Alas, pharmacy data nerds got a rude surprise when they looked for the data, because CMS PULLED THE NADAC AND NARP DATA FROM THEIR WEB SITE! CMS also removed the June and July FUL/AMP data, along with the 3-month rolling averages. (UPDATE: Data are back online. See this post.)
I have no idea what what happened. A quick injunction? Big Bird blowback? Government goof-up? I'll let you know when (if?) the data reappear.
In the meantime, many pharmacy owners wrote to me with a similar lament: "My average cost of dispensing is about $10 per prescription. If my gross profit is less than $10, then I lose money." While this sounds logical, it is actually not true. Below, I explain why.
COST OF DISPENSING
To explain what's wrong with the pharmacy owners' complaint, we need to look at the difference between a pharmacy's AVERAGE and its MARGINAL Cost of Dispensing (COD).
The AVERAGE cost of dispensing divides:
1) Total annual costs allocated to the prescription department
by
2) Total annual prescriptions dispensed
Total annual prescription-related costs include personnel costs (salary and benefits for pharmacists) and an allocated prescription-related portion of such overhead costs as rent, utilities, insurance, advertising, computer systems, etc.
For example, if:
- Total annual costs allocated to the prescription department = $640,000
- Total annual prescriptions = 64,000
MARGINAL COSTS
Now, how much EXTRA does it cost the pharmacy to fill one more script each day? In other words, what is the incremental increase in total annual costs for filling 365 more prescription per year?
If you only look at the average COD, you may conclude that total annual costs would increase by $3,650 (=365*$10). But this is inaccurate.
Instead, the MARGINAL (incremental) cost of dispensing one extra script is close to $0.00, because the total annual costs must be incurred whether the pharmacy fills 64,000 prescriptions or 64,365 prescriptions. For a typical pharmacy, total costs do not vary based on small differences in the number of prescriptions. The pharmacist is still standing behind the counter and the electric bill is already paid.
Put another way, a retail pharmacy has relatively fixed costs—expenses that are not dependent on the number of prescriptions dispensed. These costs aren't fixed forever, because enough extra volume will require a larger pharmacy or an extra pharmacist. However, we can treat them as fixed for small changes in prescriptions dispensed.
PROFIT MAXIMIZATION
For a pharmacy owner, it's sensible to fill one more prescription, if the prescription's revenues exceed the marginal COD. The average COD doesn't factor into the decision for this extra prescription.
Consider a generic drug that can be purchased for $0.02 per pill, or $0.60 for a 30-day supply. If the pharmacy sets a price of $4.00, then gross profit is $3.40 (=$4.00 - 30*$0.02). In this example, the gross profit of $3.40 is below the average COD of $10.00, but above the marginal COD of $0.60. The extra $3.40 in gross profit will drop right to the pharmacy's bottom line.
Is it better to dispense a prescription with a $10 gross profit? Absolutely. But given its fixed costs, the pharmacy is better off making $3.40 than not filling the prescription, and making $0.00.
Two more observations:
- The pharmacy industry's generic prescription price war will continue. Super-low generic drug acquisition costs, combined with low/zero marginal COD, encourage price competition. With its $4 program, Walmart fills a few incremental scripts at each of its pharmacies, with limited incremental costs. (As a bonus, people transfer other, higher-profit prescriptions to Walmart.) The pharmacy industry's marketing is making generic drugs look more like every other consumer product. Savvy pharmacy owners have already figured out this cash-pay math, and are competing successfully with chains.
- Average acquisition cost reimbursement models will be increasingly attractive to pharmacies. With traditional reimbursement models, a pharmacy can sometimes earn a very high gross profit on a prescription, but it can sometimes earn a low profit or even lose money. Cost-plus trades this volatility for a stable average margin. Medicaid programs in Alabama and Oregon are making the dispensing fee equal to the average COD, which is typically greater than the marginal COD. (As a bonus, the AAC may be inflated, per my comments on NADAC.)
