A Faulty Track-and-Trace Cost Model for Pharmacies

Implications: A new report from Accenture attempts to assess the financial costs of implementing a serialized track-and-trace system for the U.S. pharmacy supply chain. But even if we assume that Accenture did a credible and impartial job building their pharmacy cost models, the estimates in this report reflect an extreme situation that no one is seriously advocating. In other words, Accenture’s calculations may not be technically wrong, but its conclusions are highly misleading given actual proposals and practices regarding supply chain security. Thus, you should think of this report as the inflated, upper bound, "worst case" costs of a track-and-trace thought experiment.

Analysis:

I commend NACDS and NCPA for correctly highlighting an important barrier to authentication of serialized products at the point of dispensing. A truly closed-loop, interoperable track-and-trace security solution based on serialization requires a massive infrastructure upgrade at the 150,000+ points of pharmacy dispensing in the U.S. The report correctly highlights the fact that counterfeit drugs are still extremely rare in the United States and summarizes some of the business changes that have occurred to make the supply more secure. The full report is available online: Current Status of Safety of the U.S. Prescription Drug Distribution System

COST ESTIMATES

However, I do not believe that the cost estimates in this report make an accurate contribution to the debate over supply chain security.

Accenture created detailed pharmacy cost models for a 100% compliant “complete track and trace system” that is federally mandated to be implemented at the unique unit-level for all products everywhere at the same time.

I can’t evaluate the assumptions hidden in the pharmacy costs models because Appendix F, a detailed Excel spreadsheet with all of the calculations, was not made publicly available. But my calculations show that Accenture estimates first-year implementation costs to be about 3 percent of revenues for a pharmacy chain such as CVS Caremark (CVS) or Walgreens (WAG).

These figures are much higher than Accenture's previous cost estimates made in November 2007. I think that some of the newly-discovered costs come from additional pharmacy labor for scanning serialized products in the newer estimates as well as the assumption of complete year one implementation. But given the surprisingly large inflationary bump, I also surmise that NACDS and NCPA got their money's worth from Accenture.

A SIMPLIFIED MODEL

Careful readers will note that Accenture’s “complete track and trace system” is much more comprehensive than anything being seriously proposed or considered right now. In my opinion, Accenture has defined a “track and trace” model in an unrealistic manner and then proceeded to explain that such a model is cost prohibitive.

I’ll mention just four important ways that the actual implementation of “track and trace” will likely differ from the models estimated in Accenture’s report:

• A risk-based approach to serialization for high-risk products with the greatest likelihood of counterfeiting or diversion, which is included in H.R. 5839 Safeguarding America’s Pharmaceuticals Act of 2008. See National Supply Chain Security Standards Will Benefit Everyone (Council Site).
• “Normal Channel of Distribution” rules that exempt certain transactions in many states. Even California may incorporate this exemption, judging by the Schwarzenegger’s Administration new legislative proposal for California pedigree regarding an “accredited distribution chain.”
• Central-fill operations and mail order pharmacies that aggregate prescription fulfillment would dramatically lower the per pharmacy costs. (Neither is contemplated in the study.)
• The willingness of wholesaler’s and other third-parties to provide data center services as a fee-based service.

To be fair, Accenture's language is fairly neutral regarding the implications of the study, whereas the NACDS/NCPA press release mistakenly links the "results" to a specific legislative proposal. Hence my view that this report represents unrealistic, upper bound costs of a track-and-trace thought experiment.