Cardinal Health 2008 Annual Report Download - page 41

effort to reduce costs. These changes include increased use of managed care, cuts in Medicare and Medicaid
reimbursement levels, consolidation of pharmaceutical and medical-surgical supply distributors, and the
development of large, sophisticated purchasing groups.
The Company expects the healthcare industry to continue to change significantly in the future. Some of
these changes, such as adverse changes in government funding of healthcare services, legislation or regulations
governing the privacy of patient information, or changes in the delivery or pricing of or reimbursement for
pharmaceuticals, medical devices, healthcare services or mandated benefits, may cause healthcare industry
participants to reduce the amount of the Company’s products and services they purchase or the price they are
willing to pay for such products and services. Changes in the healthcare industry’s or in any of the Company’s
suppliers’ pricing, reimbursement, selling, inventory, distribution or supply policies or practices, or changes in
the Company’s customer mix, could also significantly reduce the Company’s revenue, increase the Company’s
costs or otherwise significantly affect its results of operations.
Generic pharmaceuticals. Healthcare and public policy trends indicate that the number of generic
pharmaceuticals will increase over the next few years as a result of the expiration of certain pharmaceutical
patents. A decrease in the availability or changes in pricing of or reimbursements for generic pharmaceuticals
could adversely affect the Company’s results of operations and financial condition.
Prescription drug pedigree tracking. There have been increasing efforts by various levels of government
agencies, including state departments of health, state boards of pharmacy and comparable government agencies,
to regulate the pharmaceutical distribution system in order to prevent the introduction of counterfeit, diverted,
adulterated or mislabeled pharmaceuticals into the distribution system. Several states have adopted or are
considering adopting laws and regulations, including pedigree tracking requirements, that are intended to protect
the integrity of the pharmaceutical supply chain. These laws and regulations could increase the overall regulatory
burden and costs associated with the Company’s pharmaceutical supply chain business, and could adversely
affect the Company’s results of operations and financial condition. See “Item 1—Business—Regulatory Matters”
above for more information regarding prescription drug pedigree tracking.
Deficit Reduction Act of 2005. 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 AMP and requires manufacturers to publicly report AMP for branded
and generic pharmaceuticals. Recently enacted legislation has delayed the implementation of these changes until
October 1, 2009. The Company expects the use of an AMP benchmark to result in a reduction in the Medicaid
reimbursement rates to its customers for certain generic pharmaceuticals, which may indirectly impact the prices
that the Company can charge its customers for generic pharmaceuticals and cause corresponding declines in the
Company’s gross margin. There can be no assurance that the changes in the reimbursement formula and related
reporting requirements and other provisions of the DRA will not have an adverse effect on the Company’s
business. See “Item 1—Business—Regulatory Matters” above for more information regarding the DRA.
Direct purchase policies. Some manufacturers have adopted policies attempting to limit the ability of
wholesalers, including the Healthcare Supply Chain Services—Medical segment’s businesses, to purchase
products from anyone other than the manufacturer. If manufacturers are successful in implementing these
policies in the future, the Company’s results of operations could be adversely affected if the Company is unable
to negotiate satisfactory fee-based or other compensation arrangements with these manufacturers to mitigate the
lost gross margin opportunity. See “Item 1—Business—Suppliers” above for more information regarding direct
purchase policies.
The Company’s pharmaceutical supply chain business is subject to appreciation in branded pharmaceutical
prices and deflation in generic pharmaceutical prices, which subjects the Company to risks and
uncertainties.
The Company continues to generate a portion of its gross margin from the sale of some manufacturers’
products from pharmaceutical price appreciation without receiving distribution service agreement fees. For these
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