Thursday, February 18, 2016

A Pharmacy Owner’s View of Preferred Networks

Today’s guest post comes from Michael Deninger, a pharmacy owner in Iowa who writes The Thriving Pharmacist blog. Preferred and limited networks have become a prominent feature of pharmacy benefit plans. Mike provides a fascinating, first-person perspective on this crucial trend by describing his experience living with the pros and cons of preferred pharmacy networks.

Given the importance of narrow networks, I devote all of Chapter 7 of my new 2016 Economic Report on Retail, Mail, and Specialty Pharmacies to an analysis of the trends and its impact on pharmacies, payers, and manufacturers.

As I see it, many interrelated factors support the continued adoption of narrow networks. Mike’s views complement the broader industry economics in my report and highlight why pharmacy owners generally dislike narrow networks. Let me know what you think in the comments below.

By Michael Deninger

Narrow and Preferred Networks are entrenched in the pharmacy landscape. The idea behind the narrow network seems logical: Participating in it will drive patients to a pharmacy, increasing its business. The decrease in reimbursement that accompanies preferred status will supposedly be offset by the pharmacy's ability to generate other forms of revenue from these new patients.

But does participating in narrow networks actually drive new patients to our pharmacy?

The access-to-lives argument is important: Without access to lives, my pharmacy is essentially doomed. But narrow networks do not provide significant differentiation between pharmacies because almost every pharmacy has access to one or more of these price-focused networks. We should seek the needed differentiation elsewhere. Clinical services and shared savings will differentiate pharmacies in the future. There is little money in clinical services at this point, however. This means that in order for us to thrive in the future, we must suffer inadequate reimbursement in the short term. But while we are suffering, we are preparing to differentiate ourselves by improving our clinical abilities.

Eventually, narrow networks will switch from a price differentiation to a care differentiation. A network will include only high-performing pharmacies, and reimbursement will include shared savings. Differentiation is crucial to our pharmacy. We are surrounded with three chain pharmacies within 200 yards of our front door! Despite this high level of competition, our outlook is still bright.


My pharmacy ownership experience started more than a decade ago, when I became a partner in an established independent pharmacy. Coming from an academic background and from teaching pharmacy practice, I and my business partner have strived to shape Towncrest Pharmacy into our ideal of a clinically based community pharmacy. HealthMart recently honored our innovation, designating us pharmacy of the year in our region and ranking us second nationally.

Like a lot of other independent pharmacies, we have a very loyal customer base consisting primarily of patients over the age of 65. Customer service is one of the hallmarks of independent pharmacies, and we are not an exception. Beyond customer service, however, we have worked to differentiate ourselves from others through various strategies. We have been the first in our area to offer a variety of value-added services, including immunizations, compliance packaging, durable medical equipment, and Medication Therapy Management. We have further differentiated ourselves through our use of Continuing Medication Management (CMM).

CMM leverages our pharmacists by identifying problems during dispensing—and by our working with the patient to ensure that their therapeutic goals are being met safely and effectively every day. We use a custom software solution (PharmClin) to identify and document these interventions with our patients. We routinely document 2,000 to 4,000 interventions in any given month. Our neighboring pharmacies—often dispensing significantly more than our store—have one pharmacist on duty. We regularly have four or more.


Given the differentiation described above, we have generally not had a problem maintaining or growing our patient base. Over the past several years, our active patient population has been fairly steady, with about 3,000 patients having had one or more prescriptions filled during the year. During 2015, when preferred networks came of age, our patient population declined significantly.

Our pharmacy does participate in several narrow networks: Our contracting arm has signed several preferred contracts with very aggressive reimbursement terms. The terms are so aggressive that often reimbursement very nearly matches the cost of the product being dispensed. By participating in this relatively exclusive plan, we expected to boost our patient population or, at a minimum, offset the losses of patients to other narrow networks in which we do not participate. Despite this potential, we saw no measurable influx of new patients attributable to our having participated in these networks.


Like most other pharmacies, we received a large number of patient questions about our 2016 participation in various narrow network plans during the 2015 Medicare Part D Open Enrollment session. We helped our patients finding plans that Medicare’s rules would allow. Using tools such as iMedicare, we were able to identify the plans that would best suit our patients. Every patient we helped insisted that they be able to continue with our pharmacy.

Because cost will always be an important factor in patient decisions, many of our customers chose to save money by enrolling in the narrow networks in which we do participate. The phenomenon described above likely occurred in every pharmacy in the country. Patients chose a plan intending both to save money and retain their preferred pharmacy.

This would appear to affirm the common belief that many patients place a high value on choosing their pharmacy or pharmacist: Pharmacy has long been one of the most trusted professions. All else being relatively equal, patients are loyal to their pharmacy. When this dynamic changes, though, a patient feels significant financial pressure to change pharmacy homes.

The economic consequences of narrow network participation are significant to us as a pharmacy and to our patients. If we did not participate in any low-cost narrow network plans, then we would lose our customers based on price. While our unique offerings and customer service may initially prevent some patients from leaving us, ultimately the core business of our pharmacy will erode significantly if we do not participate in at least one of these networks. This is the access-to-lives argument.

If a pharmacy participates in one or more narrow networks, its patient base will naturally gravitate to the narrow network plans in order to reduce their costs while maintaining their pharmacy of choice. There are many different narrow networks with similar cost savings.

Given this landscape, participating in one or more narrow networks provides no significant advantage to our pharmacy with respect to current patients. To our patients, one narrow network looked like any other. If a patient wants to go to a specific pharmacy, they will simply choose the narrow network that enables this choice. If we enrolled in multiple narrow networks, it may have had a modest advantage in attracting new patients that we did not already serve. By the time a person is enrolling with a Part D prescription drug program, they are likely to have already chosen a pharmacy home.


The only scenario in which participating in a narrow network might offer us a significant business advantage would be the rare case where no other pharmacies in our area participate in any narrow networks. Participation then becomes a simple marketing advantage: We offer something that the other pharmacies do not. This differentiation is the exception, not the rule.

Historically, pharmacies differentiated themselves at the local level. A chain might push lower costs; an independent might counter with better service. One store might offer a variety of immunizations; another might have classes on smoking cessation. One store might have a soda fountain; another might also be a grocery store. Historically, market advantages were generated by the individual stores. In the current economic landscape, the narrow networks offer patients huge financial incentives to join. Because most pharmacies participate, no one pharmacy has an additional advantage.

The bottom line: Pharmacies like ours cannot win in this era of narrow networks. These networks attract patients only to a given PBM, not to a given pharmacy. Yet if we don’t participate in networks, we will erode our patient base. Game over. Participating in one or more networks will help us only to maintain our current patient base. Significant influxes of patients to our pharmacy are only likely when no other pharmacies in a region participate in any narrow networks.


If our pharmacy sees no real advantage besides access to lives, how does that position us for the future? The current climate of pharmacy reimbursement is not sustainable, and many pharmacies have closed their doors over the past few years. Many more will undoubtedly follow. But there is a glimmer of hope for pharmacy.

Our pharmacy participated in a pilot project with an insurance payer, which looked at measures such as EQuIPP , as well as total health spend. Six hundred patients were enrolled in the pilot. At the end of the yearlong program, the insurance company determined that our pharmacy significantly impacted medication adherence compared with a matched set of patients at other pharmacies. More important, our pilot group showed significant and impressive savings for the payor in their total health spend.

This is the direction that pharmacy is heading: High-performing networks will replace narrow networks. Medicare’s move toward quality measures parallels the findings of our pilot. The payor is now beginning to understand the power of pharmacy to reduce health costs. This will become the important differentiation of pharmacies in the future. We believe that we are prepared for this new challenge. Are you?

Michael Deninger is Owner, Towncrest Pharmacy, and Chief Technology Officer at Innovative Pharmacy Solutions Inc. Mike graduated from the University of Iowa with a BS in Pharmacy in 1991 and completed his Ph.D. in 1998. He has over 20 years of practice experience, over half of which is as a pharmacy owner. He writes The Thriving Pharmacist blog. You can reach Mike at

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