Narrow network, or preferred network pharmacy contracts are generally offer the pharmacy lower reimbursement in exchange for access to the network’s patient base. Previously we discussed how participation in narrow networks may not actually drive patients in your direction (The Flip Side of Access to Lives). Today I wanted to talk about the math behind these contracts.
Preferred Reimbursement.
In general, a narrow network contract is not very lucrative. Several contracts that I have seen describe in terms of a Generic Effective Rate or GER. This GER defines the average discount on Average Wholesale Price (AWP) the benefit manager will take when it sets its Maximum Allowable Cost (MAC) prices for generic drugs. Historically, an non-preferred network contract might define a GER in the range of AWP – 78%. The narrow network contracts I have seen often have a GER that exceeds AWP-90%.
Doing the Math (or Why Sign a Preferred Contract?)
Before signing a contract, a pharmacy or their contracting organization will evaluate the reimbursement offered to be sure that the agreement is in the best interest of the pharmacy or pharmacies involved. Doing this involves some assumptions on what the pharmacy or pharmacies will dispense to patients in the contract. It is the assumptions that can make or break the analysis once the contract is signed and in force.
The primary assumption is mix of drugs that will be dispensed. The contract promises that the benefit manager will pay out, over all drugs and pharmacies covered by the contract, a GER that averages the discount on AWP defined in the contract. An analysis of the profitability of a contract might take historical dispensing records and calculate an estimate of MAC price from the AWP and GER. This then can be compared to an estimate of the net acuisistion cost for each drug.
Why You can Still Lose When the Average is Profitable
My contracting organization signed a narrow network contract because their analysis showed that while the reimbursement was aggressive, it was still profitable. How then, could I loose money on the plan? The answer buried in the statistics. Remember that all MAC prices are going to average AWP – GER. Profit, however is determined by the difference between the actual MAC and the actual Net Cost.
Consider the top 10 drugs in my pharmacy listed in the table below. Using the AWP / Unit, one can calculate an estimated MAC price for each drug (Est. MAC based on GER). Once a claim is processed, one can capture the Actual MAC price being returned, and calculate the Effective GER. The last two columns calculate the estimated and actual profit or loss per unit for these top 10 drugs.
Based on these calculations, my top 10 drugs should be profitable at the contracted GER (the Estimate Profit/Loss per unit averages $0.215), with only one product underwater. The reality is very different, however. The Effective GER for the top 10 drugs in my pharmacy is much higher than the contract specifies (averaging over 96%). Instead of 1 drug being underwater, 6 of 10 are underwater. The average reimbursement over all 10 drugs actually just below zero.
The next table below shows the top 10 drugs dispensed so far this year in the example narrow network:
Note that while several of the top 10 drugs match the previous table, there are several drugs on this list that appear in at a spot greater than 20 on the overall list. The sample size here is smaller (none more than 6 prescriptions), but after one month, the drug mix already appears fairly stable. Of interest in the table is one drug that does not appear in the top 200 (Quetiapine 50 mg). This becomes important in the discussion below.
Like the previous table, the estimated profit and loss using the contracted GER are positive: none of the top 10 drugs here are estimated to be losers. Looking at the actual adjudicated MAC rates reveals that the average effective GER for these 10 drugs is, like the overall list above, higher than the contractual rate. In this table, the net profit is positive. The reason that the average profit for the top 10 drugs is above zero is the presence of the single outlier drug: Quetiapine 50 mg. This drug, which is otherwise not it the top 200 drugs our pharmacy dispenses, has a high AWP with a MAC price discounted near the contracted GER. It is a stark contrast to the others: a winner. Removing this one drug from the list drops the actual profit down to zero.
This illustrates the danger of using an average GER in a contract. The plan can, and apparently does, discount common best selling drugs at rates far in excess of the contractual GER. Other, less common, drugs will be discounted at lower, more profitable rates to generate an average over all pharmacies that meets the contractual requirements. But if a given pharmacy doesn’t dispense a mix of products containing a sufficient sample of winners, they will quickly trend to either zero or negative profit.
For a given pharmacy, therefore, a preferred network contract becomes a gamble. Will I at least break even? Will I average a few dollars for each prescription over the year? Or will I actually pay the benefit manager, in the form of a net loss, for the privilege of filling prescriptions for my patients? This gamble is compounded by continuing patient migration to narrow network plans in order to save money. Over 75% of patients are now enrolled in a preferred network plan, and that number will only increase with time.
What Do I Do?
In all likelihood, the implications of the current batch of narrow network contracts is just now becoming apparent to those pharmacies participating. After a single month, for example, our pharmacy has managed a profitable mix for one of the more aggressive networks. This, of course, will need to be watched carefully as our mix changes with time. Other networks we are enrolled in use Voodoo DIR fees, which makes assessing our position virtually impossible in the near term.
But pharmacies do have options. Many states have adopted laws that regulate the MAC prices of drugs. It is very important that pharmacies exercise their voices, submitting underwater MACs for review, and reporting problems to the appropriate agencies when the benefit manager fails to implement a meaningful change. While our contract for reimbursement is tied to the GER, we are still entitled to be paid the cost of the drug product. We are still entitled to the protections offered by our laws. Despite the severity of contracted GERs, most common drugs are profitable if the benefit manager actually uses that rate. An average GER can be either fair or unfair to a pharmacy, depending on how the benefit manager manipulates individual MAC prices. It is in our interest fight and ensure we are paid fairly under the contract’s terms.