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PHARMACY PROFIT MARGINS UNDER MEDICARE CATASTROPHIC DRUG PROGRAM WILL SHRINK FROM 27% TO 21% DURING 1991-2000, PURDUE's SCHONDELMEYER PREDICTS

Executive Summary

Pharmacy profit margins will shrink under the Medicare drug program from a high of 27% in 1991 to about 21% by the year 2000, Purdue's pharmaceutical Economics Research Center Director Stephen Schondelmeyer, PhD, predicted at a symposium on the Medicare legislation during the NARD annual meeting in Atlanta last month. In a written analysis prepared for the symposium, Schondelmeyer projected a decrease in profit margins over time due to the law's provision indexing pharmacists' dispensing fees to general inflation rather than to prescription drug inflation. "Pharmacies will experience a shrinking gross margin under Medicare" unless the act's statutory administrative allowance index "is changed so that inflation of drug product costs and pharmacists' fees are adjusted at the same rate," he said. "Overall the coverage of prescription drugs under Medicare will be positive for pharmacy," the associate professor of pharmacy administration declared. Nonetheless, he said, "several aspects" of the program "will not be as beneficial as they may appear." Schondelmeyer explained that increases in the pharmacists' fee will be made each year based on general inflation. The inflation rate for the overall U.S. economy "is expected to average about 4% per year" during the 1990s, he noted; however, "the expected inflation rate for prescription drug prices is estimated to be 8.2% per year." Consequently, he maintained, although the statutory administrative allowance of $ 4.50 sounds attractive today, it "will not be offered until 1991," when its "net present value" will be "about $ 3.85 in 1987 dollars." Furthermore, the fee "will not be increased until 1992." "In other words, the purchasing power of the pharmacists' fee under Medicare will remain constant with a net present value of about $ 3.85 in 1987 dollars. With manufacturers' price increases averaging 8.2% per year and pharmacists' ]fee increases[ averaging 4% per year, the average gross margin for Medicare prescriptions in 1991 will be about 27% and by the year 2000 will shrink to as low as 21%." Schondelmeyer also pointed out that the law's provision for six-month updates of drug costs for reimbursement purposes will mean reimbursements will always be six months or a year behind actual prices. Because prices will be surveyed as of Jan. 1 each year to set reimbursements for the following July 1-Dec. 31 payment period, "the AWP that pharmacists are allowed will be six months out of date at the beginning of each six-month period and 12 months out of date before they are updated," he said. Consequently, "the actual drug product cost allowance for single-source products will be the equivalent of AWP minus 10%, and the allowance for multiple-source products will be about the same as AWP minus 5%," he maintained. However, Schondelmeyer added, the effect of the delay will be avoided if "Manufacturers change the timing of their price increases." More than one-third of drug price increases currently are made by manufacturers in January or February of each year, he noted. "If HCFA surveys prices on Jan. 1 of a given year, nearly 60% of those prices will have changed before July 1, when those prices will be used to limit pharmacy reimbursement," he explained. With a "simple change" by manufacturers in "the timing of price increases so that the majority of changes occurs during November-December or May-June," pharmacists' drug product cost allowance under Medicare would improve "by as much as 4%-5% of AWP." On the other hand, he noted that "70% or more of prescriptions from most pharmacies will have usual and customary charges at or below the $ 4.50 plus AWP rate" and will be reimbursed at the lower level. Schondelmeyer forecast that the "overall" effect of the Medicare drug program will be "growth in the prescription market." He predicted that "both the number and dollar volume of prescriptions dispensed will increase after the initiation of this program 1991." Generic drug volume, particularly, will be affected positively, he added. "The market share for generics will grow from about 15% in 1987 to more than 40% by 1995." In addition, the program will lead to "a dramatic shift in the source of payment for prescription drugs" from cash-paying customers, Schondelmeyer asserted. "Beginning in 1991 Medicare and Medicaid combined will cover 30%-35% of all outpatient retail prescriptions. Private third parties and managed health care programs are expected to be covering an additional 30-35% if all such prescriptions by 1995," he said. "In total then, two-thirds to three-fourths of all prescriptions will be reimbursed by third party programs by 1995." The pharmacist noted that the "more than 33 mil." people who are eligible for Medicare represent "about 500 mil. prescriptions per year, or nearly 15 prescriptions" each. "When it begins in 1991 the Medicare drug program is expected to cover from one-fourth to one-half of all prescriptions for the Medicare population," he said. "Therefore, this new Medicare program will cover between 120 and 250 mil. prescriptions per year, or between 7%-15% of all retail prescriptions." State Medicaid programs covered nearly 300 mil. prescriptions in 1987 and accounted for 17.7% of all retail prescriptions, Schondelmeyer said. "Medicare and Medicaid combined will be paying for about 30% of all retail prescriptions in 1991." Third-parties accounted for 17.3% of retail Rxs. Schondelmeyer also predicted that the program will "help the call of independents for a uniform pricing policy for prescription drugs at the manufacturer level." He said administrators, in their effort to control program costs, will examine the comprehensive database that will be generated on drug use and prices at the retail and manufacturer levels. The federal government "is sure to begin asking questions about how much other major purchasers of health care are spending for prescription drugs both at the retailer and the manufacturer levels," he said, and as a result, "most parties in the pharmaceutical business will be nervous." NARD Executive Committee member Calvin Anthony (Stillwaterr, Okla.) pointed out that the law "provides coverage for home I.V. therapy and extends the length of care for hospice patients' coverage." Although not all NARD members provide home I.V. therapy services, "this aspect of the new Medicare law could be a great enhancement to those pharmacists providing home health care," Anthony said. "Improved payments for hospice patients and longer length of payment schedules could be key elements in helping independents improve ]pharmacists'[ bottom lines." The cost effectiveness of home therapy will also "save patients and governments substantial amounts of money and yet dramatically improve our business," he said. Anthony also praised the act's requirement of patient consultation and other pharmaceutical care. Independent pharmacies "are in the best position" to fulfill such requirements, he said, and "those entities that try to short-circuit the health care delivery system through unconventional means like mail order and physician dispensing will be hard pressed to adequately fill these requirements."
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