Who Moved My Prescription?

Bill Roth, SVP, IntegriChain

After exploring the “Fight for the Dollar” in 2023, as I look forward to 2024, this is going to be the year of “Who Moved My Prescription?”

The world of pharmacy used to be a lot more simplistic: we had retail pharmacies and hospital pharmacies. By my rough count, I see 25 main forms of pharmacy today, and new forms keep emerging every day. As George Van Antwerpt from Deloitte likes to muse, “there are pharmacies of the future on the way.” I agree with him, and they can’t get here soon enough.

We’ve all seen the recent headlines. Brick-and-mortar retail is struggling. Reimbursement is declining. Cost of goods is increasing. Cash-pay pharmacies are eroding the commercial pharmacies’ insurance business, especially for generics. Discount card companies such as GoodRx, new cash pharmacies such as Mark Cuban’s Cost Plus Drugs, and Amazon Pharmacy are shining lights on new ways for consumers and plan sponsors to think about the economics of prescription medicines. Meanwhile, brick-and-mortar pharmacies are dealing with store closings, walk-out protests, theft, and opioid lawsuits, and are turning away branded prescriptions.

I see four main drivers for the problematic situation: a shift in product mix, the decline of reimbursement, the rise of the digital patient treatment journey, and the desire by the old guard to maintain their own status quo.

First up is that the ratio of branded Rx to generic Rx has changed dramatically. For brick-and-mortar retail, they have been on a mission to convert branded prescriptions to generics. Pharmacy benefit managers (PBMs) drove retail with economic incentives, both with script economics but also with generic utilization targets. Wholesale distributors did the same on the buy side of the pharmacy channel. With the end of the primary care patent cliff in 2017, the new item generic market is a shadow of its former self. Sure, there are still some big ones out there such as in the anti-coagulant and the diabetes markets, but these aren’t enough to reverse the tide.

Now let’s tackle the decline of reimbursement. With direct and indirect renumeration (DIR) fees set to be added to the front end of the adjudication, some industry pundits are expecting to see reimbursement decline to average wholesale price (AWP) less 21% or even greater. This new low threshold comes as pharmacies are seeing cost of goods increase as wholesalers no longer have their same mix to pass on aggressive cost less pricing.

Next is the rise of digital. From e-commerce pharmacies to the world of the tech-enabled hubs, prescriptions are being routed to points of assurance that the script that was written is the one that gets filled.

Lastly, let’s explore the archaic thinking of the legacy pharmacy market and their lack of ability or willingness to evolve. As opposed to servicing branded Rx, they are converting them to generics if generics are available in the class. Primary research that Blue Fin Group conducted in late 2022 through 2023 yielded clear insight that pharmacies proudly switch prescriptions even when there isn’t a direct generic equivalent. They perceive themselves to be patient ambassadors, lowering the patient’s out-of-pocket exposure while also lining their pockets with the high-margin generics. They call back to the prescriber, explain the patient economics, and the script gets switched. This is a problem for emerging brands, unless you’re an instant blockbuster like the GLP-1s in weight loss and diabetes, and even then, retail pharmacies don’t want to process the prescriptions. Pharmacies lose money on these. Products like the GLP-1s are brands and go against the wholesalers’ generic utilization rate targets; the more successful the brands, the greater the risk the pharmacies will experience another cost of goods increase. This is a problem for branded manufacturers.

So what are pharmacies doing about it? The national chains are out in the manufacturer community seeking their own form of a bail out. They signed contracts with the PBMs that they now deem unprofitable. The pharmacies are asking for any help possible, but really don’t want to do anything incremental or different than what they have been doing. Manufacturers aren’t buying it. They don’t see the problem as real. The responses I hear from pharma include:

• “The pharmacy signed the PBM contract—they have to honor the prescriptions.”
• “They make exorbitant margins on generics—brands are loss leaders.”
• “They have a fiduciary duty to fill prescriptions as part of their state pharmacy license obligations.”
• “They’ll turn patients away and their entire book of prescriptions.”
• “If they turn down the service levels, they’ll negatively impact theirstar ratings.”
• “If they move the brands to e-commerce and out of brick and mortar they’ll will be handing your business to Amazon Pharmacy ... and what happens to front-end profitability?”

Yes, all valid points.

There are additional issues with the situation. The two main solutions for the problem are pharmacy improving reimbursement or lowering cost of goods. The challenge with pharmacies going back and renegotiating with their PBMs is that these are longer-term contracts, and even vertically integrated pharmacies don’t seem optimistic of this approach. If retail can’t do the job, the PBM will likely be more than happy to dust off their mail order models and control another vertical channel. The challenges with lowering the cost of goods are that the two options are discounts or fees. The discounts are problematic for manufacturers because these would need to be applied to the retail pharmacy class of trade. With all the problems retail already has, manufacturers aren’t about to expose themselves to a Robinson Patman Act situation. The fee approach is likely to be problematic for two reasons. First, changing a core service to an enhanced service is tough to pass legal review, as it easily can be construed as an inducement and violation of the Anti-Kickback Statute. Second, once fees get bona fide, they will likely not close the financial gap the pharmacy needs simply to break even. So, we are in a Catch-22. Did branded pharmaceutical companies ever think they’d be in a position to worry about whether a pharmacy would service their prescriptions?

The solutions stepping forward are where we should focus our energy. Tech-enabled digital hubs have grown rapidly in the last few years. Prescribers can send eRxs to a non-dispensing pharmacy directed by the field represented, and a mix of tech and human services connect the patient and prescription with a pharmacy capable and willing to process the prescription. Yes, patient services have evolved beyond specialty and even specialty lite (averaging ~$8,000 to $20,000 year) down into general medicine/primary care.

For the legacy pharmacies, they will need to think through how they buy, sell, and operate. They will have to break through their "92% of prescriptions are generics and low cost wins the day" way of thinking. Branded prescriptions will find a way to their patients. Branded manufacturers have built skills for their own network design after 2.5 decades of specialty pharmacy experience. They are hungry for data around the prescription journey and want an experience around their brand that matches the quality of their science. Many models are standing by hoping for their chance. Ironically, this is reminiscent of specialty pharmacy when the legacy channel couldn’t get the job done and a new form of pharmacy stepped in. Given we have 25 to choose from and more on the way, let the games begin.

About the Author

Bill Roth is the SVP of IntegriChain’s consulting business, which includes Blue Fin Group, a strategic consulting company he started in 2001, and the existing IntegriChain operational consulting business.