We’ve all been conditioned to give higher status to anything categorized as “preferred,” whether it applies to placement as a customer or a tiered offering of services from a business. If something is preferred, it must be more valuable than something that’s “standard,” right?

Actually, the distinction requires a closer look, especially for independent pharmacy owners in relation to joining preferred cost-share networks vs. standard cost-share networks.

Pharmacy services administrative organizations (PSAOs) represent pharmacies in negotiations with PBMs and Medicare Part D prescription drug plans. PSAOs that favor preferred cost-share networks emphasize that member pharmacies offer covered Part D drugs with lower patient co-pays compared to pharmacies in standard cost-share networks. Accordingly, the PBMs’ pitch to independent pharmacies has been that those co-pay differentials will drive patients, and market share, to preferred pharmacies.

At the same time, however, a growing concern for pharmacies participating in preferred cost-share networks is reimbursement below cost for certain medications. That can happen in two ways: (1) the plan determines the maximum allowable cost for a medication, which may be below market price and (2) DIR fees have risen over time, to the point that formerly profitable prescription transactions are now in the red due to reimbursement claw-backs.

The real issue is whether going the preferred route, based on lower patient co-pays, is a sustainable model. Will that strategy help keep your doors open, lights on and staff paid when you factor in reimbursement from Part D plans.

 

Case in point

Individuality is a core strength of independent pharmacies, so no single cost-sharing solution will be a perfect fit across the board. That said, the following real-world encounter shows how joining a standard network can mean the difference between preserving a legacy store and going out of business.

A pharmacy in the southern U.S. had served its community well for more than 20 years. It was a family business, with the owner’s son in pharmacy school preparing to eventually take over operations.

The pharmacy had signed on with a PSAO that participated in every available preferred network in the region. But things weren’t going according to plan.

One day, over lunch, the owner shared with me a handwritten document showing key trends for his pharmacy over the past five years. Income was down. And, strikingly, cash reserves had dwindled from $200,000 to just over $30,000.

The only trend on the rise was the number of prescriptions filled. The owner had been doing all the right things to grow his prescription count, yet, in his words, “The more I fill, the more I lose.”

He continued, “I’ve run the numbers. I can keep doing what I’ve been doing for another eight months. If nothing changes, I may have to look at selling the pharmacy.”

Further investigation revealed the extent to which DIR fees had been cutting into his pharmacy’s bottom line. Part D claims were a big chunk of the owner’s business and clawed-back DIR fees made them a losing proposition.

To stop the downward spiral, the owner decided to switch to a standard-network PSAO and, within a year, his net on Part D claims had stabilized the pharmacy’s overall finances. It was because of this strategic move that he was able to keep his long-term plan intact, with his son ready to step in upon finishing pharmacy school.

 

Sizing up your options

If you find yourself in a similar situation, you may have to overcome the emotional component of switching to standard cost sharing. Pharmacists by nature want to take care of people, and it may seem like offering lower co-pays is the right thing to do. Unfortunately, when patients require drugs that are reimbursed below cost, the preferred plan ends up draining the pharmacy’s income. And when you take an objective look at the situation, that’s not financially sustainable. Here’s the reality: If you’re going to be around to serve patients in your community for years to come, you’ll need to make some hard decisions about cost sharing.

Since each region of the country tends to have a dominant player, identify which Part D plans are active in your area and whether they offer a preferred cost-share network or a standard cost-share network. Use the CMS Part D Plan Finder—the same tool that seniors use to help them choose the best Part D coverage—to locate this information.

You can further leverage the Part D Plan Finder to figure out which Part D plans your competitors have chosen to participate in. Are they independent pharmacies, chain pharmacies or big-box stores? Are they participating as preferred cost-share or standard cost-share?

Once you’ve determined your competitors’ status, think about their proximity to your store (e.g., are they down the block or two towns over). Also consider patient access. For instance, if your main competitor is inside a Walmart, patients will have to navigate the parking lot and in-store distractions to reach the pharmacy, whereas, at your location, patients simply pull up to the front door and walk in.

Additionally, consider how your pharmacy differentiates itself from competing stores. Are you the low-price leader in your area? Do customers come to your store for superior service and a one-of-a-kind shopping experience? Does your front end draw a consistent stream of business?

What’s more, low-income subsidy (LIS) patients, those dually eligible for Medicare and Medicaid, must be charged the same co-pay¹ regardless of whether a pharmacy participates in a preferred or standard network. Keep in mind that independent pharmacies tend to service a higher percentage of LIS patients compared to chains or big box stores.

All these factors combine to offset preferred networks’ contention that lower co-pays will be the main influence in capturing patient market share. More often than not, patients pick their pharmacy and then pick their plan—not the other way around. In growing numbers, independent pharmacies are confirming that they can participate in standard cost-share networks, retain access to patients and be more profitable in the process.

^{1. National Council on Aging. Medicare Low Income Subsidy. https://www.ncoa.org/economic-security/benefits/prescriptions/lis-extrahelp}