McKesson 2012 Annual Report Download - page 17

McKESSON CORPORATION
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In recent years, 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 therefore we may be less able to negotiate price terms with suppliers.
Many healthcare organizations also 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, which
in turn may erode our customer and revenue base.
The healthcare industry is highly regulated, and further regulation of our distribution businesses and computer-
related products and services could impose increased costs, negatively impact our profit margins, and the profit
margins of our customers, delay the introduction or implementation of our new products, or otherwise negatively
impact our business and expose the Company to litigation and regulatory investigations.
Healthcare Fraud: We are subject to extensive and frequently changing local, state and federal laws and
regulations relating to healthcare fraud, waste and abuse, and the government, both state and federal, continues to
strengthen its position and scrutiny over practices involving fraud, waste and abuse affecting Medicare, Medicaid
and other government healthcare programs. Our relationships with pharmaceutical and medical-surgical product
manufacturers and healthcare providers, as well as our provision of products and services to government entities,
subject our business to laws and regulations on fraud and abuse, which among other things: (1) prohibit persons
from soliciting, offering, receiving or paying any remuneration in order to induce the referral of a patient for
treatment or for inducing the ordering or purchasing of items or services that are in any way paid for by Medicare,
Medicaid or other government-sponsored healthcare programs; (2) impose a number of restrictions upon referring
physicians and providers of designated health services under Medicare and Medicaid programs; and (3) prohibit the
knowing submission of a false or fraudulent claim for payment to, and knowing retention of an overpayment by, a
federal health care program such as Medicare and Medicaid. Many of the regulations applicable to us, including
those relating to marketing incentives, are vague or indefinite and have not been interpreted by the courts. They
may be interpreted or applied by a prosecutorial, regulatory, or judicial authority in a manner that could require us to
make changes in our operations. If we fail to comply with applicable laws and regulations, we could become liable
for damages, suffer civil and criminal penalties, including the loss of licenses or our ability to participate in
Medicare, Medicaid and other federal and state healthcare programs.
Reimbursements: Both our profit margins and the profit margins of our customers may be adversely affected by
laws and regulations reducing reimbursement rates for pharmaceuticals, medical treatments and related services, or
changing the methodology by which reimbursement levels are determined. For example, the Patient Protection and
Affordable Care Act and the Health Care and Education Reconciliation Act (collectively the “Affordable Care
Act”), signed into law in 2010, revised the federal upper limits for Medicaid reimbursement for multiple source
generic drugs available for purchase by retail community pharmacies on a nationwide basis to a limit of not less than
175% of the weighted average (determined on the basis of utilization) of the most recently reported monthly average
manufacturer price (“AMP”) using a smoothing process. In addition, Medicare, Medicaid and the State Children’s
Health Insurance Program (“SCHIP”) Extension Act of 2007 requires the Centers for Medicare and Medicaid
Services (“CMS”) to adjust the calculation of the Medicare Part B drug average sales price to an actual sales volume
basis. CMS has proposed new rules for calculating AMP (“Revised AMP”) and is also offering states the option to
replace traditional reimbursement metrics for certain drugs with alternatives such as the average acquisition cost
(“AAC”) method. Under AAC, reimbursement is based on the actual acquisition costs from invoiced amounts and
from a statistically validated cost of dispensing survey. We expect that the use of a Revised AMP benchmark or the
use of an alternative reimbursement metric, such as AAC, would result in a reduction in the Medicaid
reimbursement rates to our customers for certain pharmaceuticals, which could indirectly impact the prices that we
can charge our customers and cause corresponding declines in our profitability. There can be no assurance that
these changes would not have a material adverse impact on our results of operations.