Thursday, January 5, 2012

Walgreens, Express Scripts and Pharmacy Economics

Much is being made about the spat between Expess Scripts (ESI) and Walgreen's (WAG) over their latest contract. While privately many in the industry appear to be siding with Walgreen's for finally standing up for the profession for reasons listed here, pubically it appears a more even split.

Many decry the terrible burden this is for patients, as they are left to be pushed around by big business when it comes to the management of their health. Others are screaming that it is unfair for the pharmacy employees, as they are merely overworked pawns in this mess.

But with change comes sacrifice, does it not? No one will argue that the business side of pharmacy has been on a dangerous downward spiral for the last 10+ years. So why is it that when an organization is finally starting to stand firm against this spiral, that so many are speaking out against it?

Perhaps we need to simplify what this argument is all about and explain some of the numbers behind it and what they mean.

For a quick overview of the Economics of Pharmacy, check out the associated link. No, it is not college level macroeconomics, but for many who have not directly experienced it, it  does describes what the business environment is like. And, if you'll note, I have a rather accurate prediction in my closing statement.

How pharmacies are paid is quite simple, you are given an amount for the cost of a drug and a "filling" or "service" fee for actually filling the prescription.

Note that the average overhead cost of filling a prescription, before the cost of the drug, is roughly $10. That includes wages, supplies, building expenses and so on. Again, that's $10 for every prescription, irregardless of the cost of the medication.

When it comes to how pharmacies are paid for the cost of the drug is where it becomes tricky. Essentially there is a fictitious average price called the Average Wholesale Price (AWP) that is set as a standard for a drug nationwide. This fictitious price typically is not line with the actual cost, so a lot of times you'll be paid what's called AWP - 10%, which is 90% of the AWP price.

The percentages vary and there are additional systems involved, but this is generally how pharmacy economics function. Now let's run some numbers on a fictional script.
Drug A (Generic)
Drug A AWP: $13.00
Pharmacy Cost: $10.00
Overhead Cost: $10.00
Total Cost: $20.00

PBM Cost Payment: $11.70 (AWP * 0.9 = $13 * 0.9)
PBM Dispensing Fee: $1.50
Total Payment: $13.20
Now you'll notice, due to the AWP, that the pharmacy is actually paid more than the cost of the drug on this prescription. You'll then notice that the pharmacy was only paid $1.50 (15%) of the total $10.00 it costs to dispense this drug.

Believe it or not, this last fact is very common, something which pharmacies have been lashing out against for years now. And, from what I've heard, it is this sticking point which is at the heart of the ESI/WAG stalemate.

Various reports have stated that ESI wanted to decrease their dispensing fee to $0.40, that is 4% of the total cost to fill a prescription.

Now your first question is, "How do pharmacies stay in business if they lose money like this?" With some prescriptions, namely branded drugs, the prices used to calculate cost are somewhat more accurate and they have higher margins due to their higher cost.

The last article I read placed the average cost of a generic drug, for a month supply, at around $10.00 while the average price of a branded drug, for a month supply, is around $80.00. A higher cost allows more wiggle room if you will, and it is these drugs which subsidize the losses on other prescriptions.

The second question then becomes, "Well the fee is already low, you subsidize the cost with other prescriptions and it's only dropping a $1.10, what's the big deal?"

One of the ways in which pharmacy is evolving is that the percentage of generic drugs being used is increasing. The new drug pipeline has dried up considerably in recent years and blockbuster drugs like Lipitor, Prilosec and Claritin probably will not be seen again for quite sometime... if at all.

If you are dispensing fewer and fewer of the name branded products which counteract your losses on other drugs, it becomes increasingly important that you try to mitigate your losses on those other drugs. Pharmacies have been able to survive thus far on the backbone of strong, brand name drugs, but clearly this will not last forever.

Granted, this is a greatly simplified view of what the entire disagreement is all about. One could talk about the effect of the Walmart $4 generic program or government regulation or consumer indifference to the profession itself, but quite simply this is what it boils down to.

You cannot fault Walgreen's for being the first to finally stand up to one of the monster PBMs in this country. The fact of the matter is that Express Scripts needs Walgreen's more than Walgreen's needs Express Scripts.

ESI has no equity with the consumer aside from whatever experience they may have with a help line. Walgreen's has a face, a voice and a place to visit on a daily basis. It is as big of power move by Walgreen's as we may perhaps ever see.

While it's competitors enjoy the new business and take advantage of the situation, I'm sure deep in their corperate offices they are secretly cheering WAGs on as they could be next in the lines of these cuts.

This isn't about lining the pockets of the Walgreen's CEOs or it's investors. This isn't about making a pharmacy a cash cow. It is about taking a stand for what is financially right not only for pharmacy as a profession, but for patients as well. If we want optimal, efficient healthcare, we have to be paid a fair price for this service.

Remember this is not about making more money, this is about saving what little money they are making... if any.

And that, my friends, is why Walgreen's and Express Scripts are in a stand off of historic proportions. Perhaps it's not so bad after all...


Chivas said...

If brand name prescriptions are what keep pharmacies in business, why do pharmacies always try to switch people to generics? I have to think generics are more profitable for pharmacies.

Anonymous said...

Generics are more profitable, especially newly generic medication since their "fake cost or AWP or whatever" is inflated so the insurance company may pay $80 for the new generic when it only cost $5 to get it. Generics also cost less to keep on the shelf.

Anonymous said...

Seems pretty clear that ESI doesn't need Walgreens. There are thousands of pharmacies willing to fill that script if Walgreens won't do it. Including the local independent pharmacy.

Anonymous said...

There are way too many inaccuracies all over this post. Although generally speaking your posts are amusing, you should not post things like this unless you are knowledgeable and qualified in the matter. I realize that blog contents are up to the writer, but this is a case where an editor or an editing staff would have been nice.

Anonymous said...

Decent enough post..but irregardless is not a word.

HelpRx said...

I know you are still in school but I need to explain one thing to you. AWP is what you use in class, acquisition cost is what you use in the real world. When you do calculation to see if you are making money or losing money on a drug, use acquisition cost not AWP. Nobody pays AWP. Got it.

If a cash customer comes to your pharmacy, help em out with HelpRx Drug discount card.

You can make a difference in someone life. Remember that.