Generic drug programs cut into pharmacy profits

January 19, 2009

While the generic drug discount programs offered at most chain pharmacies have saved patients billions of dollars, they have also cut into pharmacies? gross profit margins.

While the generic drug discount programs offered at most chain pharmacies has saved patients billions of dollars, they have also cut into pharmacies’ gross profit margins, according to a pharmacy consultant speaking at the American Society for Automation in Pharmacy’s Industry and Technology Issues January meeting in St. Petersburg, Fla.

Retail pharmacy executives who are considering starting a generic program should plan on an initial cost of between two and four gross profit margin points in the first year, said Michael Bunn, PharmD, a consultant for Pharmacy Healthcare Solutions in Pittsburgh, Pa. “A lot of these programs have been offered to stop the losses of people going elsewhere, but chains have to look at how much money they lose on generic drug programs,” Bunn said.

For example, on a $4 generic prescription, the pharmacy may spend 75 cents to purchase and process the product, resulting in a profit margin as high as $3.25 per prescription.

However, since $4 is too low for the pharmacy benefits manger to provide reimbursement, there is no revenue from the PBM to the pharmacy on that prescription. “It is profitable; just not nearly as profitable as before. On some prescriptions, you would have received $15 or $20 each [from the PBM], and now you are selling it for $4 [and will receive no reimbursement],” Bunn said.

Although generic drug programs are saving patients a significant amount of money – Wal-Mart’s generic program has saved its customers around $2 billion in prescription costs, according to Bunn – he is concerned about possible adverse impacts on patients. “The downside is prescriptions are divided among multiple pharmacies, and there is reduced pharmacist and patient interaction. It blurs the clinical picture when you don’t have a complete profile,” Bunn said.

While the discount programs force pharmacists to become more efficient and to use technology, the pharmacy profession could suffer in the long run, according to Bunn. “What is the generic discount programs’ impact on pharmacy’s professional philosophy? You need to compare the business versus the professional philosophy and find how those two can meet,” Bunn said.

However, generic discount programs offer some advantages to retail chain pharmacies. “Pharmacies have the ability to drive which generics are dispensed by starting one of these programs,” Bunn said. In addition, pharmacists can negotiate better prices with particular drug suppliers and some are doing more direct contracting with manufacturers. “More pharmacies are looking at warehousing products and direct contracting. It moves a lot of the players out of the wholesaler business,” Bunn said.

Pharmacies considering starting a generic discount program can be profitable, if the program is set up correctly, according to Bunn. First, executives need to decide whether the program is going to charge an enrollment fee or not. With an enrollment fee program, the discounts are given to enrolled customers only. “For traditional chain pharmacies, it allows them to capture additional revenues for those who don’t participate,” Bunn said.

Patients who don’t want to participate in the program are charged the higher, standard price of the product, and the pharmacist is reimbursed at a higher rate from the PBM, Bunn said. Executives must also decide whether it is better to offer a 30-day supply, a 90-day supply, or both. “A 30-day program is a little simpler and there is greater participation,” Bunn said.

However, with a 90-day supply program, the pharmacist touches the product fewer times, thereby improving efficiency. Choosing the right product mix in a generic drug program is also vital to its success or failure, according to Bunn.

“You need a balanced investment portfolio of higher-cost, low-volume drugs and high-volume, low-cost drugs,” he said. For example, promethazine suppositories are a higher cost item that can be offered as part of the program, but only a few prescriptions will likely be filled each quarter. “They are lower-volume drugs, so you can offer them at a lower cost,” Bunn said.