Why Purchasing In The Pharmacy Industry Is So Unique

DT: Hey everyone, this is Quinn from Drug Topics. We are here today with Wayne, from American Associated Pharmacies. Wayne, if you just want to give an introduction, who you are kind of what you do at AAP?

WB: Sure, thanks Quinn. Yeah, my name is Wayne Boese. I'm the Vice President of Sales for AAP. Been with AAP since our beginning in 2009. I've been in this industry helper for 30 years. So I spent a lot of time working with independent pharmacists working on on helping them buy better helping them understand the industry, and hopefully we keep them keep them surviving in this crazy environment in a business.

DT: Okay, Wayne, so many consumers know very little, they're kind of in the dark about the unique characteristics of how pharmaceuticals are bought and sold in this country. And even independent pharmacy owners independent pharmacists continue to be surprised by the nuances and how much goes into running their business. Why is purchasing in the pharmacy industry so different than in any other industry?

WB: Yeah, Quinn, that's a great question. And you are so right, I tried to explain this to to my family members about how prescriptions are our drugs are purchased and dispensed and reimbursed, and their eyes always gloss over as to what's happening here. But we're one of the very few industries- and I say one of the very few because there might be other ones out there, but I don't know of them- where most all of the transactions, most all the prescriptions filled in a pharmacy, are actually paid, and the pharmacy is reimbursed by somebody else other than the consumer. But 95% plus of all prescriptions filled are either insurance or a state Medicaid or a Federal plan, like a Medicare plan. They are the ones that actually reimburse the pharmacy, and that reimbursement rate, what the pharmacy is paid, is dictated by a contract with another organization. So the pharmacies have no say in really setting their price, setting their their reimbursement rate, how much money they're gonna make per prescription.

DT: Yeah, that definitely makes sense. What are some of the common variables that sort of affect the pharmacies bottom line?

WB: Well, again, the way we buy and sell in pharmacy is loaded with acronyms. We don't just purchase a product and sell a product, buy it at x and sell it at Y. There's a lot of things that are involved in that, we buy based upon WAC, wholesale acquisition cost, which really isn't a wholesale acquisition cost. We sell based upon a term called a AWP average wholesale price. And that's not every even an average wholesale price. There's additions and deductions along the way in there for the pharmacies, they'll get paid something called the dispensing fee, which really isn't a dispensing fee, it's an arbitrary number made up by again, these third party payers that will pay them something different, pay them an extra fee on top of this negative reimbursement is that that's what we call them. And that's essentially where pharmacy is at today. The margins have been cut so small based upon these limited number of payers, again, forcing down to the pharmacy what they're going to get reimbursed on a prescription.

DT: Yeah, that all make sense, there's definitely a lot to keep track of there. Is there sort of a formula you keep in mind?

WB: Well, there's a lot of things again, that are involved with that. So the way the pharmacies purchased today, they're purchased based upon WAC, wholesale acquisition cost. And unlike in any other industry, it's not the wholesale acquisition cost plus a number, it's minus a number. And for a pharmacy owner to be able to grasp this and understand that, they typically don't they just think the lower cost minus is, is the best place to be. But that's all been changing over the these last few years, they don't get the same cost minus on all branded items. So that gets confusing. There's also a term that every every deal that they purchase from their supplier is also going to include something called compliance. And that compliance can be based upon a generic to brand ratio compliance, or actually a generic to total RX compliance. Or that can be based upon a total what they call a share of wallet or percent of purchases, they're required to purchase 90% of the brand and generic from the from their wholesaler. And both of those things are okay, until they see these price variances, until they see the pricing on generics are going up and they want to buy it at a different place. That gets their compliance with their wholesaler out of line, which affects that brand cost of goods they're getting. And everybody gets a little upset with that. So pharmacy owners just need to understand what that means what those terms are need somebody that could walk them through that and how that affects the bottom line.

DT: How does that happen? With the prices kind of surging like that? Is there any one specific at fault?

WB: Well, we all want to blame the PBMs, all want to blame the third party payers, and that's really where it does start that's really where it began at. These PBMs actually, and as I said earlier, they kind of they force down the price to the pharmacies, what they're going to reimburse on on a transaction with you reimburse on a prescription claim from a patient. But they give those so they come up with this new reimbursement rate, and they give that rate to the chain and they give it to independent's, they give it to a PSAOs, all of whom are organizations independent's contract with to help them do this contracting. And a lot of the wholesalers also have their own PSAO, so over time, what has happened here is that PSAO's come up with a lower reimbursement rate. And then it's up to the the the industry to accept those. The trouble is, is we keep saying yes. The industry keeps saying yes to the lower and lower and lower reimbursement rates, and not saying enough "no." Because of this, what has occurred here, the pharmacies every time a new lower reimbursement rate comes out, they go to their wholesaler and say, "Mr. Wholesaler, I need a lower cost, I need to lower my costs," I need to essentially try to buy my way out of these lower these lower reimbursement rates. And it did for a time, it worked when it first happened, because there were a lot of generics in the market, generic prices were increasing, which from a pharmacy standpoint, they don't think that's good. But when you're looking at a compliance ratio, that is good. The other thing that was happening, there was a lot of generic brands that were becoming generic. So these high utilization brands are coming over the generic side of the business. And that allowed these lowering reimbursements to happen. And the wholeseller could make the pharmacy whole. What we're dealing with today is the brand prices are increasing. The generic prices are dropping, and it's making it very difficult for the pharmacies to make up these compliance percentages. They need that reimbursement they want to be profitable on these prescription plans.

DT: Yeah, that makes perfect sense. Because there are so many moving parts, like you just described, what are some things that pharmacies should consider or keep in mind when they're evaluating a proposed purchase agreement?

WB: Sure. There's really, you know, the major ones that are, of course, what's the brand cost minus, what brands are being at that cost minus level again, what we're seeing several in several deals now is, these brand prices have been rising, the pharmacy negotiates with the wholesaler, and they negotiate a WAC, a wholesale acquisition cost, minus four. The trouble is that they don't get the minus four on all the branded items, they're getting different reimbursement rate, or different discounts on different classes of brands, so they need to really be aware of that. The other thing that's happening on the generic side is, again, generic pricing is going down, and the pharmacies are forcing that generic price down, they want a lower price on the generics. But that also messes up that compliance component that we were just talking about just a minute ago. So what's that generic price? And then what's the rebate I get on that? A lot of pharmacy owners today say I don't want to rebate give me the least rebate that I can. The only thing about that is we've done a lot of analysis, a lot of study on this and do a lot of comparisons on that. Is that generic pricing, you'll always get a better price if there's a rebate involved because there's some carrot out there for the pharmacy to achieve. So. So that's important. And then again, the compliance and how's that compliance calculated? Whether it's a generics to total RX compliance and what we call the GCR? Or is it this 9090 compliance, which is often called the shared wallet? Pharmacy needs to understand what that is, understand how it's calculated for them. And every wholesaler does not calculate them the same. So we'll often hear from the pharmacy owner saying, "Well, I can't make X percent, I can't make a 12% generic compliance. Somebody else is offering me a 10% generic compliance, that's all I have to do." But if the math is different, the 12 and the 10 might actually be the same. So pharmacy owners need to really understand that how that compliance is done, how that's calculated, and they all assume that one size fits all, which it doesn't. And then they end up making a decision based upon bad information.

DT: Yeah, that's super interesting. You talk about pharmacy owners going to different sources kind of shopping around for the best prices, do you have any advice for them looking for that best price and how to kind of, you know, find the best deal?

WB: Yeah, pharmacy owners have become because of all this pricing move around and how their reimbursements, they've become very transactional. And by that, I mean, if they fill a prescription they see on the screen, I lost money on that prescription, not taking account any generic rebate, or any dollars are getting on that lower brand discount, they think they gotta get a better price on that. So that when they fill that prescription the next time, it shows a positive, they made money on that prescription. So they start shopping, they start looking for other generic pricing other products that can buy that same product somewhere else at a lower price. And that's okay to do a little bit of that. And there are a number of drug shortages today where pharmacies need to do that, their wholeseller probably can't supply it and you need to go looking for it for someplace else. But again, when we talk about compliance and these ratios, this generic compliance to total RX, the more they shop outside, the more they buy outside of their wholesaler, it affects that compliance percentage. It's a math problem. And the more the more they move outside of their deal, those percentages change, their whole deal gets upside down. Now, not only are they not happy, because they're not getting that generic pricing, now, they might be jeopardizing all their generic rebates by not purchasing enough from that supplier, we also may be jeopardizing the brand cost of goods that they negotiated, this cost minus four or five, or whatever that is that might be changing, because that generic dollars are lowering. So it's really important to understand what they're shopping, how much they're shopping, and what that impact is to the business.

DT: For sure, so obviously, what we're discussing here, just the price of goods for pharmacies can make or break their business. How do pharmacists avoid sort of these pitfalls that you know, are so important for how their business operates?

WB: It's really important the understanding all of this stuff, they need to understand how these pieces and parts of move it's like squeezing the balloon, we say, right? If you squeeze one place, you say I want to lower brand cost of goods, it's gonna pop out someplace else on the generic side or wherever. And so really being able to either do that analysis, the trouble is, it has become so complex that, you know, myself and my team, we've developed some tools on this, where we really lay this out in on a spreadsheet and actually walk the pharmacy owners through this, what is the impact of doing all these moves? What makes one deal better than the other? They need to understand that and too often, the pharmacy owner still understands two things, they understand what that brand, cost minus is that WAC price, and they'll understand with a generic rebate percentages, and they don't understand all the things inside there. They'll make decisions based upon emotion, and not based upon fact. And that's really what we try to come across. And what we try to deliver to our members. and to anybody else that we're talking to in the industry is, is you need to understand this stuff. And if you don't, you need to have somebody you trust, that can lay it out for you. Give it to you. So you can digest it and not just show it and walk away. But here's exactly what the numbers are. So we can digest. Is this a good deal or not?

DT: What else do you think independent pharmacists should be doing?

WB: Well, there's a lot of things that they can be doing to help improve these these situations. Number one, is saying no to these PBM lower rates, that's the that's probably the number one thing and whether they're signing their own contracts today, which many of them do not most of us a, a PSAL they're lined with an organization, but communicate to that PSAO, "We're not going to do this anymore, I'm not going to accept these these lower reimbursement rates." They need to look at their data, they need to look at patients that they're filling prescriptions for today, that may be upside down for them that they're losing money on, and they don't want to fill those prescriptions anymore. But also looking at your data and look for those prescriptions that you are making money on and make sure that you're refilling those prescriptions when they're due, when they're ready to be done. Contacting the patient saying, "Hey, you're, you're ready for your refill, we'll we'll fill it for you." Many of the states have passed laws today where I think we're up to five or six, I wish it was more than that, where the the pharmacy does not have to fill a prescription, if they're upside down. If they're losing money on that prescription, they do not have to fill that. And I think that's very, very important to be able to push back on the PBMs on that, that you gave us low, rate, it's not going to work for us, it's too low, and I don't have to fill fill those prescriptions. If more pharmacies had that option or that ability, then I think we would be in a better spot there. And lastly, that would pharmacies really need to be doing is looking inside and you look at their business. And they need to look to see if it is their overhead out of is their payroll out of line and make sure that they're running as lean as they possibly can.

DT: Awesome. So, say a pharmacy owner came to you today, and wanted to learn more about pretty much everything we've discussed, what kind of final thoughts would you have, a parting thoughts for them? What wisdom would you give them?

WB: Yeah, well, I would really encourage them to get a hold of myself or get a hold of one of my my territory managers. So again, we built the tools to do this. We built the tools to be transparent and to really show pharmacy owners how best to purchase inventory, the cost of inventory, the bottom line, not these their individual buckets and doing it that way. They need to totally understand that. And so my team can do that my team will show the pharmacy owners how to do that. And hey, if the pharmacy has a better deal than something we can show them today. Then there was home that will tell them that we want them to be transparent. They want them to survive. So maybe at a later date, we can do business with them. So you know that's that's, that's super important right there.

DT: Great. I think that's about all I have for you today. Thank you so much for joining us today, Wayne. We appreciate you taking the time and talking to us.

WB: Thanks, Quinn. Really appreciate it. Thanks so much!