Are market-share programs panning out for small retailers?

March 5, 2001

Independents charge that manufacturers' market share rebate programs are yielding only chump change

 

CHAINS AND BUSINESS

Are market-share programs panning out for small retailers?

Jerry Feitelberg is no happier with drug manufacturers now than he was in 1993. That's when he sued the largest drugmakers in the country, claiming they illegally charge higher drug prices to independent pharmacies than to hospitals, health maintenance organizations, and other customers.

Feitelberg's suit helped spark a discriminatory-pricing class action by pharmacists nationwide that was settled in the late 1990s. Manufacturers agreed to give independents and small chains the same kinds of rebates and discounts granted large customers if small retailers could move market share.

The financial impact of the suit? Pin money, according to Feitelberg, longtime owner of Alameda Pharmacy, near San Francisco. "It's business as usual," he said. "The manufacturers came out with complex rebate schedules that no one can understand. They're laughing all the way to the bank."

How much can independent pharmacies and small chains earn from rebates and discounts? Drugmakers aren't talking about how the discriminatory-pricing suits might have changed their pricing practices.

Pharmacy First, a 2,300-store network that processes Rx data and rebate for independents, said pharmacists can expect to see rebates between 0.2% and 0.8% of their total cost of Rx purchases. Executive director Steven Friedman said the average member earns $300 to $400 per quarter in rebates. The top performer earned $5,800 for the first quarter of 2000, according to the most recent figures released by the network.

"Rebates can mean a substantial number of dollars added to the bottom line," Friedman said. "It's pure profit."

Fred Mayer, president of Pharmacists Planning Service Inc., parent of the Pharmacy Defense Fund, one of the prime movers behind the discriminatory-pricing suit, isn't impressed. He said rebates top out at around 5% of product cost, but only on specific items manufacturers want to promote. "I haven't seen much overall price movement by the drugmakers," he said.

No surprise there, said companies that administer rebate programs for independents. The settlement doesn't require manufacturers to charge one price to all buyers. Drugmakers agreed only to offer independents and small chains the same market-share-based rebates and discounts offered other drug purchasers.

"The lawsuit opened doors for independents that had previously been closed," said Jeff Lurey, director of the Patient Care Information Center & Data Collection for the Academy of Independent Pharmacy. AIP is an arm of the Georgia Pharmacy Association. The company was one of the first to help independents track prescriptions at the store level, advise pharmacists when to switch products to meet rebate requirements, and report the results to manufacturers. The group has formed an alliance with Pharmacy First to give independents more clout.

"We've been able to prove that independents can move market share," Lurey said. "Once you understand market share, the independent can be very successful."

There are four steps to earning market-share money, said Greg Ehrhardt, v.p. of Freedom Drug Stores in Fort Worth. The pharmacist-owned network has about 1,300 member stores.

The first step is to identify baseline performance—how many scripts for specific products and formulations are dispensed. Next is identifying which products are eligible for rebates (or discounts on future purchases) based on market-share shifts.

The big step is shifting dispensing to those rebatable products. Some stores concentrate on switching prescriptions to high-rebate products in the same therapeutic category; other pharmacists concentrate on refill reminders to boost sales (and compliance) of rebatable products.

Friedman said the most successful independents work both ends, contacting physicians for product switches, then focusing on the patient to boost refill rates. Either way, the net effect is to move market share by selling more rebatable product and less competing product.

The last step is sending market-share data to manufacturers. Checks arrive about 45 days after the end of each quarter. Think it sounds simple? Think again, Ehrhardt said. In many categories, competing products carry rebates. Should the store push Proventil (albuterol, Schering) or Ventolin (albuterol, GlaxoSmithKline)? The choice depends on a variable mix of factors: existing dispensing levels of each product, the number of switches or new refills needed to reach the next rebate threshold, local prescriber preferences, product cost, rebate amount, and more. It's a data-intensive process, Ehrhardt said. That's where Freedom Drug Stores and competitors like AIP-Pharmacy First come in.

"You know the chain down the street is being compensated for its market-share data," said Dave Wendland, v.p. of sales for Nonstop Solutions, which crunches independent and small chain Rx data for AIP and Pharmacy First. "We give smaller operators access to the same tools their large competitors are using."

The process is straightforward. The pharmacy signs on with a service company, which handles the paperwork required to join the rebate/discount programs offered by more than a dozen manufacturers. Once the paperwork is complete, every eligible pharmacy sale is forwarded to the service. Medicaid claims are generally not eligible for rebate programs.

Claims can be sent by tape or disk for batch processing, or they can be handled on-line. Transaction costs hover around two cents per prescription.

Rx data are extracted using standard encoding specifications that are already part of every electronic claim. Freedom and Nonstop both say that no patient-specific data or identifiers are pulled from the claims they process.

Ehrhardt said routing third-party claims through Freedom does not noticeably slow on-line adjudication by pharmacy benefit managers.

Feitelberg remains unimpressed with market-share programs. "Rebates and discounts aren't a very good business model to stake your future on," he said. "Even the chains can't survive on volume alone. There has to be some genuine profit in order to survive. Market share isn't the Holy Grail that's going to save your business."

Fred Gebhart

 



Fred Gebhart. Are market-share programs panning out for small retailers?.

Drug Topics

2001;5:72.