Over the last several weeks there have been a few interesting references to pharmacies having very high cash prices for medications. The soak-the-poor mentality (as Drug Channels calls it) is an unfair characterization. High Usual and Customary prices (also called U&C or the cash price) in pharmacies are directly related to the Pharmacy Benefit Manager industry applying their terms onto the market place, often severely capitating reimbursement.
It helps to have some historical context. Consider the pharmacy landscape back in the early 2000’s. Back then, I spent a lot of time tweaking our U&C or cash prices. You see, before the middle 2000’s most senior citizens did not have any prescription drug insurance: they had to pay the cash price. In order to remain competitive in my community, I had to constantly review our U&C on common generic items. This truly was an era of competitive pharmacy and the free market worked. This is easily demonstrated by the response taken by pharmacies when companies like Walmart implemented a $4 cash drug list: many pharmacies followed suit by lowering their prices. They needed to stay relevent and competitive.
Shortly therafter, something changed. Congress had passed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) which was signed into law on December 8, 2003. This single change almost completely eliminated the cash price market: for the first time, most seniors would have relatively affordable prescription insurance under the new Medicare Part D program. And this is where pharmacy curation of U&C began to disappear. While $4 cash price lists and related competition continued after MMA, their importance gradually evaporated.
With the implementation of Medicare Part D, pharmacies lost a substantial amount of control over their businesses. Now, unlike traditional retail establishments, a pharmacy’s business was almost entirely composed of sales that were not sold at a price they set. They were now sold at a price set by the the insurance.
This is a good time to acquaint the reader with the basics of a network pharmacy contract’s definition of reimbursement. As a rule, pharmacy reimbursement is defined within the contract with the following language:
Reimbursement will be the LESSER of:
- Average Wholesale Price (AWP) minus a stated percentage OR
- The pharmacy’s usual and customary price (U&C) OR
- The Maximum Allowed (MAC) Price
Note that contract also defines the pharmacy’s cash price as their U&C and that the pharmacy cannot submit a different price to the insurance than they would offer a cash customer. A pharmacy could not maintain multiple price schedules for insurance and cash paying customers without being in violation of their contract and at risk of being dropped from the network
Ten years ago, pharmacy reimbursement was primarily dictated by the first two arms of the contract above. As such, it was not uncommon that the pharmacy’s cash price was lower than AWP minus a percent.In addition, relatively few generic drugs had MAC prices assigned a decade ago. If we fast forward to today, that landscape has changed completely. Today almost every generic drug has been assigned a very aggressive, low MAC price. It is this change that has forced pharmacies to raise their U&C prices.
To illustrate, let’s look how the standard pharmacy contract mentioned above prices a random sample of prescriptions filled at one of my pharmacies this week. The values below are the aggregate (sum) values for all of the claims. This is real data and represent about a dozen different payers, four PBMs and over 100 different medications.
Table 1
| Submitted U&C | Allowable Price | Cost Basis | Pharmacy Profit (Loss) |
| $78,337.21 | $10,925.26 | $9224.07 | $1701.2 |
Table 1 shows the total of the Submitted Usual And Customary prices of close to 200 random prescriptions submitted to the insurance. A total of over $78,000 was submitted to the insurance by adjudication thru the plan’s chosen Pharmacy Benefit Manager (PBM). Each PBM applied the terms in the form of the outlined contract above and returned an aggregate allowed $10,925.26 representing a aggregate profit of just over $1700 or just under $9 per prescription. This Submitted U&C of over $78,000 represents the cash price of the pharmacy, and it is very high. The soak-the-poor mentality characterization from Mr. Fein certainly seems to fit, and if we simply stopped the story here he would appear to be justified. But the story is a lot more complicated.
Suppose that I did not want to appear to be sticking it to the poor. The allowable price returned by the PBM is about 14% of the submitted U&C. What would happen if I changed my pharmacy’s Usual and Customary Price to reflect my invoice price (what I paid for the drug) plus $15? This equates to about 2% more than the PBM allowed on these claims. If I do this and re-apply the same contracts to every prescription I would get the following:
Table 2
| Submitted U&C | Allowable Price | Cost Basis | Pharmacy Profit (Loss) |
| $12,089.07 | $9811.70 | $9224.07 | $587.63 |
Table 2 now shows a much more reasonable Submitted U&C price. U&C has dropped by more than $66,000. But more importantly, this change also resulted in a roughly $1000 decrease in what the PBM is paying for the same drug products. By lowering my U&C, my new price may now be lower than the PBM previously paid for some drugs. The result is a lower reimbursement those products. The net effect of my change is that the per prescription profit dropped from $9 to just over $3, which is well under the national average of $9-12 per prescription cost of dispensing. The reason for this decrease comes directly from the contract above, specifically the first line: Reimbursement will be the LESSER of… Another way to think of this is that no good deed goes unpunished.
Let’s look at a graphical representation of the profit of each prescription under the assumptions of both Table 1 and Table 2.
Graph 1
A couple of notes on Graph 1:
- Zero profit is in the not at the bottom of the graph, but instead about a quarter of the way up the Y-axis
- There are two lines plotted in the graph: Blue is the original U&C profit from Table 1 and red is the modified U&C profit value from Table 2
- the shaded represents the difference between the two schedules.
The Lesser Of language in the contract only impacts the far right side of the graphic, where the traditional (arguably high) U&C occasionally allows a pharmacy to make a significant profit on a small number of prescriptions. These are often called winners by pharmacy owners. But by lowering U&C they forfeit the winners while maintaining the underwater (losers) shown on the left side of the graphic. Changing the U&C does not impact the significant number of prescriptions that earn near zero profit or less.
This phenomena illustrates exactly why Cash Prices have risen in pharmacy and the same reasoning also applies to any medical provider that has reimbursement capitated by insurance. Reimbursement levels in healthcare have dropped so low that they are often break even or or even losses. It takes the occasional winner to offset this no-profit burden and keep the practitioner in business. To restate: in is increasingly important for every healthcare provider to ensure that they leave as little reimbursement possible on the table. In pharmacy, where the the different MAC lists kept by each of the PBMs are secret, the only way to do this is to make sure that your U&C or cash price is high enough to capture the occasional winner.
Ironically, this actually helps cement the PBM industry in their position of power over the healthcare world. They can point out that they are saving the huge amounts of money over the U&C prices. Ironically it is their own contracts that incentivize providers to raise their U&C in order to stay in business. This is a win-win for the insurance and PBMs industries, and a losing proposition for providers in the United States because most healthcare providers are also businesses. They cannot keep their doors open if they don’t make money. It is the emergence of insurance capitation has necessarily caused this inflation in the cash healthcare market.
