Independent Pharmacies Learn to Live With (and Without) Preferred Networks for 2021

Last week, I highlighted the largest pharmacy chains that will participate in the 2021 Medicare Part D prescription drug plans (PDP).

Today, I examine how independent pharmacies will participate as preferred cost sharing pharmacies via the pharmacy services administrative organizations (PSAOs) that represent these pharmacies in negotiations with plans.

As you will see here, some PSAOs are rejecting preferred networks, while others are participating cautiously. There are notable differences in strategy between the PSAOs operated by AmerisourceBergen and McKesson. Details and a handy scorecard below.

The Centers for Medicare & Medicaid Services (CMS) continues to take a hands-off approach to pharmacy networks. One notable consequence: Independent pharmacies have formed their own Part D plan, in which only independents are preferred. We’ll know in January if the new plan is sitting pretty—or on a bed of nails.

SLEIGHT OF HAND

This is our third article about the 2021 Medicare Part D market. Here are the first two in the series:

• Preferred Pharmacy Networks Dominate in 2021 Medicare Part D Plans: The Scoop on Cigna, CVS Health, Humana, WellCare, and More

• Battle of the Giants: CVS, Kroger, Walgreens, and Walmart Expand in 2021 Part D Preferred Networks

For a deep dive into the economics and strategies of narrow network models, see Chapter 7 of our 2020 Economic Report on U.S. Pharmacies and Pharmacy Benefit Managers.

TWIST OF FATE

Large pharmacies interact and negotiate directly with PBMs and other third-party payers. However, nearly all smaller pharmacy owners participate in pharmacy services administrative organizations (PSAOs) to leverage their influence in contract negotiations with PBMs and other third-party payers. The PSAO relationship is crucial for independent pharmacies, because independents generate more than 90% of their total sales from prescription dispensing.

Here are the largest PSAOs:

• Health Mart Atlas (HMA), the largest PSAO, is owned by McKesson.

• Cardinal Health operates three PSAOs that serve different segments of its business. LeaderNET services Cardinal’s drug distribution customers; MSInterNet services Medicine Shoppe International franchise members; and Managed Care Connection services small chains. (For the table below, Cardinal provided us with information on only the first two of these PSAOs.)

• Elevate Provider Network is owned by AmerisourceBergen.

• Arete Pharmacy Network is the largest PSAO that is not owned by a wholesaler.

For our latest data on PSAOs and their services (along with a list of the top 10 PSAOs ranked by membership), see Section 2.2.4. of our new 2020-21 Economic Report on Pharmaceutical Wholesalers and Specialty Distributors.

AND YOU GIVE YOURSELF AWAY

To complement our analyses of retail chains, the table below summarizes the preferred network status of pharmacy members that belong to the top four PSAOs. The green shaded boxes indicate (1) a PSAO's addition to a 2021 network (vs. 2020), and (2) a PSAO's participation in a plan that is new for 2021. The red shaded boxes indicate a PSAO's removal from a 2021 network (vs. 2020). Click here to download the table as a PDF.

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Here are highlights of PSAO participation in 2021 Part D preferred networks:

• For the second year, the independent pharmacies that belong to McKesson’s Health Mart Atlas (HMA) will have preferred status comparable to the participation of the largest chains. Here’s how HMA described its 2021 strategy to me:

  “As the market evolves year over year our strategy remains focused on participation in the right plans that will provide the appropriate balance of access to lives and economic stability and opportunity for our pharmacies.”

• AmerisourceBergen’s Elevate continues to chart a unique path. Its members will once again not be preferred in any major plan for 2020. 
  
  This strategic choice is based upon Elevate’s belief that patients pick their pharmacy and then pick their Part D plan. Here’s how Elevate described its 2021 strategy to me:

  “Our goal is to offer our members access to all Part D patients but to do so in a thoughtful way that protects pharmacy profitability…Elevate pharmacies are able to compete for all Part D patients and win many loyal patients despite a copay differential. Further, low income subsidy patients represent a significant share of our patient base. At the end of the day, we allow pharmacists a greater ability to invest in their business, build stronger relationships with patients, and continue the high-touch, high-quality service independent pharmacists are known for.”

  Elevate also stated that year-over-year prescription growth (through August 2020) among Elevate PSAO members was +5.8%, compared with growth of only +2.4% for all independent pharmacies. (I was unable to verify these figures.)
  

• For the 2020 plan year, Cardinal’s PSAOs and Arete sharply cut their members’ participation as preferred pharmacies. However, these PSAOs did not make any major changes for 2021. Arete members are no longer preferred in the Express Scripts Medicare Value plan, so they will be preferred in 4 plans for 2021. Cardinal’s PSAOs lost preferred status in the SilverScript Choice plan and gained preferred status in the Express Scripts Medicare Value plan, so there was no change in the overall number of plans.
  

• Plans from Aetna, Humana, WellCare, and UnitedHealthcare do not have any independent pharmacies participating via PSAOs as preferred pharmacies.

Pharmacies still benefit from a quirk in Part D. Beneficiaries who qualify for the Low-Income Subsidy (LIS) face low out-of-pocket drug costs regardless of a pharmacy’s preferred status.

YOU, TOO

Last year, I speculated that the dearth of independent pharmacies in preferred networks could spur the Centers for Medicare & Medicaid Services (CMS) to act. For example, CMS could have reevaluated beneficiary access to lower cost sharing pharmacies or implemented greater oversight of direct and indirect remuneration (DIR). Note that the net value of pharmacy-related direct and indirect remuneration (DIR) price concessions in Medicare Part D has grown has grown significantly, to an estimated $9.1 billion in 2019.

However, CMS has not acted. Instead, the agency seems content to allow underlying economics to drive the pharmacy market’s evolution. The margin reduction from pharmacy DIR fees has neither deterred large chains from participating in preferred networks nor stopped independent pharmacies from remaining in networks with standard cost sharing. 

For 2021, an unknown number of pharmacy owners funded Indy Health Insurance Company, a new Part D plan sponsor. It offers two plans (EliteRx and SaverRx), but only in five states. MedImpact is handling back-end operations for the plan. Notably, pharmacies will pay no DIR fees to the plan.

Indy Health’s website promotes the plan as having “over 22,000 pharmacies in our pharmacy network” and that it “does not have a mail order benefit.” Based on my review of the pharmacy locator, both chains and independents are in-network, though only independent pharmacies are preferred. Indy Health automatically designates all independent pharmacies as preferred, so members of the major PSAOs shown above (including Elevate) will be preferred in Indy Health’s PDPs.

In today’s Part D market, pharmacy owners often claim they have nothing to win. Indy Health shows that they also have nothing left to lose.

 
EXCLUSIVE VIDEO

Once again, Drug Channels operatives have obtained some top secret footage. This time, we’ve caught PSAO executives discussing strategy for 2021 Medicare Part D plans. Click here if you can’t see the video.