Tuesday, September 11, 2007

A Misleading Study on Pharmacy Reimbursement

NCPA is touting the results of a new study that purports to provide “incontrovertible evidence of the slow reimbursement pharmacies have endured with Medicare Part D prescription drug claims.” (See the press release.) NCPA is quite forthright in their desire to influence two bills pending before Congress: S.1954 (Pharmacy Access Improvement Act of 2007) and H.R.1474 (The Fair and Speedy Treatment of Medicare Prescription Drug Claims Act of 2007).

I strongly disapprove of the manner in which this study’s results are being presented to the public and to Congress. It would be foolish to base health care policy based on the partially-disclosed results of this incomplete and biased study.

Bikini Research

The full study has not been released so we can only rely on the skimpy Executive Summary. And like a skimpy bikini, what the summary reveals is interesting -- but what it conceals is essential.

Consider this example of selective disclosure.

As we all remember, the Part D launch in January 2006 was fraught with operational difficulties, many of which were subsequently resolved. According to IMS Health, Part D scripts grew from 0% to 17% of the retail market during the first six months of 2006 before stabilizing at 17% for the second half of 2006.

Yet the Executive Summary conveniently averages all of 2006 together, thereby artificially inflating the magnitude of the "prompt payment problem."

Here are the implied median number of days between submission and adjudication as reported in the summary:

January 2006: 106 days
February 2006: 93 days (-12% vs. January)
March/April 2006: 54 days (-49% vs. January)
May through December: No disclosure

The trend is clear, but where are the data from the rest of the year? If the Executive Summary was intellectually honest, then it would have provided more information about changes over time. At a minimum, the summary should show the results for the first half versus second half of 2006.

These omitted data are crucial for interpreting the overall 2006 results. Figure 1 implies that the annualized median is 30 days for independent pharmacies and much lower for chains. Thus, the trend shown for the first four months must have continued. The median may have even dropped below 30 days for certain months in 2006!

Real-World Impact?

I published some Heretical Questions about the AMP War last month. Let me ask another heretical question: Is the magnitude of the allegedly slow payment worthy of a legislative fix?

The average independent pharmacy in this study filled 4,138 Part D scripts in 2006. The average retail script generated $60 in revenue at an independent pharmacy in 2006 (Source: NACDS). Therefore, Part D represented about $250,000 in annual revenue (about $21,000 per month) for a typical independent pharmacy in 2006. If half of these reimbursements come after 30 days, then the pharmacy is floating an additional $10,500 for a few weeks throughout the year.

Is this estimated float amount financially significant enough to require an Act of Congress? The study is silent on this matter, as well as other relevant questions. Are Part D claims being paid faster or slower than the other 90% of scripts? How are Days of Sales Outstanding (DSO) changing? What else should pharmacies be doing to better manage their balance sheet? What explains the performance gap between independents and chains? How sensitive are the results to the choice of break points (15 days, 30 days, etc.)?

The Full Story, Please

In my opinion, NCPA and the researchers will ultimately damage their credibility by peddling these partial results, which do nothing more than reinforce NCPA's longstanding preconceptions about PBMs. In the meantime, I call on the researchers and the NCPA to immediately release the raw data underlying the Executive Summary so that it can be subject to independent analysis and scrutiny.

I’d love to hear from you about this post. Email me or post a comment (anonymously, if you choose).


  1. Everything this study says is correct. The average pharmacy makes about $10 per script after reimbursement. Margins are incredibly low (17-22%); Part D is reimbursed at a slower rate than typical insurances. Part D takes 60-90 days, whereas other insurance are around the 30-45 day mark. Wholesalers, employess, folks holding the lease don't give you this type of window to pay your bills so pharmacies are floating a lot of money. Independent pharmacies are run business wise so much better than chain stores. Just look at the companies who have acquired Eckerd in the past 10 years (Thrift Drug, JC Penney, and Jean Coteau). All of their stock prices plummetted once they acquired the Eckerd Corp. Look at Rite-Aids performance over the past 10 years as well. My point being, when independent drug stores say their is a problem.....more than likely their is a problem present.

  2. Anyone who has actually worked in the industry and is remotely familiar with finance in the industry knows there is not a reimbursement problem.
    I think it is much more likely that the pharmacies have a reconciliation problem.

    I recently moved from a role in which I was heavily involved in finance and accounts receivable for a small mail order facility. A lack of Part D expertise within the organization created a rocky road in the first six months of the program. No one knew the most basic issues, such as which PBM's would pay on behalf of which PDP's and MAPD's, much less more complex issues such as Part B vs. Part D. Reconciliation issues resulted from the company's lack of knowledge. The company had the money, but it had posted the cash as a positive variance instead of reconciling the claims. Although the money was in the bank, finance thought we weren't being paid. I would bet that every other pharmacy and pharmacy chain, including the Big Kahuna, are having similar issues.

    The fact that the company wasn't willing to invest in the resources which would have prevented the problem is the largest determining factor. If they had brought on qualified people, or even hired a consultant to train the senior staff, this would have been a non-issue.

    This as a ploy by the NCPA to secure the future for its members.
    Independents and small chains do not want to compete in today's marketplace. They will not accept the fact that dispensing is becoming a loss leader. They will not develop a free market strategy to again become competitive.

    I see the next big move by the NCPA as a reimbursement mandate. A sponsor will introduce a bill which caps the discounts at a particular level. This bill will be met with open arms because not only does it "save" community pharmacies, it takes a swing at the "evil" PBM's. I fear that such a bill will have enough support to become law, depending on the outcome of the 2008 elections.

  3. I am interested in specific names of PDP’s or MAPD’s who aren’t paying in a timely manner. I have performed reconciliation and analysis for an independent mail order pharmacy for a number of years, before and after 1/1/2006, working with dozens of payors, and I have yet to see one which had a pay cycle which was out of the ordinary. In fact, most of the PDP’s administered by the Big 3 were paid on the same check as regular commercial claims. Most of the PBM’s which did not pay Part D and commercial claims on the same check paid Part D claims on a different check in the same cycle.

    The only payment problems I experienced resulted from failure of the pharmacy to keep their tax ID current, failure of the pharmacy to keep their Medicare Provider Number current, or mismanagement by the NCPDP (once). None of those problems had anything to do with the PDP’s, MAPD’s, or Medicare Part D.

  4. Tom Connelly, RPhSeptember 11, 2007

    Our biggest problem with Medicare Part D was seeing a minor, but not insignificant, portion of our prescription revenue going from immediate pay--cash on the barrel head--to 30 to 40 days out. Like many other independents, we had to use our line of credit to pay bills while waiting for that money to show up.

    Now, almost 2 years later and after some serious belt tightening, staff reductions and scrutiny of our finances, we're almost caught up.

    Slow pay? When I closed another pharmacy several years ago I was still receving reimbursment checks 6 months after I stopped dispensing and billing prescriptions for that location.

    I've always wondered why VISA and MasterCard and the rest can pay me within 48 hours, but it takes the PBMS at least--the very quickest--18 days to turn around a payment.

    All that being said, I do agree that NCPA does sometimes get a little hysterical about some of these things, but they do have good programs for pharmacy management that many of us have taken advantage of and I think most independents who are left are pretty good managers. We just feel pretty helpless when it comes to negotiating contracts with the PBM behomeths.

  5. As an owner of an independent pharmacy, I am one of the people pushing for this legistlation to pass because as Tom said in the previous comment, there is no reason for the delay in payment, whether it's taking 10 days, or 20 days, or 60. It's becoming the norm for most of the PBM's to do EFT deposits rather than sending an actual check, yet there is still a delay in payment, but still no explanation.
    I'm just waiting for the day where I can bill a PBM for all the time I wasted on the phone dealing with an improperly trained help desk operator, or worse yet, their supervisor who does not have a clue! These are all things that increase operational costs of a business, whether it's independent or chain (seems you're in love with the latter).
    I don't understand the infatuation with chain pharmacy when an independent can do the job much better and much more efficiently. A big chain store has so much overhead that they need to fill over 2000 prescriptions a week to be considered profitable. Compare that with just over 1000 per week for an independent. One does not have to be a great financial analyst to see who's running a better business, while providing better service to their clients.
    It's very sad that there are people out there actually trying to shut down and eliminate independents. It would not be so bad if the plan is to replace them with something better, but it is not so with chains who only claim to offer better and faster services, but in reality don't even begin to compare. Sad indeed, because at the end of the day, we're talking about healthcare here, and people have turned drugs and pharmacy into a commodity... it's not all about the money, you know. It's about caring for your patients, because if you don't they can have very serious ill-effects and possibly die from a drug interaction, or worse an error due to an overworked pharmacist milabeling or giving the wrong medicine.

  6. Dr. Fein,
    I am an independent pharmacist and pharmacy owner. Operating 2 pharmacies in an extremely rural area, we are forced to deal with a high level of Medicaid/ Medicare clientele. There are no other pharmacies within 25 miles. These two entities alone account for over 30% of my business. They are constantly on a payment cycle of 31 to 60 days from date of service to payment. With our gross margin being no more than 20% and bills being due 15 days after purchase of inventory, cash flow is negative. Balance sheets may indicate a profit, however in a business model such as ours, negative cash flow will lead to business shutdown.

    In the example stated by pbmguru, he asked if we would like to only have 3 big PBM's. This same question could be put to consumers as "do you want to only have 3 big Pharmacy chains to go to...Walgreens, Wal Mart and CVS?" This may well be the case if this current trend continues.

    Also, pbmguru states that pharmacies have a reconciliation problem. Yes, we have a problem. we don't get paid in a timely manner to reconcile our claims. He also justifies pbm delay in payments to the fact that pbm's are not paid in a timely manner by their clients. This may be true, but I seriously doubt that it makes for such hardship that pbm's can't pay in a more timely manner. I find it hard to believe that these entities are having trouble paying bills when most are reporting record profits and paying executives excessive salaries and dividends, etc.

    In addition, I believe your point of view to be somewhat skewed toward the manufacturers and insurers, considering your background.

    Thank you for this forum to communicate.

  7. I have been an independent pharmacy owner for 30 years in a major automotive urban city. I recall publishing an article in the 80's titled "95% of our business is 3rd party, what we do and why". While most of the country enjoyed private pay cash business...we have been dealing with this for over 30 years and learned how to cope then. Now the rest of the country has caught up! Good Luck!
    I recall addressing the executive board of NARD (currently NCPA) about this 3rd party problem 25 years ago, and their response was that this was a "local" problem and NARD would not get involved. Boy were they wrong!


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