New services help pharmacies negotiate the fine art of drug pricing
New services help community pharmacies price their drugs competitively for cash-paying customers
One of the biggest challenges facing community pharmacies is determining how to keep drug prices for cash customers competitive yet profitable. Can they keep prices low enough to keep up with the competition? If they price products too high, will they be accused of trying to gouge customers?
One chain that got burned on this issue recently is Rite Aid. It was sued in Florida for "racketeering" by allegedly automatically programming its cash registers to ring up extra charges for cash customers. The company was fined $10,000 to $15,000 for each violation. Similar suits were filed in New Jersey and Pennsylvania. According to Rite Aid spokeswoman Sarah Datz, the Florida suit was settled in October 2000.
"We were pleased we were able to come to an agreement with the state attorney general's office and appreciated their cooperation," said Datz. "The agreement allowed us to avoid the cost of litigation and move on. This was a past practice that was discontinued several years prior to October 2000." She added that the company has not operated stores in Florida since 1997.
A Rite Aid press release issued last June stated that the company lowered prices on hundreds of prescriptions at its more than 3,600 stores. "We made the decision in order to be more in line with local competition, and we think the new prices, combined with our focus on personal care from our pharmacists, is going to be a real benefit to our customers," the release stated.
Setting prices is a "balancing act," explained Michael Polzin, a spokesman for Walgreens in Deerfield, Ill. "We monitor competitors' pricing to make sure we're not out of line with an item," he said. "It is a bit of a tightrope that you walk, because you want to be priced competitively enough so that customers will come to your store and purchase the product. But you still need to keep your profit margin levels at a point where you can earn money on an item."
To complicate matters, consumers may become disgruntled when they find out pharmacies offer widely different drug prices on some products, said Susan Winckler, J.D., R.Ph., a spokeswoman for the American Pharmaceutical Association. Time and again, the lay media have reported on undercover investigators posing as shoppers who found widely varying prices among pharmacies.
"The price market is becoming smaller as third-party payers come more into play," Winckler said. Pharmacies should know how their competition is pricing drugs in their area. "That's often difficult to determine on their own," she observed.
Many services have sprung up to help pharmacies navigate this tricky field. They include companies such as Hamacher Resource Group, DemandTec, and NDCHealth. Hamacher, based in Milwaukee, focuses on retail management tools for brick-and-mortar and on-line pharmacies, drug wholesalers, and health and beauty care product manufacturers, said v.p. Dave Wendland.
In the over-the-counter arena, the company has a process that is "data-driven," where prices are collected and gathered from around the country. "We put this competitive information and research into a proprietary software package that we maintain for internal purposes that helps our analysts review each of those items," Wendland explained. "We also identify, categorize, and segregate those items by price sensitivity, so we know which ones are the known value. We know which ones are the next tier, and we know where the related sizes and flavors are."
The company identifies a drugstore's market area, gets the data from its market area and analyzes prices, and then returns to the store either margins that the store can apply to its own internal systems, or the entire process can be managed for the store. The company also works with on-line pharmacies to determine how their on-line pricing should relate to their brick-and-mortar store pricing.
Wendland said pharmacies need to price products in the same category in a similar way, or consumers will feel that some products are overpriced. "If 24 tablets of Tylenol PM is the fast-selling item in that category, well then we'd better make sure that the 48 tablets are priced in parity. And we want to make sure that any other 24 tablets within the Tylenol line are priced basically the same," he said.
On the prescription side, there are certain items that are "shopped items," such as insulin and oral contraceptives. "You can't charge a lot for insulin," said Wendland. "Basically, consumers know how much they pay for those things. So you have to price those in a price-sensitive way."
Acute drugs, which are purchased less often, should be researched for competition. "How price-sensitive would a consumer be?" Wendland asked. "Could pharmacies get away with charging four cents more than the biggest chain in town? Or should they try to out-Wal-Mart them? The bottom line to that is you have to outsmart Wal-Mart, you can't necessarily out-Wal-Mart them. The way to do that is to be sharp on the items where [the competition is] sharp."
Wendland said a common mistake pharmacies make with prescription drugs is charging too little for generics. "The reason is that many pharmacy pricing strategies will price generics based on the price of the drug," he said. "But you can still buy it low and sell it at a higher price, because the market will bear the retail [price]." He added that independent pharmacies tend to underprice generics more than chains.
DemandTec, a software demand-based management company in San Carlos, Calif., also provides pharmacies with computer applications that can help forecast consumer responses to price changes and recommend optimized prices to pharmacies.
"The software shows whether an item is very competitive or whether it's not very sensitive to price, so you have more liberty to change price on it," explained Wona Chung, spokeswoman for DemandTec. "It would show how sensitive consumers have been in the past to this item. This will help managers know if they change a price on an item and what it's going to do to their volume. They can run 10 different scenarios ... and forecast the impact of those decisions."
Chung said the company focuses mostly on brick-and-mortar pharmacies rather than on-line pharmacies. "Right now, Internet companies are about 1% to 2% of the total revenue," she said. "We flag the items consumers are sensitive to. If you change the price just a little on certain itemseven by five centsconsumers may stop buying it and switch to something else. Or worse, they may switch to a competitor," she said.
Competitive pricing builds customer loyalty, Chung added. "If consumers are watching prices and you drop them, they will give you credit for dropping them. We'll drop price when you're going to get credit, and when you're not going to get credit, we won't drop the price."
Glenn Rosenkoetter, v.p. of sales and marketing at NDCHealth in Atlanta, said his company offers the "Prescription Price Analyzer" and "Prescription Price Reporter," which focus on "pricing intelligence" for pharmacies. The price reporter product allows independent and chain pharmacies to obtain Web access to market data on cash prescription pricing by product and geography. The price analyzer product provides advanced analysis by incorporating the pharmacy's data with data from a wider market. The price analyzer also provides data on gross profit, third-party contract, and market share analysis.
Craig Ford, v.p. of sales for NDCHealth's pharmacy systems and services, said the price analyzer product is aimed at larger chain stores. "It allows them to go out find some real quick opportunities to either grow their market share with cash or enhance their revenues from a cash perspective," he explained.
Rosenkoetter said that most pharmacies today aren't out to overcharge cash customers. Rite Aid's legal battle over its prices is probably not the norm, he maintained.
Apparently many pharmacies are seeing the value in companies that offer pricing services. Nancy Cockerham, a spokeswoman for Longs Drug Stores, said the chain recently conducted a "limited test" of DemandTec's technology on OTC products. "We were encouraged with the results, so we're going ahead on a larger scale," she told Drug Topics.
New on-line tools are available to help consumers compare drug prices. A case in point is DestinationRx. Michael Cho, president and CEO of the company, calls his service a "personal prescription benefit manager."
The Web site, www.destinationrx.com , lists prices for specific medications at major chains and on-line pharmacies and compares them. DestinationRx also provides on-line drug consultations to help consumers find the lowest-priced drugs, and it offers a drug discount card for patients with urgent need. The service is free to consumers.
Cho said revenues are obtained from on-line transaction fees by helping pharmacies process switched prescriptions. Revenues also are obtained by targeting promotions based on what prescription drug or OTC product the consumer is comparison shopping for, allowing for more targeted promotions to consumers. "Unlike traditional health plans or PBMs that basically have a formulary that a customer must abide by, we allow each individual to define what meds are right for him or her, based not only on cost, but effectiveness," he said. "We do that because most of our customers are uninsured or underinsured with respect to prescription drug coverage. So they come to us to try to find the lowest prices."
Even without DestinationRx or other on-line tools, consumers could conduct a quick check on the Internet to determine which on-line pharmacy has the best prices. For example, 30 30-mg tablets of Allegra range in price from $15.10 at the American Association of Retired Persons (AARP) to $19.69 at CostCo. Thirty 10-mg tablets of Lipitor range in price from $48 at PrescriptionOnline to $61.87 at Walgreens.
But Internet pharmacies will never replace brick-and-mortar pharmacies, stressed Susan Winckler, J.D., R.Ph., a spokeswoman for the American Pharmaceutical Association. She said many customers prefer traditional pharmacies, because they like the one-on-one service and consultation they offer. "That face-to-face contact is important," she underscored. "Customers see it as being more personal."
Drug prices have been in the news a lot lately. The latest group to train its sights on this subject is the U.S. General Accounting Office (GAO), which just released a report comparing the prices of drug discount cards, retail pharmacies, and mail-order pharmacy. GAO asked four of the nation's largest pharmacy benefit managersMerck-Medco Managed Care, Advance PCS, Express Scripts, and Wellpoint Healthto provide it with prices that participants in its largest drug card program would pay for each of a list of 17 drugs if purchased at a retail pharmacy or through the mail. Drug prices from a fifth drug card program administered by Citizens Energy, a nonprofit company, were assessed as well.
Prices were obtained for the 17 drugs from 19 retail pharmacies in Washington, D.C.; Seattle; Chicago; and rural Georgia. GAO asked for prices that would be paid by cash-paying customers, including reduced prices available for senior citizens. GAO also obtained prices and shipping costs from five Internet pharmacies.
The results of the study indicated that for the most part, discount card drug prices at the five PBMs were less than 10% off retail prices on 12 brand-name drugs purchased in Washington, D.C.; Seattle; and Chicago.
The most significant savings were for generic drugs, with the PBMs charging on average 37% less than retail price for medications such as atenolol and digoxin in Washington, D.C.; Seattle; and Chicago.
The new federal emphasis on drug prices is, in part, related to President Bush's plan to set up a prescription discount card program for Medicare patients. While exact details on the proposal have not been released, Tom Scully, administrator of the Centers for Medicare & Medicaid Services, has been quoted as saying that, under the program, drug prices will have to be published and this would bring major changes in seniors' buying behavior.
Theresa Waldron. New services help community pharmacies price their drugs competitively. Drug Topics 2002;3:37.