One of the biggest controversies in the pharmaceutical industry is around PBMs. PBMs (short for Pharmacy Benefits Managers) are purchasing organizations that act as middlemen between pharmacies and drug companies. They purchase the drugs in large quantities and supply them to individual pharmacies, similar to wholesalers in most industries.
That seems simple enough and a necessary part of running a pharmacy. Unfortunately, the way they make profits isn’t always in your best interest. Most wholesalers make money by aggregating demand and using their buying power to get lower prices. By buying large quantities, they can create space for their own profits and still pass low prices on to their customers.
For many PBMs, the difference between the purchase price from drug companies and the selling price to pharmacies is outrageous. PBMs may simplify the ordering process for pharmacies, but they really don’t serve their role as an intermediary if the end prices aren’t less than pharmacies could have paid directly.
In theory, PBMs offer leverage by negotiating large purchases from drug companies. This should drive your costs down and help you have a decent profit margin. Unfortunately, there’s also leverage being used against many pharmacies.
Commercial insurers rely on PBMs – as do Medicaid and Medicare – to provide medications for their patients. Of the prescriptions filled in the U.S. around 70 percent are supplied by just three PBMs: CVS, Express Scripts, and Optum. CVS provides medication to its own retail pharmacies, as well as Walmart pharmacies. While this gives PBMs leverage with drug companies, it also gives them leverage against pharmacies, who have very few choices if they are going to go through a PBM to fill their orders.
This has allowed massive PBM organizations to take advantage of smaller pharmacies with their pricing. The biggest problem is a lack of transparency. PBMs often do not disclose the prices they pay or when those prices change.
For example, when a drug company increases pricing, PBMs quickly adjust the price they charge to maintain their “spread” and protect their profit margins. When drug companies lower the price, however, they may lag behind on updating their pricing, pulling in extra profit until they get around to updating. This delay can leave pharmacies filling prescriptions at a loss, as reduced reimbursements come in only after the sale has been made.
The same happens with rebates in many cases. Drug manufacturers offer rebates on certain products. PBMs often choose these products and promote them to their pharmacies, not because they are the most affordable or the best solution but because of the high rebate. Sadly, the rebate is pocketed by the PBM, leaving the pharmacy and patient with an unnecessarily expensive medication.
The current system of rebates and secretive pricing gives plenty of incentives for PBMs to continue this questionable approach. Pricing needs to be transparent in order for pharmacies to manage their profit margins and cash flow. Legislation is slowly moving into place to demand that transparency.
Solving the PBM problem is going to require regulation that limits their power to control prices and keep pharmacies in the dark. One helpful piece of legislation has already been passed. Some PBMs prevented pharmacies from sharing pricing with patients, so they wouldn’t price shop between drugs. The “Patient Right to Know Drug Prices Act” puts an end to this practice.
Looking forward, we need to reevaluate and regulate the incentives and compensation for PBMs. Pocketing the “spread” between what they pay and what they charge rewards PBMs for failure to update pricing quickly. Fixed dispensing and administrative fees, contracted up front, would allow pharmacies to plan and profit, and allow patients to benefit from the most affordable medication.
Hopefully, we will see a better system in place soon. New standards are being reviewed by congress as we speak. Until then, pharmacies will do the best they can to serve their patients and maintain a decent profit margin for themselves.
For many small, independent pharmacies, Stepping away from PBMs and going directly to the drug manufacturer isn’t really an option. Channels aren’t set up conveniently for small orders and quick delivery.
So how do you maximize your results while continuing to work within the PBM system?
First, understand your contracts and how your PBM operates. Part of the lack of transparency is simply making the process unclear. Clarify what you can to get some of your leverage back.
Second, the more you rely on products reimbursed through the PBMs, the more sway they have over your finances. Diversify your income by moving toward more cash pay. You can attract more cash patients for prescriptions by being competitive in your cash pricing.
You can also grow your cash income by offering more over the counter medication and other supplies. This is a great way to smooth your income and reduce uncertainty. Offering more services – like medication management and counseling – is another way to help your patients and add an income stream that isn’t dependent on PBM reimbursements.
Finally, reducing your costs is one thing you can always control from the inside, even if pricing is out of your hands. Make sure you’re making efficient use of labor and keeping payroll in check. Manage inventory wisely, so you don’t have cash flow tied up in excess product on your shelves. This will give you some cushion in the event of a delayed or smaller than expected reimbursement. Good inventory control can also help you reduce shrinkage from damaged or expired medication and other goods.
If you’re unsure how to proceed with these steps or don’t have time to step away from the counter and dig into the business, don’t worry. BSM Accounting Services specializes in working with independent pharmacies just like yours. We can take care of the number and guide you on everything from inventory software to cash flow best practices. Call us today for a free consultation.