McKesson 2010 Annual Report Download - page 20

McKESSON CORPORATION
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Claims Transmissions: Medical billing and collection activities are governed by numerous federal and state
civil and criminal laws that pertain to companies that provide billing and collection services or that provide
consulting services in connection with billing and collection activities. In connection with these laws, we may be
subjected to federal or state government investigations and possible penalties may be imposed upon us, false claims
actions may have to be defended, private payors may file claims against us and we may be excluded from Medicare,
Medicaid or other government-funded healthcare programs. Any such proceeding or investigation could have a
material adverse impact on our results of operations.
E-Prescribing: The use of our solutions by physicians for electronic prescribing, electronic routing of
prescriptions to pharmacies and dispensing is governed by federal and state law. States have differing prescription
format requirements, which we have programmed into our software. In addition, in November 2005, the U.S.
Department of Health and Human Services (the “HHS”) announced regulations by the Centers for Medicare and
Medicaid Services (“CMS”) related to “E-Prescribing and the Prescription Drug Program” (“E-Prescribing
Regulations”). These E-Prescribing Regulations were mandated by the Medicare Prescription Drug, Improvement
and Modernization Act of 2003. The E-Prescribing Regulations set forth standards for the transmission of electronic
prescriptions. These standards are detailed and significant and cover not only transactions between prescribers and
dispensers for prescriptions but also electronic eligibility, benefits inquiries, drug formulary and benefit coverage
information. Our efforts to provide solutions that enable our clients to comply with these regulations could be time
consuming and expensive.
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. On July 15, 2008, the U.S.
Congress enacted the Medicaid Improvements for Patients and Providers Acts of 2008 (“MIPPA,”) which delayed
the adoption of CMS’s final rule and prevented CMS from publishing AMP data until October 1, 2009. In addition,
Medicare, Medicaid and the SCHIP Extension Act of 2007 require CMS to adjust the calculation of the Medicare
Part B drug average sales price (“ASP”) to an actual sales volume basis. We expect that the use of an AMP
benchmark and the revised ASP calculations 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 and cause corresponding declines in our profitability. There can be no assurance that the changes under
the DRA would not have a material adverse impact on our results of operations.
Interoperability Standards: There is increasing demand among customers, industry groups and government
authorities that healthcare software and systems provided by various vendors be compatible with each other. This
need for interoperability is leading to the development of standards by various groups. The Certification
Commission for Healthcare Information Technology (“CCHIT”) has developed a set of criteria defining levels of
interoperability, functionality and security for the industry, which are still being modified and refined. Various
federal, state and foreign government agencies are also developing standards that could become mandatory for
systems purchased by these agencies. For example, the Health Information Technology for Economic and Clinical
Health (HITECH) Act portion of the American Recovery and Reinvestment Act (“ARRA”) of 2009 requires
meaningful use of “certified” healthcare information technology products by healthcare providers in order to receive
stimulus funds from the federal government. We may incur increased development costs and delays in delivering
solutions if we need to upgrade our software and systems to be in compliance with these varying and evolving
standards. In addition, these changes may lengthen our sales and implementation cycle and we may incur costs in
periods prior to the corresponding recognition of revenue. Delays in achieving certification under these evolving
standards may result in postponement or cancellation of our customers’ decisions to purchase our products.