drug costs

• what is net profit?

  • equation: sell price - item cost - (expenses / sell price)
  • example:
  • you sell a blood pressure measuring device for $40
  • you paid $20
  • your expenses are $10
  • so... $40 - $20 - ($10/$40)
  • or... $10/%40 = 25% net profit
• what is gross profit?

  • equation: sell price - (item cost / sell price)
  • example:
  • you sell a box of band-aids for $2
  • you paid $1
  • $2 - ($1/$2) = 50% gross profit
• some basic drug cost terms

  • list price - the price that a manufacturer "lists" for
  • it can be called catalog price
  • think of it as the same as the price on the window of a car for sale
  • most usually, list price refers to brand drugs, not generics
  • but also specialty drugs as well
• list pricing for drugs

  • list price usually also equates to what's called:
  • wholesale acquisition cost (WAC) - the invoice price a manufacturer sells a drug to a distributor for
• wholesale acquisition cost (WAC)

  • WAC almost always is connected to brand Rx drugs, specialty drugs
  • but not generics
  • most pharmacies or chains or groups purchasing organizations sign contracts to buy from wholesale distributors at WAC minus a percentage
• NET priced items

  • what are typical NET PRICED items that a pharmacy buys?
  • generic drugs
  • home health care products like wheelchairs, walkers, canes
  • large bulky items such as cases of kleenex or diapers
  • specialty drugs or biopharmaceuticals
  • private label products (vitamins, OTC generics)
• reduction in prices of net priced items

  • one of the biggest ways a pharmacy can lower generic drug costs is to agree to buy a large percent of their generic drug needs from a specific formulary
  • all major drug distributors (such as mckesson, or cardinal or amerisourcebergen) establish and maintain a specific generic drug formulary
  • buying from this formulary can earn a pharmacy rebates of various kinds
• what is a rebate?

  • simply, a rebate is money paid to a pharmacy for buying certain identified items
  • identified by their supplier
  • usually in a signed purchasing agreement between pharmacy and supplier
  • can be ongoing, quarterly, or an occasional "promotion"
• how does this formulary work?

  • simply, a distributor will solicit bids for pricing of drugs from manufacturers
  • example: mckesson may contact all makers of lisinopril and ask for a bid price to be the "chosen" lisinopril that mckesson recommends first to its pharmacy customers
  • manufacturers offer a variety of inducements to be the "winner" of the bid: lower pricing, longer payment terms, etc.
• distributor formulary

  • then, when you buy lisinopril form your chosen supplier they offer you inducements; also:
  • lower acquisition cost
  • lower payment terms
  • rebates
• let's say

  • your agreement as a pharmacy chain, hospital, independent, etc.:
  • brand drugs at WAC = 5%
  • but by contract, you've agreed to purchase 90% of your total generic dollar spend from the supplier's formulary program
  • what happens if you only buy 75%

  well...

  • your acquisition cost on brand Rx could go up
  • a negotiated rebate program could go "down"
  • your payment terms could be impacted
  • or (some other impact): your acquisition price on OTC products might go up
• what is average wholesale price?

  • commonly called AWP
  • totally fictitious number
  • totally made up
  • these days, almost exclusively used in a 3rd payment formula
• AMP usage example

  • let's say you fill prescriptions for a company that uses a 3rd party insurance group to adjudicate and administrate their pt's claims
  • a pt brings in a prescription eligible for one of those groups' contracts
  • assume the drug is a brand Rx or has an AWP assigned to it
  • as the dispensing pharmacy, you collect co-pay (~$10) plus submit the Rx data to the insurance company who sends you:
  • AWP - 18% + $4.50 for that prescription (sample reimbursement contract)
  • think of the $4.50 as a "dispensing fee"
  • average cost to dispense an Rx in CA is btwn $12 and $13 per Rx
• basic payment terms

  • how does a pharmacy pay for the items it pays?
  • usual terms would include one of these:
  • weekly EFT (electronic funds transfer)
  • bi weekly EFT - fairly standard form of payment
  • monthly EFT - more rare form of payment
• california - medi cal

  • medi-cal constitutes roughly 12 to approaching 14% of all Rx's in the state
  • a few yrs ago - 10%
  • growing - where will it stop?
  • medicare part D - roughly 38% - 40% (headed higher)
• so as of today...

  • the average of CA pharmacy will fill more than 50%
  • probably closer to 60% of its Rx's for Medicare or Medical
  • about 35% for other 3rd party programs
  • < 5% for "cash"
• something new...

  • CVS has announced they are moving to "cost plus" pricing
  • versus AMP based pricing and re-imbursement
  • so if "cost" is $80 and CVS decides to mark up by 20%, then the sell "price" will be $96
• two basic types of pricing systems

  • the cost plus system - where a product buyer uses product cost price as a base
  • to that, they add a "mark up"
  • mark up covers
  • 1) expenses
  • 2) profit margin
• market basket approach

  • simply means that the mix of the products sold and quantities
  • when you add the nest profits of all the items in the market basket, they total your desired number
  • example: market basket may contain 10 items or 110,000 items -- will always have desired number
  • the principle is the same