Thursday, March 14, 2013

What Free Generic Lipitor Says about Pharmacy's Future

Supermarket chain Wegmans just extended its discount program for atorvastatin, the generic version of Lipitor. Through the end of 2013, the total prescription price is … nothing. Yes, you read that right: $0.00. Click here to read the story from the Philadelphia Inquirer.

As I document below, a pharmacy's profits on a generic Lipitor prescription are still double the brand-name prescription's profits. At this stage in the generic life cycle, few other pharmacies are foolhardy (or desperate) enough to give up these superior generic profits. Wegmans' willingness to race to the bottom illustrates the inexorable downward economics facing retail pharmacy in coming years.

What’s the implied value of pharmacy counseling when the prescription is free? Hint: You don’t need to compute the circumference over the diameter to figure out the answer.

RACING TO THE BOTTOM…

As regular readers know, I foresee trouble ahead for the retail channel’s future profitability from core dispensing activities. Generic drugs’ extremely low acquisition cost, combined with the pharmacy industry’s basic fixed-cost economics, has triggered a generic price war. The problems will be especially acute as the generic wave winds down in a few years. See Drugstore Sales Drop Along with Drug Trend: Implications for Retail Pharmacy.

Pharmacies’ willingness to participate in preferred networks (as in Medicare Part D) also reflects the growing price war over generic prescriptions. In addition to competing with low cash prices to consumers, pharmacies are now also competing with lower prices to third-party payers.

Wegmans’ loss leader strategy illustrates the industry’s race-to-the-bottom strategy and exposes the industry's unspoken reality:

Most consumers don’t need much assistance or advice when picking up a prescription.

Yes, yes, I know that certain products and situations will always require counseling and high levels of service. But for the vast majority of maintenance prescriptions, a low-cost, efficient channel is sufficient.

Put another way, the business of dispensing retail prescriptions is often (but not always) a commoditized business that should be priced accordingly. In 2009, Walmart published a prescient article making the same point. See Wal-Mart Explains Its Healthcare Strategy.

Like it or not, we are all learning to shop for prescriptions by price, just like any other consumer packaged good.

…EVEN AS PROFITS STAY HIGH

Wegmans must really be desperate, given the profitability that still remains in generic Lipitor.

Consider retail pharmacies' average gross profit per prescription for Lipitor and its therapeutically equivalent generic version. In May 2012, Lipitor moved into the post-exclusivity period and faced multiple generic competitors.


By December 2012, the less-expensive generic prescription still generated gross profits that were more than twice that of the brand-name prescription. Note that this chart partially updates Exhibit 64 (page 97) from the 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies.

Consistent with the “Lifecycle Profits for Generic Drugs” section (page 94) of the pharmacy economic report, these profits have dropped somewhat over time. For generic Lipitor, pre-prescription gross profits declined by 15% from September to December.

AS EASY AS … YOU KNOW

I computed the chart above using the National Average Retail Prices (NARP) and National Drug Acquisition Cost (NADAC) data. For background, see Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins. Gross Profit per prescription equals NARP minus NADAC.

Actual pharmacy gross profits were probably greater than the amounts shown in the chart, because my computations exclude any adjustments for the off-invoice discounts and rebates that reduce NADAC below the published figures. See Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs.

P.S. Happy Pi Day! Be prepared for next year with the nerdtastic Mental Floss t-shirt pictured above.

P.S.2 Check out the latest Health Wonk Review!

10 comments:

  1. Pharmacy is used as a loss leader in this segment of the business. They are in the pharmacy business to stimulate customer traffic flow...much like selling a gallon of milk for $.99. No difference. Loss leader. Remember they are a grocery store chain, much like Giant Eagle.

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  2. Pharmacy is rapidly heading towards a world where retail stores will be filling generics for $4.00 and a small handful of either very entrepreneurial or payer owned specialty pharmacies will dominate dispensing. Selling products and providing professional services without taking into account the full cost of doing business will only accelerate the process.

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  3. I agree with Kevin. This is the same reason that WalMart came out with the $4 generics. If a pharmacy chain or independent is competing with grocery or mass merchandiser then they are at a disadvantage. It is a different strategy altogether.

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  4. I agree that treating prescriptions not only as a commodity (price
    only) but as a loss leader greatly diminishes the pharmacy profession and will
    bring the profession to a logically concluded end if continued.

    It’s almost impossible to go a few days now without seeing information about prescription drugs in the mainstream news. Financial analyst talking about the lack of blockbuster drugs in the pipeline, a report talking about the $290B cost of non-adherence, discussions around or how more than 25% of kids now take a prescription medication.

    This has raised the average consumer’s awareness of the
    pharmacy profession and continues to push the trend of consumerism with which the entire healthcare industry is dealing.

    Most of us in the Pharmacy industry know that pharmacy is
    the most used health benefit (12 Rxs PMPY for PPO members and we as pharmacist “believed” that pharmacists were a critical part of the “care” continuum.

    Kroger’s, Giant Eagle, Myers, Wegmans, Target, Market Street, Price shoppers, and others have shattered that believe with their loss leader mentality and now the pharmacy profession must counter balance this market force.

    The challenge to be met is for the pharmacy industry to demonstrate their value beyond simple trend management. The growth in generics will slow down and profits diminish while specialty spending grows.

    Pharmacy and pharmacists have to AGAIN become a critical path in the “care” continuum and demonstrate how they engage consumers/patients to improve outcomes.

    It will become increasingly important to link outcomes and reimbursement as CIGNA Pharmacy did in their diabetes deal with Merck.

    If we as pharmacist do this as a profession we will not only maintain status but grow in status and numbers.

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  5. If they gave away ALL their drugs, I would agree with much of your premise. Giving away 1 drug is just a gimmick to sell more tomatoes. The consumer needs to be aware that Wegmans will make it up somewhere (most likely on other generics). There is still no such thing as a free lunch.

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  6. An independent can compete...if they can shed their "old way of doing business" and get in the game.

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  7. Of course. But prescriptions never used to be no-price "loss leaders." Like other pharmacies, Wegmans also has a low-price $4/$10 generic list.

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  8. The evolution of retailing has dragged pharmacy (kicking and screaming) along with it. The consumer (patient's and employers) need to pay attention and be savvy and not get suckered

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  9. Reimbursements are way lower than what was reported last year via the voluntary cost of drug reporting. The survey was mailed out just a few weeks after these blockbuster drugs went generic and insurances were still paying us "well" and those reimbursements are no longer there. Ps I would rather sell one Rx at $14 than 4 Rx for $16. That means less labor and over head. Ultimately patients picking up their prescriptions from an independently owned pharmacy (with a pharmacist that has some business common sense) will end up paying less than they would at a chain or supermarket pharmacy. Generic Maxalt is costing us less than $1 a tablet and cvs is charging over $450. You can easily charge $150 and make ton of money. Same with generic Plavix most chains are still charging over $100 for a 30 day supply and my patients are gladly paying $50 a month. Same with levaquin .... Etc. Educate your patients that your are the lowest prices in town just don't over or under charge them.

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  10. "Most consumers don’t need much assistance or advice when picking up a prescription"--Adam Fein Ph.D.

    Dr. Fein, Then why are written prescriptions necessary at all? Why not have hyperlipidemia medications on aisle 11 of our favorite smiley faced retailer, aisle 12 could be the "blue light special drug of the day", and down aisle 13 we could have BOGO's of Lipitor! The quoted statement above simply highlights in BIG BRIGHT PINK COLOR, the disconnect between you and the actual delivery of healthcare @ a Pharmacy. But it's not your fault. You've been conditioned just as the masses have, by non pharmacist corporate bean counters and PBM lobbyists that Pharmacists don't matter. Let me explain something to you and the non Pharmacist readers of this blog: In my modest Pharmacy we process ~ 150 rx's per day. Within the course of daily business, we typically have to contact physicians 6-8 times per day for issues such as DRUG-DRUG interactions, Drug allergies, incorrect directions, or non therapeutic dosing to name a few. These instances may seem small to a numbers cruncher like you, but to some patients who typically are on many different medications, it is a much appreciated and valued service (and with an avg. gross margin of ONLY $12.50 per RX, that's one hell of a value that saves thousands of dollars in hospitalizations). Now then, how has the prestige and standing of the individual Pharmacist been diminished over the last 30 years? I cite 2 reasons in particular: 1) the NON Pharmacist corporate bean counters who have made individual Pharmacists irrelevant by marketing their store brand above all else and the Pharmacists of the 1970's and 80's who willfully sold out their own profession for personal profit to these corporations. and 2) the insurance lobbyists of the PBM industry who have been able to somehow place the US POSTMAN between the relationship of the Pharmacist and the Patient. Despite brick and mortar Pharmacies providing patient information leaflets complete with a contact phone number in case a patient has a question regarding their medication just as mail order operations do;BUT ONLY BRICK AND MORTAR STORES ARE REQUIRED TO OFFER PATIENT COUNSELING AT THE DELIVERY OF THAT MEDICATION TO THE PATIENT. This is a clear double standard that holds the retail store to a higher standard than the insurance company's mail order operation and this double standard exists solely because of the greed and influence of insurance lobbyists. --and quite frankly, it is a violation of many state's Pharmacy Practice Acts. Further, many medications have a recommended temperature range that must be maintained or the medication can potentially lose potency.Despite this, mail order lobbyists have somehow been able to legitimize the delivery in the summer to the hottest parts of the country and in the winter to the coldest parts of our great land, medications which are being subject to temperatures outside of the accepted stability range. In conclusion, chain store corporate bean counters and big money insurance lobbyists have successful damaged and minimized the reputation and roles of the Pharmacist over the past 30 years. Pharmacists who continue to collect a check and who simply be "employees" need to begin to get politically active within their respective state legislatures in order to reposition our profession and re-emphasize the important role we play in maintaining patient health. One only need to do a quick Google search to see the drug overdose is the #2 cause of accidental death in the USA and if corporate interests and insurance lobbyists continue to get their way it will no doubt climb to #1.....Dr Fein's quote above is just a resultant symptom of the disease that has been malignantly spreading throughout our profession for the last 30 years.

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