Regardless of where you are politically on the issue of healthcare, the Affordable Care Act -- aka ObamaCare -- will be going into effect in 2014, and its effects on the healthcare industry are already being felt. The U.S. is going on a regulatory binge, especially in the areas of money laundering and drug law enforcement. There is no question that the primary trend is toward more government supervision of money, travel, and information with a lot of the focus on trying to control the flow of Schedule II and higher drugs. This drive toward regulation will change many business models within the healthcare industry.
Last year, New York passed the I-STOP law, which created a mandate to have physicians log all Schedule II and higher prescriptions in a state-run database in real time. Prescription drug related deaths totaled more than 20,000 in 2008 -- the most recent statistics from the CDC. And the problem of over-prescription, both intentional and unintentional, is a large part of that number. The most commonly quoted street price for oxycodone is as high as $1 per milligram -- not a number I believe, because who can really afford that? But it is clear that there is a huge market for even half or a third of that price.
And economics drives everything. The problem in Florida became so acute that doctors were simply banned from prescribing the drug. But that is not a practical or comprehensive solution. To control this flow will have to come from a mix of innovation and attention to detail within the industry to better safeguard medication making it into the patients' hands based on their doctor's perception of their needs.
In states like Georgia, where the law allows a pharmacist to turn down any prescription, has made it difficult -- if not impossible -- to get legitimate prescriptions for oxycontin filled. Simply put, the larger chains are not filling prescriptions for opioids in general. CVS (CVS), for example, will not do so in Florida. And this is a trend that is likely to continue because of the increased scrutiny and the legal implications for doing so mistakenly.
In other industries where legal issues begin to dominate goods and services fulfillment, implementation of strong chain-of-custody requirements invariably crop up. The irony in this is that nearly every move made by a person involved in the production of these drugs is logged with some form of legal chain of custody, but that process fails at the moment the prescription is written.
This is a $30 billion industry in which there are as many as 75 million people being prescribed medication for chronic pain at any time. Regulations like I-STOP tend to treat everyone as a criminal first and a patient second. As the potential for legal liability on doctors grows, the tendency will be for them to work together with a particular pharmacist for narcotics.
Moving into this trend, toward closing this chain of custody loophole and increasing liability, I can see a small company like Assured Pharmacy (OTCQB:APHY) take advantage of it. As a firm it has been around for a number of years, but has recently changed its business strategy to focus on this secure, closed-loop handling of pain medication and Schedule II and higher drugs to minimize the opportunity to alter or copy the prescription. By picking up the prescription directly from the physician, filling it, and delivering it to the patient directly, the firm solves the problem of the prescription getting altered or copied. This creates a couple of opportunities for value to both the doctor and the patient, since now the patient is relieved of having to fill the prescription themselves while Assured takes on the inventory and prescription management for three-month prescriptions. This reduces by one-third the number of primary care physician visits that are simply for refilling a prescription.
The company takes no walk-in business and as such does not place its facilities in high-rent commercial spaces, but rather within medical office parks. As I gathered from my talk with the company's investor relations department, it has a robust compliance program that is overseen by a former Drug Enforcement Agency agent. This focus on reducing physician liability has greatly reduced the company's customer acquisition costs. While the firm looks to be properly aligning itself with trends within an industry that is undergoing rapid change, its financials are indicative of a company in the same transitional state. Looking over its recently filed 2012 annual report, the change in business model is beginning to be reflected operationally as gross margins rose from 19.6% in 2011 to 21.8% in 2012.
As the larger retail pharmacies pull back from the chronic pain medication market, companies like Assured Pharmacy will move in to fill the void. Couple this with the expected increase in insured customers when the Affordable Health Care Act goes into full effect in 2014, the specialization of the pharmacy industry will only accelerate. Small companies like Assured can then find themselves throwing off good returns for investors.