Month: January 2024

As I previously explained, a couple of significant changes happened at the start of the new year. DIR fees became effective at the point of sale, and many contracts have reverted to MAC language. The positive aspect of these changes is that we know immediately what we are making on any given prescription. But there are still some nagging questions: we have lost some transparency into both the product pricing (MAC pricing is proprietary) and DIR fees are variable.

The first thing I looked at when we started adjudicating claims in 2024 was the returned claim details. I was curious if we would see the DIR fee applied to the claim broken out. Unfortunately, and as expected, there is no such information in the claims being returned. We are, once again, expected to trust that the DIR portion being deducted is correct. Hopefully, we will still see a DIR report from the PBMs on a regular basis to ensure that they are not taking advantage of pharmacies.

Our best estimate of DIR fees last year, across all of our pharmacies, was 3% of gross sales. Each store had a different blend of commercial and Medicare Part D, with the latter having DIR fees collected. We expect to see, therefore, a 3% decrease in our gross margin for the new year. The question, therefore, is how are our gross margins holding up for the first 2 weeks of 2024? Let’s jump in and take a look.

December 2023 (Baseline)

Store	Revenue	UGM	GM
Small Town + Rural Contract + 340B	$515,919.60	14.3%	21.0%
Small Town + limited 340B	$174,683.24	10.0%	12.6%
Small Town + limited 340B	$401,338,53	9.6%	12.5%
Small Town	$263,063.51	8.2%	10.0%
Medium Town	$317,114.01	19.4%	25.5%
Large Town	$455,542.55	17.0%	21.0%
Grand Total	$2,127,661.54	13.6%	18.0%

The column entitled UGM represents the unadjusted Gross Margin: the gross margin before accounting for any purchase rebates. Rebates are not a given, and are being estimated as 15% of the cost on generic items purchased based on historic data for the stores.

The first thing to notice is that the average GM across all 6 stores is below 20% in December of 2023 before any DIR fees. Previously, I reported that for our stores, we have historically seen DIR fees represent 3% of gross sales. We would therefore expect to see a 3% decrease of the GM column in 2024.

The other thing to note is that many of the small town stores that do not qualify for rural contracts are significantly below 20%. The only explanation for the discrepancy is the mix of insurance plans these stores see compared to other stores. This is disturbing because if (when) these stores can no longer remain profitable, the next closest store is in another town or city many miles away. This creates pharmacy deserts in states like Iowa, where all of these stores are located,

January 2024 — the first two weeks

Store	Revenue	UGM	GM	Change
Small Town + Rural Contract + 340B	$171,080.73	14.0%	16.8%	-4.2%
Small Town + limited 340B	$62,620.03	7.8%	9.8%	-2.8%
Small Town + limited 340B	$124,456.40	8.2%	11.5%	-1%
Small Town	$73,308.64	5.2%	7.2%	-2.8%
Medium Town	$109,542.69	21.3%	23.5%	-2%
Large Town	$133,343.70	12.4%	14.7%	-6.3%
Grand Total	$674,352.19	12.3%	14.8%	–3.2%

First, a note: the 2024 data represents almost 11,000 adjudicated claims. It is a small but representative sample. The decrease in GM is almost exactly what we anticipated: -3%. So the good news: we know what we are making on the claims. The bad news: gross margins are no better today than last year. The bad news can be even worse for smaller, more rural pharmacies where diversification of their business is more challenging.

Both December and the initial numbers for January are highly problematic with gross margins (after DIR) well below 20%. I have said it before and will say it again: this is simply not sustainable. Suffice it to say that we have already optimized our cost of goods where possible. Most of the pressure on the gross margin is from Brand name drugs where there is only a little room for improvement. Our Brand purchases are at Wholesale Acquisition Cost (WAC) minus nearly 6%, which is nearly as low a COGS for brand as I can possibly get.

That brings us to the point that we should start digging into the 2024 data more deeply. If I look only at brand name medications we see a grim story.

Store	Revenue	GM
Small Town + Rural Contract + 340B	$126,258.89	7.7%
Small Town + limited 340B	$46,918.37	0.0%
Small Town + limited 340B	$93,516.45	0.6%
Small Town	$58,494.97	1.9%
Medium Town	$76,123.27	7.4%
Large Town	$91,901.89	3.5%
Grand Total	$493,213.84	4.1%

The PBMs are paying us a gross margin of just over 4% across all store (low 0% and high 7.7%). This gross margin represents over 73% of total gross sales. The margin on generics is much better at 43.8% (low of 29.1% and a high of 60.2%). Because the dollars for the brand side are so much larger, the low GM on the brand tanks the overall GM. Simply put, this is completely inexcusable behavior by the PBMs. Consider the January brand numbers to date: We have almost a half-million dollars in inventory sold, waiting 15-30 days for payment ,and our profit to cover our overhead is an anemic $20,000. Even the largest chain pharmacy would struggle to make these economics work. Hence my lack of surprise when chain pharmacies are closing at a rate not that dissimilar to independents right now.

The PBMs have created this problem, and if they don’t make an accommodation soon, they will not only drive most pharmacies out of business, but they also jeopardize their own existence. I have been seeing more and more requests by PBMs for non-participating pharmacies to add certain networks because the PBS doesn’t have the coverage required by the payer: the PBM is in dereliction of its own contract by not maintaining network adequacy. Yet there is a real reason that pharmacies have worked to drop these contracts in the first place. They simply are not profitable enough to maintain. The number of contracts we will have drop in 2024 to stay in business will be significant. It is unsustainable.

This blog post was designed to create awareness of the current situation. Every pharmacy needs to perform a similar self-study. From there, they need to determine which contracts are hurting them the most and make moves to drop them. Not taking action today means not having a pharmacy tomorrow. It’s your turn to make Every Encounter with your own data Count.

Many pharmacies and pharmacists have been dreading 2024 due to the arriving DIR Cliff (tsunami, hangover etc). The new year brings a two very dramatic changes to the pharmacy landscape:

1. DIR fees will no longer be retroactive but will instead be reflected at the point of sale in the form of a reduction in the adjudicated amount.
2. GER (Generic Effective Rate) contract language is being eliminated in many different plans. 

DIR changes

DIR fees are essentially discounts built into the pharmacy contract with the PBM. The discounts were supposed to be based on pharmacy performance; therefore, they were calculated after the close of a period (e.g. a quarter). The discount was therefore collected up to several months after claim adjudication.

These DIR fees often represented up to 10% or more of the adjudicated drug cost — what the plan paid for the drug product, excluding any dispensing fee. These fees added up quickly, representing hundreds of thousands of dollars (about 3% of gross sales) for our pharmacies paid back to the PBM months after the product was sold.

DIR collection at the point of sale means that we are expecting to see a reduction in what we are paid for any given item in 2024 compared to 2023. This will be most noticeable for brand name drugs. 

By collecting the DIR fees at the time of adjudication, we remove the uncertainty we had before. This is a good thing. We will now know before selling the product what we are making. This is a net positive change. If we are losing money on a product in 2024, we will know immediately (not in 3 months) and can pursue the appropriate course of action.

GER, MAC and the Implications 

The GER model was created, in part, by the industry to address criticisms of the PBM’s Maximum Allowable Cost (MAC) pricing methodology. MAC pricing is proprietary–how the PBM established the price is a company secret. 

MAC pricing was added to the traditional reimbursement language as an addition. Contracts originally were written as Average Wholesale Price (AWP) – a percentage. The PBMs added the “or MAC price” later. Early on, there were a few MAC prices. Ultimately, most every drug had a MAC price.

The problem was that pharmacy may not be able to purchase the product anywhere near MAC price. While we could complain that it was too low, there was no guarantee it would ever change. MAC prices are frustrating: they are shrouded in secrecy, can and do change unexpectedly, and rarely do they reflect what pharmacies would consider a fair price. 

The GER model, instead, created an aggregate reimbursement level for a group of pharmacies. This group might comprise pharmacies in region, or a chain of pharmacies, or even a PSAO’s member pharmacies. On the surface, GER contracts were promising. You knew what you were going to get paid. The price was once again based on AWP, just like before.

The GER model usually defined the group’s reimbursement as AWP minus a percentage. While this formula is familiar, don’t get too comfortable. There is a subtle but important difference here. The GER contract does not mean that every prescription adjudicated was paid at that rate. No, the PBM might pay some items well above or below that rate, and the reimbursement might change throughout the year. The GER contract language was written to look at the whole group’s reimbursement across all prescriptions during the period. 

Using this model, thee PBM would pay you whatever it paid you. That might be a loss, or a nice profit for any given claim at any given pharmacy. At the end of the period (typically a year), the PBM would calculate all payouts across the group and compare it to the GER in the contract. If the PBM missed the aggregate target (high or low) it would “true-up” by either paying the network what it was due or collecting any overpayment.

GER contracts created significant potential for inequity amongst pharmacies within the group. This isn’t an issue if the group is a national chain, as the pharmacies maintain common ownership. The chain is guaranteed to be paid accurately across all its stores per the contract. 

Where GER is problematic is the independent space. Independent pharmacies do not share common ownership. Here, one pharmacy might end up on the very short end, with its own average claims paid well below the GER rate, while another might do exceptionally well. Where you landed depended on the blend of products that was dispensed to your patients. 

For this reason, transition of contracts away from GER is a positive for independent pharmacy. Well, sort of a positive. GER is being replaced by MAC language in the contracts. What’s old is new again!

2024

So, we enter 2024 with two significant changes. Both share one advantage: a pharmacy will know where it stands with any given claim. Immediately. The pharmacy is now able to decide what changes it needs to make to maintain its viability as a business. On the flip side, the industry has created the potential for further reductions in reimbursement to pharmacies. This race to the bottom has only hurt the public’s access to pharmacies and pharmacists. 

Next time we will look at actual numbers coming from claims in the new year and compare them to last year. We will see where the rubber meets the road. Until then, don’t forget to Make Every Encounter Count!

The target audience of this blog is independent pharmacy owners. Many, perhaps most pharmacy owners have little to no formal education in business. Most of us learned on the job. In the coming weeks we will be hitting a core concept pretty hard. Gross Margin. Before I do that I wanted to spend a few moments discussion what Gross Margin (GM) is and why is it important.

Gross Margin is a measure designed to look at the core profitability of the business. It is simple to calculate from financial statements if it isn’t already explicitly there. GM is the net profit divided by the revenue. Let’s look at an example

An auto repair shop pays its mechanics $50/hr. When that mechanic works on a car, the customer is billed $100/hr. Likewise, the business uses a simple 50% markup on selling price: something that cost the business $10 is billed to the customer at $20. Let’s look at an invoice for repairing my car:

Labor: 2.5 hours.— $250.00
Parts:
  Battery — $50
  Zip ties — $1
Total: $301.00

In this simple example, the business has $125 invested in labor and $25.50 in the parts totaling $150.50. The Gross Margin is therefore 50% ($150.50/$301.00), Why is this important? GM is important because it represents the percent of total sales that remain to pay expenses.

If you run a business you already know that it cost the repair shop more than $150.50 to repair the vehicle. There are other costs like benefits paid to the employee and overhead including the building and utilities. Most importantly, after expenses are removed, there is the most important part: profit for the owner.

A low Gross Margin means that there is less to work with to pay expenses. This in turn means that given some level of expenses, the profit also goes down. The general rule in business when it comes to Gross Margin is that higher is better, and anything less than a GM of 20% is a serious problem for the business.

The GM equation is simple. We only have two ways we can improve GM—decrease our cost of goods (what we pay for parts and labor in the above example) or raise our prices. If our GM is low and we cannot do either of those, the business only left with cutting overhead to maintain profit. Being simple means that GM is powerful, but it also means that if you don’t have control over the limited variables you are in for a rough ride.

And this is where we are with pharmacy. Pharmacies that accept insurance have only one significant lever they can manipulate their Gross Margin: cost of goods. Pharmacies generally don’t have any control over their selling price: the insurance sets that for us. If a pharmacy has a poor GM it has to purchase pharmaceuticals for less and / or cut expenses. Too low of a GM usually means that the pharmacy at risk of having to close its doors permanently.

Soon, we will take a close look at early 2024 reimbursement numbers which reflect the significant changes that have taken effect as of Jan 1 of this year. With this information, we can discuss the ramifications of pharmacy reimbursement in the new year.

Last time we discussed the added complexity of health insurance: the administrative layers involved. At the end, we made the observation that any company purchasing health insurance from an insurance company is essentially pre-paying for health care: your health care premiums will always reflect your usage. Therefore, every company with a health benefit is, in essence, self-insured.

Once you accept this reality, you quickly recognize that the convenience of having an insurance company manage your health care expenditure comes with a mark-up. If there is a markup, there are also ways we could save money by simplifying the equation.

As an employer that provides health insurance, our companies pay 50% of the health care premiums. Our employees pay the other half. If I can find a way to deliver the same benefit that we have at a lower cost, not only does the company win, but so does the employee. So let’s look at some of the ways we might achieve some savings.

Our companies run pharmacies. We complain about Pharmacy Benefit Managers underpaying us for our products, and in turn, profiting from our work. In many instances, the PBM makes more than the pharmacy does! This is now well documented.

Yet, my own companies health benefit uses a PBM to process our pharmacy claims. This is an obvious opportunity to save money: why pay a middleman when we could CARVE OUT the pharmacy benefit and run it ourselves? In fact, many larger companies have started to recognize the potential to save money by carving the pharmacy benefit out of their health insurance. As it turns out, however, this is harder than it sounds. 

The insurance companies and the PBMs have a complex relationship. This centers primarily around rebate dollars involved for putting certain (and primarily brand name) medications on formulary. These rebates enrich both the PBM and the Insurance company, and they are not necessarily passed to the insured (patient or company) as savings. For this reason, a lot of insurance companies will resist or refuse to allow you to carve out the pharmacy benefit — it is a revenue center for the insurance company. Such is the case of the insurance company we currently use. 

Hope is not lost: there ARE insurance companies that will sell insurance plans that carve out the pharmacy benefit. The primary concern, however, is maintaining a benefit that is as good or better than what we currently have, and if we are looking at switching insurance companies, perhaps we should look to replace more than just the prescription benefit.

The process of self-insurance takes advantage of some of those same extra layers described in the last blog post, replacing the insurance company with our own company. Like the insurance company, we can also leverage the health care provider networks by choosing a TPA. For the pharmacy benefit, there are transparent PBMs that can be contracted–though there are potentially even better options for the pharmacy benefit (stay tuned for thoughts on direct pharmacy contracting).

By using the TPA as a resource, you achieve the same pricing advantages the insurance company leverages. Depending on the TPA choice, you can maintain similar or identical access to the doctors, labs, hospitals, and other providers. This allows you to mirror the existing benefit almost exactly.

A small company that self-insures using a TPA can eliminate the mark-up on health care costs imposed by the insurance company. The economic cost of eliminating the insurance company is purely administrative: the company now pays providers directly, based on the negotiated prices obtained through the TPA and the affiliated health network. The employee would still pay their coinsurance or copays, as defined by the plan. The additional work of managing the benefit can be done internally or farmed out to a third party. 

Before we dive further into the details, we need to understand that there is an actual insurance component to health insurance. While most expenditures in health care are maintenance expenses and are readily estimated / predicted, there is a random, event-based, component as well. Examples include accidental injuries or the emergence of a previously unknown health concern. The unknown costs might be small, or very large. Just like life insurance or health insurance, the risk of the unknown events are low, but you must have a plan to deal with these events. The health insurance company allocates health insurance premiums to fund several contingency funds or “buckets”:

1. Expected Expenditures (the maintenance expenses–based on actual historical usage)
2. Reserve Expenses (for unanticipated healthcare expenses)
3. catastrophic reserves (traditional event based insurance)

If one wanted to self-insure their company, they would have to do the same thing: assign the premium such that you can set aside these dollars for the benefit to cover expected and reserve needs. The amounts reserved for the first two buckets can be determined by historical usage and an estimated percentage to be held in reserve. The catastrophic reserve is different. An insurance company generally covers the third bucket themselves, by aggregating risk across multiple groups and tens of thousands of their insured. A smaller company cannot do this, as it lacks the ability to aggregate risk.  Instead, a self-insured company would purchase stop-gap (catastrophic) insurance policy to cover these events. This works like a high deductible policy. The self-insured company funds the expected and reserve funds with premiums. The stop-gap policy will only pay out if expenses exceed a predetermined amount (the risk the company wants to take). The higher that number, the less expensive a stop-gap policy becomes.  

The great part of thinking about insurance in this way is that it makes it easy to identify the potential savings. If you have year with lower than anticipated expenses, you will accumulate bucket two (the reserve). If you have a worse than expected year, you increase your premiums just like the insurance company would do to help replenish the buckets. If you have a horrific year, with catastrophic events costing far more than your anticipated reserve costs, the stop-gap prevents a catastrophic loss for the company. 

It is not unusual for companies that have self-insured to quickly accumulate significant reserves. This should be no surprise: insurance companies make a profit doing this! When reserves accumulate significantly, the company has a lot of possible options: 

1. the company might decrease health insurance premiums
2. the amount (fraction) of the premium paid by the employee might be reduced
3. There might be additional benefits made available to employees
4. the company might move some of the reserves back into operations (keep in mind that excess money in the reserve funds is still the company’s money — the profit as it were, of self-insuring).

Let’s look at a graphic of what this would look like. In my case, a self-insured pharmacy, I would provide my own pharmacy services. In a general case, one could use a transparent PBM and pay a markup on pharmacy services OR use a direct contract with a local pharmacy, having the pharmacy collect the copay / coinsurance and bill the company for the balance.

Self-Insured Pharmacy providing its own pharmacy benefit Yellow arrows are claims submissions, Green arrows are payments and Blue arrows represent self-referral services.

In both cases the company, not an insurance interest, is as the center of the process. There are no unnecessary layers adding cost. The TPA simply receives the claims, processes them, and passes them back to the company to pay. The TPA charges the company an administrative fee for this service.  

A self-insured company still must define its coverage. This will often be modeled off the previous plan it replaced. Things like the deductible, co-insurance, covered and non-covered services are all defined. For those things that are not in place, there is still an opportunity to cover or not cover the request through the prior-authorization loop.

The self-insured plan does have some additional costs resulting from the administrative burden being picked up. Depending on the size of the company, and the number of insured, this may marginally decrease the potential savings. Even with the added administrative costs, the savings can be significant over time. The financial downside is kept in check by the stop-gap insurance. 

You can bet that my companies will be working hard to implement a self-insured structure for our next health-care renewal. We are not going to miss an opportunity to Make this year’s Renewal Period Encounter Count.