Tuesday, October 09, 2012

Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins

Pharmacy economics nerds: Your day has arrived!

Late Friday evening, the Center for Medicare and Medicaid Services (CMS) released its first batch of detailed data on pharmacy acquisition costs and pharmacy revenues (by payer type). These data allow anyone to compute average per-prescription pharmacy profit margins for more than 3,000 drugs at the 11-digit National Drug Code (NDC) level.


To illustrate how easy it is, below I compute the per-prescription profit margins for three brand-name and three generic prescriptions. I also discuss profit patterns for the 3,230 drugs with both acquisition cost and revenue data.

The era of transparency has arrived. Expect violent and strenuous protests about these data from the pharmacy industry. Download the data now, before the inevitable injunction.


The data’s publication should come as no surprise to Drug Channels readers. I first discussed CMS’ intentions in August 2010’s CMS Wants Public Transparency to Pharmacy Profits.

You can get all information from CMS’ Survey of Retail Prices page. CMS provides detailed descriptions of the methodology behind the two surveys in these two documents:
The monthly NARP is based on 50 million nationwide retail pharmacy claims, or about 15% of the U.S. market. The revenue data includes: (1) the amounts paid for drug ingredient costs, (2) customer copayments or coinsurance, and (3) dispensing fees. In addition to an overall average, CMS also provides separate Medicaid, third-party, and cash-pay averages. Assuming the sampling is done properly, these data should be pretty accurate.

In contrast, the NADAC survey’s accuracy is unknown. As I discuss in Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs, the NADAC is voluntary and excludes certain off-invoice discounts. There are already some oddities in the data, such as multiple NARPs for multisource generics. For example, there are 13 NDCs listed for the simvastatin 20mg example shown below.

To generate the tables below, I combined the NADAC data (collected in September 2012, I think) with the NARP (from July 2012). CMS helpfully provides all data on Excel spreadsheets, so third-party payers and Medicaid programs can play along.


As a reminder, gross profit equals the revenues received by a pharmacy minus the costs of products (net of discounts and returns) bought from a manufacturer or a wholesaler. For a single prescription, these revenues include the amounts paid for drug ingredient costs, customer copayments or coinsurance, and dispensing fees. Gross margin expresses gross profit as a percentage of revenues. Gross profit measures the portion of a pharmacy's revenues available for the operating expenses and operating profit of a pharmacy.

The table below shows the per-prescription gross profit and margin for the common dosages of three widely-prescribed brand-name drugs—Abilify, Nexium, and Singulair. All three will be facing generic competition in the next few years, per the table in A New Generic Wave Update, Courtesy of Express Scripts.

The table below shows the per-prescription gross profit and margin for the common dosages of three widely-prescribed generic drugs—hydrocodone APAP, simvastatin, and lisinopril.

Pretty amazing, isn't it?


Win some, lose some. Of the 3,230 drugs with both a NADAC and a NARP, the equally-weighted mathematical average gross profit per prescription was $7.46 per prescription. However, there were wide variations in the dollar profits earned by a pharmacy for dispensing a prescription. Like other retailers, pharmacies make money dispensing a basket of products. Some items in the basket are more profitable than others. For the six examples above, gross profits range from $3.15 to $37.80. In the whole sample, about 5% had negative gross profits, while about 5% had gross profits above $20 per prescription.

Cash is still king. For the six drugs above, gross profit and gross margin are higher for cash prescriptions. The exception is lisinopril, which appears on Walmart’s $4 list. As I have pointed out many times, pharmacies typically earn much higher profit margins from uninsured and underinsured individuals, a.k.a., cash-paying customers. This is a downside of healthcare reform for pharmacies—fewer uninsured consumers translates into lower profit margins. See Health Care Reform: Impact on Drug Channels, Post-SCOTUS. Exhibit 45 (page 68) of the 2011-12 Economic Report on Retail and Specialty Pharmacies presents overall self-reported pharmacy profit margins on cash-pay prescriptions.

Medicaid remains more generous. For three-quarters of the drugs, a pharmacy’s gross profit from Medicaid was greater than its gross profit from other third-party payers. On average, Medicaid permitted gross profits that were 18% higher than other third-party payers. Now you know why the states have been pressing CMS to conduct these surveys and publish the results, per the discussion in Coming Soon: Average Acquisition Costs for Pharmacies.The profit results also highlight two other healthcare reform downsides—the massive Medicaid expansion and the coming AMP-based Federal Upper Limits (FULs). See Generic Plavix: Let's Do the Price Limbo.

$4 generics are not loss leaders. For years, pharmacy associations have claimed that discount generic programs are “bait-and-switch” or a “PR stunt.” This is simply not accurate. Many common generic drugs can be acquired for pennies per pill, so discount generics merely represent a good old fashioned price war. The new CMS data are consistent with the realities that I outlined as long ago as December 2006’s Sloppy reporting about Wal-Mart.

Transparency = Trouble. With these newest data, CMS is opening up the distribution system to intense scrutiny over its profits. Pressure on channel profits from generic drugs will rise, posing profit risks to the entire channel—pharmacies, pharmacy benefit managers (PBMs), and wholesalers. As I point out in Chapter 5 (page 74) of the 2012-13 Economic Report on Pharmaceutical Wholesalers, a savvy analyst could combine the published AMP (wholesalers’ average purchase price) and NADAC data (wholesalers’ average selling price) to estimate a wholesaler’s average profit margins for a specific generic category. This would provide unprecedented transparency into a heretofore hidden wholesaler spreads.


Drug channel economics just got a lot more interesting. Stay tuned for more disclosure…and more angst.


  1. Ok, so you think percentage profit is great?  How much do you think it costs a pharmacy to dispense a drug?  Why have several states including Alabama gone to an acquisition cost plus a $10.64 dispensing fee.  Most of the generic drugs generate above generate a profit of $1.00.  How is that supposed to pay for dispensing the drug?  I don't think $4 generics are a "lost leader" where they break even or make a little on the cost of a drug.  Especially when you see grocery chains and other chain drug stores using these promotions to get people to get their prescriptions filled at their pharmacy.  So once again, pharmacy is seen as a commodity not a profession.  
    As a pharmacist, I see the pharmacy profession hurting themselves by selling a commodity instead of a service.  We go to school to learn about drug therapy and disease management (and I graduated a long time ago) and then end up counting pills for a living.  In the meantime, companies with little to do with the actual prescription are making money by pushing buttons - wholesalers, claim switches, and PBMs.  How do any of those companies really make a difference in patient care?

  2. Nothing new under the sun in my pharmacy world, prices are fairly accurate. I imagine the PBMs will have some explaining to do when employers see what pharmacies are paid compared to what they are billed.

    I have a 15 drug cash comparison of my prices against the chains that you have my permission to publish. I have said for years that the PBMs do to employers what the chains do to the uninsured (take advantage of their cost naivete')...it doesn't have to be that way.

    BTW It would be interesting to compare other high dollar retailers gross profit % against pharmacy. I highly doubt a jeweler sells a $600 ring at a 5.4% gross profit. Same with an electronics retailer, do they sell $500 TVs at 5.4% GP? Can they successfully cover overhead and manage inventory. If they can, it may be because Vise/MC pays them in in 24 hours, not 30 days.....

  3. True transparent pricing models gives the payer, both government and private, more control over pharmacy medication distribution cost. Once a payer is confident that they have received best Rx distribution pricing, which will be no longer be filtered through a myriad of agents, brokers, and TPAs, the payer can move on to pertinent questions. Is there a cheaper or better medication than this expensive one and payers will even have the CLARITY  for sophisticated questions: are these medications providing any benefit as a return on investment via increased employee productivity( i.e. are these drugs I am paying for providing the touted disease management that they advertise to have and if not why not).
    Adam, as you have stated in the past, transparency as elicited here, puts the traditional Mail Order and PBM business models at various risk.
    This new found concept of looking at the bottom  line(Sarcasm) enabled by true transparency between the different distribution channels will not only encourage the use generics, but use of therapeutic interchange, ROI, productivity, disease management, MTMs and wellness/prevention as well.
    Mail order of any kind must have a lack of true transparency through AWP pricing, co pay advantages and a confused payer to compete.  Mail order presently cannot lower their COD to the point where a gross margin of $7.64 per Rx is profitable, attractive to the consumer, and competitive with community pharmacy, pharmacies that will be put on a level playing field including co pays and 90 day supply per Rx. How will a PBM who owns their Mail Order facility justify profits greater than this number?
    The  Market is already producing a new PBM business"service" model based on ROI for the client’s drug spend similar to the formula used to determine ROI on a 401K.

  4. Adam,

    Lets compare the gross margins with some "big "box retailers

    first six months of 2012 as detailed ZACHS:

    Walmart   25.06%
    Target 32.03%
    Costco 14.86%

    Gee it looks like pharmacy is indeed a bargain.

    Remember Adam" Everyone is entitled to their own opinion, but not their own facts"

    Doubt me? Then pull up the information for yourself and we will wait for your response. Please don't confuse gross margin with dollar profit per RX. How many retailers are  going to make $32.00 dollar profit on a $550.00 cost item and brag about it?


  5. I didn't see the link for the dataset... has it already been pulled?

  6. Government agencies and firms such as Myers & Stauffer have determined that the average cost of dispensing is about $10-$15.  Subtract that from the average "gross profit" of $7.46 and you get an average NET LOSS of roughly $5.  But you knew that, right? 

  7. Mr. Fein, I took you as an intelligent person until I read this article!  You only mention operating expences one time in your article.  That is what you fail to consider with your argument.  Those expenses average better than $10 per prescription even for those big chain pharmacies who offer the $4 prescription.  When those pharmacies argue for the $4 prescription they conveniently leave that out, just as you have done.  So those "pharmacy associations" you refered to are correct when they refer to the "bait-and-switch" stunts.  If you will refer back to your charts only 8 of the 17 prescriptions you have listed will produce a profit at all.  The other 9 are loses. 7 of the 8 are brand drugs.  With a large percentage of prescriptions dispenced today being generic; how do you expect pharmacies to make much of a profit at all?

  8. Adam,

    Thanks for the post.  Two thoughts . . .

    First, as a result of the implementation of Medicare Part D in 2006, cash prescriptions represent a neglible fraction of the market for the vast majority of community pharmacies.  As such, conventionally priced cash prescriptions (as distinguished from $4 loss leaders) are no longer relevant to the discussion of pharmacy profits. 

    Second, an average gross profit of $7.46 per prescription when combined with a median dispensing cost (from a 2007 national study) of $10.86 suggests that the typical pharmacy actually loses over $3.00 on the average prescription. 

    I'm not sure how this squares with the conspiracy theorists who seem to believe that community pharmacies are making exhorbitant profits on prescription drugs.  Do you?

  9. Hey pharmacies,pbms, and distributors, I've got an idea: Instead of quibbling about profit margins and other survey based metrics, why not change the system so you can get paid what you're really worth? Why don't we do what every other non-healthcare industry does and adopt a market-based approach?  Certain pharmacies can charge $15, heck $25 bucks or whatever they want on top of cost if there's a market for it. If my plan only coverages the "average" amount or cost plus a certain amount, then I as a patient have to decide if the extra is worth it. However, if I as a consumer would like to pay the lowest possible amount above cost (using legal dispensing practices), it becomes my choice. 

    Competition and free markets are what made the U.S. wealthy enough afford the current scheme, however, the "healthcare exemption" from market forces is bankrupting us in the form of future Medicare liabilities. Pharmacy is a good place to start if only we can break our addiction to the drug known as opaqueness.

  10. Yup, looks like CMS pulled it off of their website. No idea what happened.

  11. LOL. I still have that photo framed on the wall of my office. I bought it back in 1978.

  12. Interesting. Anyone know where CMS maintains AMP data on its website ?

  13. Adam,
    Where oh where does CMS get those averages?  New Hampshire is the lowest reimbursed state for medicaid.  I tried to bill the three brands listed, and guess what?  All three of those medications require Prior Approval before the patient has access to the meds.  How much does it cost the healthcare system to deal with PAs?  Do you have a dollar number for this?  You do understand PAs, don't you?

    I was able to bill the state for the 3 generics, hydrocodone apap was paid at 3.31 with my net being 2.27; simvastatin 20 was adudicated at 3.19 and my net was 2,61 and lisinopril 20 was 3.18 and I made a whopping 2.60.  Go figure my percent profit. 

    So if you average @6f40ee728f15967a5bb18eecd33aafe2:disqus 2.49 per RX and fill 150 per day, 6 days a week you would get a little over $116,000.00.  Oh yeah, first we have to deduct all direct and indirect costs.  Oops, I am negative big time.  I should have been a columnist.

    Ed McGee

  14. The methodology is described in the links above.

    The collection and publication of these data are a direct result of the Affordable Care Act (Obamacare). I suggest you raise your concerns with your Congressional representatives or industry lobbyists.

  15. Adam,

    Your definition of "Loss Leader" needs to be updated.  A loss leader is not necessarily a product that is sold below cost.  The standard definition is an item that is offered for sale at a reduced price and is intended to "lead" to the subsequent sale of other items.  The "Loss Leader" is offered at a price below its minimum profit margin, not necessarily below its cost.

    In Walmart's case, (1) since you can't get out of the store without a 1/2 hour wait and they estimate the average cart of stuff that goes out the door with that $4 prescription is over $80 dollars, and (2) the prices on their non-$4 generics are quite high in comparison to cost, their "program" fits the definition perfectly.

    But overall, it looks like you made a classic "newbie" mistake of thinking gross profit in some way is an indicator of net profit.  You don't get to take gross profit home with you.

  16. PA's from Medicaid PBMs can run between $10-15 each depending on who is handling the call (Tech, Rph, Nurse).  One time PA cost is much less expensive than a years worth of fills of a costly brand.... 

  17. I tip my pizza guy more then these pharmacists get reimbursed. Perhaps we should start tipping the pharmacist so they don't make a mistake with our prescriptions?

  18. Regardless of your definition, my point remains: the drugs are generally not being sold below acquisition cost, in contrast to the statements made by a leading pharmacy association.
    See Pharmacy Economics 101 for more on the gross/net profit issue.

    BTW, it's been a long time since anyone called me a newbie! Thanks for making me feel young again.

  19. Maybe with a "30 minutes of less" guarantee?


  20. I can't say I'm familiar with the statement being made, but I'd suspect they are slightly vague about what "Cost" they're referring to.  If I ran a gas station and bought gas for $4 a gallon from my supplier and I knew that it cost me a dime to pump it into your car (pump and electrical expenses) but had to sell for $4.05 because of competition, couldn't I reasonably say I was selling below cost?  Selling it to you but leaving it in my storage tanks isn't an appealing option to any driver...

    By the way, I like your slightly vague comment: "drugs are GENERALLY not being sold below acquisition..." How many that are being sold below acquisition does it take to make your gross profit go negative?


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