Summary
U.S. spending on outpatient prescription drugs grew by only 4.9 percent in 2007, which was below overall health care spending growth of 6.1 percent. Public funds (primarily Medicare and Medicaid) paid for 36 percent of total retail prescription drug spending in 2007. So, how much money do pharmacies make from Medicare and Medicaid? The answers may surprise you. Here’s what I found: (1) Medicaid remains the most profitable third-party payer for independent pharmacies. (2) Despite what you may have heard, gross margins on third-party insurance business are growing at independent pharmacies. (3) The generic price war that was triggered by Wal-Mart is squeezing pharmacy margins on cash-pay consumers. While $4 generics may be good news for uninsured/underinsured patients, they are bad news for pharmacy owners.
Analysis
According to self-reported survey data from independent pharmacies in the 2008 NCPA Digest:
* Pharmacy margins from third-party-paid prescriptions increased in 2007 versus 2006.
* Medicaid prescriptions remain more profitable than either Medicare Part D (+160 basis points vs. 2006) or private third-party payers (+120 basis points vs. 2006).
* Gross margins on Part D business jumped by 270 basis points in the second year of the program. The self-reported gross margins of 18.7% in the NCPA Digest correspond almost exactly with the 18.5% reported by the OIG last year. See Pharmacy Profits & Part D for details.
The most interesting change come from “Non Third Party” prescriptions. This category includes primarily cash-pay consumers, i.e., people who pay the full cost of their prescriptions out of their own pocket. In 2007, average pharmacy margins from these uninsured/underinsured people were 42.4%, a decline of over 1400 basis points compared to 2006.
Keep in mind that despite the drop in cash-pay margins, independent
pharmacies also earned 2X margins from non-third-party scripts compared
to third-party scripts. This differential reflects our health care
system’s “soak the poor” approach, whereby cash-pay customer pay list
price while those of us with insurance benefit from our pooled
negotiating power.
These data confirm my supposition that the price war started by Wal-Mart in September 2006 will reduce pharmacy profits from uninsured/underinsured customers. Today, many independents will match prices to avoid losing a customer (and to avoid changing their Usual & customary rates).
Although they may deny the existence of price competition, Walgreens (WAG) and CVS Caremark (CVS) are also feeling the pressure on pharmacy profits. (See Walgreens vs. Reality on my Drug Channels blog.)
Cash-pay customers love the generic price wars, which offer the most value for uninsured and under-insured patients. Price shoppers are fans, too, given the wide and apparently persistent variations in pharmacy prices for many common, high volume generics. (See The Price Might Be Right on my Drug Channels blog.)
Additional details on the U.S. spending data can be found on my Drug Channels blog in Who Pays for Prescription Drugs
