Recently, I have spent some time trying to lend some understanding of the inner workings of the pharmacy world to a financial reporter interested in DIR fees (among other things). The most recent discussion with this reporter left me thinking about how far the profession of pharmacy has been corrupted by outside interests. Pharmacy today is a lot like a game of Russian Roulette.
Narrow Networks and Choice
This blog has discussed the benefits and difficulties facing pharmacy with respect to access to lives. Consider a pharmacy invited to participate in a narrow network. The pharmacy has to make a decision on their participation. The idea with narrow networks is that not every pharmacy will be invited to participate, creating an illusion of exclusivity and access to the patient group represented by the narrow network. This exclusivity comes at a price: lower reimbursement to the pharmacy for servicing these patients.
If a pharmacy elects to participate in the network, they are forfeiting the current level of reimbursement for the services (medications) they provide and accepting a much more aggressive (lower) reimbursement in its place. The carrot, as it were, is the potential of this exclusivity to drive patients to come to your pharmacy. If a pharmacy rejects the lower reimbursement, the pharmacy risks losing most or even all of the patients (even current customers) in the narrow network. If a pharmacy elects not to participate, the patients then have to make a decision: pay more at their pharmacy, or switch pharmacies to one that is preferred by their plan. Make no mistake, many, or even all, patients will eventually succumb to the lure of a lower copay and leave the non-participating pharmacy. A preferred network is, metaphorically speaking, the Pharmacy Benefit Manager (PBM) placing a gun to the head of the pharmacy. Choose between lower reimbursement, or fewer patients (customers).
The wild card in this choice is the reimbursement the pharmacy is going to receive. Reductions in the contract are usually specified as the lesser of either Average Wholesale Price (AWP) minus a percentage or Maximum Allowable Cost (MAC). This lower reimbursement may also be accompanied by Direct and Indirect Remuneration (DIR fees) taken from the remittance advice (withheld from the payment at a later date).
While a pharmacy might be able to estimate the impact of AWP – % or a simple DIR fee, without a clear definition of the MAC price (a price that the PBM considers to be a trade secret), there is no real way to know how participation in the narrow network will actually effect the bottom line before signing up.
Access to Lives
An optimistic pharmacy, chain, or PSAO might look at the numbers and decide to participate, hedging that with the published reimbursement rates, the pharmacy will maintain a profitable margin. The pharmacy will have to find other ways to generate revenue using the “access to lives” it has negotiated. Independent pharmacies using Pharmacy Service Administrative Organizations (PSAOs) heard exactly this logic when preferred network contracts were signed for the 2015 year. Large chains undoubtedly made similar decisions.
A pessimistic pharmacy (or chain or PSAO) might elect to not sign the contract. In the end, they undoubtedly will lose customers. This is revenue that drops from the bottom line. And if the customer doesn’t come into the store, you cannot offer them services or other items to purchase.
The real question for any pharmacy, chain, or PSAO, is which chamber the bullet is in when the pharmacy pulls the trigger on the contract. And each year, the chamber rotates around, so if a pharmacy survived 2015 with a preferred network, it has to pull the trigger again in 2016.
Even a large chain (like WalMart), with some very smart lawyers and accountants, appear to have miscalculated for 2015. WalMart’s recent, lower than forecast financial disclosure blame, in part, pharmacy reimbursement for lower than expected profits. It is not an accident; WalMart participates more narrow network contracts than any other pharmacy chain.
Two Edged Sword Revisited
Earlier this year, I wrote about access to lives (see A Two Edged Sword), and in the end I wrote:
I don’t like the current landscape of pharmacy and healthcare, and it is going to take hard work to change it. Giving up access, to me, is simply wrong. Micheal Lefoeuf once said “Every company’s greatest assets are its customers, because without customers there is no company.” Access to our patients is our lifeline!
Even given the stark reality that the past 6 months have revealed (with reimbursement in some networks well below break-even), I am sticking with my previous assertion. The difference today, though, is the realization that one cannot necessarily generate enough new revenue to cover the losses realized by participation in some of these narrow networks. In order for my pharmacy to continue to service our patients, we are going to have to optimize every aspect of our care. This will be difficult to do while maintaining high quality service. The goal now is to survive long enough to see the end game, where pharmacy and pharmacists are reimbursed not for product, but for the value they provide to the system.
That time is coming, of this I am certain. A significant number of pharmacies will close before that time, and pharmacists not performing clinical services and adding value will find themselves in a difficult position. The pharmacy transformation is coming, and I am certain that we are ready. Ask yourself what you need to be doing to be ready in your practice, and work to make every encounter count.