned to this issue, in part because of their 

clinical responsibilities under existing statute, which were raised by multiple 

stakeholders. In particular, the Nursing Home Reform Law, passed under the Omnibus 

Budget Reconciliation Act of 1987, established standards of care for nursing home 

residents and stated that the nonavailability of program funding did not relieve facilities 

of this obligation.20 Importantly, these requirements are driven by residents’ clinical care 

plans, meaning that if physicians choose not to switch residents’ medication orders, 

facilities are required to adhere to the written treatment plan. Beyond regulatory 

requirements, however, the cost of non-covered drugs are an issue for LTCPs and nursing 

homes to assign financially. In addition, the challenge of minimizing these costs is a 

shared challenge, requiring nursing homes and LTCPs to partner in ways that they 

haven’t before. 

It should be noted that non-coverage of medications may be Part D program-wide 

or PDP-specific. It is important to distinguish between the two, as they raise distinct 

policy issues. For instance, Medicare Part D excludes coverage for benzodiazepines, 

barbiturates, over-the-counter medications, prescription vitamins, and cough and cold 

remedies. States can provide coverage for these drugs, many of which were previously 

covered by state Medicaid programs (http://www.cms.hhs.gov/States/EDC/list.asp); 

however, the extent to which this coverage is sufficient and the extent to which nursing 

homes have to pay LTCPs for these medications are currently unclear. In contrast, when 

27
a prescribed, Part D-allowable drug is not on a plan formulary, three options (apart from 

going without the drug) seem available to the nursing home – switch the individual to a 

therapeutically-equivalent drug that is covered; appeal to the plan for coverage of the 

medication; or encourage the individual to enroll in another plan. As mentioned above, 

non-covered medications may be dispensed in advance of pursuing one of these alternate 

routes for coverage. 

How nursing homes and their LTCPs are dealing with the non-covered drug issue 

seems to vary across providers. With the caveat that some providers were reluctant to 

characterize financial arrangements with their pharmacies, some LTCPs seem to be 

shouldering the costs of non-covered medications at this point (e.g., focusing most efforts 

to recoup these costs on PDPs), while others have passed these costs to nursing homes 

earlier in the process. In any case, one would expect the costs of unpaid medications and 

increased LTCP administrative costs to be passed down to nursing homes eventually, 

either directly in payments for non-covered drugs or indirectly in higher service and drug 

prices for residents whose drugs are covered under Medicare Part A. 

These changes signify a shift in LTCP-nursing home contractual relations. Prior 

to Part D, LTCPs viewed nursing homes primarily as clients to whom they were 

delivering a service. With Part D, nursing homes are still clients of the LTCPs, but they 

are also partners. In particular, the financial implications of Part D for nursing homes 

and LTCPs are intertwined, with each depending on the other’s performance under the 

benefit. This realignment is still evolving, but it has already spurred changes in the way 

facilities and pharmacies interact. For instance, several stakeholders mentioned the 

importance of better integrating information systems to ensure consistent communication 

28
between the nursing home and the pharmacy with PDPs. It has also spurred some 

changes in the way medications are dispensed vis-à-vis coverage determinations, which 

we will discuss below in the clinical impact section. At this point, it is unclear whether 

and how these changes will affect nursing home-LTCP contracting. Although nursing 

home providers were reluctant to discuss the topic in detail, they did note that LTCP 

contracts were trending toward shorter time periods (e.g., a few large providers cited 

contract periods of a few years, while some smaller providers noted annual contracts with 

30-day cancellation policies), a change they considered to be positive. 

Competitive Impact of Part D in the LTCP Sector 

Prior to Part D’s implementation, CMS predicted that the Medicare Part D 

program would “improve competition in the LTC pharmacy market while preserving the 

pharmacy relationships and levels of service that LTC facilities now enjoy.”21 CMS 

anticipated that the MMA’s changes would help level the playing field between large and 

small LTCPs.22 Specifically, CMS expected that LTCP rebates would disappear over 

time, resulting in the unbundling of LTCP dispensing and service fees and greater 

transparency in LTCP pricing. As a result of these changes, CMS predicted there would 

be entry into the LTCP market by smaller organizations, resulting in increased price and 

quality competition. 

Current Level of Competition in the Market. A variety of stakeholders, including 

LTCP representatives, nursing home providers, and analysts, expressed the view that the 

LTCP market continues to be very competitive after Part D’s implementation despite the 

fact that almost half of all nursing home beds are served by a single LTCP (Omnicare) 

29
and almost two-thirds by the three largest LTCPs. As evidence of competition in the 

market, stakeholders pointed to the lack of barriers to entry in the market and the high 

rate of “bed churning” (i.e., nursing home beds that switch from one LTCP to another). 

Importance of Economies of Scale. A number of stakeholders, including several 

analysts, agreed that economies of scale remain an important feature of the LTCP 

industry after Part D’s implementation. Economies of scale enjoyed by the larger LTCPs 

include those related to the ability to buy in greater volume (and thus negotiate lower 

drug prices and/or larger rebates from pharmaceutical manufacturers), the lower costs 

associated with performing their own repackaging of medications for LTC settings, 

greater bargaining power in negotiations with PDPs over dispensing fees, and the ability 

to absorb the receivables that have accrued as a result of Part D implementation (e.g., 

copayments charged for institutionalized dual eligibles). 

In the past, larger LTCPs had an important competitive advantage because they 

were able to leverage their size to negotiate large rebates from manufacturers. These 

rebates reportedly were shaped additionally by market share targets (e.g., ensuring that a 

certain percentage of prescriptions in a class were for a particular drug). Importantly, in 

the nursing home environment, consultant pharmacists could help ensure a high degree of 

compliance with drugs on the LTCP formulary. Bank of America Securities analyst 

Robert Willoughby was quoted in a December 2006 Wall Street Journal article that 

Omnicare’s size helped it to negotiate “fantastic rebates” from drug manufacturers.23 

However, several stakeholders noted that the use of group purchasing 

organizations, or “GPOs,” (e.g., GeriMed, Innovatix, and MHA) by smaller LTCPs has 

increased the negotiating power of smaller LTCPs, allowing them to negotiate lower drug 

30
prices and helping to level the playing field between small and large LTCPs with respect 

to pricing. As noted above, the member pharmacies of the largest GPO (MHA) together 

serve close to 1 million beds (including assisted living beds, which account for an 

estimated 20-25% of its beds served), which substantially increases the bargaining power 

of smaller local and regional pharmacies in price negotiations with manufacturers.24 The 

other two LTCPs (GeriMed and Innovatix) together account for approximately 1/3 of the 

privately-held independent pharmacies.24 

LTCP rebates have not been disallowed under Part D, but they must be reported 

to the PDPs with which LTCPs contract, which, in turn, must report the rebates to CMS. 

These price concessions should be deducted when calculating allowable reinsurance and 

risk corridor costs for PDPs. Furthermore, as noted above, it is the PDPs and not LTCPs 

that have legislative authority to design formularies and negotiate with manufacturers 

under Part D. In fact, CMS has hinted that rebates received by LTCPs could “raise 

significant fraud and abuse concerns” under Federal anti-kickback statutes.25 Yet, in 

practice, LTCP formularies and consultant pharmacists still likely influence nursing 

home prescribing practices on the ground. In the context of PDP formularies and Part D 

requirements (e.g., the six protected drug classes), this influence likely varies across 

drugs and classes 

(http://www.healthstrategies.com/download/document.cfm?d=2145&download=1). 

Based on our stakeholder conversations, it appears that manufacturers continued 

to pay rebates in the first year of the program but also that rebates were anticipated to 

diminish somewhat in the coming years. Due to the sensitivity of the topic, it was 

difficult to get a sense of the magnitude of rebates’ importance toward the profitability of 

31
LTCPs. One small regional LTCP estimated that rebates represent approximately 25% of 

the LTCP’s bottom line; no other LTCPs (including the large LTCPs with potentially 

greater negotiating power with drug manufacturers) provided an estimate. 

LTCPs and some analysts who cover the sector questioned why federal 

policymakers singled-out rebates to LTCPs and not those in other parts of the drug supply 

chain (e.g., PDPs). Federal policymakers have viewed rebates to LTCPs as representing 

a conflict of interest that may be particularly problematic given the institutional 

arrangements in long term care and the vulnerability of the institutionalized population. 

According to this view, LTCPs had considerable power to move market share to 

medications for which they negotiated higher rebates before Part D, even if lower-cost 

alternatives were more beneficial for patients clinically. According to some federal 

policymakers, these incentives had the potential to trigger overutilization, adverse drug 

events, and increased Medicare expenditures. While neither PDPs nor LTCPs have a 

direct financial incentive to ensure that patients receive the most beneficial medications 

under Part D, PDPs (unlike LTCPs) do have direct financial incentives to control drug 

expenditures because PDPs share financial risk for drug costs with the Medicare 

program. If rebates paid to LTCPs diminish or disappear, LTCPs questioned whether 

these rebates would actually accrue to the benefit of PDPs, beneficiaries, or the Medicare 

program more generally as opposed to the benefit of pharmaceutical manufacturers. 

LTCPs and analysts mentioned that LTCPs would likely attempt to recoup lost revenue 

through increased dispensing fees to PDPs and increased service costs to nursing homes 

if rebates decline. It is unclear whether the considerable market power of the larger 

32
LTCPs would allow them to maintain their margins in this manner even without the 

rebates. 

In addition to helping level the playing field between large and small LTCPs in 

price negotiations with drug manufacturers, GPOs have also done so with respect to PDP 

negotiations over dispensing fees. In anticipation of Part D, GPOs began offering what 

they refer to as “network” services (provided through a separate business entity) that 

involve negotiating contracts with PDPs. For example, MHA created its Long-Term 

Care Network in 2004 to contract with PDPs under Part D. The Network currently has 

over 650 member pharmacies, or approximately 2/3 of all privately-held, independent 

LTCPs.24 Because MHA has the legal authority to act on behalf of its members in 

matters related to contracts with PDPs, the large number of beds represented by MHA 

has given the GPO considerable negotiating power with PDPs. The emphasis placed on 

adequacy of a PDP’s LTCP network in the Part D negotiations may also have increased 

GPOs’ negotiating power with PDPs due to the presence of GPO pharmacy members in 

rural areas. 

According to one GPO representative, limited negotiating power with PDPs over 

LTCP dispensing fees, which are generally lower for smaller pharmacies than larger 

pharmacies for some PDPs, was the major competitive disadvantage that its members still 

faced. Most PDPs we interviewed felt that dispensing fee levels represented proprietary 

information but stated that the dispensing fees they negotiated were similar across 

LTCPs. One PDP representative stated that the PDP’s dispensing fees varied based on 

negotiations with each LTCP, with a differential of approximately 10-20 cents per 

prescription. It is unclear the extent to which the size of the GPO affects its negotiating 

33
power over dispensing fees (i.e., whether members of larger GPOs face a smaller 

dispensing fee differential relative to large LTCPs). 

Although stakeholders felt that economies of scale remained important in the 

LTCP industry after Part D’s implementation, two regional LTCPs felt that an advantage 

of smaller LTCPs over larger LTCPs was the ability to better personalize their services 

and communicate directly with patients, physicians, and administrators. They noted the 

importance of local relationships between pharmacists, physicians, and nursing home 

administrators in this business as being particularly helpful in the context of Part D 

implementation. Several interviewees also noted that the decentralized billing systems of 

some of the larger LTCPs (especially Omnicare, whose repeated acquisitions have 

resulted in decentralized billing) have created billing problems not experienced by 

smaller pharmacies. 

New Market Exit or Entry after Part D. Several stakeholders speculated that 

smaller pharmacies may have had greater difficulty than larger pharmacies (which are 

likely to have larger reserves and greater cash flow) in holding receivables resulting from 

Part D copay charges for institutionalized duals (who face no copayments after the first 

30 days of institutionalization) and rejected claims while these issues were being resolved 

with PDPs. However, there were mixed accounts of whether there has actually been 

either additional entry or exit in the LTCP industry since Part D was implemented. For 

example, one nursing facility representative noted that four small LTCPs with which the 

organization had contracted in the past had dropped out of the market this year (unclear 

whether the exits were due to acquisition by a competitor or closure). A representative of 

the LTCP stakeholder group and an analyst also thought there had been a low level of 

34
drop out by smaller LTCPs, although neither could provide documentation. A GPO 

representative noted that none of its members had exited the market due to issues related 

to Part D. Another stakeholder noted that although he/she was aware of little drop out 

thus far, smaller LTCPs were ripe for acquisition and further consolidation was likely. 

An analyst with whom we spoke saw no evidence of entry in 2006 but noted that some 

regional LTCPs were trying to position themselves to increase market share under Part D. 

Another stakeholder predicted future entry by private equity-based firms in the near 

future, particularly on the assisted living side of the market. 

In theory, there could be entry into the LTCP market by PDPs, retail pharmacies, 

or nursing homes looking to diversify (vertical integration). No stakeholders were aware 

of other types of organizations besides institutional pharmacies entering the market to 

assume the functions of a LTCP. One PDP representative stated that a PDP was unlikely 

to try to assume the LTCP role on its own because of the importance of local delivery and 

relationships within nursing facilities, although a partnership with an institutional 

pharmacy might make sense for the assisted living population. Another PDP 

representative said his/her organization had no interest in pursuing this line of business. 

A third PDP representative also noted no current interest on the part of his organization, 

although the individual thought that PDPs with specialty pharmacy distribution capacity 

might consider using this type of model for entering the LTCP market in the future, given 

that the specialty pharmacy and LTCP lines of business are somewhat similar (unlike the 

highly-automated mail order pharmacy business). Nursing home representatives also 

expressed no interest in performing LTCP functions internally. An analyst noted that a 

large retail chain could choose to enter the market in the future, either by starting its own 

35
division or by acquiring Omnicare. Although Omnicare is very large in the LTCP space, 

it is a relatively small company and could be acquired easily by a larger retailer, the 

analyst noted. 

 Price Competition for Part D Now and in the Future. As noted in the Appendix, 

nursing home providers and analysts both pointed out that the two most important factors 

influencing the choice of a LTCP by a nursing facility or chain before Part D were: 1) 

performance of core LTCP functions, e.g., whether pharmacy services and medications 

are delivered in a timely fashion, and 2) the pricing of drugs for residents covered by 

Medicare Part A (for whom the nursing facility is paid a per diem that covers all care 

including prescription drugs). These same stakeholders reported that performance of core 

LTCP functions and price of drugs for Part A covered stays remained the most important 

factors in 2006, while Part D pricing and coverage issues were a secondary concern. 

Although pricing for Part D business has not been a primary factor for nursing 

homes selecting a long-term care pharmacy to date, pricing strategies of LTCPs and the 

level of price competition in the Part D market may change over time, depending on a 

number of factors. A substantial decrease or elimination of rebates paid to LTCPs in the 

future may, as some predict, lead to the unbundling of fees charged to both nursing 

homes and PDPs. The greater transparency of LTCP fees charged to these parties could 

serve to increase price competition in the market, as some federal policymakers expect, 

or could serve to disadvantage smaller LTCPs to some extent. For example, larger 

LTCPs might have an efficiency advantage in terms warehousing, packaging, and 

dispensing capabilities.. Alternatively, smaller LTCPs might be able to run more 

specialized programs targeted at particular nursing homes for a lower cost, just as some 

36
local pharmacies can do now. Although large LTCPs will clearly lose a major component 

of their competitive advantage if their rebates shrink or disappear, the extent to which 

scale economies will leave them advantaged is unknown. 

Finally, the reduction or elimination of rebates may also result in LTCPs passing 

increased administrative costs or a greater share of costs for items like consultant 

pharmacist services (which are generally not reimburseable through Part D26) onto the 

nursing homes with which they contract. If they occur, these changes would likely 

accompany higher LTCP and consultant pharmacist costs that result from the revised 

pharmacy F-tags mentioned above. Diminished rebates could also lead to higher drug 

prices for Part A residents from LTCPs, something only one nursing home provider 

claims to have experienced just prior to Part D’s start. Similarly, as risk corridors widen 

for PDP payments, PDPs may have greater incentive to press LTCPs for lower costs, 

which could lead LTCPs to charge higher prices to their nursing home customers.27 

Although PDPs reported that payments for institutionalized enrollees currently seem 

adequate, plan representatives did not have views about the anticipated adequacy of 

payments in future years (e.g., as risk corridors widen). 

Conclusions

Part D represents a substantial departure from how prescription drugs were 

previously financed and administered in nursing homes, and nursing home providers and 

LTCPs have struggled in adapting to some of these changes. At the same time, meeting 

the needs of nursing home residents and working with LTCPs are new challenges for 

most PDP carriers as well. Although LTCPs, nursing homes and their clinicians, and Part 

37
D plans will gain experience with the benefit, its structure, and how it works in the 

nursing home setting over time, stakeholders whom we interviewed identified a range of 

longer-term issues and questions that merit attention as the benefit proceeds. Nursing 

home residents are a particularly vulnerable population, and vigilance is needed to ensure 

the benefit works well in meeting their needs. 

In sum: 

• The overall fit between Part D and the nursing home pharmacy sector is a matter of 

contention among the stakeholders we interviewed. Many stakeholders characterized 

the Part D benefit as being a better fit for community-based beneficiaries who access 

medications in retail pharmacies than for institutionalized beneficiaries. 

• Medicare beneficiaries in nursing homes have the same freedom to choose plans as 

community-based beneficiaries; however, stakeholder interviews highlighted a 

tension between balancing this freedom-of-choice and allowing nursing home 

providers to encourage enrollment into plans they perceive to be a better fit with 

residents’ medication needs and that minimize facility and pharmacy administrative 

burden. 

• Part D increased the variation around formularies and drug management processes for 

residents at the facility level. In general, stakeholder interviews highlighted the 

tension between cost-saving strategies used by PDPs such as utilization management 

and the burden these processes can place on clinical and pharmacy staff. 

• Formulary coverage appears adequate for many medications used by nursing facility 

residents, and the special protections required for six medication classes plus Part D 

transition coverage requirements helped to shield residents from any coverage 

38
limitations. However, stakeholders noted what they consider to be important 

exceptions to overall formulary adequacy for the institutionalized population and 

instances where the application of utilization management policies were particularly 

problematic. 

• Empirical analyses are needed to assess the impact of Part D on utilization patterns, 

outcomes, and quality of care. Noting this important caveat, stakeholders pointed to 

within-class drug utilization shifts but did not report a change in gross drug 

utilization. To date, stakeholders have not perceived any adverse impact on resident 

outcomes or quality of care attributable to Part D. 

• Stakeholders indicated that Part D’s financial impact on nursing homes is still 

evolving. Part D altered the relationship between nursing homes and their LTCPs, 

introducing a tension between facilities’ need to dispense medications quickly and 

LTCPs assuring coverage for those drugs. Nursing homes and LTCPs both have an 

incentive to minimize prescriptions for non-covered drugs, but how the financial 

impacts of these costs will be shared by these entities depends on nursing homeLTCP contracting, which will likely continue to vary across providers. 

• The impact of Part D on the future competitiveness of the LTCP sector is also 

evolving. Although the LTCP sector is concentrated, financial analysts with whom 

we spoke characterized the sector as competitive, with few barriers to entry. The 

prominent role of Group Purchasing Organizations (GPOs) and LTCP network 

organizations in particular has helped smaller LTCPs access more favorable pricing 

from manufacturers and PDPs such that most small LTCPs have joined these 

organizations. 

39
• Consensus among stakeholders was that LTCP rebates –which seem to have 

continued to date – would likely decline in future years. CMS has not disallowed 

LTCP rebates under Part D, but it has expressed strong reservations about them, 

raising the possibility that they could constitute fraud and abuse. 

• If LTCP rebates decline or disappear, these changes could lead to increased 

transparency of pricing and perhaps increased price competition. Although reduced 

rebates would likely have a greater negative impact on larger LTCPs, these entities 

would still likely maintain certain economies of scale that might be advantageous in 

terms of service pricing, dispensing costs, and negotiating power. 

• A reduction or elimination of rebates also could result in LTCPs passing increased 

administrative costs or a greater share of costs for items like consultant pharmacist 

services onto the nursing homes with which they contract. 

• PDPs generally did not express a reluctance to have institutionalized enrollees in their 

plans; however, there seemed to be a level of uncertainty among PDPs about the 

adequacy of payment and risk adjustment going forward as risk corridors widen. 

Reassessing the methodology of risk adjustment and possibly making future 

refinements could be important to ensure adequate availability of plans for dual 

eligible beneficiaries. 

40
Acknowledgements 

We are grateful to the Medicare Payment Advisory Commission for funding this 

work. Dr. Huskamp also acknowledges funding from the National Institute of Mental 

Health (K01 MH66109). In particular, we thank Rachel Schmidt and Joan Sokolovsky at 

MedPAC for overall project guidance and support. The views expressed in the report are 

those of the authors and do not imply an endorsement by MedPAC or its Commissioners. 

We are also indebted to Laurie Coots for excellent research assistance. 

41
References

1. Avorn J, Gurwitz JH. Drug use in the nursing home. Ann Intern Med. Aug 1 

1995;123(3):195-204. 

2. The Lewin Group. Review of Current Standards of Practice for Long-Term Care 

Pharmacy Services: Long-Term Care Pharmacy Primer. Baltimore, MD: US 

Centers for Medicare and Medicaid Services; December 30, 2004 2004. 

3. Stuart B, Simoni-Wastila L, Baysac F, Shaffer T, Shea D. Coverage and use of 

prescription drugs in nursing homes: implications for the medicare modernization 

act. Med Care. Mar 2006;44(3):243-249. 

4. Jones A. The National Nursing Home Survey: 1999 summary. Vital Health Stat 

13. Jun 2002(152):1-116. 

5. U.S. Office of the Inspector General. Prescription Drug Use in Nursing Homes.

Washington, D.C.: U.S. Department of Health and Human Services; 1997. OEI06-96-00080. 

6. Gurwitz JH, Field TS, Avorn J, et al. Incidence and preventability of adverse drug 

events in nursing homes. Am J Med. Aug 1 2000;109(2):87-94. 

7. Institute of Medicine (U.S.). Committee on Nursing Home Regulation. Improving 

the quality of care in nursing homes. Washington, D.C.: National Academy Press; 

1986. 

8. Mendelson D, Rajeev R, Abramson R, Tumlinson A. Prescription Drugs in 

Nursing Homes: Managing Costs in a Complex Environment. Washington, D.C.: 

George Washington University; November 12, 2002 2002. 

9. Gurwitz JH, Field TS, Judge J, et al. The incidence of adverse drug events in two 

large academic long-term care facilities. Am J Med. Mar 2005;118(3):251-258. 

10. Long-Term Care Pharmacy Association website: http://ltcpa.org/. Accessed 

March 23, 2006. 

11. Medicare Prescription Drug Benefit Final Rule. 42 CFR Parts 400, 403, 411, 417, 

and 423. Federal Register Vol.070, No.018. January 2005. 

12. State Medicaid programs also receive rebates from manufacturers based on the 

best price in the market. These rebates are separate from any rebates that LTCPs 

obtain. 

42
13. However, Part D coverage explicitly excludes specialized services provided in the 

administration of drugs after they are dispensed and delivered from the LTCP 

(e.g., drug regimen review). 

14. Stevenson D, Huskamp H, Newhouse J, Keating N. Medicare Part D and Nursing 

Home Residents. Journal of the American Geriatrics Society. Forthcoming. 

15. Medicare Marketing Guidelines for: Medicare Advantage Plans (MAs), Medicare 

Advantage Prescription Drug Plans (MA-PDs), Prescription Drug Plans (PDPs), 

and 1876 Cost Plans. Baltimore, MD: U.S. Centers for Medicare and Medicaid 

Services; 2006. 

16. CMS requires plans to cover “all or substantially all” antidepressants, 

anticonvulsants, antipsychotics, anticancer, immunosuppressant, and HIV/AIDs 

drugs. Plans are not required to cover multisource brands of the same molecule, 

extended release products, or all dosages of a molecule in these classes, however. 

17. Long Term Care Physicians Still Experience Difficulties in Prescribing Selected 

Drugs for Patients in Medicare Part D: American Medical Director's Association; 

October 12, 2006: http://www.amda.com/news/releases/2006/101206.cfm. 

18. Leavitt M. Report to Congress: Review and Report on Current Standards of 

Practice for Pharmacy Services Provided to Patients in Nursing Facilities.

Washington, D.C.: US Department of Health and Human Services; 2005. 

19. Pear R. Pharmacists say drug plans threatens their livelihood. New York Times.

March 13, 2006, 2006: A 12. 

20. Brewer B. Medicare drug plans create more work. Wall Street Journal. April 4, 

2006. 

21. U.S. Centers for Medicare and Medicaid Services. High-Quality Access to LongTerm Care Pharmacies: Center for Medicaid and Medicare Services; 2005. CMS 

Issue Paper #26. 

22. Medicare Prescription Drug Benefit, Final Rule. 42 CFR Parts 400, 403, 411, 

417, and 423. Federal Register Vol.070, No.018. January 2005. 

23. Lueck S. In Nursing Homes, A Drug Middleman Finds Big Profits. Wall Street 

Journal. December 23, 2006: A1. 

24. Kutner J, Kramer A, Mortimore E, Feuerberg M. Hospitalization of nursing home 

residents: A qualitative study. Annals of Long-Term Care. 1998;6(1):1-10. 

43
25. This topic is covered in detail on the CMS Question and Answer website 

(http://questions.cms.hhs.gov/). In particular, Answer 6326 and 6688 detail the 

position of CMS as directed by statute. 

26. Part D coverage explicitly excludes specialized services provided in the 

administration of drugs after they are dispensed and delivered from the LTCP 

(e.g., drug regimen review). 

27. Doctrow J, Gommel E, Streckfus K. A Lump of Coal for Omnicare from the Wall 

Street Journal: A Stifel Nicolaus Analyst Report December 26 2006. 

44
Exhibit 1. Nursing Home Beds by LTCP 2006 

N=1,725,326

Omnicare

49%

smaller local and 

regional retail 

and LTCPs

32%

KPS 6% PharMerica

13%

`

Sources: Total nursing home beds obtained from AHCA’s June 2006 estimate at 

http://www.ahca.org/research/oscar/rpt_certified_beds_200606.pdf, accessed 01/11/2007.

Omnicare, PharMerica, and KPS estimates obtained through January 2007 communications with 

representatives and are estimated. 

45
Exhibit 2: The Long-Term Care Pharmacy Market before and after Medicare Part D

--------------------Before Medicare Part D-------------------- --------------------After Medicare 

Resident 

Payer Type

% of 

Totala 

Rx Drug 

Coverage Paymentb 

Formulary/ 

Utilization 

Management Contractingb 

Rx Drug 

Coverage Paymentb Formulary 

Medicaid 62% Medicaid 

Medicaid paid 

LTCP on 

discounted FFS 

basis outside of 

daily rate

LTCP/NH 

formulary and 

Medicaid prior 

authorization 

and preferred 

drug list

NH typically contracted with 

single LTCP; LTCP contracted 

with drug manufacturers, often 

securing rebates; LTCP 

contracted with state Medicaid 

program for payment 

All duals 

automatically 

enrolled in 

Medicare Part D

Part D plans 

pay LTCPs 

on negotiated 

basis

Multiple Part 

formularies 

and utilizatio

manageme

tools

Medicare 15%

Medicare 

Part A 

(SNF)

Medicare bundled 

Rx drugs into 

prospective perdiem rate; NH paid 

LTCP from bundled 

rate

LTCP/NH 

formulary 

NH typically contracted with 

single LTCP; LTCP contracted 

with drug manufacturers, often 

securing rebates; LTCP 

contracted with NH for payment 

Unchanged Unchanged Unchange

Private Pay 23% private funds

Residents without 

supplemental 

coverage paid 

OOP; for residents 

with supplemental 

coverage, thirdparty coverage paid 

LTCP on FFS basis 

LTCP/NH 

formulary

NH typically contracted with 

single LTCP; LTCP contracted 

with drug manufacturers, often 

securing rebates; LTCP 

contracted with third-party 

payer or accepted OOP 

payments from resident 

If private pay 

resident doesn't 

enroll in Part D:

Unchanged Unchanged Unchange

If private pay 

resident enrolls in 

Part D:

Medicare Part D

Part D plans 

pay LTCPs 

on negotiated 

basis

Multiple Part 

formularies 

and utilizatio

manageme

tools

Notes:

a. Authors' calculations using 2004 On-Line Survey Certification and Reporting (OSCAR) Datab. Payment and contracting arrangements described are typical in the LTCP market but are not universal. See paper text for more detail. FFS=fee-for-service; LTCP=long-term care pharmacy; NH=nursing home; OOP=out-of-pocket; SNF=skilled nursing facility
Exhibit 3: Top 20 Drugs Rejected by Part D Plans, 2006. Data from One LTCP.*

REJECT CODE GIVEN - % OF TOTAL REJECTS FOR LINE ITEM

C

NO HISTORY PRIOR CLAIM PLAN CLAIM CLAIM 

NDC NOT RECORD REFILL AUTHORIZATION HAS BEEN LIMITATIONS NOT TOO T

BRAND NAME COVERED(2) ON FILE(2) TOO SOON(2) REQUIRED(2) PAID(2) EXCEEDED(2) PROCESSED(2) OLD(2) 

LEXAPRO 49.1% 20.0% 6.6% 3.2% 2.3% 2.3% 0.0% 3.4% FUROSEMIDE 4.0% 30.3% 18.2% 0.0% 10.2% 0.0% 0.0% 8.3% WARFARIN SODIUM 4.4% 40.0% 23.8% 0.0% 8.8% 0.2% 0.0% 5.9% OMEPRAZOLE 10.9% 17.6% 15.3% 13.2% 7.1% 15.0% 0.0% 1.3% HYDROCODONE W/ACETAMINOPHEN 8.5% 34.2% 10.3% 0.0% 8.0% 4.3% 0.0% 6.6% ARICEPT 7.2% 13.3% 7.2% 33.6% 2.6% 7.8% 0.0% 10.1% FENTANYL 66.5% 10.2% 4.7% 0.0% 1.6% 6.5% 0.3% 0.9% SEROQUEL 1.9% 40.3% 14.0% 3.2% 9.7% 5.5% 0.0% 7.5% LEVAQUIN 37.7% 13.1% 5.1% 0.0% 10.8% 1.3% 17.8% 1.3% LISINOPRIL 7.7% 22.1% 15.9% 0.0% 13.3% 5.9% 0.0% 4.1% LEVOTHYROXINE SODIUM 5.7% 26.4% 18.8% 0.0% 12.3% 0.8% 0.4% 6.1% NAMENDA 3.1% 11.2% 10.4% 32.3% 6.5% 10.4% 1.5% 8.1% PROCRIT 7.1% 1.6% 0.0% 82.1% 0.0% 2.4% 1.6% 4.0% NORVASC 10.0% 19.2% 10.8% 0.0% 5.2% 6.8% 28.4% 2.4% PREVACID 49.4% 5.3% 3.3% 2.5% 0.8% 6.2% 15.6% 0.8% K-TAB 86.6% 2.1% 1.7% 0.0% 2.5% 0.4% 0.0% 1.3% XENADERM 81.0% 1.3% 0.8% 0.0% 1.7% 0.4% 0.0% 3.0% RISPERDAL 4.7% 28.9% 20.3% 0.0% 9.1% 9.5% 0.0% 3.9% LIPITOR 6.3% 14.0% 10.8% 0.0% 4.1% 15.8% 18.5% 5.4% RANITIDINE HCL 40.8% 22.9% 5.0% 1.4% 6.9% 0.0% 1.8% 5.0% TOP 20 23.6% 19.9% 10.7% 8.2% 6.3% 5.0% 3.6% 4.6% TOTAL 27.4% 18.4% 9.1% 6.5% 5.4% 5.0% 5.0% 4.3% *Data on claims in rejected status as of December 2006 provided by one LTCP in January 2007. (1) Number of times line item is rejected divided by the total number of rejected claims.(2) Represents the percentage of rejects attributable to a particular reject code for each line item, i.e.. 49.1% of Lexapro rejects were for NDC not covered.NDC = National Drug Code
Exhibit 4: Part D Claims Rejections for One LTCP, 2006*

Plan Rejection NDC No History Refill Claim Plan Prior Claim has No 

Rate Relative to the not Record on too too limitations authorization been Reject 

Part D Plan Average Plan(1) covered(2) File(2) soon(2) old(2) exceeded(2) required(2) paid(2) Code(2) p

Plan A 0.23 15.8% 19.2% 12.8% 26.8% 4.8% 0.0% 0.6% 8.0% Plan B 0.39 9.6% 38.8% 0.0% 8.6% 5.7% 3.9% 5.1% 5.2% Plan C 0.53 25.1% 27.7% 12.0% 0.0% 8.5% 4.5% 1.1% 2.6% Plan D 0.79 4.8% 5.1% 34.1% 0.5% 10.3% 2.9% 17.4% 5.5% Plan E 0.98 19.9% 19.7% 13.7% 19.7% 7.1% 2.4% 1.0% 4.6% Plan F 1.06 30.2% 23.8% 10.8% 1.0% 5.7% 5.3% 0.8% 4.3% Plan G 1.09 31.3% 4.0% 28.4% 0.0% 0.3% 0.9% 6.6% 2.3% Plan H 1.25 2.0% 10.3% 24.7% 12.8% 1.5% 20.7% 9.3% 2.9% Plan I 1.36 40.3% 40.2% 0.0% 0.3% 2.0% 4.7% 0.7% 4.4% Plan J 1.45 22.7% 3.9% 22.8% 7.2% 8.3% 8.8% 6.8% 4.7% Plan K 1.92 19.2% 0.5% 21.3% 0.0% 3.1% 23.1% 1.4% 1.6% Plan L 1.98 17.3% 5.9% 9.4% 37.4% 6.0% 8.9% 1.2% 1.3% Plan M 2.06 20.4% 9.9% 31.7% 0.0% 6.6% 14.6% 0.5% 1.7% Plan N 2.50 15.6% 16.2% 6.2% 32.8% 7.1% 10.6% 0.7% 3.3% Plan O 2.99 18.8% 0.0% 12.6% 7.4% 5.0% 0.0% 0.1% 4.0% Plan P 3.54 15.1% 7.4% 9.5% 33.3% 20.4% 1.3% 0.6% 0.2% TOTAL 20.3% 16.4% 13.9% 11.1% 6.0% 5.9% 3.6% 3.4% *Data on claims in rejected status as of December 2006 provided by one LTCP in January 2007. (1) Percentage of LTCP rejects attributable to a PDP divided by the percentage of the LTCP’s Part D claims filled by that same PDP. Ratio over (2) Represents the percentage of rejects attributable to a particular reject code for each line item, i.e. 15.8% of Plan A's rejects were for NDC not NDC=National Drug Code

Ratio over 1 is above average.
Appendix: Overview of the Long Term Care Pharmacy (LTCP) Industry 

Structure of LTCP Industry 

According to the Sanofi-Aventis Managed Care Digest, there were approximately 1,079 

LTCP providers in the U.S. in 2005, down from 1,148 in 2004.1 The industry is heavily 

concentrated, with three large LTCPs (Omnicare, PharMerica, and Kindred Pharmacy Services 

(KPS)) providing pharmacy services to approximately two-thirds of nursing home beds in the 

U.S. (Exhibit A-1). 

With respect to firm-size, the LTCP industry could be described as having four tiers: 1) 

Omnicare, 2) PharMerica and KPS; 3) smaller regional pharmacy chains; and 4) small local 

pharmacies. Omnicare, the largest LTCP, serves an estimated 850,000 nursing home beds and 

provides pharmacy services to approximately 1.4 million nursing home, assisted living facility, 

and other institutional beds in the U.S. and Canada.2 In addition to its LTCP business, 

Omnicare’s divisions include a contract research entity that provides clinical trials management 

and data analysis, infusion therapy services, specialty drug distribution services, and pharmacy 

benefit management services.3

 

The second tier includes the #2 and #3 firms in the industry. PharMerica, a division of 

the drug distributor AmerisourceBergen Corporation, is the second largest LTCP, serving 

approximately 234,600 beds.4

 The third largest LTCP is Kindred Pharmacy Services (KPS), a 

division of Kindred Healthcare, which operates hospitals, nursing homes and rehabilitation 

services throughout the U.S. KPS currently serves an estimated 105,000 beds, approximately 

100,800 of which are nursing home beds. During the first quarter of 2007, AmerisourceBergen 

and Kindred Healthcare are expected to spin off PharMerica and KPS, respectively, to create a 

single, publicly-traded firm. 

A-1
 The third tier of LTCP providers includes substantially smaller regional pharmacies, 

which tend to serve from a few thousand to 50,000 beds in either a single state or small number 

of states. Finally, the fourth tier of LTCP providers consists of small local institutional pharmacy 

providersa

 that serve only a few hundred or thousand beds in a defined geographic area. Because 

both regional and smaller local LTCPs (tiers 3 and 4) are not publicly-traded, it is difficult to 

obtain data on the number of beds served and financial performance for these providers. As 

noted below, most pharmacies in the third and fourth tiers are members of group purchasing 

organizations (GPOs), increasing their negotiating power with pharmaceutical manufacturers 

over drug prices and with PDPs over dispensing fees. The largest GPO (MHA) negotiates on 

behalf of an estimated 2/3 of pharmacies in these tiers, which together represent close to 1 

million beds (including both nursing home beds, assisted living beds and other institutional 

beds).5 As a result, the combined market power of member pharmacies rivals that of Omnicare. 

There has been considerable consolidation in the LTCP industry over the past decade. 

One analyst who studies the LTCP industry said that increased concentration in this industry 

mirrors that found in its customer base or other parts of the drug supply chain. In addition to 

consolidation by the larger LTCPs (e.g., Omnicare’s 2005 acquisition of NeighborCare, Inc., and 

its acquisition of other smaller LTCPs in recent years; the upcoming PharMerica/KPS merger), 

there has been an increased level of acquisitions by smaller regional LTCPs. 

Margins of LTCPs 

 

a

 Particularly in rural areas, some retail pharmacies also provide institutional pharmacy services. 

A-2
Among the three (soon to be two, after the PharMerica/KPS merger) largest LTCP 

providers, margins are highest for Omnicare, with an estimated margin of 11.3% in 2005.b The 

margin for Kindred was 10.9%.c PharMerica has lower reported margins, 5.0%, although this 

may be because it calculates segment operating income net of corporate office expense and 

certain other allocations.d

 If one allocates corporate overhead for Kindred to its lines of business 

in proportion to revenues in an effort to obtain a number more comparable to the PharMerica 

value, the Kindred number would be 7.7%.e

Margins for Omnicare and Kindred thus appear to be higher than firms in some other 

related industries (e.g., 4-6% for PBMs, 3-7% for retail pharmacies, and 1-6% for distributors) 

during the same period (Exhibit A-2). One analyst we interviewed believes that Omnicare has 

had greater efficiency due to its scale, but these efficiencies have not fully materialized in 

Omnicare’s margins thus far. A number of operational problems (e.g., billing issues, a fire and 

quality control problems at the company’s main drug repackaging facility), a pending lawsuit 

with United HealthGroup, and investigations and legal settlements with state and federal 

governments reportedly lowered Omnicare margins for ’06.6 Another analyst predicted that 

Omnicare should be able to improve its profitability and increase its margins this year by 

addressing these and other operational problems through planned reengineering efforts such as 

centralizing billing and collections functions. Expectations for 2007 margins for the merged 

PharMerica/KPS firm differ. Last summer, AmerisourceBergen CEO David Yost stated that a 

sizeable margin expansion (over previous levels for PharMerica) was expected for the combined 

 

b

 This figure was calculated from Omnicare’s 10-K filing dated March 16, 2006. It uses the operating income figure 

for pharmacy services (page 135) less the restructuring charge divided by net sales (0.113 = (583,954-

5,245)/5,110,414. 

c

 This figure was calculated from Kindred’s 10-K filing dated Maarch 8, 2006. It uses the revenues of the pharmacy 

division (page F-21) divided by revenues (0.109=56,837/522,225). 

d

 Calculated from AmerisourceBergen’s 10-K filed December 8, 2006, pages 84 and 85 (0.050=83,745/1,668,308). e

 This would net out (522,225/4,252,616)(134,514)=16,518 from the operating income of 56,837 in the previous 

calculation. 

A-3
firm because of economics of scale.4

 In January 2007, Amerisource Bergen reported strong 

revenues and market share growth for PharMerica, according to a Stifel Nicolaus analyst report 

on the LTCP industry.7 A September 2006 Lehman Brothers analyst report notes that previous 

relative underperformance of PharMerica despite a management change in the past few years 

suggests that “fixing the business may take some time.”8

Competition in the Industry

 Despite the fact that the majority of beds are served by just three LTCPs (and most by 

the largest LTCP in the market, Omnicare), a variety of stakeholders, including LTCP 

representatives, nursing home providers, and analysts, expressed the view that the LTCP market 

is competitive. In fact, analysts with whom we spoke described the industry as “extremely” or 

“very” competitive. Nursing home providers and analysts both pointed out that the two most 

important factors that have traditionally influenced the choice of a LTCP by a nursing facility or 

chain are: 1) performance of core LTCP functions (e.g., whether pharmacy services are 

delivered in a timely fashion), and 2) the pricing of drugs for residents covered by Medicare Part 

A (for whom the nursing facility is paid a per diem that covers all care including prescription 

drugs). 

Lack of Barriers to Entry. Several stakeholders pointed to the lack of barriers to entry in 

the market. The Federal Trade Commission (FTC) concluded in its 2005 ruling on the potential 

merger of Omnicare and NeighborCare (two of the four largest LTCPs at the time) that there had 

been several recent examples of competitive entry in the industry and that “relatively easy entry 

conditions in the current marketplace further reduce the likelihood that incumbents, under 

current market conditions, could profitably sustain a course of coordinated interaction over a 

A-4
significant time period.”9

 The FTC based this conclusion on the fact that there were multiple 

rivals, including several independent LTCPs, serving a high percentage of the service areas 

where Omnicare and NeighborCare compete, and that independent LTCPs “generally are 

effective rivals to the chain LTCPs in these areas.”9

 The FTC also investigated whether 

Omnicare (after acquiring NeighborCare) would be able to leverage its position in the market to 

“extract above-market rates from PDPs as a condition of joining their networks” after Part D was 

implemented, and concluded that the available facts did not support this theory at the time the 

ruling was made.9 Several stakeholders we interviewed also pointed to the high rate of “bed 

churning” (i.e., nursing home beds that switch from one LTCP to another), as evidence of 

competition in the market. 

Importance of Economies of Scale. A number of stakeholders, including several analysts, 

agreed that there were important economies of scale enjoyed by the larger LTCPs, particularly 

related to the ability to buy in greater volume (and thus negotiate lower drug prices and/or larger 

rebates from pharmaceutical manufacturers) and the lower costs associated with performing their 

own repackaging of medications for LTC settings. Regarding price negotiations, Bank of 

America Securities analyst Robert Willoughby was quoted in a recent Wall Street Journal article 

that Omnicare’s size helped it to negotiate “fantastic rebates” from drug manufacturers.10 

However, several stakeholders noted that the use of group purchasing organizations, or 

“GPOs,” (e.g., GeriMed, Innovatix, and MHA) by smaller LTCPs has increased the negotiating 

power of smaller LTCPs, allowing them to negotiate lower drug prices. One GPO representative 

noted that they passed all rebates negotiated on behalf of their member LTCPs on to the LTCP, 

and these rebates have allowed them to effectively level the playing field between large and 

small LTCPs on this issue. 

A-5
The member pharmacies of the largest GPO (MHA) together serve close to 1 million 

beds (including assisted living beds, which account for an estimated 20-25% of its beds served) 

and almost two-thirds of all privately-held, independent LTCPs.5 Interestingly, Omnicare, 

PharMerica, and KPS are also GPO members, which allows them to take advantage of group 

purchasing for items for which it would not be cost-effective for them to contract directly. The 

other two LTCPs (GeriMed and Innovatix) together account for approximately 1/3 of the 

privately-held independent pharmacies.5 

Although stakeholders felt that economies of scale were important in the LTCP industry, 

two regional LTCPs felt that an advantage of smaller LTCPs over larger LTCPs was the ability 

to better personalize their services and communicate directly with patients, physicians, and 

administrators. They noted the importance of local relationships between pharmacists, 

physicians, and nursing home administrators in this business. Several interviewees also noted 

that the decentralized billing systems of some of the larger LTCPs (especially Omnicare, whose 

repeated acquisitions have resulted in decentralized billing) have created billing problems not 

experienced by smaller pharmacies. 

A-6
References

1. Managed Care Digest Series 2006. 

http://www.managedcaredigest.com/resources/edigests/sr2006/Senior2006.pdf. Accessed 

January 9, 2007. 

2. Personal communication with Omnicare representatives, January 2007. 

3. Omnicare website. http://www.omnicare.com/home.asp. Accessed January 11, 2007. 

4. Lehman Brothers Equity Research, "AmerisourceBergen: Perspectives on Proposed 

Pharmerica Spin" August 8 2006. 

5. Personal communication with MHA representatives, January 2007. 

6. Doctrow J, Gommel E, Streckfus K. Revising Estimates; Reiterating Buy Rating

November 27 2006. 

7. Doctrow J. Kindred Sees Little Impact from Proposed LTACH Regulations January 29 

2007. 

8. Lehman Brothers SNF Quarterly Review, September 6 2006. 

9. Statement of the Commission: In the Matter of Omnicare, Inc./NeighborCare, Inc. File 

No. 041 0146. Federal Trade Commission; 2006. 

10. Lueck S. In Nursing Homes, A Drug Middleman Finds Big Profits. Wall Street Journal.

December 23, 2006: A1. 

A-7
Exhibit A-1. Profiles of the 3 Largest Long-Term Care Pharmacies (LTCPs) 

LTCP Rank 

Annual 

Revenue 

LTCP Corporate 

Headquarters 

Geographic 

Area Served 

Types of Institutions 

Served 

# Nursing 

Home Beds 

Served 

1 

$5,293M 

Omnicare Inc. Covington, 

Kentucky (incorporated in Delaware) 

47 states, D.C. and Canada 

-skilled nursing -assisted living -other healthcare facilities 

850,000 

2 

$1,668M 

PharMerica†Parent company: Amerisource Bergen Corp. 

Chesterbrook, Pennsylvania (incorporated in Delaware) 

36 states -long-term care and 

alternate care patient populations 

222,870 

3 

$635M 

Kindred Pharmacy Services†Parent company: Kindred Healthcare 

Louisville, Kentucky (incorporated in Delaware) 

29 states -nursing centers 

-assisted living facilities -other specialized care centers -includes nearly all Kindred facilities 

100,800 

†PharMerica and Kindred Pharmacy Services have spun off from their parent companies and are merging in 2007 into one publicly trad

merged company is projected to have 119 pharmacies in 41 states and will serve approximately 330,000 beds. Sources: Omnicare data were obtained from the corporate website accessed 01/11/07 at http://www.omnicare.com/home.asp and 

http://ir.omnicare.com/phoenix.zhtml?c=65516&p=irol-homeProfile&t=&id=&

PharMerica/AmerisourceBergen data were obtained from the corporate websites accessed 01/11/07 at http://www.pharmerica.com/ab

http://www.amerisourcebergen.com/cp/1/; the number of beds was obtained from Lehman Brothers Equity Research, "AmerisourceBe

Proposed Pharmerica Spin" August 8 2006; and the estimated number of nursing home beds obtained through PharMerica correspond

Kindred Pharmacy Services/Kindred Health Care data were obtained from Kindred Healthcare website accessed 01/11/07 at http://www.kindredhealthcare.com/InvestorInfo/profile/kps.asp; http://www.kindredhealthcare.com/; the geographic area served and b

obtained through correspondence. PharMerica-Kindred merger data were obtained in the ABC Annual Report/SEC Form Filed 12/08/06 and Kindred Investor Presentatiaccessed 01/11/07 http://www.kindredhealthcare.com/documents/January%202007%20Presentation.pdf
Table A-2. EBITDA and Revenue Measures: Selected LTCPs, PBMs, and Distributors, 2005-2007E

(US$ in millions)Company 2005 2006 2007E* 2005 2006 2007E* 2005 Long Term Care Pharmacies Omnicare $630 $797 $870 $5,264 $6,441 $6,666 12% Pharmacy Benefit Managers Caremark Rx $1,628 $1,891 $2,155 $32,991 $36,769 $38,955 5%  Express Scripts $728 $948 $1,058 $16,266 $17,686 $18,141 4%  Medco Health Solutions $1,350 $1,673 $1,893 $37,871 $42,788 $46,620 4%  HealthExtras $40 $53 $71 $695 $1,268 $1,733 6% Distributors AmeriSourceBergen† $754 $856 $868 $55,594 $62,794 $67,088 1% 

 Cardinal Health $2,758 $2,702 $2,838 $77,416 $84,998 $92,375 4%  McKesson $1,465 $1,539 $1,822 $85,330 $92,625 $98,881 2%  PSS World Medical $92 $110 $128 $1,598 $1,727 $1,850 6% Retail Pharmacies‡

 Walgreen Co. (WAG) $2,938 $3,326 - $42,202 $47,409 - 7%  CVS Corp (CVS) $2,609 not avail. yet - $37,006 not avail. yet - 7%  Rite Aid Corporation (RAD) $676 $570 - $16,816 $17,271 - 4% *2007 data are Bank of America estimates †Includes PharMerica ‡EBITDA measures for retail pharmacies were calculated by authors

Sources: Willoughby, RM and Wood, JD. "Pharmaceutical Services Valuation Update." 12/14/06, Bank of America Equity Research

Value to EBITDA (2007E) Multiple Analysis and Exhibit 3: Price to Revenue (2007E) Multiple Analysis. Data on retail pharmacies cEBIT and revenue values from http://finance.yahoo.com and D,A values from recent annual reports/SEC form 10-K filings.

EBITDA Total Revenue EB