Tuesday, March 09, 2010

Pharmacy Profits and the Uninsured

The New York Public Interest Research Group just released A Bitter Pill, their latest annual review of retail pharmacy prices throughout New York state. The data shed light on our health care system's unfortunate “soak the poor” model, which provides 4X profits for pharmacies from consumers lacking insurance coverage.

As I show below, a retail pharmacy’s usual and customary list prices to the uninsured far exceed the reimbursement levels received from third-party payers. When President Obama was in Philly yesterday bashing insurance companies, he forgot to mention that the uninsured cash-pay customer must pay list price for a prescription while those of us with insurance pay the least.

The extreme vitriol aimed at PBMs by independent pharmacy owners makes sense once you see my pharmacy profit math example below. It’s also a downside of health care reform for pharmacies—fewer uninsured consumers would depress pharmacy margins.

Someday, Walmart (NYSE:WMT) will finally decide to launch a brand drug retail pharmacy price war over the uninsured consumer, especially if the healthcare reform effort fails. The model below shows that it’s a realistic possibility.


The Prescription Drug Prices in New York State website allows consumers to compare the retail price of the 150 most frequently prescribed drugs at different pharmacies throughout New York. Price is measured as the "usual and customary" (U&C) price reported to Medicaid by a pharmacy. In theory, this site could help uninsured or underinsured consumers shop around for lower prices.

Alas, the NYPIRG once again found the data on the New York web site to be incomplete, outdated, or just plain wrong. How about $39,804 for an Ambien CR 12.5 MG prescription?

I wrote about this report last April in The Problem with Pharmacy Prices. The situation seems just as bad as ever.

Adding insult to injury, retail pharmacies don’t take the price reporting law very seriously. According to A Bitter Pill, no pharmacies reported prices for all 65 brand name drugs examined in the study. The average pharmacy reported costs for only 39 of them. Among a sample of 246 pharmacies, 82% (210 out of 246) failed to display the drug price website address, as required by law.


According to the NY PIRG report, Plavix 75MG TAB is the most prescribed brand-name drug in New York City. The average retail price for Plavix 75MG at a New York City pharmacy was $189.29, presumably for a 30-day supply.

Below, I compare a pharmacy’s average profit per prescription for Plavix from an uninsured, cash-pay consumer to average profit under the New York State Medicaid program. As you can see, gross profit dollars are 4 times as large from the cash-pay consumer ($54.50 vs. $13.44).

See what I mean? (Click the chart to enlarge it.)

The pooled negotiating power and knowledge of a third-party payer (private or public) limits a retail pharmacy’s ability to earn excessive mark-ups on expensive products. Bummer.

This illustration is consistent with the figure shown in my much-loved post Why do pharmacy owners care about PBM transparency?. Note that those margin data include both brand and generic prescriptions, whereas the example above focuses on brand only.


Unfortunately, most uninsured consumers lack the knowledge and understanding about pharmacy economics to negotiate or ask for lower prices. I suspect most consumers also feel uncomfortable about asking a pharmacist for a lower price on a drug because they do not even realize how much money the pharmacy is making.

Cash-pay prescriptions are only about 10% of retail scripts, down from 63% just 20 years ago. I hope consumers who fall into this unlucky category will shop around and not just accept the prices posted at their local community pharmacy.

P.S. The photo above comes from an oddball website called Uninsured Wristband. Not an endorsement, just an acknowledgment.


  1. Hmmm...a price war on branded drugs? That would be interesting and if anyone could do it, Walmart could do it.


  2. Yes, that part caught my attention too. The answer is that Walmart doesn't want to screw the pooch on drugs. They will sell a small number of generics at a loss to make you forget they are overcharging just like everyone else. if they really did decide to take losses on brands to take market share, then we are all screwed.

  3. PBMs exacerbate this problem by writing contracts that pay the lesser of contract rate or submitted U&C. It's easier to set a safely-high U&C in the pharmacy system than it is to make sure the U&C tables are kept up to date with prices that won't cause erosion in third party reimbursements. The third party reimbursements are tight margin as it is; losing dollars to a mis-set U&C is too risky.

    Most pharmacies, including independents, can offer a cash discount card for just a few dollars that will adjudicate cash payments through a BIN to arrive at a customer price very close to what the third party reimbursement would have been. A smart shopper would look for (and insist upon) one of those cards.

  4. In my experience a poor person wouldn't pay for most brand name medications even if Walmart could sell it at 50% the aquisition cost. They are just too expensive. Because of insurance reimbursement levels, cost shifting takes place across all of healthcare. It is not unique to pharmacy and it is not new.

  5. Dr. Fein - would you like the Independent Pharmacy - to just evaporate? Why don't you take your brilliant research capabilities and dig into this story:


    “CVS and Caremark have colluded to essentially steal from not only seniors, but from the tax payers."

    Independent Pharmacy is needed more so than Mail Order / and or Walgreens/ Walmart/ CVS. CVS-Caremark - It's a HORRIBLE consumer model.

  6. PTR,

    I'm not going to defend CVS Caremark. As regular readers know, I have been critical of the business rationale behind the CVS-Caremark combination for the PBM business. (example)

    But don't forget that Maintenance Choice, which is the program described in your link, is a benefit design decision made by the plan sponsor, not by CVS Caremark. The people in your article are asking someone else--a third party--to pay for their prescriptions. If they (or the reporter) understood how the system really works, then they would be getting mad at their employer or health plan, not at CVS Caremark.


  7. You have no clue as to how the retail pharmacy marketplace works. 10% cash customers? No way. I don't have one patient who pays cash for Plavix. If they have no insurance, they take aspirin. The real reason why these reported prices are so high is as one poster pointed out, to maximize reimbursement from PBM on u&c or contract price. And again, what is the overall profit picture. Academic moron!!

  8. In case you are curious, The 2009-10 NACDS Chain Pharmacy Profile (page 61) reports that 10.8% of prescriptions were cash-pay in 2008 according to Wolters Kluwers. I'm skeptical that your personal experience at a single pharmacy trump the data from 53,000 retail pharmacies.

    And if you don't like my Plavix example, plug in another drug. Math is the same.


  9. And how many of these were otc items, not covered by insureance, multivite, feso4, acetaminophen, loratadine, etc. Check the average retail of cash rx vs. 3rd party, there is a distinct difference, the data you are looking at is reported u&c, not even close to what a cash pt would purchase for.Show me a receipt where the patient pays that for Plavix, Lipitor, etc. You manipulate data to suit your agenda.

  10. The NY PIRG data are the list (U&C) price reported by pharmacies to Medicaid. Are you suggesting that pharmacies are reporting false data to Medicaid? I had not considered that angle, although it raises other questions.


  11. Great post. Here is a related article from Forbes:

    Saving Big Bucks On Prescription Drugs


  12. Old news! The cash customer has always subsidized those with coverage so the insurance industry has the money to pay their executives outrageous salaries. This price modeling is present in most industries in a slightly different form where shopped items are sold at a low teaser price and the customer is jabbed on things they need or do not pay attention to...think tires (why is the uncommon size much more expensive than a common one)...light bulbs (why does a 3ft fluorscent bulb cost more than a 4ft one)...etc

  13. "why is the uncommon size much more expensive than a common one?"


    I think a better example would be "why do cash customers pay the same as credit card customers when the CC customers are incurring a minimum 2% additional charge on the vendor?"

    Here too, cash customers are subsidizing the others.

  14. Hello Adam.

    Cost shifting is a sad fact of our society...in every industry.

    Yet you should review your chart re the Pharmacy Acquisition Cost section. I realize the data was submitted by pharmacies, but I believe this info does NOT take into account the AWP spread shrinkage which occurred a few months back.

    1. Typical small chain/independent is buying brands at about WAC less 2 pct. Pre-AWP shrink days, that was approx AWP less 22pct. Today that's about AWP less 19pct.

    2. Reimbursement piece is clearly correct as most States took full advantage of the AWP shrink margin, while private entities did not.

    Also, your perspective please on Villanova over the next couple weeks.

  15. Increasing the acquisition cost would reduce the absolute values of gross profit but would not change the message. In fact, the generic-to-brand GP ratio would be even larger.

    I'm afraid that my non-disclosure policy prevents me from commenting on March madness. ;-)


  16. "Increasing the acquisition cost would reduce the absolute values of gross profit but would not change the message. In fact, the generic-to-brand GP ratio would be even larger".

    Not true on this Adam. You are a smart guy and know this industry better than most, but clearly you are missing something here.

    Pre-AWP shrink days, pharmacies had a buffer (or call it as you'd like) in the AWP discount section of about 7 percent. Today, that buffer is down to about 4 percent. Of course this is true only with those third parties that held the reimbursement line with the New and Improved AWP.

    Remember, when AWP was shrunk our so called transparency shrunk with it.

    In addition, we are only focusing on the branded side here. Generics are handled via a MAC program more tha 90 pct of the time.

    Please educate me if I'm wrong.

    Lastly, do the Owls have the same passion and desire that the Penn crew did back in the late 70's?