Ask any pharmacy employee how many calls they received weekly from secondary sources for product, and you will likely see a quick eyeroll. Personally, I received up to a dozen calls per week: it is a veritable alphabet soup of companies.
The companies run a gamut of philosophies: short-dated drug product, DME specific, compounding ingredients, OTC and front end, and of course the traditional drug product offerings, sometimes even including brand items. The reason they call so often is that they aren’t your first choice for purchasing. You likely have a primary wholesaler where you purchase most of your product.
Most pharmacies have a primary wholesaler contract for a reason — they require a full catalog of brand and generic offerings–something that most secondary suppliers generally cannot do. If you do have a primary wholesale relationship, chances are that there are provisions within that agreement (sometimes called levers) that allow you to achieve a better cost of goods as the levers are triggered.
Common metrics used by the wholesaler to unlock progressively better cost-of-goods (CGS) include things like purchase volume, Generic Purchase Rate (GPR), Generic Compliance Rate (GCR), and Brand Purchase Rate (BPR). The savings in CGS is often reflected in rebates on generic purchases, with rebates increasing when the pharmacy performs better in the metrics.
The primary wholesaler is trying to create a sticky customer — one that purchases all, or at least most, of the product they need from them. Many of these metrics reflect generic purchases: the wholesaler is interested in capturing the generic purchases from the pharmacy because this is where they themselves have a margin. Here is a not-so-secret: wholesalers often sell brand name products at or below cost to their customers, hence the focus on the generic sales. (This secret doesn’t take the sting out of the pharmacy also selling the brand below their cost much of the time.)
But with reimbursement from payers continuing to drop below the pharmacy’s costs more and more often, pharmacies feel pressure to find savings on generics in the secondary market. This is where the challenges begin. While purchasing a small amount of generic product periodically will likely not impact your GCR or GPR, significant leakage can drastically lower this metric, increasing your Cost of Goods for your primary and negating any savings you might achieve by decreasing your rebates in two ways. First, a lower percent rebate and second, lower generic purchases to base the rebate on.
What the primary wholesaler wants, of course is all your volume, and they know that you generally cannot just forgo having a primary wholesale relationship. The wholesaler, therefore, has leverage on the pharmacy thru the levers and the necessity of having a primary source. The pharmacy’s only leverage on their primary wholesaler is the possibility to of changing primary wholesalers — a proposition that is very painful, and generally doesn’t save the pharmacy any real money in the end. So, what is the pharmacy owner to do? What they want, what the NEED, is to minimize their CGS in the face of the overwhelming pressure of falling reimbursement given their position in the wholesale equation.
Obviously, there are strategies that can be applied to try to accomplish this goal. Generally speaking, here is an outline of the options available:
- Stick with the primary wholesaler and maximize your rebates to achieve the best CGS possible with the primary.
- With a GCR based contract, manage the GCR ratio (generic purchases to total purchases) to make room for savings in the secondary market.
- Don’t play the rebate game at all. Always purchase the cheapest product available from the cheapest source.
- Rethink your pharmacy model.
The first option is the easiest. Your CGS may not be completely optimized, but you may also be able to achieve a better brand CGS, offsetting some of the loss on underwater generics. This may require negotiation with your primary wholesaler to optimize your cost of goods. We are on a GPR contract, and this is the strategy that we are currently using at our pharmacies.
The second option takes extra work and planning. This can be done successfully, but in my experience, the amount of savings possible depend on the effort put into the strategy. You always must compromise on something in the equation: for example, accepting a lower generic rebate target and an increased cost for brands in exchange for generic savings. If you do go this route, and are on a GCR model, you will need secondary source that has a significant brand drug catalog. The is the only way you can balance your GCR is to push brand name purchases away from your primary wholesaler. There aren’t that many secondary sources with significant brand catalogs. One good choice is Independent Pharmacy Cooperative warehouse. We have used this strategy in the past when we were on a GCR contract.
The third option has become more popular with some of my colleagues in recent years. I hear them swear that their overall CGS is better, but at what cost? The time spent chasing deals, and the excess inventory often stocked when they find a good deal both hurt the financials in other ways. Another down-side of this option is the increased burden of DSCSA record keeping that will eventually become required — using dozens of sources could make this a nightmare. A further risk of this options is losing your primary wholesaler. If you are not purchasing adequate volume with them, you may not be worth their time. This could leave you without access to some products. A successful implantation of strategy requires both managing purchasing and maintaining a delicate balance with your primary.
If the amount of effort for the middle options frightened you, the last option is probably not feasible for you either. In this option you transition to other business models for your pharmacy. Examples might include converting to a cash-based pharmacy model, or perhaps focusing on compounding. You might work with a concierge medical provider and provide a subscription-based model with a limited generic formulary. The goal here it to not take insurance. This removes the pressure on CGS, as you can market the product at a fair cost: a cost that makes you margin and saves the patient / provider money.
This article is a bit long, but I promise that is could have been a LOT longer. The complexity here only goes up when you start to look at any given pharmacy and the variables important for that practice. The bottom line is that there are options. Not all are easy. If you need additional information or help, our consultants may be able to help. Be sure you take the opportunity to evaluate your purchase model, or even practice model: Make Every Encounter Count!
