Pharmacy is an interesting business. Unlike most other business models, pharmacy does not completely control the price it charges for services and product. Pharmacy Benefit Managers have leveraged several aspects of contracts and healthcare to remove significant parts of the free market. These include indirect manipulation of a pharmacy’s Usual and Customary Prices, maintaining independent MAC lists, and taking advantage of the requirement that patient claims have to be submitted at the point of sale for them to be counted toward out of pocket expenses and deductibles. The end result is that the some plans actually charge patients more than the plan pays the pharmacy for the medication, a tactic known to pharmacists as a claw-back. Let’s look each component before we look more closely at the claw-back.
Usual and Customary Price
Usual and Customary (U&C) Price is the price a business charges for a product or service. The pharmacy is required, by its contract with the benefit manager, to submit its U&C price to the PBM: it cannot have a lower price for cash customers. A typical contract between the PBM and a pharmacy provider stipulates that the PBM will pay the pharmacy the lesser of:
- Average Wholesale Price (AWP) minus a percentage, plus a dispensing fee or
- Maximum Allowable Cost (MAC) plus a dispensing fee or
- The pharmacy’s U&C price
If a pharmacy submits a U&C price lower than either of the other two arms of the contract, it leaves money on the table. Ten years ago, we regularly submitted U&C prices that were lower than the MAC rate for common generics in order to keep our cash business competitive. Back then, a lowered U&C price, even if it means getting paid less buy the insurance, still represented a respectable margin and profit.
The same concept is not true today. MAC Reimbursement, being applied to virtually all generic medications sold today, is often so low that leaving even a few pennies on the table becomes significant. Today, pharmacies must ensure that they are paid the full allowable amount on every claim simply to keep their doors open. In short, the nature of the PBM contract forces pharmacies to inflate their U&C price in order to ensure maximum allowable reimbursement for all prescriptions.
If a pharmacy only had to deal with one PBM, manually adjusting the pricing of each product on the MAC price list would be possible. In this way, the pharmacy could maintain competitive cash prices and not violate contracts. But few pharmacies deal in such a limited environment. Most have dozens of different PBMs, and each PBM can have multiple MAC lists, one for each plan.
Each of these lists contains different drugs and different prices. Attempting to ensure a pharmacy’s U&C is slightly above every MAC price would be impossible. Any attempt to be competitive in the cash market would necessarily be decreasing pharmacy reimbursement on the insurance side. That being said, there are examples of companies trying to do just this. The most notable example is Walmart, who attempted to leverage the idea of the $4 generic as a loss-leader. Their goal was to drive customers to its pharmacies and therefore increase traffic in its stores. While they would not make the same margin / profit on the prescription, they hoped to increase sales elsewhere in their stores. This worked for Walmart for awhile.
But gradually, this tactic began to fail. At the time Walmart started this program, getting $4 for a 30-day supply still made the pharmacy a small profit. The PBMs, however, moved to decrease their MAC prices for on these drugs. This impacted not only Walmart, but all pharmacy providers. At first, the PBMs reduced the MAC prices to $4, but later they went even lower. So even Walmart’s loss-leader U&C price ended up above the PBM’s MAC prices.
Trapped by Insurance
Whenever insurance in involved, the equation is always more complicated: the provider has to be in-network, or the service provided to the patient may not be covered. So if a patient finds a product or service to be less expensive outside the network, they risk spending money on healthcare that does not apply toward their deductible or out-of-pocket maximum expenditures. While there are instances where the patient can submit the expenses themselves to have them counted, this is not universally true. In cases like Medicare, patients cannot submit expenses themselves. Many HMO organizations have similar requirements.
The Art of the Claw-Back
To summarize the constraints outlined above: the current healthcare system tends to artificially elevate a pharmacy’s U&C prices. The net effect: plans look like they are saving consumers money. This subtile subversion of the free market is enhanced by the fact that patients must use participating providers to use their insurance benefit. It is this tight control over providers that allows the claw-back to exist today.
What is a claw-back? With a standard claim, the provider submits the service or product to the insurance and the benefit manager or plan will price the product and return the patient’s copay. In this case, patient’s copay represents all, or some part of the total price. But in a clawback, the copay is actually greater than the total price (the amount paid to the pharmacy). Let us look at a concrete example of a clawback.
A patient goes to a pharmacy and fills a prescription for a sertraline 50 mg tablets # 90. The pharmacy bills the insurance its Usual and Customary of $305.48 The insurance returns the following:
- Total Authorized amount (the amount the pharmacy is to be paid): $6.68
- Patient Copay: $25
The pharmacy will collect $25 from the patient. The insurance will withhold $18.32 from the pharmacy’s next remittance, effectively collecting a clawback. In this case, the “cash” price (U&C) is not less than the copay. That does not mean, however, that there are not other programs outside the patient’s insurance that would result in a lower copay to the patient.
So what happens if the pharmacy lowers its Usual and Customary Price from $305.48 to $10 to be competitive with the Walmart 90 day plan? The same $6.68 is authorized by the insurance. The same $25 copay comes back to the patient. Now the cash price IS lower than the patient copay!
Now what happens if the pharmacy further lowers its U&C below $6.68? This is where things get interesting: the claim comes back HIGHER. The pharmacy sees more than it asked for (the same authorized $6.68) and the copay is still $25. There is no rational, contract-based explanation for this.
Are clawbacks common? Most every pharmacy sees them. In our case, we see only a few. This year, to date, we have only seen 11 clawbacks. All 11 are from two plans that are not highly represented in my geographic region. In other areas of the country, clawbacks are much more prevalent.
What can a pharmacy do to educate patients? Our answer is to put the authorized amount and the copay on the patient’s receipt. This allows us to easily point out the practice to the patient while they are standing in front of you at the point of sale. This is yet another example of making every encounter count.