Friday, July 06, 2007

Why AMP will not be Independents' day

Yes, we’re still waiting for the Final Regulation regarding Average Manufacturer Price (AMP) from CMS. Personally, I was hoping that it would be released on July 4 so I could write a blog post titled “CMS’ Declaration of AMP-dependence.”

In the meantime, let’s go to the Drug Channels mail bag. Here’s a question from an independent pharmacist:

“Hello Dr. Fein: As an independent retail pharmacy owner I'm getting a little anxious about the AMP situation and your blog isn't relieving my anxiety at all. Why do you think the impact of AMP will be greater on indies than on chains? … I'm trying to take a long view, "creative destruction" and all that, but I really would like to continue to serve my community for a while longer. I just hate to think I could be sitting here in 2 years wishing I had bailed out in 2007. What do you see in your crystal ball?”

Thanks for the question! Sorry about causing you anxiety.

Here are five reasons why I expect independents to be more vulnerable than chains to the AMP switch:
  1. The average independent gets 25% of their revenue from Medicaid (per NCPA) vs. 10% for the typical chain. In part, this reflects the fact that chains now dominate the relatively richer suburbs.
  2. A multi-location chain can minimize their exposure to any changes in AMP by selectively closing stores or modifying store hours in high Medicaid areas. In contrast, most independents have been in their location for a long time and have a loyal customer base -- moving the store is not really an option.
  3. Independents get 95%+ of their revenue from pharmacy, but the mix for pharmacy chains is 65-70%. The convenience store aspect of CVS/ Walgreens makes them less vulnerable here, too.
  4. Large chains and PBM/mail order buy generics directly, but independents buy through wholesalers. Thus, the 250% markup has to cover two channel margins (wholesale+retail) for independents.
  5. Since AMP is a computed average, it will decline as the large customers get better buys. In a List minus system, the company that buys at a lower price makes higher gross profits. But in an average cost plus model, the company that buys better also hurts everyone else by bringing down the average. (The impact of this last point will depend on the final definition.)
These points are highly relevant to me for assessing the industry-level outcomes. However, I can't advise any individual pharmacy because these points may or may not apply to your situation. YMMV.


I’ll update the blog whenever CMS gets back from the beach. Meanwhile, your friendly neighborhood pharmacy supply chain blogger will be waiting poolside since the Philly forecast calls for 95 degrees and high humidity.

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