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.
