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How to Respond to Pharmacy Reimbursement Threats

By Peter Kounelis

Working together, you and your PSAO can mitigate or avoid PBMs’ bias toward commoditization.
When you look at pharmacy reimbursement challenges spanning the retail landscape, everything traces back to the dominance of the three largest pharmacy benefit managers (PBMs). CVS Health (including Caremark and Aetna), Express Scripts and the OptumRx business of United Health process over three-quarters of reimbursement claims for all prescriptions in the United States.1

And because retail pharmacy is a mature industry, those PBM entities—let’s call them the Big 3—are fighting a zero-sum battle. Namely, the only way for any of the Big 3 to win a client from the others is through price concessions extracted from pharmacies such as yours. That translates to lower reimbursement rates currently manifesting in several areas.

Here’s what’s happening.


Cuts come in varied ways
Foremost among pharmacies’ reimbursement concerns are direct and indirect remuneration (DIR) fees, through which PBMs “claw back” payments for Medicare prescriptions, often more than six months after the initial transaction. DIR fees have increased by 45,000 percent since 2010.2 DIR fees inject uncertainty into the reimbursement process and ultimately impact pharmacy cash flow and profit margins.

Generic effective rates (GERs) add a hurdle similar to DIRs. Pharmacies in a network may be advised that reimbursement has exceeded a contracted amount for generic drugs—even though individual pharmacies may have no knowledge of contracted amounts and/or the medications contributing to the claimed overage. Reimbursement deductions stipulated in payer contracts can run into hundreds of thousands of dollars.3 To make matters worse, the timing of recoupments often comes without advance notice.

Maximum allowable cost (MAC) adjustments, also applicable to generics, take their toll when the upper reimbursement limit for certain drugs falls short of the amount the pharmacy paid its wholesaler to acquire them. This problem stems from PBMs’ lack of clarity on which drugs are included on their MAC lists and how they price those products.4

Payment rates for branded drugs are also under the gun. Pharmacy reimbursement for brand-name medications generally falls very near—and sometimes below—acquisition cost. Even without DIRs, GERs or other deductions, a pharmacy often can’t make any margin on branded products based on reimbursement from their PBM.

Note that both independent and chain pharmacies face parallel challenges as a result of margin leverage from the Big 3. However, independents tend to feel the pinch disproportionately because of their small scale.

So, what can you do to fight back?


Take a collaborative approach

The most effective way for you to combat the ongoing reimbursement squeeze is to work in alignment with your pharmacy services administration organization (PSAO), which negotiates and enters into contracts with third-party payers on your behalf.

True, you have a contractual relationship with your PSAO, but you can’t simply sit back and expect individualized action in regard to PBM reimbursement. Similarly, the PSAO shouldn’t strictly view itself as a mechanism to facilitate collection of contracts for their member pharmacies; the PSAO must be active in maintaining the feasibility and profitability of those contracts.

Viewed as a whole, reimbursement threats won’t be mitigated if either party fails to live up to its full obligation. But when you and your PSAO work together, you can make big strides toward maintaining your independence.

What’s key here is a matter of perception. The Big 3 promote the notion that like drugs are the same, so it doesn’t matter where patients get their prescription filled. Of course, not all drugs are exactly the same, and the differences can be critical. Likewise, the Big 3 categorize pharmacies as interchangeable and too numerous; therefore, they narrow their networks to just the stores willing to accept the lowest reimbursement.

Your PSAO shouldn’t cave in to PBMs’ bias toward commoditization. In fact, your PSAO should be fully aware that independent pharmacies have earned the highest customer satisfaction scores in the industry—not only in areas such as courtesy, helpfulness and speed of checkout, but also in regard to pharmacists’ knowledge and accuracy.5 As such, it’s in the PSAO’s best interest to believe that your pharmacy’s capabilities and patient relationships will transcend the negligible difference in out-of-pocket prescription costs.

But again, this is a two-way street. You need to deliver on those expectations by rejecting commoditization and striving to be more than a production-line pharmacy that’s fixated on filling prescriptions. Continue to nurture the level and depth of your patient relationships while developing new, valuable services.

With that mindset, we should all take a more critical look at PBM contracts. For example, it may be positioned that we have to accept higher DIR fees as a prerequisite to being designated as a preferred cost-share pharmacy (i.e., offering some lower patient co-pays) in order to keep your patients. That’s a false premise, because DIRs can be avoided or minimized by choosing the standard cost-share option instead, with better margins and little risk of significant prescription or patient loss.

According to market share data from IQVIA, which maintains the industry’s largest prescription dataset, most pharmacies that avoided or paid lower DIR fees in Medicare Part D plans held their market position, despite stepping down from preferred to standard cost-sharing. What’s more, the monitored pharmacies increased profits by 30 to 50 percent on prescriptions affected by DIR fees.6 The data confirms that PBMs lack the market-share-moving potential they claim to have. A small co-pay differential, or a non-existent one for the millions of low-income Part D patients, isn’t nearly enough to sever independent pharmacies’ profound patient relationships

In a similar fashion, some PSAOs have been able to avoid GER contracts, negotiate better GER contracts or postpone their impact on member pharmacies by focusing on the non-commoditizable value proposition their member independent pharmacies deliver best (e.g., better services and deeper patient rapport).

The big takeaway: The top threats to independent pharmacies are, to a significant extent, addressable. The financial benefit in focusing on value vs. cost can run well into six figures per store per year, which can easily represent the difference between a profitable and unprofitable pharmacy.

Only by refusing the notion of commoditization, and by continuing to emphasize what your pharmacy does best, will we continue to prove that patient relationships that positively change behavior, improve outcomes and reduce overall medical costs are the real value of independent pharmacy.

Looking for a PSAO that will battle the Big 3 with you?

Elevate Provider Network is highly selective when considering what plans to join at the preferred cost-share vs. the standard cost-share level, because we know how much your patients value the personalized service they get at your pharmacy. Our data-driven approach results in the optimal mix of payer contracts for your pharmacy, maximizes your reimbursement and helps you avoid DIR fees.
A Good Neighbor Pharmacy managed care expert shakes hands with a plan representative

1. Drug Channels. CVS, Express Scripts, and the Evolution of the PBM Business Model.

2. National Community Pharmacists Association. Pharmacy United in Call for President Trump to Act on DIR Fee Reform.

3. Frier Levitt Attorneys at Law. Pharmacies Face Expanded “Effective Rate” Withholdings from PSAOs.

4. PBM Watch. Maximum Allowable Cost Information Center.

5. Consumer Reports. Consumers Still Prefer Independent Pharmacies, CR’s Ratings Show.

6. IQVIA data on file

Managed care

About The Author

Peter Kounelis
Vice President, Managed Care Contracting
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