As pharmacies are seemingly being built on every corner, and inside every grocery and department store, the casual observer might assume that retail pharmacies are profiting from this increase in spending on prescriptions. But, as every pharmacy owner knows, the profit margin on prescription drug sales is slim, and it continues to narrow due to low reimbursement rates set by private and government third-party payers.

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Issues in Pharmaceutical Reimbursement
As pharmacies are seemingly being built on every corner, and inside every grocery and
department store, the casual observer might assume that retail pharmacies are profiting from
this increase in spending on prescriptions. But, as every pharmacy owner knows, the profit
margin on prescription drug sales is slim, and it continues to narrow due to low
reimbursement rates set by private and government third-party payers.
And yet, maximizing reimbursement is a vital component of any healthy community pharmacy.
In order to best serve your patients, you need to provide quality service; and, delivering high
quality consistently requires an investment of both time and money. Therefore, shrinking
reimbursement is a complex problem.
Medicare, Medicaid and Private Pay
While a number of consumers pay cash for their prescriptions, most patients are covered
either by Medicare, Medicaid, or private insurance. With respect to Medicaid, the program
pays for more than one-quarter of all medications dispensed in the U.S. In 2005, Congress

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changed the basis for determining prescription drug reimbursement for Medicaid from the
Average Wholesale Price (AWP) to the Average Manufacturer’s Price (AMP). The Centers for
Medicare & Medicaid Services (CMS) calculates AMP to define rebates for brand-name and
generic drugs. Because rebates range from 13% to 23.1% of the AMP, they are often the
deciding factor in whether a pharmacy makes a profit (or a loss) on a specific drug.
Even larger than Medicaid, the Medicare program pays for more than half of all prescriptions
annually in the United States. Medicare Part D, which pays for prescription drugs for seniors,
was implemented in 2006. Pharmacy reimbursement under Part D is based on negotiated
prices, which is usually based on the AWP minus a percentage discount, plus a dispensing fee.
Private third-party payers currently base their reimbursement formula on AWP. Private
insurers, however, have traditionally followed the government’s lead and adopt
reimbursement formulas set by the government.
Dispensing Fees vs. Costs
A dispensing fee compensates the pharmacy for transferring the drug from the pharmacy to
the patient, including patient counseling. The national average cost of dispensing medications
is $10.55 per prescription – not including pharmacy profit — but Medicaid only reimburses a
dispensing fee on average of $4.50 per prescription. Under Medicare, the pharmacist is paid
even less — $2.27 per prescription. In group-health plans or private insurance, a pharmacy
benefit manager (PBM) negotiates the dispensing fee with the individual pharmacies, typically
at 40 percent off the usual and customary dispensing fee charge. With little control over
reimbursement for drugs dispensed, a community pharmacist has only one option when it
comes to profitably filling scripts: reducing the cost to dispense each prescription.
PBMs and MACS and DIRs
Any discussion of reimbursement must plainly take into account the cost of medications being
dispensed. Especially in the area of generic drugs – where costs are rising dramatically –

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pharmacies are often reimbursed less than the acquisition cost of the drug.
That’s because when drug manufacturers raise the price for generics, PBMs are slow at
updating the maximum allowable cost (MAC) for each drug. PBMs can take several weeks or
months to update listings for MAC prices. Perhaps not surprisingly, when the cost of the drug
goes down, PBMs act quickly to update the MAC list, to avoid potentially over-reimbursing
their pharmacies.
In addition to issues with the MAC, PBMs also charge what are called direct and indirect
remuneration (DIR) fees. Sometimes called “pay-to-play” fees, DIR fees occur when
pharmacies pay to participate in preferred networks and reimbursement reconciliations.
According to the National Community Pharmacists Association, “Plans and PBMs have used
the term ‘DIR fee’ to describe a ‘true-up’ between a target reimbursement rate in a
participating pharmacy agreement and the aggregated effective rate actually realized by a
pharmacy, as well as a ‘true up’ between the aggregate MAC/adjudicated rate and the
aggregate contracted rate.”
PBMs are required to report DIR fees annually to CMS. However, there is a lack of
transparency and consistency in the calculation of DIRs and how fees are disclosed, so many
pharmacies are left wondering if it’s a fair system. In addition, PBMs may audit pharmacies on
performance metrics, which can be time-consuming and stressful.
There’s another way for independent pharmacies to respond the “profit squeeze” described
above: boosting star ratings. CMS, uses a five-star rating system to measure the quality of
health plans. In turn, the health plans themselves evaluate the medication management
services of pharmacies and assign their own ratings to them. Thus, anything you can do to
increase your pharmacy’s efficiency, decrease errors and improve patient adherence, will
improve your reimbursement, and thus your bottom line.