The surprising conclusion about a preferred network design with transparency? A majority of the savings come from reduced pharmacy margins, not from reduced PBM margins. Milliman estimates that the pharmacy gross profit per script would drop by 78% for brands and by 50% for generics. Yikes!
While these reductions seem awfully large to me, this report is a useful thought experiment that should spark some critical thinking by plan sponsors, PBMs, and pharmacies. The detailed estimates are pictured below. Let me know what you think in the comments.
Last February, I asked: Why do pharmacy owners care about PBM transparency? The Milliman study suggests an important corollary: Be careful what you wish for, lest it come true.
Restat offers a preferred pharmacy model to self-insured employers called Align, which allows consumers to reduce their out-of-pocket costs at certain network pharmacies. (Full disclosure: Retstat is a past and future sponsor of Drug Channels. However, this sponsorship did not influence my comments.)
The growth of preferred pharmacy networks such as Align is one of the four major trends for the PBM and pharmacy industry in 2011. Other examples of preferred networks include the Humana Walmart Preferred Rx Plan and the Caterpillar-Walmart-Walgreens network model. Walmart advocates narrower pharmacy networks in a white paper released last June. (See Walmart's Pitch for Smaller Pharmacy Networks.)
Pharmacies participating in Restat’s Align program include the usual suspects—Walmart, Target, and many supermarkets—along with a number of regional chains. Surprisingly, the network includes 2,600+ independent pharmacies through the participation of McKesson’s Health Mart franchise members.
BTW, the report has a fairly neutral explanation of PBM revenue sources and contract structures (pass-through vs. spread pricing) starting on page 7. See Exhibit 23 (page 30) of The 2010-11 Economic Report on Retail and Specialty Pharmacies for my own estimates of the Big Three’s profits for a spread pricing model by pharmacy format and type of drug.
Milliman began with top-line average savings for employers from Restat’s Align program, which are reportedly 38% savings for retail generic prescriptions and 10% savings for retail brand prescriptions. I computed the savings using “Net Cost to Employer (Employer pays PBM, net of rebates)” on page 23 of the report. Restat confirmed to me that these figures represent real-world savings seen by its Align clients.
The study’s authors then estimated the source of per-script savings by estimating the flow of the drug dollar from manufacturer to consumer, across all drug channel participants (PBM, pharmacy, and wholesaler). See page 20 for Milliman’s methodology. Note that the estimates do not rely on claims data from Restat clients.
Milliman modeled the comparison between a “traditional model” (open network) and an “Alternative Pharmacy Network." Keep in mind that the estimates incorporate two different effects:
- Competition among pharmacies to participate in the network
- Payer visibility into PBM and pharmacy spreads
And here is the brand retail prescription result. A pharmacy’s per script gross profit—spread (“other margin”) plus dispensing fee—drops from $12.07 to $2.60 (-78%).
WHAT DO YOU THINK?
If we assume a 70% generic dispensing rate, the average gross profit per script goes from $15.07 to $6.44.
Is this a realistic figure? Do employers think that this level of profit is reasonable for a pharmacy? Will pharmacies willingly bear the brunt of transparency? Are narrower networks gaining momentum or not?
Bonus question: Can you tell a green field from a cold steel rail?