In Who Pays for Prescription Drugs?, I showed you how the payer for prescription drugs has changed over the past 40 years. The next logical questions: How much money do pharmacies make from different payers? How will a dominant government payer influence pharmacy profits? And what happens as competitive pressures increase?
I only have data about independent pharmacies in 2007, but the answers may surprise you. Here’s what I found:
- Medicaid remains the most profitable third-party payer for independent pharmacies.
- Despite what you may have heard, gross margins on third-party insurance business are growing at independent pharmacies.
- The generic price war that was triggered by Wal-Mart is squeezing pharmacy margins on cash-pay consumers. While $4 generics may be good news for uninsured/underinsured patients, they are bad news for pharmacy owners.
The data in the table below come from the NCPA 2008 Digest, which summarizes self-reported survey data from a sample of independent pharmacy owners.A few observations:
- Margins for all three categories of third-party-paid prescriptions increased in 2007 versus 2006.
- Medicaid prescriptions remain more profitable than either Medicare Part D (+160 basis points) or private third-party payers (+120 basis points). This is something to keep in mind the next time you hear that half of all independent pharmacies will close if Medicaid reimbursements drop by 2 percent.
- Gross margins on Part D business jumped by 270 basis points in the second year of the program. The self-reported gross margins of 18.7% in the NCPA Digest correspond almost exactly with the 18.5% reported by the OIG last year. See Pharmacy Profits & Part D for details.
THE WAL-MART EFFECT
Look at the category labeled “Non Third Party” in the table above. This category includes primarily cash-pay consumers, i.e., people who pay the full cost of their prescriptions out of their own pocket.
In 2007, average pharmacy margins from these uninsured/underinsured people were 42.4%, a decline of over 1400 basis points compared to 2006.
I’ll give you one guess why this is happening.
Wait for it.
Yes, you got it – it’s the generic price war!
These data confirm my supposition that the price war started by Wal-Mart in September 2006 will reduce pharmacy profits from uninsured/underinsured customers. And from the department of tooting-one’s-own-horn (ahem), this margin drop is consistent with the predictions that I made at the time that Wal-Mart announced its $4 generics program in Wal-Mart's Generic Pricing Will Trigger Big Changes and Reconsidering Wal-Mart (but just a little).
In September 2006, I wrote:
“Wal-Mart clearly struck a powerful chord with people. They are signaling their intent to remove profits from the retail pharmacy industry, to the ultimate detriment of pharmacy chains and independents. I believe that we’ll look back and acknowledge
Today, many independents will match prices to avoid losing a customer (and to avoid changing their U&C rates). Although they may deny the existence of price competition, Walgreens (
Cash-pay customers love the generic price wars, which offer the most value for uninsured and under-insured patients. Price shoppers are fans, too, given the wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right.)
Keep in mind that despite the drop in cash-pay margins, independent pharmacies also earned 2X margins from non-third-party scripts compared to third-party scripts. This differential reflects our health care system’s “soak the poor” approach, whereby cash-pay customer pay list price while those of us with insurance benefit from our pooled negotiating power.
Will this pattern continue in 2008 and beyond? Will PBM margins on third-party business trend downward as payers get more information about true profitability? Will direct-to-payer, cost-plus deals trigger another margin takedown?
Stay tuned, dear reader.