The Fat Lady is getting ready to sing
While it may have come as a shock to some and didn’t happen exactly as anticipated, the deal to avoid the fiscal cliff includes a provision that likely signals the end of the diabetes testing supply business as we know it. Included in the bill passed by Congress and signed by the President is a provision that diabetes testing supplies sold by retail pharmacies will be subjected to reimbursement rates set by competitive bidding. Previously retail pharmacies were to be exempt and the new reimbursement rates which are set to begin April 1, 2103 would only apply to mail order outlets. The government estimates this change will save $600 million although not unexpectedly retail pharmacist’s dispute this number and are claiming it will force many retail pharmacies to stop servicing Medicare patients.
Although this provision was unexpected it really doesn’t change the future for the glucose monitoring market, which as Diabetic Investor has been outlining is not a pretty one. About the only winner to emerge from this move are the cheap imports that will now become the only reasonable option if mail order or retail wants to make any money at all from the sale of diabetes testing supplies sold to Medicare patients. This move will also likely adversely impact Roche, Bayer (soon to be Sanofi (NYSE:SNY) and Abbott (NYSE:ABT) more than LifeScan as the little three as they are today just don’t have enough share to make it without a significant share of their business coming from Medicare. This doesn’t mean LifeScan won’t feel any pain just less pain then the other branded players.
Another possible winner could be Nipro Diagnostics as they are leading provider of store branded systems. It all depends on whether retailers continue to push their store branded products as an alternative to branded systems. It’s also possible that retailers working with Nipro will switch tactics and begin using their store branded systems as means to keep their Medicare patients from switching to another retailer or mail order outlet. These retailers could easily reason that it is better to make no money on the sale of these system and keep their Medicare customers coming back for other items than to lose these patients altogether.
This decision will also reinforce another existing trend, in that, insulin using non-Medicare patients are the most coveted patient. Everyone is already fighting over these patients a fight that will now become an all-out war as without these patients some players will not be able to survive. And it should go without saying that private insurers are salivating over this fact as they now hold the keys to the kingdom. Private payors were already in a strong position before and now have a full blown stranglehold over the branded players.
This news is also very bad news for those companies developing interconnected diabetes management systems. As valuable as these systems could be, it is also true they will be more expensive and it’s an open question whether anyone will pay this extra cost. The main problem here is that while it is believed these systems can improve outcomes so far no one has conclusively proved they have done so or to an extent that would justify the extra cost.
Diabetic Investor would like to offer a glimmer of hope for the BGM market but it is becoming increasingly difficult to find a ray of sunshine among the growing storm clouds. This market has been on a downward spiral for some time and so far no one in the market has been able to execute any strategy that has even come close to changing anything.
The bottom line here is the fat lady has passed the warm up stage and is getting set to belt out the glucose monitoring swan song.
