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Pharmacy must reckon with the cost of transparency

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Lari Harding

In the business of pharmacy, there is a cost to not having transparency. And there is a cost attached to transparency. The question is which of these is better for you and your customers. It’s an increasingly important question given the growth of health care. The consumer health care industry grew 12% in 2021 while prescription sales grew more than 7%. Self-care trends are present in every category — front and back, including food. I chose the word “customer’’ in order to focus on the two customers in this business: the individual consumer and the organizational payer.

Over the last 20 years the relative importance of these customers as payers has shifted dramatically. While the volume share of prescriptions paid for by employers, plan sponsors and the government was once as high as 95%, approximately 40% of today’s prescriptions are paid for by individual consumers with cash, or a 100% co-pay running through an insurance or discount card program.

In the last few years, high deductible health plans have become much more prominent. Consumers have lower premiums in exchange for paying for routine care while still having catastrophic coverage. This shifting cost burden is a core driver of increasing consumerism in health care. Consumerism escalates in an environment of a continuous rise in prices, product underperformance, declining quality of service, a shortage of product and deceptive advertising.

More than 40% of all prescriptions filled are paid for by individual consumers with no contribution from their insurer. The design of high deductible plans is confusing for the consumer. The retailer that they know and trust is presenting them with confusing prices. Before a consumer meets their deductible, many prescriptions do not adjudicate with MAC pricing or the maximum allowable cost, which is ~Average Wholesale Price (AWP) – 90% for generic drugs. Retail pharmacies then present the consumer with a very high price at ~AWP – 20%. This price does not sound like a good value, so consumers are motivated to look for ­alternatives.

And the alternatives are increasing. The discount card companies have trained consumers to look to them for better pricing, while discount, cash-only pharmacies have emerged along with several online pharmacies serving niche markets. In the over-the-counter consumer health care category, e-commerce grew 27% in 2021 compared to about 7% growth in brick-and-mortar. COVID-19 was, unquestionably, a catalyst for the acceleration of alternative models.

While I was writing this article from my parents’ home in Florida, I didn’t have to look very far to find examples of consumers changing behaviors in order to save money on prescriptions. Because I am in the industry, my parents (who are in their 80s and on Medicare) started telling me about their new iPhones and Apple Watches — and how they now have the app for a popular discount card program on their Apple Watches.

Their move into tech-enabled consumerism began when my mother went to her regular retail pharmacy to get her blood pressure medicine where she paid $95. When she got back to the car, my father said that it was too expensive and that something must be wrong. So they went back into the pharmacy to question it.

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After speaking with the pharmacist, the transaction was reprocessed using a discount card after which they paid only around $15 for the prescription. So now, they have a discount card app on their Apple Watches to ensure they never have this problem again. Good for them. Bad for the retailer.

This is a great example of how consumers — at any point in their shopper journey — can transfer their loyalty and trust from the retail pharmacy to a discount card program. Even worse for the retailer, they had to pay a fee to the discount card company while surrendering my parents’ loyalty.

But, it’s not just seniors looking for help. Use of prescription discount cards continues to grow across consumer sectors. The driving factors are threefold:

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First, employers are shifting more of the costs of health care to consumers through high deductible health plans and consumers are looking for some relief. (According to the Kaiser Family Foundation, 31% of covered workers were enrolled in high deductible health plans in 2020.) With many families filling prescriptions with generic drugs, most will not meet the average coinsurance of $4,500 before their insurance pays so they are using discount cards to stretch their health care budgets.

Pharmacies set Usual and Customary prices high to make sure they maximize revenues from insurance companies. Discount cards are 100% co-pay on an insurance rate or maximum allowable cost (MAC). However, high deductible health plans do not offer MAC pricing during the deductible period — further driving consumer usage of discount cards.

Second, the number of people who have a gap in coverage is growing. The gaps are caused by employment changes, gaps in coverage in Medicare plans or other commercial plans, and the underinsured population.

And finally, pharmacy pricing strategies have evolved. While some pharmacies are focused on low prices, others have well-marketed free and $4 or $10 generic programs, while still others have shifted away from these programs to pharmacy-friendly discount cards with low fees that help protect margins and enable them to manage discount prices and win rates. Consumers are becoming more savvy and asking pharmacies to run multiple discount cards through the adjudication process to find the lowest cost, increasing both labor and fees for the pharmacy.

In industry reports and investment statements, the disruptors with discount cards and low-price cash models are reporting that three out of four consumers who use their programs already have private insurance or are covered under Medicare or Medicaid. These companies and other disruptors are also providing telehealth, diagnostics and mail order services to their customers.

Even more troubling than retail pharmacies paying a fee to discount card companies while “transferring loyalty” is the fact that they are selling discount card prescriptions at the lowest reimbursement rates. On average, retail pharmacies earn AWP-88.7% for generic drugs and AWP-20% for brand drugs. But when consumers use discount card programs, the calculated rates are even lower for generics at AWP-94.6% and AWP-21.8% for brands.

On top of all this, retail pharmacies are paying, on average, another 2.9% (as a percent of total sales) in direct and indirect remuneration (DIR) fees. And despite industry efforts to contain them, DIR fees are up from the 2020 average of 2.4% of sales.

Factoring in the front of the pharmacy, the over-the-counter industry grew at 12% in 2021 with the increase driven largely by traditional O-T-C, nutritionals, and at-home COVID-19 tests. A repeat O-T-C shopper spends $5 to every $1 spent by a non-O-T-C shopper and visits the store four times more often. So, the dilemma facing retail pharmacies is quite complex but comes down to just one key question: Should they continue to pay to transfer loyalty?

Here’s the economic equation to help answer that question:

+ What did you gain on a lower percentage of claims paid at U&C reimbursement with your cash pricing strategy?

+ What did you gain on commercial contract negotiations and preferred network status with your discount card program participation?

+ What did you gain in patient share? It is important to measure loyal patients, new patients, lost patients and patient churn here. It is also important to understand the O-T-C benefit.

– What did you give up on reimbursement rates?

– What did you give up in fees to discount card providers?

= If the net result is positive, then yours is a winning strategy. For now. However, as industry disruptors expand their telehealth, diagnostics and e-commerce/mail order services and threaten to take as much as 40% of the prescription volume, will it still be the way to go?

Now let’s shift our vantage point on the cost of transparency to pharmaceutical manufacturers. As stories like those of my parents become more common and ultimately reach Congress, there will be much public rhetoric acknowledging that constituents are confused and want help. There will also be much discussion about pharmaceutical manufacturers raising prices. When, in fact, this is not the cause of the confusion.

The latest figures from the Kaiser Family Foundation show that the U.S. spends almost twice as much per capita on health care compared to other countries.

U.S.: $10,966 with 13% on Rx at $1,440.

Others: $5,697 with 16% on Rx at $911.

It’s important to note that U.S. spending on prescription drugs represents a lower percent of total health care costs even as the expenditure is significantly greater than that of other countries. Inpatient and outpatient treatment costs in the U.S. far exceed those in other countries. Despite greater spending, the U.S. falls below other countries in life expectancy.

Pharmaceutical companies are not the root cause of the rising consumer cost burden and consumer frustration. Generic drug prices have been deflating for years. And, according to a study from Drug Channels, brand drug prices — when rebates and discounts are factored in — declined or grew only slightly in 2020. Whereas list prices have increased to cover PBM rebates, 340B discounts for hospitals and other purchase discounts. The speed and size of the gap between list prices and net prices has grown significantly.

Delivering real value to consumers is at the core of both the O-T-C and prescription drug industries. Through continuing innovation new product development, and enhancing the professional services offered by our frontline retail pharmacists who are accessible in-person within five to 10 miles of most U.S. consumers, value is delivered. But this value must be combined with transparency. That’s how we’ll win, or retain, consumers’ trust and loyalty.

We have a complicated system, and there is a cost to our lack of transparency. The pandemic is still fresh in my mind. The emergence (crossing my fingers) is so welcome. I am very excited about seeing all my industry friends and colleagues at NACDS Annual Meeting this year. It will be the first time we have met in person since the COVID-19 crisis. We haven’t met in person for two reasons: It wasn’t safe for us to be together, and retail pharmacies and pharmaceutical manufacturers have been busy protecting consumers.

The pharmaceutical industry made huge investments to produce critically needed vaccines and treatments in record time. At the same time, retail pharmacies were on the front line, providing point-of-care solutions requiring in-person arms and nasal cavities. What if this collaboration hadn’t occurred? What if there were far fewer brick-and-mortar retail pharmacies? What if that was the cost of our lack of transparency?

As we come together for the NACDS Annual Meeting this year, let’s work together to ensure we continue to have a safe, cost-effective, pharmaceutical delivery system that is there for consumers. We are all consumers.

Lari Harding is vice president of client development at Inmar ­Intelligence. She can be reached at [email protected].


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