Having Skin in the Game

Independent pharmacies are in a difficult position in today’s health care climate. By themselves, they have little power to negotiate with larger companies, especially the predominant Pharmacy Benefit Managers (PBMs) that represent well over 90% of all patients in most markets.  In business, there is power in numbers. Enter the Pharmacy Services Administrative Organizations (the PSAOs).

Historically, pharmacy owners paid little attention to their PSAO. The PSAO did their job signing contracts and negotiating on the pharmacy’s behalf, allowing the independent pharmacy owner to take care of their patients. Today, however, the face of pharmacy and reimbursement has changed dramatically, bringing the PSAO into the crosshairs of pharmacy owners everywhere.

If you were to ask the upper management of a PSAO what their job is, they would likely state that they are responsible for providing access to lives for their constituent pharmacies. Pharmacy owners, on the other hand, are more worried about their bottom line. What good does having access to lives do for the pharmacy if those lives do not make the pharmacy money, or worse, lose the money [See “A Dual Edge Sword” for a related discussion].

The disconnect is clear. The PSAO, representing a large number of pharmacies, must find a balance acceptable to all of its members. The PSAO looks to:

  1. Negotiate the best possible contract terms for their pharmacies
  2. Maintain the customer base of member pharmacies to the best of their ability and
  3. Grow the potential customer base of the member pharmacies.

None of these are easy for the PSAO as they have to represent a diverse group of stores representing a variety of geographic regions and economic climates. Even though the PSAO may represent thousands of member pharmacies, the Pharmacy Benefit Managers often dictate terms. The PBMs have a monopsony like position in the market.

Pharmacy Owners, on the other hand, are much more likely to be myopic in their view of a contract. They have significant personal risk in the form of payroll and inventory. Having “skin in the game” tends focus them on reimbursement details and the bottom line. With such a difference in goals, it is no surprise that some pharmacy owners are critical of their PSAO. How can a PSAO sign contracts for its constituent pharmacies that may cause them to go out of business? To some pharmacy owners, the PSAO might be considered to be as harmful to pharmacies as the PBMs. The PSAO does not appear to have any skin in the game, and therefore appears to have little to lose.

Recently, it was revealed that a number of PSAOs had opted out of one specific Medicare Part D preferred network for 2015. Only one larger PSAO signed this contract. Obviously there was something in the contract that effectively persuaded most PSAOs from signing with the network on behalf of their member pharmacies.

In the above case, it was not just reimbursement rates that were the problem. The network contract also specified that the pharmacy needed to maintain minimum Generic Dispensing Rates (GDRs) during the course of the year. Failure to do so would result in penalties enforced at the end of the year. This type of contract is potentially catastrophic to a pharmacy that fails to meet the requirements. The resulting chargebacks from such a failure have the potential to cause significant pressure on cash flow and liquidity for the business.

a PSAO that puts its own skin in the game, however, is a game changer

So why did one PSAO elect to sign this contract? The answer is surprising. The PSAO that signed the contract decided to put some “skin” into the game itself. The PSAO determined that they were confident that they could monitor their stores and help coach stores in jeopardy, effectively working together to maintain the minimum GDR during the course of the year. At the end of the year, if a pharmacy fails to maintain the minimum GPR, the PSAO, not the pharmacy, would pay the penalty.

Access to lives is important. Access to a PSAO that puts its own skin in the game, however, is a game changer. I hope that more PSAOs realize that they need to have skin in the game as well.