McKesson 2008 Annual Report Download - page 59

McKESSON CORPORATION
FINANCIAL REVIEW (Continued)
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Reimbursements. Both our own profit margins and the profit margins of our customers may be adversely
affected by laws and regulations reducing reimbursement rates for pharmaceuticals and/or medical treatments or
services or changing the methodology by which reimbursement levels are determined. For example, the Deficit
Reduction Act of 2005 (“DRA”) was intended to reduce net Medicare and Medicaid spending by approximately $11
billion over five years. Effective January 1, 2007, the DRA changed the federal upper payment limit for Medicaid
reimbursement from 150% of the lowest published price for generic pharmaceuticals (which is usually the average
wholesale price) to 250% of the lowest average manufacturer price (“AMP”). On July 17, 2007, CMS published a
final rule implementing these provisions and clarifying, among other things, the AMP calculation methodology and
the DRA provision requiring manufacturers to publicly report AMP for branded and generic pharmaceuticals. On
December 19, 2007, the United States District Court for the District of Columbia issued a preliminary injunction
prohibiting use of the AMP calculation in connection with Medicaid reimbursement pending resolution of a lawsuit
claiming that CMS had acted unlawfully in adopting the rule. We expect that, the use of an AMP benchmark would
result in a reduction in the Medicaid reimbursement rates to our customers for certain generic pharmaceuticals,
which could indirectly impact the prices that we can charge our customers for generic pharmaceuticals and cause
corresponding declines in our profitability. There can be no assurance that the changes under the DRA would not
have an adverse impact on our business.
Healthcare Industry Consolidation. In recent years, the pharmaceutical suppliers have been subject to
increasing consolidation. As a result, a small number of very large companies control a significant share of the
market. Accordingly, we depend on fewer suppliers for our products and we are less able to negotiate price terms
with the suppliers. Many healthcare organizations have consolidated to create larger healthcare enterprises with
greater market power. If this consolidation trend continues, it could reduce the size of our target market and give the
resulting enterprises greater bargaining power, which may lead to erosion of the prices for our products and services.
In addition, when healthcare organizations combine they often consolidate infrastructure including IT systems, and
acquisition of our clients could erode our revenue base.
Competition may erode our profit.
In every area of healthcare distribution operations, our Distribution Solutions segment faces strong competition,
both in price and service, from national, regional and local full-line, short-line and specialty wholesalers, service
merchandisers, self-warehousing chains, manufacturers engaged in direct distribution and large payor organizations.
In addition, this segment faces competition from various other service providers and from pharmaceutical and other
healthcare manufacturers (as well as other potential customers of the segment) which may from time to time decide
to develop, for their own internal needs, supply management capabilities which would otherwise be provided by the
segment and other competing service providers. Price, quality of service, and in some cases, convenience to the
customer are generally the principal competitive elements in these segments.
Our Technology Solutions segment experiences substantial competition from many firms, including other
computer services firms, consulting firms, shared service vendors, certain hospitals and hospital groups, hardware
vendors and Internet-based companies with technology applicable to the healthcare industry. Competition varies in
size from small to large companies, in geographical coverage, and in scope and breadth of products and services
offered. These competitive pressures could have an adverse impact on our results of operations.
Our Distribution Solutions segment is subject to inflation in branded pharmaceutical prices and deflation in
generic pharmaceutical prices, which subjects us to risks and uncertainties.
Certain of our U.S. pharmaceutical distribution business’ agreements entered into with branded pharmaceutical
manufacturers are partially inflation-based. A slowing in the frequency or rate of branded price increases could
have an adverse impact on our results of operations. In addition, we also distribute generic pharmaceuticals, which
are subject to price deflation. An acceleration of the frequency or rate of generic price decreases could also have an
adverse impact on our results of operations.