I promised we would delve further into health insurance, and like onions, there are lots of layers. A basic form of insurance, like Whole Life or Term Life insurance, involves a contract between the insured and the insurance company. There also exists a relationship between the insurance company and the insurance agent and possibly a relationship between the insured and the agent. That looks something like the illustration below (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships):
Simple Insurance Relationship Graph.
As we alluded the last time, there are more layers involved in Health Insurance. Some of these layers are owned / operated by the insurance company, and others are contracted out. This type of insurance might look a something like this: (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships. Yellow Arrows represent administrative relationships)
Typical Health Insurance Relationship Graph.
Here we add a TPA (Third Party Administrator), which may or may not be owned by the Insurance company. This company is responsible for processing medical claims. Likewise, the Pharmacy Benefit Manager (PBM) processes pharmacy claims. Both of these companies have created networks of contracted providers (hospitals, labs, doctors, pharmacies etc) that have agreed to accept negotiated price reductions for their service in exchange for inclusion in the network. The TPA and PBM pays the provider and, in turn, seeks reimbursement from the Insurance, including some form of transaction fee for its service.
The Prior Auth department or company (PA) decides what is covered and is not. They traditionally report directly to the insurance company. The TPA and PBM enforce the decisions made by the PA department.
Below the TPA and PBM is where the providers finally appear. Not only are there a lot more financial relationships (green arrows) and Administrative relationships (yellow arrows), but we have placed multiple entities between the providers and the insured.
Here is another way to look at this: the Insured is not purchasing healthcare from the providers, but instead from an insurance company. This is completely backwards! And whenever a group or company inserts itself into the equation, they will ultimately increase the costs passed on to the insured: there is no such thing as a philanthropic TPA or PBM — they are in the business to make money.
These added layers represent both increased costs, but also represent several different opportunities to providers. First, providers might find ways to directly contract with patients, or groups of patients. Concierge medical practices are a great example. A pharmacy directly contracting with an employer to provide service is another. Some pharmacies are eschewing insurance contracts completely, moving to a Cash Plus model. Direct Contracting and Cost Plus will be discussed here in the near future (stay tuned)
One other major implication of this model is recognizing that a company that pays for health insurance is in fact, self insured. They are purchasing health care from the insurance company at a mark-up (the insurance company will always make money), and if their business uses the insurance more than anticipated, the insurance company will front them the money for the expenses. When that happens, the insurance premiums will go up, and the insurance company will get their money back. This creates an opportunity to explore removing some or all of the middlemen from the equation and saving significant dollars on health care.
This final observation will be the focus of the next blog, where we look at what it takes to self-insure your business by removing some of the layers without actually changing your benefit. The result is a more streamlined benefit that saves both the employer and the employee money, Making Every Encounter with your health care insurancebenefit Count.
If you have followed the topics here over the years, you will undoubtedly know that we have spent a great deal of time discussing Pharmacy Benefit Managers. Today we are going to spend a few moments discussing the larger picture: Health Insurance. To do this, we need to describe insurance first, as Health Insurance is not pure insurance.
Insurance, in the dictionary sense, is nothing more than a guarantee for compensation for a specified loss. The most common example would be Life Insurance (compensation for the loss of life). Other losses that are insurable might be damage to your home or car. You can insure a lot of things. The policy requires a premium — the price paid for the insurance, and the premium is based on the assessment of risk. Using statistics, it is possible to ascertain the likelihood of the loss based on historical data and information provided by the insured. This is a key point: Insurance is EVENT BASED.
Another key point is that insurance is entirely funded by the insured. The insurance company is in business to make money — they are not altruistic. The premiums they collect cover the expected losses paid out for the year plus additional reserves, money to pay commissions to agents, and of course profit. If a large number of claims are filed, the insurance company guarantees payment: the additional reserves are there for a reason. But after a run on the reserve funds, the premiums for the customers will go up to compensate.
Heath insurance shares some of the historical attributes of traditional insurance. For example, it would cover medical expenses from an accidental injury. But the business of health is not entirely event based. While there are events that influence the need for health care, health care in general is a maintenance function. Even the healthiest individuals, with no major events, consume health care. As our bodies mature and age, they need more and more general maintenance to keep things operational.
Health insurance, like any insurance, is a net win for the insurance company. They charge premiums based on usage of heath care. If you use more than they expect, your premium will go up. This is a key point: the covered person, family, company, or group is, essentially, self insured. They are just pre-paying for their health insurance PLUS the reserve, PLUS the profit to the insurance company. If the aforementioned covered entity uses more than anticipated (or costs simply rise), their premiums will go up to compensate the increase. The insurance company simply advanced you the money, and like a bank, you will repay them.
Now let’s reconsider healthcare insurance. If I offer healthcare as a benefit to my employees, the premiums being paid are just pre-payment for what is going to be spent. If there is extra, the insurance company does better. If we use more, my premiums go up (and the insurance company still wins). I am self-insure, but paying another company for the privilege. Why would I do this? Convenience and the status quo are the two biggest reasons. But could I use this knowledge to save my company money? The answer is a resounding YES.
In the coming weeks we will discuss the economics of taking the insurance company out the equation. More and more companies are looking to do accomplish this, and it isn’t as far-fetched as it sounds. So until next time, be sure you Make Every Encounter in your business Count!
In pharmacy, there are a few different ways that drug product is organized on the shelves. This organization is important because there are thousands of different combinations of drug and strength. Efficiently in finding the correct product on the shelf is important. The two systems that are used in our stores are alphabetizing drugs on their name (brands by brand name, generic by generic name) and having two sections, one for brand and one for generic, both alphabetized.
The brand section for oral solids at one of our stores once spanned an equal number of bays as the generic drugs. Over the years, with brands going generic and fewer new brands being released, the shelving space relegated to the brand name drugs has diminished. Significantly. Currently we have about twelve 4-foot shelves tasked to organizing our brand name medications: about a quarter of the size it was back in 2003 when I began my ownership journey.
Bulk medications, like inhalers, for example, have maintained a higher percentage of brand name product over the years. This has to do with the specialization required to create generics of these dosage forms. Here, our brand and generic products are stored side-by-side. We have about 36 feet of shelving dedicated for this section.
So, why am I describing my shelves to you? In the last months, we have made the decision to significantly cut back on our inventory of brand name medications in order to increase turns and to free up cash flow. For faster-moving products like Eliquis, we are maintaining a 2-3 day supply on the shelf. For slower moving items, we would typically have just a partial bottle or even no stock. For bulk items, the number carried is often zero.
As I pursued my shelves the other day, I was struck by how bare certain areas of the shelves were. The inhaler section, which normally was stacked 1-3 units deep and covered most of the available space was almost bare. The oral solid brand shelves were also very spare. We were approaching zero stock on most of these expensive items.
The question, therefore, is what impact is this having on the practice. And because we are approaching the end of the year, our inventory crew just happened to be scheduled for a visit. The result? Our inventory turns have improved, and are >14, and our overall inventory was down by $90,000.
This transition was not made in isolation. We have worked hard to use MedSync to ensure that patients have their medications on time. We have socialized these changes to our patients, asking them to give us a day or more notice on certain refills if they are not in MedSync. And while there are always outliers, this has worked well.
Our purchases went down for a short time as we burned through excess inventory, but now that we are back at equilibrium, we are still spending the same amount with the wholesalers. The differences are two fold: we don’t have the extra inventory on our shelves and we have more cash on hand if needed.
Given the challenging situations that have been thrust upon pharmacy, with brand name medications often being paid below our costs, this was a logical first step. If legislators don’t take action to reign in the anti-competitive practices of the pharmacy benefit managers, the next steps will be to start paring our brand offerings or shifting those prescriptions to mail order as perviously described.
Pharmacy owners need to be nimble today. Make changes quickly, responding before the crisis occurs. Make Every inventory Encounter Count.
We have discussed the problems pharmacies have been having with reimbursement for brand name medications for a few weeks now. The implication for pharmacy are significant: dropping plans with underwater reimbursement, not stocking some, or all, brand-name medications, closing their doors permanently (even after trying one or more of the of the previously mentioned solutions). A pharmacy intervention is desperately needed.
Short of the Federal Government stepping in and prohibiting some of the unfair business practices being used by Pharmacy Benefit Managers, what can be done at an individual pharmacy level to maintain patient access to pharmacies? For independent pharmacies, at least, there is one possible solution that comes from an unlikely source. Mail Order.
I can hear the whispers and buzz out there at my mention of Mail Order pharmacy as a solution to the difficulties currently being seen by independent pharmacies. I have not been drinking: hear me out. What if a pharmacy could, at the request of the patient, arrange for unprofitable brand name medications to be filled by the PBM’s mail order pharmacy while maintaining the patient’s home pharmacy for all other services? Sound Crazy? It isn’t. Let’s take a closer look at how this might be possible.
At first, you might think that losing the unprofitable prescription to mail order creates gateway for the patient to receive all their medications by Mail Order. The Mail Order pharmacies would certainly welcome that option. But what if the pharmacy managed the mail order experience for the patient on their behalf? Let’s outline what this might look like:
The pharmacy gets written permission from the patient to manage their mail order benefit on their behalf.
The pharmacy creates and manages the patient’s mail-order pharmacy account.
During the normal Med-Sync process at the pharmacy, the pharmacy orders the patient’s off-loaded brand medications from the Mail Order Pharmacy.
Depending on local pharmacy rules, the Mail Order prescriptions are either mailed to the Pharmacy (if allowed) for the patient to pick up with their other synced medications OR sent to the patient directly (if not allowed).
The concept is simple enough. While it requires a little footwork and coordination, the independent pharmacy can remain the patient care hub as before. The only difference is that the pharmacy doesn’t lose significant dollars on specific brand-name medications anymore.
This mechanism has non-financial benefits as well. The patient maintains a pharmacy home: a place they can interact face-to-face with a pharmacist, a place where the patient’s health and medications are managed locally. If the landscape changes–say Congress re-balances the equation and pharmacies no longer lose money on brand name medications–bringing these prescriptions back to your pharmacy is simple.
But in practice, scaling such an operation can be a challenge. Doing this for a few patients is probably manageable (and that might be all that is needed for some smaller volume stores). As the volume of the independent goes up, however, management of the workflow becomes critical. There are, however, partners that can help you manage a larger population using this strategy.
As it turns out, we have another option. An option that may be far more palatable to the independent pharmacy owner than ultimately closing shop. Independent pharmacies have a way to continue to serve their communities. Independent pharmacies can continue to Make Every Encounter with its patients COUNT.
Today, it is possible that a pharmacy can be penalized for the mixture of patients they serve. Given the exact same contract with a PBM, a pharmacy might be paid less on average than another pharmacy solely based on the mix of plans and products billed to the PBM. These things are entirely out of the control of the pharmacy, but the consequences can have profound impacts on the financial viability of the practice.
Today we must religiously watch our monthly reimbursement trends across all payers to see if things are changing. Let’s look at one PBM’s Plan payments made to two pharmacies in terms of brand name drug reimbursement over the course of several months this year. The biggest differences between these pharmacies are physical locations (patient populations) and the mix of different brand name drugs dispensed to their respective patients.
We first need to level set; in case you do not already understand the complicated relationship between purchase price and contract terms. A PBM’s reimbursement contract rates with the pharmacy terms are typically written in terms of the Average Wholesale Cost (AWP) minus a percentage. The pharmacy purchases at Wholesale Acquisition Cost (WAC), which is about 17% lower than AWP. Furthermore, if a pharmacy is a good customer to its wholesale partner, it may receive additional discounts on brand name drug. As a rule, few pharmacies purchase brand name product much below AWP -21.5% to AWP -22%. This is, essentially, the break-even point on brand drugs for pharmacies.
Another thing to remember when looking at reimbursement based on percentages: higher cost items impact the pharmacy far more than lower cost products. Many generic drugs cost the pharmacy less than a dollar. Brand name medications can cost $500-$2000 and up. Being underwater by a couple of percent in the generic realm sets the pharmacy back a small amount, but in the case of a brand name medication it can easily lose the pharmacy $50-$100 or more. Given that the average profit for prescriptions is typically between $5 and $6, one loss on a brand name medication can erase any profit from 10 or more profitable generic prescriptions.
The graphs below display reimbursement based on discount from AWP. The Y-Axis ranges from AWP -19% all the way down to AWP -27%. Remember that most pharmacies are breaking even at AWP – 21% to 22%, and losing money below that threshold. Look at these two graphs and see if you can spot similarities, trends, and difference between these two pharmacies.
Pharmacy A Brand ReimbursementPharmacy B Brand Reimbursement
Both pharmacies show a downward trend over the past several months. Pharmacy A (the TOP graph) was seeing an average loss on all brand name drugs billed to these plans in every month except July. Pharmacy B (the BOTTOM graph) was underwater on brand-name medications in every month, and their losses were also significantly worse, dropping well below AWP -27% in three of the six months shown. Their brand reimbursement for these plans was far, far below the break-even reimbursement level of AWP -22%.
So, what is the reason for the difference between the stores? There are three pieces to this puzzle. First, this PBM, like most, has several plans, each with slightly different reimbursement rates. The pharmacy with the worst brand result (B) has some patients taking medications designated as specialty by the PBM. This 3-5% of brand-named product dispensed is being reimbursed at AWP – 27% to AWP-30%, decreasing its overall reimbursement. Second, pharmacy B has a much higher percentage (60% vs 85% of claims) of patients using one specific plan that pays, on average, significantly less than other plans offered by the PBM. Finally, the effective rate being paid across all plans is lower for one pharmacy based on the selection of brand name drugs being dispensed.
Remember, the pharmacy has little control over any of these variables. The only things it can do, faced with this poor reimbursement are (in order off increasing severity or risk):
Stop stocking and dispensing specific brand medications (especially those designated as specialty).
Drop individual plans that reimburse poorly.
Stop stocking all brand medications.
These are all drastic steps: the pharmacy cannot simply refuse to fill products for one plan and fill for others as this would be a violation the contracts. In other words, whatever response the pharmacy has will have to be duplicated for all insurance plans across all PBMs.
Keep in mind that any of these choices will result in the patient having less access to their medications. If there are other pharmacies near either of these pharmacies, impacted patients will likely move all their prescriptions. This could result in the recipient pharmacy, having picked up even more patients with a poor mix of plans and products, to make the same decisions, further propagating the problem.
If the pharmacy is more geographically isolated, for example in a rural area or a city center with few or no other pharmacies, the reduction in accessibility is far more concerning. Patients could be forced to drive significant distances to a pharmacy that would accept their insurance or stock the product(s) they need.
Pharmacies are at a point where significant losses from dispensing brand name drugs are not sustainable. Most pharmacies don’t make enough revenue elsewhere to cover brand name drugs as a significant loss-leader. These hard choices are becoming more and more inevitable.
What is clear is that something must change. Stay tuned and we will discuss an alternative that may be able to allow independent pharmacies to continue to serve their patients while maintaining accessibility to brand name medications. There are no silver bullets, but make your next encounter with the Thriving Pharmacist blog count. Next time we will offer a possible solution.
I am going to date myself: My first pharmacy job, back when I was a pharmacy student in the mid 1980’s, still used a typewriter to create labels. There were computerized pharmacy systems available, but they were not ubiquitous as they are today. Comparing workflow technologies at my first pharmacy job to what I do today is a very, very stark contrast.
Technologies have made the practice of pharmacy much more robust over the years. First came electronic patent records and electronic claim submission. Then robust clinical screening tools, electronic point of sale registers, and IVR technologies. Today, we use advanced robotics and networking, allowing me to manage my stores that might be more than 2 hours away by car.
Along the way, pharmacy, and especially independent community pharmacies, have become targets on the digital front. Pharmacies collect significant amounts of personal information that are useful to identity thieves, as well as process a lot of credit card transactions. And unlike the larger chains, who have technology budgets to address these threats, smaller independent pharmacies are often not aware or prepared to thwart these threats.
Today, even large companies regularly suffer data breaches. I received two notices in the last 6 month related to my information possibly being involved in breaches with larger companies. We generally don’t hear about the smaller companies being breached, but it does happen, and the consequences are just as troublesome for both the pharmacy and their patients.
Information Technology Security is a big deal today, and generally speaking, it is beyond the expertise of most small pharmacy owners. Even if an owner is technically savvy, they probably don’t have the time to handle it AND manage the other daily aspects of operating a pharmacy. You need help. Expert help.
This can be expensive. Our company underwent a security audit awhile back. This was a real expense, but the money was well spent. While our physician and technical security was well reviewed (and we were able to shore up some small deficiencies quickly), we discovered that we lacked specific policies and procedures. Knowing your technological weaknesses, in today’s world, is important.
Security thru obscurity is not an option. If you have not invested in your network security, you are at risk. Even if you have made the investment, having a third-party validate your work is important. Like everything worth doing, Make Every Encounter Count, including those involved around your businesses security. And as always, if you have questions or need additional guidance, let us know!
Over the years, the patient base of our pharmacies has changed dramatically. When I started in pharmacy, for example, we had a significant cash business. The percentage of our business that went thru insurance was growing steadily: the number was near zero not that many years before. Then came Medicare Part D, and cash customers became rare. Today, nearly all our pharmacies’ business is submitted to a third-party payor.
Back in the 80’s and early 90’s, we kept tabs on what percentage of our business was insurance. Today, we pay more attention to which insurances are most impactful in our business.
In Iowa, for example, commercial insurance has been predominantly represented by one company, and only recently have we seen that domination fade. That means that if that payer made any changes that impacted our reimbursement, our pharmacy would be subject to real consequences.
While commercial insurance is still heavily weighted in my state by a few primary players, diversification is beneficial: not all our eggs are in one proverbial basket, so to speak. Medicare Part D is another basket, and the total percentage of our business that Medicare Part D represents is yet another key metric we are interested in.
What makes both measurements more difficult has been the consolidation of the Pharmacy Benefit Manager (PBM) market. Today, almost all our business (both commercial and Medicare) is managed by three or four PBMs. And one or two of these represent most of our current business.
It is more important than ever to understand which companies have heavily weighted influence over your stores. This insight shows you where you are most vulnerable to outside pressures. With this information, you can make decisions on individual prescription drug plans you might want to drop due to unprofitability.
Teasing this information out is becoming more complicated because the PBMs have created their own buckets for plans. These buckets are described by the BIN, PCN and GROUP numbers. The combination of these variables can, and does change, year to year. Often there isn’t an easy way to identify what plan a patient is on unless you have a copy of the patient’s current card on file.
Running a payer analysis on your store(s) is an important tool you can use to better understand your strengths and weaknesses. If your payer mix is anything like mine, you might need a hand to match BIN:PCN:GROUP combination to different types of plans (Commercial, Medicare Part D, Medicaid, etc). If you use a PSAO (Pharmacy Services Administration Organization) that works on the contracting for your store(s), they are one place to gather this information.
As always, if you need additional information or help, reach out to us. Make Every Encounter Count, even when you are counting prescriptions in each bucket!
If we think back to our time in pharmacy school, many of us remember the excitement of learning new clinical skills, discovering drug therapy problems, and the satisfaction of patient care. These are all important, and to this day I still get excited for the unknown clinical realms that I will venture into any given day: no two days are alike.
As a pharmacy owner, I also think back on how little time was spent in pharmacy school learning about the various aspects of running a business. And let’s face it, back when I went thought pharmacy school, we did spend time on this. Today, with the emphasis increasingly on clinical skills, new pharmacists have even less exposure to the business aspects of running a pharmacy. It is left for them to learn this on the job.
Ironically, I also have noted an uptick in young pharmacists with interest in pharmacy ownership, in part due to dissatisfaction with some of their first experiences in the pharmacy work force. Having a solid grasp on the mechanics of operating a business is again becoming more important. Today we will look at an important concept in any retail facing business: Turns.
The standard definition of inventory turns is the cost of goods sold (CGS) / average inventory. This is closely related to two other metrics, sell-through rate and days of inventory on hand. A store’s “Turns” metric is a benchmark for inventory turnover. The average retail store nationally has just under 11 “turns” of its inventory each year. Another way of stating this would be: the average item on your shelf sells 11 times a year.
Turns are important because inventory is money. For example, my pharmacies have between $100,000 and $260,000 of inventory on their shelves at any given time. That represents cash on the shelf, not in my bank account. Yes, you need inventory on the shelf to do business. With too little inventory and you will be known as the “out house” and with too much inventory you will suffer cash flow issues. Optimizing your turns is optimizing your cash position.
Like any financial measure, it is simple to see how one can impact turns. Given the two parameters — Cost of goods sold and inventory on the shelf, one can logically increase turns by increasing sales or decreasing inventory. Being a pharmacy, however, makes this a little more nuanced. In a pharmacy in the United States, the inventory is typically not unit of use (one bottle is one patient prescription): we tend to have a lot of items that will have a remainder once something is used.
In pharmacy, therefore, the trick is to balance the reorder points for items to cost of and demand for the product. Because your turns equate directly to dollars, it makes sense that the best way to positively impact the metric is to concentrate on the high dollar items. Let’s look at three examples:
At one of my pharmacies, Atorvastatin 20 mg tablets are dispensed 40-50 times a month and we use 2500 to 3000 tablets every month. This is a low cost and high use item. Selling more Atorvastatin 20 mg would not appreciably increase my cost of goods sold (as it is inexpensive) and having a month’s supply on my shelf might represent $100-$150. This is not a good candidate.
On the other end of the spectrum might be Ozempic 4mg/3ml. This product is unit-of-use: we don’t have to worry about having a partial box on the shelf after we dispense it. Each month we dispense 7 prescriptions, representing 20-30 boxes. Each box costs between $800-$900. With this product, I can significantly impact my turns because sales represent roughly $250,000 per year, which is about my average inventory on the shelf.
My goal the Ozempic is to keep the absolute minimum necessary in my refrigerator. This takes a little work: I need to know who is taking the medication and when their next prescription is due so I can order it shortly before the prescription will be filled. I determine that I only need to keep one or two boxes of the drug in my refrigerator for any new patient started on the medication.
By performing a variant of Medication Synchronization (MedSync) on all patients with this medication might be able to decrease the number of boxes of the medication in inventory from 10 to 2. A pharmacy with an average $210K of inventory and $2.3M in CGS/yr has 10.95 turns. Taking 9 boxes out of inventory over the course of the year increases turns to 11.3, a significant change with one medication.
Not all medications are unit of use. Our third example is a vaccine: Shingrix. We currently give 8-10 doses of this every month and the product comes in a box of 10 doses. The drug isn’t quite as expensive as our Ozempic, having just 12 doses in the refrigerator puts the value north of $2,000. With this drug, I cannot adjust the quantity I keep on hand: I have to order 10 doses at a time.
So how can I impact turns? In my case, giving 10 doses/month on average, I reorder only when I get down to one dose (called a Re-Order Point or ROP of 1). This means that I will never have more than 11 doses in my fridge and I’m risking being out of the vaccine on occasion, when we have several walk-ins near the end of the box. But I can also take an additional step: I can schedule my vaccinations. This way, I can ensure I have stock on hand. Scheduling can also allow you to use the entire box in a short period of time: schedule 10 doses over a few days and order what you need immediately prior.
This drug, using the prior example, will add 0.1 turns if we can decrease our average inventory on hand from 12 to 1. This might not seem like a significant change, but it represents, on average, having and extra $2000 in your bank account over the course of the entire year. This helps take pressure off of paying other bills, like payroll, by having additional cushion in the checkbook.
This is the essence of managing turns. Obviously, a pharmacy has hundreds or even thousands of different items in its inventory. The trick is to identify which items have the most impact and work with these first. There are, of course, tools you can use to further manage and even predict demand. These can used to further increase your turns and improve your cash flow.
As always, if you have questions, or need further help, our consultants can help. In this case, help you Make Every (inventory) Encounter Count!
Ask any pharmacy employee how many calls they received weekly from secondary sources for product, and you will likely see a quick eyeroll. Personally, I received up to a dozen calls per week: it is a veritable alphabet soup of companies.
The companies run a gamut of philosophies: short-dated drug product, DME specific, compounding ingredients, OTC and front end, and of course the traditional drug product offerings, sometimes even including brand items. The reason they call so often is that they aren’t your first choice for purchasing. You likely have a primary wholesaler where you purchase most of your product.
Most pharmacies have a primary wholesaler contract for a reason — they require a full catalog of brand and generic offerings–something that most secondary suppliers generally cannot do. If you do have a primary wholesale relationship, chances are that there are provisions within that agreement (sometimes called levers) that allow you to achieve a better cost of goods as the levers are triggered.
Common metrics used by the wholesaler to unlock progressively better cost-of-goods (CGS) include things like purchase volume, Generic Purchase Rate (GPR), Generic Compliance Rate (GCR), and Brand Purchase Rate (BPR). The savings in CGS is often reflected in rebates on generic purchases, with rebates increasing when the pharmacy performs better in the metrics.
The primary wholesaler is trying to create a sticky customer — one that purchases all, or at least most, of the product they need from them. Many of these metrics reflect generic purchases: the wholesaler is interested in capturing the generic purchases from the pharmacy because this is where they themselves have a margin. Here is a not-so-secret: wholesalers often sell brand name products at or below cost to their customers, hence the focus on the generic sales. (This secret doesn’t take the sting out of the pharmacy also selling the brand below their cost much of the time.)
But with reimbursement from payers continuing to drop below the pharmacy’s costs more and more often, pharmacies feel pressure to find savings on generics in the secondary market. This is where the challenges begin. While purchasing a small amount of generic product periodically will likely not impact your GCR or GPR, significant leakage can drastically lower this metric, increasing your Cost of Goods for your primary and negating any savings you might achieve by decreasing your rebates in two ways. First, a lower percent rebate and second, lower generic purchases to base the rebate on.
What the primary wholesaler wants, of course is all your volume, and they know that you generally cannot just forgo having a primary wholesale relationship. The wholesaler, therefore, has leverage on the pharmacy thru the levers and the necessity of having a primary source. The pharmacy’s only leverage on their primary wholesaler is the possibility to of changing primary wholesalers — a proposition that is very painful, and generally doesn’t save the pharmacy any real money in the end. So, what is the pharmacy owner to do? What they want, what the NEED, is to minimize their CGS in the face of the overwhelming pressure of falling reimbursement given their position in the wholesale equation.
Obviously, there are strategies that can be applied to try to accomplish this goal. Generally speaking, here is an outline of the options available:
Stick with the primary wholesaler and maximize your rebates to achieve the best CGS possible with the primary.
With a GCR based contract, manage the GCR ratio (generic purchases to total purchases) to make room for savings in the secondary market.
Don’t play the rebate game at all. Always purchase the cheapest product available from the cheapest source.
Rethink your pharmacy model.
The first option is the easiest. Your CGS may not be completely optimized, but you may also be able to achieve a better brand CGS, offsetting some of the loss on underwater generics. This may require negotiation with your primary wholesaler to optimize your cost of goods. We are on a GPR contract, and this is the strategy that we are currently using at our pharmacies.
The second option takes extra work and planning. This can be done successfully, but in my experience, the amount of savings possible depend on the effort put into the strategy. You always must compromise on something in the equation: for example, accepting a lower generic rebate target and an increased cost for brands in exchange for generic savings. If you do go this route, and are on a GCR model, you will need secondary source that has a significant brand drug catalog. The is the only way you can balance your GCR is to push brand name purchases away from your primary wholesaler. There aren’t that many secondary sources with significant brand catalogs. One good choice is Independent Pharmacy Cooperative warehouse. We have used this strategy in the past when we were on a GCR contract.
The third option has become more popular with some of my colleagues in recent years. I hear them swear that their overall CGS is better, but at what cost? The time spent chasing deals, and the excess inventory often stocked when they find a good deal both hurt the financials in other ways. Another down-side of this option is the increased burden of DSCSA record keeping that will eventually become required — using dozens of sources could make this a nightmare. A further risk of this options is losing your primary wholesaler. If you are not purchasing adequate volume with them, you may not be worth their time. This could leave you without access to some products. A successful implantation of strategy requires both managing purchasing and maintaining a delicate balance with your primary.
If the amount of effort for the middle options frightened you, the last option is probably not feasible for you either. In this option you transition to other business models for your pharmacy. Examples might include converting to a cash-based pharmacy model, or perhaps focusing on compounding. You might work with a concierge medical provider and provide a subscription-based model with a limited generic formulary. The goal here it to not take insurance. This removes the pressure on CGS, as you can market the product at a fair cost: a cost that makes you margin and saves the patient / provider money.
This article is a bit long, but I promise that is could have been a LOT longer. The complexity here only goes up when you start to look at any given pharmacy and the variables important for that practice. The bottom line is that there are options. Not all are easy. If you need additional information or help, our consultants may be able to help. Be sure you take the opportunity to evaluate your purchase model, or even practice model: Make Every Encounter Count!
We are well into the fall seasons, with Halloween right around the corner and Thanksgiving is not far behind. Besides the costume fun and turkey with all the fixings, we are also preparing our pharmacies for the new year. Medicare Part D Open Enrollment has begun and Retroactive DIR fees will soon be a thing of the past.
While that all sounds pretty normal, there is a reason that this blog post is titled as it is: the future of pharmacy is very uncertain, murky, and potentially terrifying. One only has to look at the news to understand that things are shifting quickly, and not for the better. Consider:
Pharmacy Employees walking out in protest of working conditions
Pharmacy departments closing earlier or even unexpectedly due to insufficient staff
a large national pharmacy chain filing for bankruptcy
An uptick of independent pharmacies closing
This is an abbreviated list, but the theme is the same: pharmacies of all types are struggling.
Consider the first two bullet items above: Poor wages and lean staffing results in unhappy, over-worked employees and difficulty hiring new employees. These both are things that a company would normally address. But pharmacy is unusual: it is one of the few examples of a business where supply and demand don’t truly apply.
This is because of insurance: pharmacies and other health industries don’t set their selling price. It is dictated to them by a contract. So you re-negotiate the contract, right? That would work if the pharmacy had significant leverage. These contracts are largely one-sided: take it or leave it.
The last two bullet points fall into place once you understand this current dynamic in healthcare. Pharmacies are being squeezed by the insurance–paid less and less for the product and service they provide. Given that there is only so much a business can do to decrease its cost of goods, they have to become more efficient elsewhere. Eventually, this leads to lower staff levels, unhappiness, walkouts and ultimately bankruptcy or closing.
To be fair, there are some pharmacy operators that doing better than others at balancing the lower reimbursement. The most successful pharmacies share one thing in common: having other revenue streams including front-end sales, selling groceries, or perhaps owing the insurance company.
But none of this is easy, and smaller operators and independent pharmacies are perhaps the most challenged. If it isn’t enjoyable and profitable to provide patient care and fill prescriptions, why own and operate a pharmacy? Pharmacy is rapidly reaching a breaking point.
What does this mean? Well, we are already seeing chains struggle. Target sold their pharmacies to a competitor — one that also owns an insurance company. Where historically some chain pharmacies were opening a new store every week, they are now closing stores instead. Overall, the country is losing access to pharmacies.
Some might say that this contraction of the pharmacy market is a good thing. I disagree: the contraction is not due to over-supply. It is due to an artificial constraint on the profitability of these pharmacies. It is due to insurance. If we ultimately arrive at a point where only a few chain pharmacies and mail order options remain, we will all suffer.
We are already seeing pharmacy deserts emerge. Places where larger operations cannot justify opening or maintaining a presence. Without access to a pharmacist, drug safety suffers, access to immunizations and point of care testing decrease.
We envision that pharmacies of all types will ultimately have to make some hard choices if they want to survive. Some possible outcomes of the challenges facing pharmacies are:
Pharmacies drop out of insurance plans that are not reimbursing them adequately.
Pharmacies stop carrying brand name medications — as these are paid well below the pharmacies acquisition cost and are costly to keep on the shelf
Pharmacies stop taking insurance entirely
More pharmacies close.
If a handful of pharmacies in an area drop some, or even all insurance contracts, those patients will be forced to use the remaining pharmacies that accept that insurance if they want to use their plan. If stores stop caring brand medications, that business will also shift to those that continue to stock them. And unless the stores that took these actions were very wrong about the actual impact of those decisions, the added unprofitable business that the remaining stores receive will likely be detrimental to them as well. The spiral would then continue.
The possibilities above are drastic, but real. While there is significant risk in doing something drastic like eschewing brand name medications drugs entirely, or dropping unprofitable plans, inaction is equally risky.
What is right for your pharmacy? Are you able to ride out the next 12-24 months without making a drastic change? If you do survive, what then? We cannot see the future with any certainty, but we know that now is the time so start planning. investigate your options. Get an outside opinion. There is opportunity, you must make the decision to Make Every Encounter Count.
