Three Practices to Protect Profits from the Slippery Slope of Retail Drug Pricing

image of pill capsules on top of money

By John G. King, CEO OmniSYS

Running a retail pharmacy is hard. First and foremost, you serve the needs of your patients: dispensing drugs, ensuring safety, improving medication adherence and providing clinical care.  Then there is the operating side of your business: marketing, pricing, inventory management, vendor relations, finance and accounting, reporting… the list goes on.  And all of this must be done during a period of transformation as the industry evolves from a traditional dispensing model to that of a provider of care.

And while the ‘pharmacist as a provider’ business model creates new sources of revenue and growth opportunities, the industry transformation itself presents significant business challenges. Declining revenues, a continuous squeeze on margins and a variety of other increasingly difficult market conditions. Consumers are spending less in stores and shopping more online. Retail giants like Amazon are moving in as direct competitors. Then there’s the seemingly never-ending consolidation among healthcare systems, payers, larger retail pharmacies and manufacturers.

So how does one successfully navigate these waters, ensuring that they not only survive the industry transformation, but that they do so profitably?

One way is to focus on pricing. For retail pharmacies, pricing often represents a missed opportunity. As the saying goes, ‘no money no mission’. Each year pharmacies lose thousands, even tens of thousands of dollars, due to non-competitive cash pricing, third party underpayments and eroding margins due to changes in inventory acquisition costs.

Win the Local Pricing Battle

Let’s first look at the issue of cash prescriptions. While cash paying customers may only represent a small portion of a pharmacy’s total business, their impact on its margins is significant. For example, cash prescriptions for a typical pharmacy only represent 10 percent of the total script volume but they make up 25 percent of its overall margins.  Winning the local pricing battle is an imperative.

As noted earlier, running a pharmacy is hard. Unfortunately, consumers don’t care. But their perspective matters. So, what insights can we achieve looking through their lens?

While we all want to believe that people are loyal, and in some cases they are, pricing talks. With the explosive growth of high deductible health plans and discount drug cards like GoodRx, consumers are speaking loudly. With that level of transparency, they can easily vote with their wallets. And their wallets want the lowest price. They will shop prices. They will order online. They will even drive a little farther to get it.

So, what can you do to leverage that information to protect and even compete for new profits? One practice is to deploy a market monitoring and analysis workflow. First, run a sales report to identify drugs that represent profit centers. Then assign a member of your staff to analyze local market pricing regularly and report back on the “profit-center” relevant data, identifying threats and opportunities for more informed pricing decision-making.

The value in this practice is in the commitment to execute over time. You must also systemize and automate as much of the workflow as possible to maximize results. That data can then be used in support of the next two pricing management practices.

Prevent Underpayments

Now let’s look at underpayments.  Payers typically contract with pharmacies to reimburse at the lessor of the contracted rate or the usual & customary (U&C) price.  Over time, whether it’s in response to market pressure or override patterns, NDC prices change. If you aren’t carefully monitoring these changes, the new U&C prices often fall below the maximum allowable contracted amount.  And we know payers don’t miss the opportunity when the math favors them.  That translates to dollars left on the table.

Changes to acquisition costs creates a similar problem.  A typical pharmacy might set their pricing based on a simple strategy of acquisition cost plus a standard percentage.  If pricing is not consistently reviewed and updated, negative changes to your acquisition costs will cut into margins, or worse yet, force the pharmacy into operating at a loss.  Conversely, positive changes to your acquisition costs might result in a scenario where your cash pricing is no longer market competitive.

In either case, you can protect you profits by performing consistent analysis of your U&C pricing. In terms of reimbursement, it must be a priority to look for third-party paid at U&C events to identify potential underpayments.  Also evaluate cash claims to determine that pricing is both competitive and profitable (see the first practice covered in this piece).  Likewise, by comparing U&C pricing to current acquisition costs, pharmacy leaders ensure that margins remain healthy. While it’s easy to say, analyzing U&C pricing for improvement opportunities is often tedious and time-consuming. And in light of the many demands placed on pharmacies today, it can be hard to make this practice operational.

Use Technology for Best Results

Fortunately, technology solutions do exist to help pharmacy leaders avoid the labor-intensive and tedious work associated with pricing analysis. Choosing the right one means that they can automate the entire process, guarding profits by applying machine intelligence so that margin opportunities are automatically identified, actions taken to adjust U&C, and finally, see that these pricing updates are reflected within the pharmacy management system (PMS).

To make the right choice, you must invest time on the front-end to research and evaluate relevant technologies and the companies behind them. Pricing is a moving target. You need to find out the product roadmap and ask about challenges your vendor foresees solving in the near future. You can also ask peers about their experience with different pricing management solutions. Lastly, carefully consider the integrity and depth of the integration with pharmacy management systems.

Running a pharmacy is hard. But as one of the most trusted professions, it’s also a rewarding experience. You deserve to succeed. Take the time to protect your hard-won profits.

John G. King, CEO

John is the chief executive officer of OmniSYS. He focuses on driving innovation and delivering high-impact solutions that enable customers to grow their businesses profitably. He is passionate about the company’s mission to improve the health of healthcare. With over 25 years of sales and operational expertise in healthcare and information technology, John has devoted his career to advancing health through the creation and adoption of innovative solutions.

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