Trials and Tribulations in Pharmacy Part 1

It’s been a while since I have written an article. My previous articles were focused on steps for starting a new pharmacy; I felt that I could help impart what I had learned to help others join the independent pharmacy community.  However, I started this blog in the hopes that it would become a forum for pharmacists to discuss issues affecting our profession without regard to your practice setting.

Pharmacy practice continues to evolve and as pharmacists we need to adapt to all the changes that are happening in our profession.  Pharmacy has been in the news a lot lately, most of which puts our industry in a bad light. Pharmacies and pharmacists seem to take the blame for everything, from the increasing prices of prescription medications to the President and DEA’s declaration of war on dispensing of controlled substances. I thought perhaps hearing our side (i.e. the pharmacist’s side) of things on these issues may be helpful.  So here goes.

Let us address the pricing issue first.  Drugs typically move from manufacturer to wholesaler to pharmacy and finally to the patient (the end user).  Drug prices are mostly set by manufacturers which then are negotiated with wholesalers and chain drug stores (for a discussion of this topic please see the following articles: Newsweek’s “How Prescription Drugs Get Their Prices, Explained”, and US Pharmacist’s “Understanding Drug Pricing”).  Most chain drug stores (including some grocery stores with pharmacies) tend to have their own warehouses and purchase directly from manufacturers.  This allows them to forgo the middleman (i.e. pharmacy wholesalers) and negotiate directly with manufactures using the chain’s large numbers and economies of scale to obtain better prices for their purchases.  In addition chains and grocery stores who do not own warehouses can use their large scale to negotiate discounted prices with wholesales such as McKesson, Amerisource Bergen, Cardinal Health, and others.

An independent pharmacy owner has no such advantage.  An independent pharmacy cannot negotiate directly with the myriad of manufacturers and must deal with pharmaceutical wholesalers to obtain medications for resale.  When starting a new pharmacy you have very little negotiating power with the wholesalers.  You are offered very little in the form of discounts until you reach higher volumes whereby you are moved into a better discount category with the wholesaler.  But don’t kid yourself, the discount does not come close to what a chain store gets for the same product.

I also find that independent pharmacies seem to charge lower prices for medications than chain drug stores.  An independent pharmacy owner is often at a handicap when setting prices for their medications.  Most independents rely on suggestions from wholesalers, setting prices based on the wholesaler’s comparable pharmacy pricing in their area, or use preset pricing schemes offered by their computer software dispensing program.  In addition, a pharmacy owner’s limited resources will not allow him/her to conduct thorough market research in setting their prices.  As a result the overall independent pharmacy prices tend to be lower than chains.  For example, I may charge $15.99 for a generic Z-Pak, but the same product costs upward of $30 to $40 at a chain store.

Patients seem to have the misconception that independent pharmacies have higher prices.  They fail to take the whole picture into view. For example, a number of chains offer a listing of medications at reduced prices (e.g. $4.00 or $5.00 for a 30 day supply of a popular generic blood pressure medication), while the same product may cost 1 or 2 dollars more at an independent pharmacy.  What patients fail to see is that the chain’s prices on other products (generic or otherwise) are so much higher that it negates the savings customers get from the listed reduced price products.  I had a patient come to my pharmacy where the patient bought a total of 4 medications (2 on the reduced price list and 2 others not on the list) from a chain store and the price paid for all 4 was $25 to $30 more than what it would have cost the patient had they bought the medications at my pharmacy without discounts.

So far, the comments above have been relating to cash paying customers. This segment of the pharmacy patient population, however, continues to diminish in size.  Even before the advent of Obamacare, the percentage of patients using prescription insurance to pay for the medications was on the rise. Insurance customers comprise between 95 to 97 percent of a pharmacy’s patient population.

Most patients are enrolled with a third party plan which contracts with a pharmacy benefits manager (PBM) to administer the purchasing of medications and negotiate the prices paid for pharmacy services and items.  When negotiating drug prices, the PBMs use a myriad of pricing formulas in order to drive the cost of medication as low as possible.  Chain drug stores are often in a better positon to negotiate with PBMs due to their large size and ability to negotiate better prices from manufacturers and wholesalers.

Independent pharmacies, however, have no such luxury; they must often join co-ops and buying groups (a loose association of independent pharmacies banding together to obtain better prices for medications often organized by or a subsidiary of a wholesaler), who contract with a Pharmacy Service Administrative Organization (PSAO) to negotiate reimbursement contracts with PBMs on behalf of the independent pharmacy.  But, how confident are you that your PSAO is negotiating contracts with the independent pharmacy’s best interest at heart?  How many times have you been forced to provide medications at a nominal profit or even worse at a reimbursement that is below the actual cost of the medication?

Some major PBMs such as Express Script, CVS Caremark, and MedImpact require independent pharmacies to contract directly with the PBM and will not go through a PSAO for contracting.  In such cases, there are no negotiations involved.  The independent pharmacy is sent a contract with a preset “negotiated” reimbursement price structure which they must either accept or refuse.  The independent pharmacy is left with the option of accepting reimbursements that are at or below the cost, leaving them with profit margins that are not sustainable.  Is it a wonder we are seeing more independent pharmacies closing their doors?

There is a lot more to talk about regarding pricing and this post does not even scratch the surface, but I hope it is enough to start a discussion.  On the next post, I will be addressing some of the controlled substance dispensing issues plaguing pharmacies today.

About Ali

I have been a pharmacist since 1986. I have practiced in the community pharmacy setting since 1989. During this time I have learned a great deal about the challenges pharmacists must overcome to provide quality service and patient care. Forging relationships with patients, physicians, pharmacy organizations, other pharmacists, and pharmacy personnel have offered me a unique perspective in how to own and operate a successful pharmacy. I constantly strive to learn new avenues to advance the profession as well as the business of pharmacy. I graduated from University of Washington in 1986 with a Bachelor of Science in Pharmacy, and again in 1989 with a Master in Business Administration. I continued on to Willamette University College of Law, where I earned my Certificate in Dispute Resolution and Juris Doctor in 1992. I hold pharmacy licenses in Washington, Oregon (Retired), and California, and am a member of the California Bar.
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