Only in the Business of Pharmacy…

Within the healthcare delivery engine, community pharmacy has been largely overlooked, often perceived as a dispensary function. Today, nothing could be further from the truth. The pharmacist’s role has evolved to include more patient care services, providing a vital link between the patient and entire healthcare system. While these changes are transformational, pharmacy is not only a profession, it is a business. After all, a community pharmacy is a retail operation just like any other. Except it is not.

There is no other industry that operates quite like pharmacy, and the list of challenges faced by community pharmacy is long and growing.

Access vs. Quality

A fundamental question in the business of pharmacy involves access to patients versus the value of reimbursements received for filling prescriptions. Historically, access to patients has won out over reimbursement to keep patients coming in the door. This may be changing.

For most independent pharmacies, the biggest contribution to revenue comes from dispensing medications. However, reimbursement rates have become so aggressive and margins so thin that access to patients who cost the store money is becoming less desirable. Add the impact of direct and indirect remuneration fees that are assessed sometimes months after the prescription has been filled, and the reimbursement hole gets even deeper.

The problem is that a pharmacy cannot pick and choose which customers to serve. Third party payer contracts are so locked down that a pharmacy cannot refuse to serve a patient due to low reimbursement. In fact, even if the medication dispensed is reimbursed below the pharmacy acquisition cost, the pharmacy must still fill the prescription. Indeed, there is no other industry like pharmacy, and there is no other buyer-and-seller marketplace in the world where the buyer always wins.

Direct and Indirect Remuneration

Over the past few years, direct and indirect remuneration (DIR) fees have taken center stage over other issues like maximum allowable cost (MAC) pricing and preferred networks. Basically, DIR refers to monies that a Medicare Part D plan or pharmacy benefit manager (PBM) may collect to offset member costs.

Often called Performance Payments or Incentives, there is little to no carrot and mostly just stick involved in these arrangements. Calculation of DIR fees varies widely but is mostly based on a generic dispensing rate (GDR), although some include the Centers for Medicare and Medicaid Services star ratings, formulary compliance, or other parameters. In most cases there is virtually no possibility of eliminating a DIR clawback – only the possibility of reducing the amount taken. Even then, the DIR will be based on the aggregate behavior of all stores in a network, meaning an individual pharmacy will be subject to the DIR regardless of how well it performs.

For pharmacies, DIR fees are price concessions not adjudicated at the point of sale, so a pharmacy does not know how much will be charged until the fee is collected. This lack of transparency makes it impossible for pharmacy owners and managers to know whether they made or lost money on a script until several months after it was filled. Again, the business of pharmacy is unique in this regard. No other retailer anywhere operates blindly with regard to profitability.

MAC Pricing

MAC prices are the upper limits that a PBM or plan sponsor will pay for generic drugs and brand name drugs that have generic versions available. The pricing methodologies behind these lists are not transparent. They are considered proprietary, and according to the Academy of Managed Care, if MAC price information were publicly disclosed, it would have an anti‐competitive effect on health plans, employers and other payers.

MAC pricing and reimbursement below cost (RBC) is not new to independent pharmacy. MAC lists have been around for years, and when an RBC transaction occurs, there is an appeal process for asking the PBM or plan to consider changing the MAC price of the drug. MAC appeals often involve sending a copy of an invoice as clear evidence that the drug was indeed priced below the acquisition cost.

Unfortunately, the success rate of these appeals has plummeted over the last several years. As many as 94 percent of MAC appeals are denied, and there is no way to dispute the conclusion that the pricing is consistent with market conditions. Why not? Because the algorithm or methodology used to set the price is kept secret by the PBM or plan. Only in the business of pharmacy.

Good News – Bad News

The bad news is the list of challenges goes on to include such issues as Preferred and Restricted networks, Generic Effective Rate contracts, mail order, specialty drugs, and PBM consolidation and vertical integration. It is no surprise that many small independents, especially in rural communities, are closing their doors. A recent policy brief from the RUPRI Center for Rural Health Policy states that 1,231 independently owned rural pharmacies in the United States (16.1 percent) have closed over the last 16 years. This decline has continued through 2018, although at a slower rate. However, 630 rural communities that had at least one retail pharmacy (independent, chain, or franchise) in March 2003 had no retail pharmacy in March 2018.

The good news is these issues are getting noticed. There are many independent pharmacy advocates taking a stand and working to keep indies independent and viable. Also, state-by-state grassroots activity within the pharmacy community is beginning to bring awareness to legislatures across the country, and such efforts are getting some traction at the federal level as well. The recent removal of certain gag clauses in pharmacy contracts, as outlined in the 2018 Patient Right to Know Drug Prices and Know the Lowest Price Acts, is a good example of progress in the right direction. But it’s not enough. Further reform is greatly needed, or patients in small towns and rural communities across the country will continue losing access to quality care.

You may be asking, what can I do to protect my pharmacy’s independence and financial health while continuing to provide customer care excellence for my local community? Choosing the right Pharmacy Services Administrative Organization (PSAO) is one very important step. Your PSAO should be on the front lines, working diligently on your behalf and providing the support services you need to stay competitive, operate efficiently, and do what you do best – serve your patients.


About the Author

Robert Dickey, MBA, is the Chief Executive Officer of Pharmacy First, a Pharmacy Services Administrative Organization serving more than 2,300 independent pharmacies. With a strong business, technical and entrepreneurial background, Robert has a successful track record working with key decision-makers to meet pharmacy business objectives. Robert has more than 30 years of experience managing cross-functional teams in a variety of industries including pharmaceuticals, pharmacy services, manufacturing, transportation and finance.