Patient Access IS Pharmacy Viability

Last week while I was in Washington DC, I had the privilege to meet with several US Senators, US Representatives, and the lawmakers’ staff charged with healthcare issues. I was with a group of independent pharmacy owners, and we were asking for support for three pieces of bipartisan legislation that had implications related to patient access to healthcare. Our job while meeting was to convey real stories and the ramifications of the legislation to these lawmakers. 

One of the things we were asked to do when speaking with our legislators and their staff was to speak in terms of how the legislation impacts our patients. The patients are constituents of the lawmakers. We were cautioned to limit speaking in terms of the benefits or ramifications of how these bills would impact the businesses (both chain and independent pharmacies).

While I understand the need to approach the lawmakers from the perspective of access of patients to healthcare, I view enabling the success of the local pharmacy as the other side of the same coin. Legislation that helps maintain the viability of a pharmacy by making the playing field more fair results in the pharmacy staying open. Pharmacies that are open can care for and serve the patient. A pharmacy that closed its doors due to poor or non-existent reimbursement for services cannot serve the patient. 

If a pharmacy has to close and there is another pharmacy nearby, care will generally gravitate to that pharmacy. There is a real risk when this happens that the addition of these new patients with prescription plans that poorly reimburse the pharmacy will further erode the financial viability of the remaining pharmacy. Once all pharmacies are closed in an area, then access to care becomes a crisis.

The number of small towns in Iowa now without a pharmacy that have approached us to open stores in them is, frankly, staggering. But given the current state of pharmacy reimbursement, it is unlikely we could ever manage such a feat without risking the overall viability of our existing stores. Something has to be done on a federal level to protect access to pharmacies.

So, while we voiced our concerns to legislators in terms of the impacts of the legislation on the patients we serve, the real concern is and will continue to be pharmacies being paid fairly for the care they provide. This is Legislative Season. Many groups are contacting or even heading to Washington DC to engage with their legislators. Make the effort. Make Every Encounter with your lawmakers Count this spring!

Sticky

Do you have a store or shop you regularly patronize? Have you ever stopped to consider why? There are numerous reasons, of course, but it boils down to one concept. Given a choice between two alternatives, the store you prefer offers sometime that the other doesn’t. That something might be an employee, or customer service. It might be convenience of location or hours. We call patients with an allegiance to a business sticky customers.

If you are operating a pharmacy, your goal is to attract and maintain long-term, loyal, sticky patients. But what differentiates one pharmacy from the next? It likely isn’t the medications: most every pharmacy has access to the same product. Patients perceive that all community (retail) pharmacies to the same thing. Jerry Seinfeld’s observation on pharmacy sums up what many believe pharmacists do

“I’m workin with pills up here. I’m taking pills from this big bottle and then I’m gonna put them in a little bottle!”

Jerry Seinfeld

Many customers really don’t understand what pharmacists and pharmacies actually do. As a result, a lot of patients are sticky to chain or box store pharmacies simply because they don’t know that not all pharmacies follow that model.

Of course there is always churn in pharmacy. The most common reason a patient switches pharmacies is customer service. Even just one bad customer service experience can result in a patient transferring to a new pharmacy. While customer service can help with achieving a sticky customer base, and poor service can certainly result in the loss of customers, customer service alone doesn’t really differentiate a pharmacy.

If you start to compare chain and independent pharmacies, you start to recognize that there are a lot similarities beyond just prescriptions. Things like a drive-thru window, over-the-counter medications, greeting cards, and sundries are all common features in pharmacies. Things like delivery and durable medical equipment might be less common, but again, there are multiple options typically available to the pharmacy customer. This begs the question: what can one do to truly differentiate a pharmacy?

Differentiation

When trying to define something that truly differentiates a pharmacy, it essentially boils down to the same question. “Where else can I go to get this?” In a small market, if the answer is more than zero, it isn’t a differentiator. In a larger market, it can be more than zero, but it still has to be fairly small.

It isn’t enough to offer something uncommon, it also has to be in demand and the quality has to be high. This applies to services as well as product. Ultimately, a well differentiated pharmacy is the only place you can go in the area to get something that is in demand. Of course, this isn’t an easy thing to achieve. It requires thinking outside of the box. Once you determine your niche, it requires marketing and effort to grow it.

Perhaps the easiest path to differentiation is to know what your competition does and compare it to what your pharmacy offers. These things are not differentiating your store. The trick is to identify what you might add as a service or product that they don’t do. Ideally, it would also be something that your competition cannot offer because if you do hit a home-run, the competition will want in on the action.

We obvioulsy cannot offer individualized suggestions to every independent pharmacy here in this article. Today, we will discuss one example that many independent pharmacies could implement.

Professional Supplements.

One way to differentiate an independent pharmacy from the chain pharmacy competition is supplements. Every pharmacy can order national brands of vitamins and supplements. You can go to almost ANY pharmacy and pick up a bottle of Nature Made Stress B-Complex. If the pharmacy doesn’t stock it and there is demand, they can add it. But what if you could order a supplement line that was unavailable to the chain pharmacies?

Professional Supplements refer products that are not sold by the traditional wholesale channels in pharmacy. Companies Ortho Molecular only sell their products to independent pharmacies. These are high quality products that one cannot purchase from your local big-box pharmacy.

Just putting in a quality product that is unavailable elsewhere isn’t generally enough. While there may be existing demand for the products in your area, the public needs to know that you have the product and learn why they need it. In other words, adding a professional supplement line is just step one. Marketing and education follow, to raise awareness and create demand.

In order to create the demand for professional supplements, it is necessary to reach out to practitioners and prescribers that understand the importance of quality supplements and are receptive to general aspects of functional medicine. It also will require the pharmacists and staff to become familiar with nutrition, nutrient depletion and supplementation, and to become comfortable with the basics of functional medicine. This requires ongoing, significant professional commitment and work in marketing and education. Is it worth it to go down a path like this? It absolutely can be a big win for the pharmacy. Margins on supplements are very good, and the patient interactions can be very rewarding.

In a given market, it is possible that two pharmacies might both sell one or more professional supplement brands. While this may or may not be an issue depending on the market saturation, it does diminish the differentiation factor. If you achieve respectable sales of a profesisional product, you might then consider private labeling some of the products. This means that the professional product X becomes YOUR own product, under its own brand, with a different name. Now, even your local competitor cannot offer your product (unless you sell it to them).

Obviously, there are lots of different ways a pharmacy can create truly sticky customers. Differentiation is necessarily an individual process, and there may be a variety of ways to achieve this goal. The important lesson: you have to make the effort. If you don’t make Every Encounter Count in your pharmacy practice, you will miss opportunities!

Do We Need Pharmacists?

If the title of this article makes you uncomfortable, it should. This is the exact question my business partner, Randy McDonough posed to our pharmacists at a recent clinical meeting. The profession of pharmacy is literally at a precipice. The future of pharmacy depends on how every pharmacist answer this question.

The issue facing the profession is one of initiative, or the lack thereof. For years, thought leaders in pharmacy have been pushing pharmacists to perform at the top of their licenses. We have been asking our staff to do more than simply count, pour, and label drug product. We need our pharmacists to leverage their relationship with the patient to help them active their drug therapy goals. We need pharmacists to monitor outcomes. We must have pharmacists that take the initiative to act as health care providers, not simply drug dispensers.

Yes, there are pharmacists that are doing some or even all of this. The problem for the profession is that these outstanding individuals are in the minority. Today, many pharmacies are struggling to keep their doors open. I am not just talking about independent pharmacies. Even the larger players are having difficulty maintaining enough profitability to continue to provider pharmacy services.

The key to the next generation of pharmacy is getting paid for clinical services that pharmacists can, and in some places, are already providing. The problem is one of timing. Pharmacy owners and pharmacists desperately went to be paid for their services. But many, even most, are not providing the services, nor are they even ready to start. This is a classic chicken / egg problem. Pharmacies have to prove themselves in order to be paid for the services, but many pharmacy owners won’t make changes until they are already getting paid.

Additionally, even if a pharmacy owner is committed to making these changes in order to be ready for future of clinical revenue, finding pharmacists that are willing to put forth the effort required is unbelievably difficult. Far too many pharmacists have become complacent. They are being paid very well to do very little outside of dispensing functions and they are far too comfortable with their limited responsibility. The thought of putting their clinical skills to work is both scary and daunting.

The answer to the question posed at the beginning is actually easy. Yes! Hell yes! Pharmacists are definitely needed. But the pharmacists that are needed are not those that are simply dispensing. Dispensing will eventually become extinct. Healthcare is evolving, and these skills don’t require highly paid professionals. Where we are headed, like it or not, is going to make a lot of pharmacists and pharmacy owners uncomfortable. Change is hard. Change is inevitable.

So if you are a pharmacist, ask yourself this tough question: Am I ready to take on the new challenges of healthcare? Am I going to evolve to become a clinical interventionist? If the answer is yes, and I hope that it is, then you need to start now. Be ready to prove your importance in healthcare. Learn new skills. Advance your practice site. And above all else, Make Every Encounter Count.

Bait-and-Switch?!?

Pharmacy is a difficult business for a lot of reasons. The PBM industry, years ago, turned the profession upside down by transitioning from selling a service to pharmacy (processing claims) to selling access to their pharmacy networks, and later also selling patients of those networks as a commodity. This pivot made pharmacies essentially dependent on the PBM industry for access to their own patients.

When a PBM is involved, pharmacies do not have any real control over what they are paid for product or work. If a PBM wants to pay a pharmacy less than the product costs, a pharmacy has few alternatives. The only way to take back control is to cancel contracts with a PBM network. Of course, this also carries the risk that patients using that insurance will go to a different pharmacy to use their insurance. A serious Catch-22.

There are examples, however, when pharmacies do cancel contracts. I have seen pharmacies drop major payers due to poor reimbursement. The question becomes, if I am being reimbursed so poorly that I will go out of business if I continue to take the insurance, then the loss of that bad business might be enough to keep the doors open. This is akin to amputating a leg with gangrene. Tough choices need to be made in order to survive.

Some contracts that are bad for a pharmacy have less draconian implications. A good example is a discount card with high transaction fees leaving little or no margin for the pharmacy. These cards may advertise themselves to patients as a good option, but they are bad business for pharmacies. As there are many options for discount cards, cancelling an egregious contract for a discount card is not as risky to the pharmacy as cancelling a network based insurance contract.

Pharmacy is also a very dynamic industry. One cannot become complacent as things are always changing. The PBM industry has a new trick up its sleeve: piggyback discounts. The PBMs claim that they need to offer their clients (businesses and insurance providers) better copays. Never mind that the PBM completely controls the copay structure. They want to reduce copays but not impact their own pocketbook or cost their customers more money. And they have found a way to achieve this.

Today, when some PBMs receive a claim electronically from the pharmacy, they then submit the claim to one or more discount cards. If the discount card offers a better price than the PBM’s logic, it uses that instead. This all happens outside of the normal claim response loop. In other words, the claim is sent to and returned from the insurance, but it also took a stop elsewhere. Essentially, a bait-and-switch tactic on the pharmacy.

This extra (and secret) hop can create problems. For example, some of the discount card partners being used by the PBMs are the same one that many independent pharmacies went out of their way to cancel. The PBM, with this new program, has essentially overridden the pharmacies preference to not do business with what they perceived as a bad player by piggybacking the discount plan’s contract onto the PBM’s contract with the pharmacy. The PBM contract has vastly more significance to the pharmacy if it wanted to opt-out.

The biggest challenge with the new tactics is that it is essentially transparent to the pharmacy. Unless you are looking closely at the claims, you will be unlikely to notice that it happened. We have also been told that patients and payers are also unaware that this switch is taking place. So how can a pharmacy ascertain if this is happening? There are a few things you can do to flag these claims in your pharmacy system.

  1. Ask your switch to capture any of these types of claims and then return a soft-reject, essentially giving you an alert that something has happened. At this time, our switch is working on an implementation, and expects that it will be ready to deploy in April of 2024. If this is not soon enough for you (and it isn’t for us), then continue below.
  2. Create a filter or restriction on claims based on an ingredient cost paid field returned by the insurance. Look for when the returned value is less than $0. This is NCPDP D.0 field 506-F6. Discount cards in general return a negative value here (this is the claw-back or fee the card takes). This is a very GENERAL test for claw-backs and discount cards.
  3. Finally, and most specific, create filters or restrictions on claims based on the Network Reimbursement ID field. This is NCPCP D.0 field 545-2F. What you look for here depends on the payer. The values and their affiliated plans to capture in the field are:
######GDRX for GoodRx where the ###### are numbers (often a BIN number) *  
######SSRX for SureScripts with the ###### like above again *
CNTRCT5001 for the Caremark internal discount card
CASH for Cigna patient not covered anymore discount card
NET=9185 for the Humana OTC discount / not covered item
OPTPRP is the Optum Patient Relief (no longer covered)

*Because the ###### component may change, you will need to look for the static part by using logic like "Contains GDRX" Alternatively, you may find PBM published payer sheets that outline the actual numbers. In my state, for example,  the insurance using GoodRx returns 999999GDRX in 545-2F.

Most of the above programs have very high fees. These fees fall on the pharmacy, and not the PBM or the patient! The list above is not guaranteed to be complete, and values can change.

Personally, I consider this tactic unethical. As the tactic is just now appearing in our area of the country and we don’t have enough data at this time to fully comprehend the implications nor the significance of the change. One expert on pharmacy contracting indicated that the strategy was used in other areas of the country in the fall of last year. That plan phased the strategy out, apparently using what it learned from the discount card partnership to lower their own Maximum Allowable Cost (MAC) pricing.

Assuming that this practice is here to stay, what can a pharmacy do? A pharmacy refusing to run these claims has to understand the contractural implications. Refusing to run claims might put your pharmacy in violation of a network contract and run the risk of being terminated from the network.

At this point, our pharmacies are collecting data: we have implemented filters to flag these claims as they occur. Our staff has been instructed to document the information and forward for analysis. Until we understand how this strategy is being used in our area, we cannot formulate our response. With more information, we can decide what our response might be going forward. Your assignment this week: put these types of flags into place in your pharmacy and prepare to make Every Encounter with your claims Count!

Footnote: If you are not sure how to implement a restriction or alert on your pharmacy system based on returned claim information, contact your pharmacy management software vendor. I am familiar with two common systems being used by independent pharmacies, Pioneer and Liberty. Both allow this type of implementation. Others undoubtedly have similar features.

Comparison: Strip Packaging workflows

Recently, our pharmacy revisited our strip packaging robotics: our current packager was getting long on the tooth, and we were interested in either upgrading or investigating other options. Ultimately, we added a new product to our arsenal.

Target Market

There are a few different strip packaging options available in the market today, and while they all create a similar end-product, their design and operation might influence the type of practice they best compliment. For simplicity, I divide the market into two groups — Long Term Care (LTC) focused pharmacies, and Community / Retail focused practices. The difference between these two groups, for my purposes, are primarily centered on the duration of packaging provided. A LTC pharmacy supplying medications for facilities will provide strip packaging frequently: the day supply provided to facilities generally ranges from 1 to 14 days at time. In contrast, community pharmacies doing compliance packaging would package no more frequently than every 14 days with most patients receiving 28 to 30 days’ worth of medication at a time.

The packaging machines that are required to support these two examples are designed very differently. Machines designed for the LTC style of practice ideally can house hundreds of medications at time. An example is the Parata Pass family of devices. The RxSafe RapidPakRx was designed with community pharmacy compliance packaging in mind. Both machines could technically be used in either environment, but their operation outside their focus space would less than optimal.

Canisters

The volume driven Parata machines house a large number of small containers (208 to 576 drugs) that contain a carousel optimized for a specific size and shape of medication. There are thousands of possible cassette wheels available. For a given canister, even small changes in tablet or capsule size mean that the canister will either work poorly or not at all. Without a canister, the efficiency of the packaging operation drops precipitously. 

The RxSafe RapidPakRx, on the other hand, takes a very different approach. Instead of hundreds of canisters, the RxSafe product has only 20, 30 or 40 canisters. The mechanism in the canister is also much more elegant–it is capable of dispensing a wider range of different sizes and shapes, including half-tablets. The dispensing wheel used in the RxSafe product comes in just 5 variants that optimize efficiency for very small to very large dosage forms.

The RapidPak canisters are large, accommodating larger quantities of medications needed the longer day supply used in the community setting. They are also easier to clean, which is important, as the canister is not typically dedicated to one medication. While you can assign a few canisters in the RapidPak to be fixed — staying on the machine between batches like a Parata canister, most of your stock remains in the manufacturer’s stock bottle, optimizing product shelf life and limiting overall inventory. Infrequently used Parata canisters can go weeks to months between refills, meaning the drugs spend extended times outside of the sealed, desiccated bottle. Inventory management is more difficult when product stays in the machine.

Smarter

The difference in canister design also ties in another important feature. A machine like the Parata uses an optical sensor to register the drop of the medication. If the cassette was loaded incorrectly but the dosage form fits the canister, it will drop the wrong medication into the pouch. I have had this happen more than a few times, and it is as scary as it sounds. The RapidPakRx uses a very different, and much smarter and safer mechanism.

The RapidPakRx canister wheel picks up the tablet or capsule and it rides up the wheel until it is deposited onto a platform. Here, a camera inspects what was presented by the canister. It first checks that only one item was dropped, emptying the platform, and trying again if it did not receive a single unit. With one unit present, it inspects the size, shape, color, and markings to ensure that the correct medication is on the platform. If it doesn’t match with a very high level of certainty, it rejects the unit and tries again. If it fails multiple times in a row, it will alert the operator so the drug can be corrected, or the canister size changed (wrong canister size results in poor drug capture — too many or two few reach the platform). Once the product is correctly identified, it is then dropped into the awaiting package pouch.

In practice, this mechanism is nothing short of amazing. If one accidentally put the wrong medication in a canister, or even a different generic manufacturer version of the right medication, it will almost always know (and flag an error). If one or two tablets of a different medication are introduced into the canister accidentally, it will reject them. Only in a case where the medications that are virtually identical to each other might the machine logic fail to notice the change. Using this mechanism, you have a very high degree of certainty that the right medications made it into the medication packs, despite any introduced human error.

Workflow and Speed

The RapidPakRx was designed with a retail / community pharmacy workflow in mind. With only 20 to 40 canisters, you load each canister every time you package. At first glance, this might appear to be a large inefficiency compared to a Parata style machine with hundreds of medications loaded, but the difference is not as significant as you might think. Working with the Parata, you typically replenish multiple cassettes before a given run, and if the inventory number is off, you may end up having to replenish them during the run as well. For volume runs (large numbers of patients for short time frames), the Parata still has an edge, but the RapidPakRx is respectably efficient if the drug storage shelves are located close to the robot.

The RapidPakRx also comes with an optical tablet counter: we opted for the GSE EyeCon device (spoiler alert, the parent company of the EyeCon also purchased RxSafe). In a community / retail setting, the pharmacy management system integrates tightly with the EyeCon, documenting the initial product verification. The EycCon saves the images of the count (including NDC and a check on the size and shape of the product) back to your pharmacy system: there is a robust electronic paper-trail. After the initial verification, the RxSafe software collects additional information on the product (like Beyond Use Date), the product is dropped directly into the cassette and placed on the robot. The workflow on a Parata is similar but counting is done by weight (less accurate) and the audit trail is not quite as robust.

Packaging Materials and Cost

On the subjective side, my patients are almost completely in agreement: they prefer the RapidPak pouches. This is due to their stiffer paper backing and the exceptional quality of the printing. The Parata strip packs are all cellophane. Parata offers a white / clear cellophane that offers similar readability, but it in my judgment, it is less legible than that RxSafe. The Parata cellophane is also more prone to wrinkling, making them harder to read after they have been rolled up and boxed. Here the edge goes to the RxSafe product.

Cost of materials for the RxSafe is also better. When we did a cost analysis of the packaging materials used versus standard prescription vials, the Parata packaging was roughly the same. The RxSafe packaging supplies are less expensive, creating a net savings versus rx bottles with time.

Integrated Checking

When we first started with our Parata packager, we did all checking by hand. This was a tedious process and was prone to fatigue. Eventually we purchased a Parata Perl imaging workstation. This allowed us to image each envelope and use the images to do the final verification more quickly. This was a significant added cost as the device is not included with the robotic packager.

The accuracy of the Perl’s integrated verification (where it flags things it doesn’t recognize as correct) drops significantly as the number of doses in each pouch goes up. We found that if we had more than 4 or 5 tablets in a pouch, the accuracy dropped quickly. While the pharmacist had to look at every pouch, the pre-check (when it worked) would dramatically decrease the time required to check the product.

The RxSafe has integrated product imaging and verification included in the cost of the robot. As mentioned earlier, the verification taking place when the product is dropped dramatically decreases the chance that a wrong product is dropped. It also decreases the chance of extra doses falling, something that was common with the Parata device. After the pouches are sealed, a photo is created of the commingled product. Like the Parata Perl, the RxSafe verifies what is in the pouch and flags issues.

Both units have decent software interfaces for checking. The Perl relies on many camera tweaks and once set properly it does a decent job. The RxSafe’s software is newer, and suffers a few minor annoyances, mostly because I have seen both and like some things and miss others. The checking experience on the RxSafe is marginally better than the Perl, but the Perl’s software is probably a little more refined. 

If your pharmacy is doing packaging and looking for a strip packaging solution, both devices deserve your consideration. Depending on your workflow and your market niche, one product may serve you better than the other. For community pharmacies doing compliance packaging, the RxSafe product is probably the winner. If you are servicing many different facilities with frequent med exchanges, the Parata would win hands-down. When you are considering purchasing a robot that costs as much or more than a nice house, it is important to understand the niches the machine services best. 

Counter-Productivity and the CancelRx Message

Today’s topic will not be new to the pharmacists that read this forum. The purpose today is to give pharmacists a chance to share this information with providers and patients with the hope of increasing the awareness of some of the more challenging aspects medication therapy management: how to reconcile medications when the pharmacy doesn’t know a change has occurred.

Let’s look at a scenario that came up today. We received a call from the hospital looking for a current medication list for a patient who was being admitted. This is fairly routine: medication reconciliation is a staple of the admit and discharge process from hospitals. During the call, the pharmacist doing the reconciliation questioned one medication we were providing: they recalled reading a clinic note that referenced the medication being discontinued. Our records did not show this change.

Often, the patient’s own pharmacy is the last to know when a change is made, and sometimes, we are never informed of changes. How can this be? Many hospitals and doctors give the patient a post-visit summary. This might include changes in how they are to take a medication, new medications to start, and old medications to stop taking. Sometimes the patient will share this with their pharmacy. This is ideal, and we train and encourage our patients to provide us with a copy when they receive one so we can reconcile their medications on our side as well.

If the patient doesn’t share this, some of the changes will still become apparent. For example, a new medication will result in a new prescription being sent to the pharmacy. In the other scenarios, though, there isn’t any communication of the changes made back to the pharmacy. The change may eventually come to light when the patient requests a refill early or doesn’t need a refill when we expect. Both of these scenarios depend on the pharmacy being very proactive.

Independent pharmacies like ours are proactive. We leverage Medication Synchronization (MedSync) and make calls to patients a week or so before they are due to get refills to ask about changes and confirm what needs to be filled. Changes may become apparent at this point. Pharmacies that do not have these types of program may completely miss these changes.

When a pharmacy packages patient medications, the lack of communication could result in changes not being made promptly. There really should be a better way to communicate. As it turns out, there is. SureScripts has supported the CancelRx transaction for quite some time now.

The CancelRx message is a message to the pharmacy to discontinue one or more prescriptions that the prescriber previously sent. This message, when used, alerts the pharmacy of changes that they otherwise might not be alerted to in a timely manner. Unfortunately, some providers don’t use this message, or their electronic health record (EHR) doesn’t support the message.

This message is not without its own caveats. We routinely receive CancelRx messages from providers to cancel the old Rx at the same time we receive a new Rx for the same item. If the doctor, however, forgets to send the new Rx, the medication might be instead be just discontinued. Today we received a host of CancelRx messages for seizure medications without new prescriptions following. This resulted in a call to the provider to ascertain their intent.

It should be apparent by this point that communication between the patient, prescriber and the pharmacy is exceedingly important. With our without the CancelRx message, the pharmacy needs to be in the loop on any changes being made. The patient can help by providing their after-visit or discharge summaries to the pharmacies promptly. The prescribers can make judicious use of the CancelRx messages, as well as other communication avenues.

The pharmacy has a job in this as well. The pharmacy should be documenting and providing regular feedback to the prescriber, including the current list of medications. Every message, SOAP note, and request that our pharmacy sends to a provider includes a current medication list as we have it documented. This includes supplements and medications that may come for other providers. This helps close the loop of communication between the provider(s), patient, and pharmacist.

The take-home lesson today: Patients — provide your pharmacy with a copy of the information you receive from your visit or hospital discharge. Prescribers — be sure to communicate changes not only to the patient and their caregivers, but also to their pharmacy. Finally, pharmacies need to provide feedback to the providers, both with respect to current medications and supplements the patient is taking as well as any issues, side effects, or concerns the patient voices to the pharmacy staff. In short: Make Every Encounter Count!

2024, a First Look at GM

As I previously explained, a couple of significant changes happened at the start of the new year. DIR fees became effective at the point of sale, and many contracts have reverted to MAC language. The positive aspect of these changes is that we know immediately what we are making on any given prescription. But there are still some nagging questions: we have lost some transparency into both the product pricing (MAC pricing is proprietary) and DIR fees are variable.

The first thing I looked at when we started adjudicating claims in 2024 was the returned claim details. I was curious if we would see the DIR fee applied to the claim broken out. Unfortunately, and as expected, there is no such information in the claims being returned. We are, once again, expected to trust that the DIR portion being deducted is correct. Hopefully, we will still see a DIR report from the PBMs on a regular basis to ensure that they are not taking advantage of pharmacies.

Our best estimate of DIR fees last year, across all of our pharmacies, was 3% of gross sales. Each store had a different blend of commercial and Medicare Part D, with the latter having DIR fees collected. We expect to see, therefore, a 3% decrease in our gross margin for the new year. The question, therefore, is how are our gross margins holding up for the first 2 weeks of 2024? Let’s jump in and take a look.

December 2023 (Baseline)

StoreRevenueUGMGM
Small Town + Rural Contract + 340B$515,919.6014.3%21.0%
Small Town + limited 340B$174,683.2410.0%12.6%
Small Town + limited 340B$401,338,539.6%12.5%
Small Town$263,063.518.2%10.0%
Medium Town$317,114.0119.4%25.5%
Large Town$455,542.5517.0%21.0%
Grand Total$2,127,661.5413.6%18.0%
Baseline

The column entitled UGM represents the unadjusted Gross Margin: the gross margin before accounting for any purchase rebates. Rebates are not a given, and are being estimated as 15% of the cost on generic items purchased based on historic data for the stores.

The first thing to notice is that the average GM across all 6 stores is below 20% in December of 2023 before any DIR fees. Previously, I reported that for our stores, we have historically seen DIR fees represent 3% of gross sales. We would therefore expect to see a 3% decrease of the GM column in 2024.

The other thing to note is that many of the small town stores that do not qualify for rural contracts are significantly below 20%. The only explanation for the discrepancy is the mix of insurance plans these stores see compared to other stores. This is disturbing because if (when) these stores can no longer remain profitable, the next closest store is in another town or city many miles away. This creates pharmacy deserts in states like Iowa, where all of these stores are located,

January 2024 — the first two weeks

StoreRevenueUGMGMChange
Small Town + Rural Contract + 340B$171,080.7314.0%16.8%-4.2%
Small Town + limited 340B$62,620.037.8%9.8%-2.8%
Small Town + limited 340B$124,456.408.2%11.5%-1%
Small Town$73,308.645.2%7.2%-2.8%
Medium Town$109,542.6921.3%23.5%-2%
Large Town$133,343.7012.4%14.7%-6.3%
Grand Total$674,352.1912.3%14.8%–3.2%
First Look 2024

First, a note: the 2024 data represents almost 11,000 adjudicated claims. It is a small but representative sample. The decrease in GM is almost exactly what we anticipated: -3%. So the good news: we know what we are making on the claims. The bad news: gross margins are no better today than last year. The bad news can be even worse for smaller, more rural pharmacies where diversification of their business is more challenging.

Both December and the initial numbers for January are highly problematic with gross margins (after DIR) well below 20%. I have said it before and will say it again: this is simply not sustainable. Suffice it to say that we have already optimized our cost of goods where possible. Most of the pressure on the gross margin is from Brand name drugs where there is only a little room for improvement. Our Brand purchases are at Wholesale Acquisition Cost (WAC) minus nearly 6%, which is nearly as low a COGS for brand as I can possibly get.

That brings us to the point that we should start digging into the 2024 data more deeply. If I look only at brand name medications we see a grim story.

StoreRevenueGM
Small Town + Rural Contract + 340B$126,258.897.7%
Small Town + limited 340B$46,918.370.0%
Small Town + limited 340B$93,516.450.6%
Small Town$58,494.971.9%
Medium Town$76,123.277.4%
Large Town$91,901.893.5%
Grand Total$493,213.844.1%
Brand Only 2024

The PBMs are paying us a gross margin of just over 4% across all store (low 0% and high 7.7%). This gross margin represents over 73% of total gross sales. The margin on generics is much better at 43.8% (low of 29.1% and a high of 60.2%). Because the dollars for the brand side are so much larger, the low GM on the brand tanks the overall GM. Simply put, this is completely inexcusable behavior by the PBMs. Consider the January brand numbers to date: We have almost a half-million dollars in inventory sold, waiting 15-30 days for payment ,and our profit to cover our overhead is an anemic $20,000. Even the largest chain pharmacy would struggle to make these economics work. Hence my lack of surprise when chain pharmacies are closing at a rate not that dissimilar to independents right now.

The PBMs have created this problem, and if they don’t make an accommodation soon, they will not only drive most pharmacies out of business, but they also jeopardize their own existence. I have been seeing more and more requests by PBMs for non-participating pharmacies to add certain networks because the PBS doesn’t have the coverage required by the payer: the PBM is in dereliction of its own contract by not maintaining network adequacy. Yet there is a real reason that pharmacies have worked to drop these contracts in the first place. They simply are not profitable enough to maintain. The number of contracts we will have drop in 2024 to stay in business will be significant. It is unsustainable.

This blog post was designed to create awareness of the current situation. Every pharmacy needs to perform a similar self-study. From there, they need to determine which contracts are hurting them the most and make moves to drop them. Not taking action today means not having a pharmacy tomorrow. It’s your turn to make Every Encounter with your own data Count.

2024 — Industry Changes

Many pharmacies and pharmacists have been dreading 2024 due to the arriving DIR Cliff (tsunami, hangover etc). The new year brings a two very dramatic changes to the pharmacy landscape:

  1. DIR fees will no longer be retroactive but will instead be reflected at the point of sale in the form of a reduction in the adjudicated amount.
  2. GER (Generic Effective Rate) contract language is being eliminated in many different plans. 

DIR changes

DIR fees are essentially discounts built into the pharmacy contract with the PBM. The discounts were supposed to be based on pharmacy performance; therefore, they were calculated after the close of a period (e.g. a quarter). The discount was therefore collected up to several months after claim adjudication.

These DIR fees often represented up to 10% or more of the adjudicated drug cost — what the plan paid for the drug product, excluding any dispensing fee. These fees added up quickly, representing hundreds of thousands of dollars (about 3% of gross sales) for our pharmacies paid back to the PBM months after the product was sold.

DIR collection at the point of sale means that we are expecting to see a reduction in what we are paid for any given item in 2024 compared to 2023. This will be most noticeable for brand name drugs. 

By collecting the DIR fees at the time of adjudication, we remove the uncertainty we had before. This is a good thing. We will now know before selling the product what we are making. This is a net positive change. If we are losing money on a product in 2024, we will know immediately (not in 3 months) and can pursue the appropriate course of action.

GER, MAC and the Implications 

The GER model was created, in part, by the industry to address criticisms of the PBM’s Maximum Allowable Cost (MAC) pricing methodology. MAC pricing is proprietary–how the PBM established the price is a company secret. 

MAC pricing was added to the traditional reimbursement language as an addition. Contracts originally were written as Average Wholesale Price (AWP) – a percentage. The PBMs added the “or MAC price” later. Early on, there were a few MAC prices. Ultimately, most every drug had a MAC price.

The problem was that pharmacy may not be able to purchase the product anywhere near MAC price. While we could complain that it was too low, there was no guarantee it would ever change. MAC prices are frustrating: they are shrouded in secrecy, can and do change unexpectedly, and rarely do they reflect what pharmacies would consider a fair price. 

The GER model, instead, created an aggregate reimbursement level for a group of pharmacies. This group might comprise pharmacies in region, or a chain of pharmacies, or even a PSAO’s member pharmacies. On the surface, GER contracts were promising. You knew what you were going to get paid. The price was once again based on AWP, just like before.

The GER model usually defined the group’s reimbursement as AWP minus a percentage. While this formula is familiar, don’t get too comfortable. There is a subtle but important difference here. The GER contract does not mean that every prescription adjudicated was paid at that rate. No, the PBM might pay some items well above or below that rate, and the reimbursement might change throughout the year. The GER contract language was written to look at the whole group’s reimbursement across all prescriptions during the period. 

Using this model, thee PBM would pay you whatever it paid you. That might be a loss, or a nice profit for any given claim at any given pharmacy. At the end of the period (typically a year), the PBM would calculate all payouts across the group and compare it to the GER in the contract. If the PBM missed the aggregate target (high or low) it would “true-up” by either paying the network what it was due or collecting any overpayment.

GER contracts created significant potential for inequity amongst pharmacies within the group. This isn’t an issue if the group is a national chain, as the pharmacies maintain common ownership. The chain is guaranteed to be paid accurately across all its stores per the contract. 

Where GER is problematic is the independent space. Independent pharmacies do not share common ownership. Here, one pharmacy might end up on the very short end, with its own average claims paid well below the GER rate, while another might do exceptionally well. Where you landed depended on the blend of products that was dispensed to your patients. 

For this reason, transition of contracts away from GER is a positive for independent pharmacy. Well, sort of a positive. GER is being replaced by MAC language in the contracts. What’s old is new again!

2024

So, we enter 2024 with two significant changes. Both share one advantage: a pharmacy will know where it stands with any given claim. Immediately. The pharmacy is now able to decide what changes it needs to make to maintain its viability as a business. On the flip side, the industry has created the potential for further reductions in reimbursement to pharmacies. This race to the bottom has only hurt the public’s access to pharmacies and pharmacists. 

Next time we will look at actual numbers coming from claims in the new year and compare them to last year. We will see where the rubber meets the road. Until then, don’t forget to Make Every Encounter Count!

Gross Margin

The target audience of this blog is independent pharmacy owners. Many, perhaps most pharmacy owners have little to no formal education in business. Most of us learned on the job. In the coming weeks we will be hitting a core concept pretty hard. Gross Margin. Before I do that I wanted to spend a few moments discussion what Gross Margin (GM) is and why is it important.

Gross Margin is a measure designed to look at the core profitability of the business. It is simple to calculate from financial statements if it isn’t already explicitly there. GM is the net profit divided by the revenue. Let’s look at an example

An auto repair shop pays its mechanics $50/hr. When that mechanic works on a car, the customer is billed $100/hr. Likewise, the business uses a simple 50% markup on selling price: something that cost the business $10 is billed to the customer at $20. Let’s look at an invoice for repairing my car:

Labor: 2.5 hours.— $250.00
Parts:
  Battery — $50
  Zip ties — $1
Total: $301.00

In this simple example, the business has $125 invested in labor and $25.50 in the parts totaling $150.50. The Gross Margin is therefore 50% ($150.50/$301.00), Why is this important? GM is important because it represents the percent of total sales that remain to pay expenses.

If you run a business you already know that it cost the repair shop more than $150.50 to repair the vehicle. There are other costs like benefits paid to the employee and overhead including the building and utilities. Most importantly, after expenses are removed, there is the most important part: profit for the owner.

A low Gross Margin means that there is less to work with to pay expenses. This in turn means that given some level of expenses, the profit also goes down. The general rule in business when it comes to Gross Margin is that higher is better, and anything less than a GM of 20% is a serious problem for the business.

The GM equation is simple. We only have two ways we can improve GM—decrease our cost of goods (what we pay for parts and labor in the above example) or raise our prices. If our GM is low and we cannot do either of those, the business only left with cutting overhead to maintain profit. Being simple means that GM is powerful, but it also means that if you don’t have control over the limited variables you are in for a rough ride.

And this is where we are with pharmacy. Pharmacies that accept insurance have only one significant lever they can manipulate their Gross Margin: cost of goods. Pharmacies generally don’t have any control over their selling price: the insurance sets that for us. If a pharmacy has a poor GM it has to purchase pharmaceuticals for less and / or cut expenses. Too low of a GM usually means that the pharmacy at risk of having to close its doors permanently.

Soon, we will take a close look at early 2024 reimbursement numbers which reflect the significant changes that have taken effect as of Jan 1 of this year. With this information, we can discuss the ramifications of pharmacy reimbursement in the new year.

Parting out Health Insurance?

Last time we discussed the added complexity of health insurance: the administrative layers involved. At the end, we made the observation that any company purchasing health insurance from an insurance company is essentially pre-paying for health care: your health care premiums will always reflect your usage. Therefore, every company with a health benefit is, in essence, self-insured.

Once you accept this reality, you quickly recognize that the convenience of having an insurance company manage your health care expenditure comes with a mark-up. If there is a markup, there are also ways we could save money by simplifying the equation.

As an employer that provides health insurance, our companies pay 50% of the health care premiums. Our employees pay the other half. If I can find a way to deliver the same benefit that we have at a lower cost, not only does the company win, but so does the employee. So let’s look at some of the ways we might achieve some savings.

Our companies run pharmacies. We complain about Pharmacy Benefit Managers underpaying us for our products, and in turn, profiting from our work. In many instances, the PBM makes more than the pharmacy does! This is now well documented.

Yet, my own companies health benefit uses a PBM to process our pharmacy claims. This is an obvious opportunity to save money: why pay a middleman when we could CARVE OUT the pharmacy benefit and run it ourselves? In fact, many larger companies have started to recognize the potential to save money by carving the pharmacy benefit out of their health insurance. As it turns out, however, this is harder than it sounds. 

The insurance companies and the PBMs have a complex relationship. This centers primarily around rebate dollars involved for putting certain (and primarily brand name) medications on formulary. These rebates enrich both the PBM and the Insurance company, and they are not necessarily passed to the insured (patient or company) as savings. For this reason, a lot of insurance companies will resist or refuse to allow you to carve out the pharmacy benefit — it is a revenue center for the insurance company. Such is the case of the insurance company we currently use. 

Hope is not lost: there ARE insurance companies that will sell insurance plans that carve out the pharmacy benefit. The primary concern, however, is maintaining a benefit that is as good or better than what we currently have, and if we are looking at switching insurance companies, perhaps we should look to replace more than just the prescription benefit.

The process of self-insurance takes advantage of some of those same extra layers described in the last blog post, replacing the insurance company with our own company. Like the insurance company, we can also leverage the health care provider networks by choosing a TPA. For the pharmacy benefit, there are transparent PBMs that can be contracted–though there are potentially even better options for the pharmacy benefit (stay tuned for thoughts on direct pharmacy contracting).

By using the TPA as a resource, you achieve the same pricing advantages the insurance company leverages. Depending on the TPA choice, you can maintain similar or identical access to the doctors, labs, hospitals, and other providers. This allows you to mirror the existing benefit almost exactly.

A small company that self-insures using a TPA can eliminate the mark-up on health care costs imposed by the insurance company. The economic cost of eliminating the insurance company is purely administrative: the company now pays providers directly, based on the negotiated prices obtained through the TPA and the affiliated health network. The employee would still pay their coinsurance or copays, as defined by the plan. The additional work of managing the benefit can be done internally or farmed out to a third party. 

Before we dive further into the details, we need to understand that there is an actual insurance component to health insurance. While most expenditures in health care are maintenance expenses and are readily estimated / predicted, there is a random, event-based, component as well. Examples include accidental injuries or the emergence of a previously unknown health concern. The unknown costs might be small, or very large. Just like life insurance or health insurance, the risk of the unknown events are low, but you must have a plan to deal with these events. The health insurance company allocates health insurance premiums to fund several contingency funds or “buckets”:

  1. Expected Expenditures (the maintenance expenses–based on actual historical usage)
  2. Reserve Expenses (for unanticipated healthcare expenses)
  3. catastrophic reserves (traditional event based insurance)

If one wanted to self-insure their company, they would have to do the same thing: assign the premium such that you can set aside these dollars for the benefit to cover expected and reserve needs. The amounts reserved for the first two buckets can be determined by historical usage and an estimated percentage to be held in reserve. The catastrophic reserve is different. An insurance company generally covers the third bucket themselves, by aggregating risk across multiple groups and tens of thousands of their insured. A smaller company cannot do this, as it lacks the ability to aggregate risk.  Instead, a self-insured company would purchase stop-gap (catastrophic) insurance policy to cover these events. This works like a high deductible policy. The self-insured company funds the expected and reserve funds with premiums. The stop-gap policy will only pay out if expenses exceed a predetermined amount (the risk the company wants to take). The higher that number, the less expensive a stop-gap policy becomes.  

The great part of thinking about insurance in this way is that it makes it easy to identify the potential savings. If you have year with lower than anticipated expenses, you will accumulate bucket two (the reserve). If you have a worse than expected year, you increase your premiums just like the insurance company would do to help replenish the buckets. If you have a horrific year, with catastrophic events costing far more than your anticipated reserve costs, the stop-gap prevents a catastrophic loss for the company. 

It is not unusual for companies that have self-insured to quickly accumulate significant reserves. This should be no surprise: insurance companies make a profit doing this! When reserves accumulate significantly, the company has a lot of possible options: 

  1. the company might decrease health insurance premiums
  2. the amount (fraction) of the premium paid by the employee might be reduced
  3. There might be additional benefits made available to employees
  4. the company might move some of the reserves back into operations (keep in mind that excess money in the reserve funds is still the company’s money — the profit as it were, of self-insuring).

Let’s look at a graphic of what this would look like. In my case, a self-insured pharmacy, I would provide my own pharmacy services. In a general case, one could use a transparent PBM and pay a markup on pharmacy services OR use a direct contract with a local pharmacy, having the pharmacy collect the copay / coinsurance and bill the company for the balance.

Self-Insured Pharmacy providing its own pharmacy benefit Yellow arrows are claims submissions, Green arrows are payments and Blue arrows represent self-referral services.

In both cases the company, not an insurance interest, is as the center of the process. There are no unnecessary layers adding cost. The TPA simply receives the claims, processes them, and passes them back to the company to pay. The TPA charges the company an administrative fee for this service.  

A self-insured company still must define its coverage. This will often be modeled off the previous plan it replaced. Things like the deductible, co-insurance, covered and non-covered services are all defined. For those things that are not in place, there is still an opportunity to cover or not cover the request through the prior-authorization loop.

The self-insured plan does have some additional costs resulting from the administrative burden being picked up. Depending on the size of the company, and the number of insured, this may marginally decrease the potential savings. Even with the added administrative costs, the savings can be significant over time. The financial downside is kept in check by the stop-gap insurance. 

You can bet that my companies will be working hard to implement a self-insured structure for our next health-care renewal. We are not going to miss an opportunity to Make this year’s Renewal Period Encounter Count.