The Pharmacy Benefit Management Institute (PBMI) just released its 2010-11 Prescription Drug Benefit Cost and Plan Design Survey, an informative and useful report that you can download for free. A hearty Drug Channels “Thank You” to Takeda Pharmaceuticals North America for sponsoring the research.
The latest survey shows that retail pharmacy payment tightened significantly in 2010, reinforcing the fact that efficient, low-cost dispensing is crucial to a retail pharmacy’s economic survival.
But here’s the unexpected conclusion from my number-crunching of the latest PBMI data: Retail pharmacy profits from brand-name prescriptions have remained remarkably stable over the past 10 years. The apparently steep drop in third-party reimbursements to retail pharmacies primarily reflects mathematical adjustments to underlying pharmaceutical price inflation.
I expect channel participants will strongly disagree, so read on and make up your own mind.
The PBMI survey data are collected from employers, not from PBMs. The 2010-11 edition includes responses from 372 employers representing 5.8 million members—a decline from the 417 employers with 7.0 million members in last year’s report. The average group size in the 2010-11 data is 9,736 members, but this is a bit misleading because 44% of the employers have plans with fewer than 2,000 members. Survey methodology wonks can see the Profile of Respondents for more details.
As far as I know, PBMI publishes the only report tracking pharmacy reimbursement rates in a consistent way over multiple years, although the sample base changes over time. I focus on retail pharmacy reimbursement for brand-name drugs in this article.
Most private and government third-party payers still use the Average Wholesale Price (AWP) benchmark to estimate a pharmacy’s ingredient costs for a brand-name drug. The PBMI survey documents that private third-party payers (employers) are reimbursing pharmacies at an ever-smaller share of AWP.
As the chart below shows, the average discount from AWP has declined by four percentage points (400 basis points) since 2000 for brand-name drugs dispensed by a retail pharmacy. (source) There's been an especially sharp drop of 100 basis points since last year.
The PBMI data also shows the dispensing fee dropping by 30% from $2.31 in 2000 to $1.62 in 2010.
BUT MORE DOLLARS
AWP has a mathematical (but legally tangled) relationship to Wholesale Acquisition Cost (WAC), which represents the manufacturer’s list price as defined in Section 1847A(c)(6) of the Social Security Act.
Numerous studies have shown that manufacturer’s list prices—and therefore AWP—have been increasing more quickly than overall inflation. Therefore, deeper discounts from AWP are not necessarily bad for pharmacies given the increase in overall drug prices.
Put another way, pharmacies now receive a smaller percentage of a bigger number. How much bigger? According to data published in the 2010-11 NACDS Chain Pharmacy Industry Profile, the average retail (non-mail) prescription price has increased from $65 in 2000 to $155 in 2009—a total increase of 138% and an average annual growth rate of 10.1%.
WHAT ABOUT PHARMACY PROFITS?
In addition to a dispensing fee, retail pharmacies earn spreads between (a) the ingredient cost reimbursement that a pharmacy gets from a third-party payer, and (b) the pharmacy’s net acquisition cost for purchasing the product. This “spread pricing” provides retail pharmacies with more than 80% of their gross profits from prescriptions because pharmacies acquire drugs for less than the ingredient cost reimbursement amount.
To model the profit impact implied by the PBMI data, I combined the NACDS-reported prescription price data and the PMBI reimbursement data to compute a per-script AWP estimate. The table below shows my computations for the average gross profit and gross margin per brand prescription. These are averages, so YMMV. (Click the chart to enlarge it.)
The surprising result? Gross profits per brand prescription have been fairly stable, remaining in the range of about $9 to $11 during the past ten years. Estimated average gross profits per brand drug prescription have even increased over the past decade. This result makes sense given studies suggesting the average cost-of-dispensing is slightly below these figures.
Of course, gross margin—gross profit as a percentage of revenue—has declined, but this is simply a computational artifact of rising prescription prices.
Note that the gross profit dollar computations are sensitive to the particular assumptions for column [E]. The absolute dollar profit level would be higher (lower) with lower (higher) acquisition costs. However, the general conclusion doesn’t change because of the channel pricing dynamics for single-source brand-name drugs.
UPDATE: The pharmacy reimbursement data reported in the PBMI survey reflect what the employers pays, i.e., the rate paid by the employer to the PBM when a script is filled by a retail pharmacy. In my computations above, I incorrectly use the data to compute what the pharmacy gets paid, i.e., the rate paid by the PBM to the pharmacy. However, this may not affect the results. Please see my comment below the post for clarification on this technical point.
Although I had no involvement in the PBMI survey research, I want to let you know that I will be delivering the keynote address at the 16th Annual PBMI Drug Benefit Conference in February 2011. My topic: "The Future for Pharmacies." Perhaps I’ll see you there!