Wednesday, June 11, 2008

An AMP Fix for Rural Pharmacies

Pharmacist trade associations are pursuing an aggressive, take-no-prisoners approach to “fixing” the Average Manufacturer Price (AMP) situation by citing the dangers to patient access if rural independents fail.

In fact, two recent studies support the idea that some rural communities could face access challenges if the local pharmacy closes. However, less than one percent of the U.S. population faces potential access problems and there are less than 2,000 at-risk rural pharmacies. In other words, the problem appears to be smaller and more fixable than pharmacy industry rhetoric.

So why not solve the rural access problem with a targeted solution for at-risk pharmacies that would cost much less and thereby have a greater chance of success? Rural pharmacists should be asking this question.


Eric Shields, Pharm.D., maintains a blog and website for Montana pharmacists called GrizRPh. Eric is a self-confessed “avid fan of Drug Channels” (thanks!), but feels that I underestimate the dangers to rural pharmacies from AMP.

In an exchange with me following a recent GrizRPh blog post, Eric makes two compelling points about rural pharmacies:

  • Access to healthcare would be compromised if a town’s only pharmacy closes and there are no viable alternatives within a reasonable driving distance.
  • Pharmacies in rural communities can’t get bigger (as I suggest in Pharmacy Profits & Part D) because they serve small, fixed rural populations that are not growing.

These are very legitimate access issues for individual pharmacies, such as the store where Eric works now. Tobey Schule, RPh (owner of Sykes Pharmacy in Kalispell, MT) testified in May 2007 before the Senate Committee on Finance about the unique challenges facing his rural pharmacy. (Click here to read his testimony.)


Alas, the plural of anecdote is not data.

To assess the prevalence of rural access problems, I found two recent studies that attempt to quantify the impact of access on individual communities or consumers. There may be more, but these two illustrate the situation.

  • Consumer Access to Pharmacies in the United States – “Independent pharmacy consumers in rural areas typically have access to 14 competing pharmacies located with 15 miles of their current pharmacy.” This study was funded by the Pharmaceutical Care Management Association and cited by PWC in its study.

In other words, these studies imply fewer access problems than the exaggerated claims that 11,105 pharmacies will close due to AMP.


If rural access is the real problem, then let’s find a solution to that problem.

How about we ask states to designate rural pharmacies that are the sole provider in a community as Critical Access Pharmacies (CAP)? These pharmacies would be eligible for higher dispensing fees that would be set based on the pharmacy’s cost accounting data. There should be about 1,000 to 2,000 such pharmacies in the U.S.

There is CMS precedent for this policy. Medicare designates approximately 1,300 small hospitals as Critical Access Hospitals (CAH). According to this MedPAC briefing document, CAHs are limited to 25 beds and primarily operate in rural areas. To qualify for the CAH program, a hospital had to be at least 15 miles by secondary road and 35 miles by primary road from the nearest hospital. States can also waive the distance requirement for a hospital declared to be a “necessary provider.”

Unlike traditional hospitals (which are paid under prospective payment systems), Medicare pays CAHs based on each hospital’s reported costs. Each CAH receives 101 percent of its costs for outpatient, inpatient, laboratory and therapy services, as well as post-acute care in the hospital’s swing beds.


NACDS, NCPA, or FMI are pursuing an aggressive, take-no-prisoners approach to a legislative AMP “fix.”

An alternative approach would be to advocate with Congress and/or CMS for a targeted, solution aimed at mitigating the specific risk of rural access. Judging by the studies cited above, a targeted CAP program would have much lower costs than an all-or-nothing AMP rollback. Therefore, it would be more palatable to lawmakers and perhaps more likely to get enacted.

My web traffic shows many readers of Drug Channels in the U.S. Senate and House of Representatives. Perhaps they can help pharmacy craft a winning solution for rural pharmacists.

Back to you, Eric.


  1. AnonymousJune 11, 2008

    Why is there this pressure to remove profit from independant pharmacies. I don't know of any pharmacy owners that live in mansions. I don't hear about million dollar salaries for pharmacy owners. I personally just want to make a living and do the thing I love to do, own and work my own pharmacy and take care of my patients. If you feel we make to much profit on generics why don't you help us make more profit on brands. Then solve the generic problem. I don't see anyone going after oil profits, entertainment profits, wal-mart profits, or Medco profits. How about we start at the top and work down. Most owners I know are like me and if AMP goes through I will not be open for business any more. I'm barely making it now.

  2. I enjoy your blog! Your latest discussion on the impact of lower reimbursement is well done. There are precedents for more liberal reimbursement to small pharmacies. Michigan Medicaid has done exactly that for many years.

    But the real problem is the dirty little secret that pharmacies make most of their profit from the ‘spread’ between their true costs and the product component of the reimbursement from Medicaid and the PBMs. (In this regard they are as duplicitous as the PBMs whose profits come from the same type of spread calculus.)

    NACDS and NCPA need to change their strategy, and accept the notion that, sooner rather than later, their profit calculus will become transparent – and untenable. It is very difficult to ask for higher dispensing fees when so much of the gross profit comes from ‘spread’. They should be talking with the government about accepting cost based reimbursement, but with adequate dispensing fees!

    Best regards,

  3. AnonymousJune 11, 2008

    I don't think these are mutually exclusive since an AMP fix would also help rural pharmacies. But it's an interesting idea to focus on rural pharmacies directly. I'm not sure whether different types of pharmacies want to unite even if your proposal makes sense.

    As a manufacturer, we have not been involved in the AMP issue but your blog has motivated me to ask marketing for our sales by outlet in rural markets.

  4. AnonymousJune 11, 2008

    I agree with the premise that rural pharmacies need special consideration. While you're at it, please advocate for impact pharmacies (usually inner-city)which fill a disproportionate share of Medicaid Rxs. How about pharmacies that serve "at risk populations" such as indigent, migrant, etc.? IHS pharmacies are recognized in current regulation as a special contract class, how about FQHC in-house and contracted pharmacies? But wait, I made the same suggestions in my response to CMS addressing the proposed regulation in the first place. Along with HRSAs comments, CMS decided not to allow diffential classes to extend beyond the IHS pharmacies.

    That being said, the opponents of AMP have several valid points, not the least of which is that AMP is not meant to reflect the cost of goods to community pharmacies. CMS will back me up on this one, explaining that the Congressional fudge factor is supposed to make up for AMP's failings. NOT.

    Perhaps you can be convinced that you're championing the wrong cause. The lack of transparency to payors and policy makers by the PBM industry has allowed PBMs to profit at the expense of the taxpayer, through cost-shifting to public programs. They were successful at this strategy by picking up pharmacy contracts at bargain-basement pricing since they historically represented, insignificant incremental business. The entrance of Part D to the commercial market forever changed that segment to core business, but at prices that cannot support necessary pharmacy overhead. One can now understand why the pharmacy lobby is working so hard to keep fair reimbursement for public sector business; necessary to cover the shortfall in operating cost. The FTC and existing antitrust law prohibit pharmacies from joining to fight for fair reimbursement from the commercial payors/PBMs and thus to relieve the pressure on public programs to maintain access.

  5. Adam,

    Your idea is very commendable and unique; unfortunately it still has many flaws. Independent pharmacies in rural areas do serve patients whom otherwise would not have access for miles and AMP as we know it will threaten there existence. In addition, independent pharmacies and specialty pharmacies and, as the other blogger had mentioned, impact pharmacies, etc. also provide services which other pharmacies can’t or won’t provide.

    For instance, the pharmacy in which I’m currently employed serves many mental health patients in which we provide weekly packaging for better compliance, safety, and quality of life, as well as serve many of the towns assisted living and group homes with special packaging that they are required to have by state law. None of the chain stores will put the money towards man hours or proper equipment and packaging to provide these services; however, someone needs to provide these services for the welfare of the patients and community. As I mentioned, these special services take time and money such as: delivery, special packaging, compounding, DME services, etc all get rolled into the usual overhead expenses such as rent, lights, electric bill…costs of doing business. Therefore the overhead for “specialty” pharmacies is more than a chain store and compounding equipment and overhead is much more. With this said, even though we are in a rural setting (see Montana), we have 2 Safeways, 3 Osco Drugs, CVS, Shopko, 2 Walmarts, 2 Walgreens, Costco, Kmart, Rosauers, 4 compounding pharmacies, and 3 independent pharmacies all within a 15 minute driving distance in one town. This brings me to my second point.

    Since the Critical Access Hospitals (CAH) “model” is based off miles from primary care hospital that have the cardiology floor, rehab wing…the whole ordeal; then, I assume, that the Critical Access Pharmacies (CAP) would also have similar regulations. This “model” will do nothing for most independent and specialty pharmacies, letting hard working pharmacists, whom mainly own their own business just so they can be their own boss and give good patient care, fall through the cracks and suffer the devastating effects of AMP. Patients may still have access to chain stores, but is it the access they need? With the CAP “model” I foresee many non-compliant mental health patients and many underserved assisted living and group homes, and not to mention no delivery services for non-ambulatory patients...the pharmacies serving these populations are still going to get the shaft. Inner city pharmacies that serve many mentally ill and disabled patients would have to cut their staff, in their already short-staffed pharmacies leaving pharmacists and staff over-worked; which in turn, opens room for med errors as with any pharmacy that has to cut staff.

    Independent pharmacies and specialty pharmacies just want a “square deal”. We aren’t looking to make huge profits and become millionaires like CEO’s of chain stores and PBM’s; we just want to serve our patients the best way we know how. If we got paid enough for overhead, just like any other business, represented by a feasible dispensing fee plus a small cut of the commodity, then no one would be complaining. We can’t do anything below cost, nor should we be expected to.

    The data may possibly be inaccurate as you portrayed in an earlier blog, but even if two-thirds of the devastating effects are true, isn’t that enough for us to stick up for ourselves…why is the money coming directly off our backs when we don’t really make much to begin with…not nearly as much as other successful business owners.

    At this point, given the above situations, I still believe NCPA and NACDS are doing the right thing and covering the bases as much as they can…nothing is perfect, but they still have the most reasonable approach so far.

    I appreciate the plug for rural pharmacies and as always, thanks for all you do!


    Eric Shields, Pharm.D.

  6. Eric,

    Thanks very much for your thoughtful and detailed post. I really value these type of constructive comments.

    As I have noted before, the retail pharmacy industry is going through a transformation that has affected many other U.S. retail industries (books, pet supplies, hardware, office products, etc.). Obviously, the need for health care services makes this industry different from others.

    The PCMA study cited above found that 71% of independent pharmacies are located in urban areas where "...consumers patronizing independents have access to 30 competing pharmacies within two miles of their current pharmacy."

    Should the health care system (increasingly taxpayers) finance the economic model for independent pharmacies in geographies where access is *not* at risk? The answer to this question seems to depend quite a bit on whether or not your livelihood comes from being an independent pharmacy owner.


  7. AnonymousJune 17, 2008

    Although your insight on many issues is commendable, I'm incredulous at the thought that despite repeated reasoned debate you have not acknowledged that access to specialized pharmacy services means lack of access to essential pharmacy services for 100% of those patients who require such specialized services. Please re-read the last two comments, apply the bookstore model and contrast the difference between lack of a desired book title and an inability to access a life-saving or life sustaining pharmacy product/service.

    I don't advocate for government to bail out our industry, just that law and regulation don't mirror the market manipulation already hoisted upon us by the unopposed dictates of non-public payors. A fair dispensing fee that reflects cost of dispense and an accurate cost benchmark would suffice. Neither FUL as presently constituted nor CMS's reluctance to accept any state's attempt to define a fair dispensing fee (see Louisiana's second rejection) fit the respective fairness criterion. The fact that government is unfairly burden by its civil responsibility to maintain access to essential services should be addressed to the private sector payors, which pursue maximum profit unrestrained by social responsibility. Some states have addressed the excesses of that industry by legislation empowering PBM regulation. Congress is silent.

  8. Thank you for taking the time to comment.

    Just to be clear, my post explicitly acknowledges that access to a pharmacy could be a genuine concern -- for the less than 2 million Americans in rural areas without a viable alternative. But "maintaining access to essential services" is not necessarily equivalent to maintaining the current market structure in geographies with an over-abundance of pharmacies.


  9. It is important to grant access to health care not only by cost but also by location-this is something that is rarely thought about.


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