Ct Atty Gen Investigating CVS Threat To Terminate Discount Drug Program

CTWatchdog.com ^ | Jun 23, 2010 | By George Gombossy

[YankeeReb]

Connecticut Attorney General Richard Blumenthal Wednesday announced an investigation of CVS Caremark’s threat to terminate a consumer discount drug program because the law requires the chain to extend the same discounts to the state’s Medicaid program.

Blumenthal, in cooperation with Department of Consumer Protection (DCP) Commissioner Jerry Farrell, Jr., has sent CVS Caremark a subpoena demanding the company explain why providing the discounts to the state Medicaid program would result in termination of its Health Savings Pass program in Connecticut and other information.

His actions followed a request from Governor M. Jodi Rell, who last week asked Blumenthal to review a proposed policy change by CVS Caremark that could result in the cancellation of its Health Savings Pass pharmacy discount program – an apparent attempt to avoid complying with a new state law that requires pharmacies to give Medicaid patients the same discounts and savings given to the general public.

[YankeeReb]

For those of us following the CT senate race, this is one more reason that Blumanthal would be just another term for Chris Dodd. What's happening is that Medicade is cutting the reimbursement for discount prescriptions. Obviously the cost of delivering those drugs will not drop , so someone must pick up the difference. The progressive solution is to have the corporation absorb the cost, which only means the non-medicade consumer ends up picking up the costs.

Corporations don't pay increased taxes and fees, consumers do.

[the OlLine Rebel]

"Corporations don't pay increased taxes and fees, consumers do."

Not if they don't want to. And when they don't want to in droves, the corporation pays the ultimate price.

[ebersole]

How long before CVS will decide to no longer operate in Connecticut?

[plain talk]

Yes - corporations just pass their costs on to us.

[Thurston_Howell_III]

This line of thinking is wrong, here’s why:

Corporations attempt to maximize profit, meaning they charge the MOST they can get for a product. To maintain a specified margin when the costs to make that product increase you assume the price of the product would go up, but if they could still sell that product at that higher price, why would they not have done it originally, since they are bound to maximize profit?

[silverleaf]

when a business announces it is changing an unprofitable practice, it is now a “threat”

Perhaps CVS should offer folks “either” their MEDICAID discount “or” the discount off full price offered to the rest of the tax paying public

[Bob]

Corporations attempt to maximize profit, meaning they charge the MOST they can get for a product. To maintain a specified margin when the costs to make that product increase you assume the price of the product would go up, but if they could still sell that product at that higher price, why would they not have done it originally, since they are bound to maximize profit?

You're conflating the term "maximize profit" with "maximize price". They are very different.

Corporations are very aware of the volume changes which result from price changes. If a price increase reduces sales sufficiently, profits will be reduced rather than increased.

Corporations have competitors who face the same cost issues as they do. If XYZ Corp. and ABC Corp. are selling the same products, their costs will rise simultaneously and they can both then increase their prices. If one of them raises its prices arbitrarily, they'll lose business (hence profits) to the other.

[Paine in the Neck]

Blumenthal is an AG of the ilk that tries to make political hay by orchestrating “two minute hates”. Unless he can cite black letter law that CVS is violating he should shut up and get on to dealing with real crime.

[Robbin]

“Corporations attempt to maximize profit, meaning they charge the MOST they can get for a product. To maintain a specified margin when the costs to make that product increase you assume the price of the product would go up, but if they could still sell that product at that higher price, why would they not have done it originally, since they are bound to maximize profit? “
I can tell you’ve never sold anything before..

I sell product A, so does 20 other Companies. I sell it for the most I can get, which is moderated by what the other 20 will sell it for. Now along comes uncle sam and he puts a 10% tax on product A. I will raise the price of my product A by 10% as will all the other providers. The price has already been controlled by market forces. The 10% tax is simply a new tax on everyone that purchases product A.

Corporations don’t pay taxes, their customers do...

[Ditto]

Corporations attempt to maximize profit,

Correct.

meaning they charge the MOST they can get for a product.

Not always. There are various pricing strategies and the above is only one strategy. See Wall Mart for instance whose profit strategy is based on high volume sales driven by low price.

[Thurston_Howell_III]

Not always. There are various pricing strategies and the above is only one strategy. See Wall Mart for instance whose profit strategy is based on high volume sales driven by low price.

Sure, but now you're talking about a dynamic price along a dynamic demand curve. Depending on the elasticity, if you shift the price you also shift the demand. If Wal Mart can sell 5 units at 2 dollars apiece and they now sell 15 units at 1 apiece, thereby increasing their aggregate take, they will price at the latter. Notice that in this example the demand shifts. If the demand didn't shift at different price levels, then they will price as high as possible. If Walmart will sell 5 units regardless of whether they're priced at 2 dollars or 100 dollars, they're going to sell them for 100 dollars.

Maybe my comment should have read that they will price as high as possible at a certain demand level. The idea that higher costs will affect demand is solid, however, its not honest to think that demand will remain the same and any price increases will be passed through to the customer without affecting it.

[GeronL]

I did not realize that government controls retail price strategies. hmmm

[FormerACLUmember]

Medicaid prescriptions are ALREADY reimbursed at a massive discount. The are not money makers for CVS or anyone else.

And Blumenthal KNOWS THIS. It is fake grandstanding by this phoney.

[Principled]

The line of reasoning isn’t wrong, just incomplete imo - but mostly right.

A retailer has to pay all costs. One of the sources of revenue with which costs may be paid is sales revenue [prices] - indeed sales revenue is the only indefinite revenue stream for a retailer.

However if one particular retailer [in a competitive environment] is unable to recover increased costs via sales revenue, it only means that the costs must be recovered from somewhere else.

In the end, it is always an individual who pays for [increased] costs incurred by a retailer - always.

It is usually an individual consumer via higher prices. But if the retailer is put at a competitive price disadvantage for some reason [as in this case] then the increase will have to be made up by an individual elsewhere;

it will be paid by an individual worker in the form of lower wages or
it will be paid by an individual investor in the form of lower ROI.

Those [or a combination defined by market circumstances] are the only three possibilities. It sounds like CVS determined that neither wages or ROI can suffer. Hence, no increase in cost will be permitted.

[VeniVidiVici]

“Furthermore, CVS Caremark also has an obligation to charge the state of Connecticut the same discounted price for drugs for Connecticut Medicaid recipients that CVS Caremark charges to customers enrolled in the Health Savings Pass pharmacy discount program.

If Connecticut demands that they be extended the same discount CVS charges it's full-fare customers/insurance companies, wouldn't it only be fair that Connecticut fully reimburse insurance companies/hospitals for the care of illegal aliens and indigents?

[Thurston_Howell_III]

Bingo, some firms will choose to eat the increased costs because they don’t want to affect their demand curve. To say that it will “always” be passed to the consumer via higher prices is wrong.

[Ditto]

Sure, but now you're talking about a dynamic price along a dynamic demand curve. Depending on the elasticity, if you shift the price you also shift the demand.

In the case of a retailer such as Wall Mart (or CVS in this story) it is not about shifting the demand curve --- it is virtually a fixed demand. Only so much soap or toothpaste or prescription drugs are demanded by the market. Lower price does not increase aggregate demand.

It is about capturing market share from competitive retailers by lowering price and spreading their fixed costs over a far greater number of units sold while also gaining increased purchasing power from manufactures and lowering variable costs as well.

In the meantime, the consumer benefits from lower retail prices by making the entire supply chain more efficient.

[Thurston_Howell_III]

Sure, like I said, elasticity is an issue, its not a blanket “pass through” to consumers for all products.

[plain talk]

I think my reasoning is perfectly fine as it is but thanks for your concern. :-)