Tuesday, December 11, 2012

Surprise? CMS Computes and Publishes Pharmacy Prescription Profit Margins

Last week, Myers and Stauffer, the contractors collecting pharmacy acquisition costs and revenue data for the Center for Medicare and Medicaid Services (CMS), unexpectedly presented average per-prescription pharmacy profit margins, by payer and prescription type. Click here to view the slide deck. (See pages 64-67.)

Nobody expected this CMS inquisition. They didn't wait very long to follow through on the implied visibility to pharmacies’ prescription economics, as I predicted in Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins.

Below, I summarize the new gross profit and margin computations based on NADAC and NARP data, along with adjusted numbers that account for the acquisition cost survey’s flaws. Highlights:
  • A pharmacy’s average gross profit per prescription is $12.50.
  • Gross margins on brand prescriptions average about 10%, while gross margins on generic prescriptions average about 50%.
  • Pharmacies continue to earn more from Medicaid than other third-party payers.
  • Cash pay prescriptions, most of which are generic, yield higher margins than third party prescriptions.
  • The response rate for the acquisition cost survey is surprisingly high, especially among independent pharmacy owners.
Perhaps we shouldn't be surprised. After all, CMS’ chief weapon is surprise and fear. No, wait, their two weapons are fear, surprise, and ruthless efficiency. No, no, their *three* weapons are...Wait, I'll start again...


Briefly, Myers & Stauffer are the contractors collecting the following two different data sets for CMS.

National Average Retail Prices (NARP)
  • Provides average prescription revenues, composed of (1) the amounts paid for drug ingredient costs, (2) customer copayments or coinsurance, and (3) dispensing fees.
  • Publishes average revenues for 3,000 to 3,500 of the most commonly dispensed brand and generic outpatient drugs, listed by 11-digit National Drug Code (NDC)
  • Based on actual market transaction data gathered from data suppliers, i.e., it is NOT a survey. The NARP is computed from 50 million nationwide retail pharmacy claims, or about 15% of the U.S. market.
  • The data file is published monthly.
National Drug Acquisition Cost (NADAC)
  • Provides average pharmacy acquisition cost at invoice cost.
  • Publishes acquisition cost for approximately 20,000 brand and generic outpatient drugs, listed by 11-digit NDC
  • Based on a voluntary, monthly mail survey of chain and independent pharmacies.
  • The survey EXCLUDES off-invoice discounts, rebates, or price concessions received by pharmacies. Thus, the data do NOT reflect net actual acquisition costs, hence my adjustments below.
  • The data file is updated monthly based on the survey, and then updated weekly throughout the month based on WAC pricing changes or inbound inquires to a CMS help desk.


I view the NADAC data to be much less reliable than the NARP data.

The NADAC methodology calls for a random monthly sample of approximately 2,000-2,500 chain and independent pharmacies, or about 3-4% of total locations. Last week, M&S disclosed that they are receiving 600-800 surveys per month, which is about a 30% response rate. This response rate implies that the NADAC data are based on 1% of pharmacy locations. You can read more of my NADAC critique in Government Boldly Launches a Deeply-Flawed Survey of Pharmacy Acquisition Costs—the top-rated Drug Channels article, according to Star Trek fans.

In the tables below, I adjust the NADAC data to account for estimated off-invoice discounts, rebates, or price concessions received by pharmacies. Such amounts could include volume-based rebates from wholesalers, buying groups, or manufacturers. I estimate these discounts to average about 4% for brand drugs and 10% for generic drugs. Please email me if you have better information.

Note that these discounts are in addition to a pharmacy’s negotiated invoice discounts, which are generally small for single-source brand-name drugs. According to the OIG data cited in Pharmacy Invoices Show Flaws in Drug Pricing Benchmarks, a pharmacy’s invoice cost for single-source drugs are 99.5% of Wholesale Acquisition Cost (WAC).

Unlike the sample computations that I show in Transparency is Here! CMS Exposes Pharmacy Prescription Profit Margins, M&S has access to the raw data and can compute appropriate overall margins.


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. Myers and Stauffer compute Gross Profit as the difference between NARP and NADAC.

Based on the overall averages presented on page 67 of the M&S deck, I compute the overall generic dispensing rate (GDR) to be 77.4%. Taking into account the brand/generic mix, the overall average gross profit and margin figures are:
  • Unadjusted: $9.88 (15.9%)
  • Adjusted: $12.49 (20.1%)
The adjusted figure looks pretty reasonable. For comparison, the latest NCPA Digest reports that an independent pharmacy’s average gross profit dollars per prescription were $12.40 in 2011. See Pharmacy Ownership: Getting Less Profitable.

These averages vary dramatically by payer and prescription type. The exhibit below shows the per-prescription gross profit and margin for brand-name and generic prescriptions. I include both the raw M&S figures as well as my adjusted estimates.

  • Pharmacy profit margins look reasonable. On average, pharmacies seem to be earning adequate margins to cover their costs of dispensing. Just sayin’.
  • On average, generic prescriptions are less profitable. The data seem to be at odds with conventional wisdom on the relative profitability of brand vs. generic prescriptions. However, the data are consistent with the idea that *newer* generics are more profitable, while more-common older generics are less profitable. In Pharmacy Profits from Authorized Generics, I provide data showing that pharmacy gross profits per prescription almost double during the 180-day exclusivity period.
  • The uninsured are more profitable, but… Pharmacies earn much higher profit margins from uninsured and underinsured individuals, a.k.a. “cash-paying customers.” There is a strong mix effect, given that GDR was 91.6% for cash-pay prescriptions vs. the overall average of 77.4%. The data also show that the average prescription price is lower for cash pay prescriptions, so the products being dispensed are also different.


This video shows Myers and Stauffer agents collecting pharmacy acquisition cost data.

P.S. Check out Hank Stern’s excellent round-up of health care analysis in
Health Wonk Review: Festival of Lights edition.


  1. Pembroke Consultants finds that Myers and Stauffer contract work for CMS regarding pharmacy margins not complete; Pembroke states “pharmacy acquisition survey’s cost flawed”. Adam Fein of Pembroke corrected the Myers and Stauffer’s flawed numbers by using Pembroke consulting “estimates”.
    Adam your estimate of discounts, rebates, and/or price concessions to retail pharmacies on brand drugs equaling $7.74 is not correct. While I do agree that the drug channel eats up $7.74 per branded drug, it just does not happen at retail. At the wholesaler, yes, the PSAO, yes, the PBM yes, mail order yes, chain warehouses yes. The only break a retail independent pharmacist receives on branded products is dating on new product releases.
    Your estimates on generics are in the ballpark.

  2. Pharmacies consistently report that their portfolio-average GP/Rx is
    higher for generics than branded. What do you think accounts for the opposite appearing to be the case in this data? Is it possible the authors have defined single-source generics as branded or made some other definitional change?

    While you're right to point that "old generics" are less profitable than "new generics" my understanding is that the mix is skewed more towards the latter (where "new" doesn't just mean the six-month exclusivity period but also any generic that hasn't become completely commoditized), such that generics taken as a group should still be more profitable.

  3. Thanks for your comment. Can you suggest an alternative figure for average off-invoice discounts associated with brands? I got the 4% figure by (unscientifically) polling some pharmacy owners. I'd appreciate your estimate or range. 

    FYI, 64% of NADAC responses come from independent pharmacies. See page 50 of the M&S deck. Wholesalers and mail pharmacies do not participate in the NADAC survey.

  4. According to my analysis, 7 of the top 10 most dispensed generics have NARP below $10. I suspect this is influencing the overall averages. I will be looking into this issue further.

  5. Monty Python and the Holy Grail is one of my all time favorite movies.  Unfortunately I find the references in the article a bit offensive as in my profession and family this is a most serious subject and should not be taken lightly.
    I find a few of the areas a bit misleading. 
    For some reason I've often heard the patient copay reported by the insurance industry and it is misleading.  The patient copay amount is subtracted from the ingredient cost and the fee.  It does nothing to our bottom line except reduce our margin if they write a bad check, use their credit card/flex card or tie up our cashflow if they use our house charge accounts.
    In my state, for the past two years our Medicaid and Medicaid Managed Care reimbursements, expecially for generics are below the commercial reimbursements.  Quite often there is no margin here.  As my pharmacy is located in a rural underserved poor region in Virginia, this has had a tremendous effect on my business.  It has caused me to reduce my hours and reduce my staffing levels.
    Even if the gross margin is the same percent, with many of the blockbuster drugs going generic, while the margin might be the same, the dollar amount is much lower as all of those $150.00 per month brands are now $12.00 generics.  This report also does not consider the impact the aggressive marketing by third party payers of requiring high dollar specialty items or maintenance prescriptions via the mail.  The same margin on fewer prescriptions hurt the small pharmacy.
    Maybe the chains have that percentage of margin on brands, I certainly can't buy that way.  There are brands I fill at less than a 1% gross margin for 90 day prescriptions on some plans. 
     I think it's also very important to keep in mind these are gross margins.  Not net margins.  They don't cover expenses which have steadily gone up as well as new costs such as electronic prescription transaction fees, higher technician costs, fuel, electricity, and then there are the audits for ridiculous technicial errors found on a prescription.  Pharmacist salaries also come out of this gross margin.  This is a rather high expense.  And shouldn't it be, that individual must cover the cost of a seven year education and this is the individual who with one lapse in concentration or judgement could accidentally devistate a family and their loved ones.  I also find it a bit odd that the gross margin tends to be less than the reported annual price increases for brand products.  I wish CMS would put similar effort to identify the profit levels for the other players.