Statement from Daniel Barbara, NC Association of Pharmacists
Posted November 3, 2014
Thank you for your inquiry. As with most issues in business and health care, the issue of co-pays and medication costs is not nearly as a simple as it would appear from a cursory review of the subject. Often business (especially large scale) utilizes marketing tactics which are designed to generate additional business but actually result in a short term loss or net zero profit on the item purchased. This is typically the case with the $4 generics sold by the large scale retailers you mentioned. The vast majority of medications currently on the market (even many of the medications sold by these retailers for $4) cost substantially more than $4. The ability of these larger scale retailers (especially attached to discount stores/clubs) to sell their products for $4 in spite of a potential or even probable loss or net zero profit on these sales in that the majority of customers who purchase those generic medications from those retailers are drawn into their stores to purchase many other items, resulting in a substantial profit that offsets the loss on the sale of the generic medication. Unfortunately, the ability of mid-sized or smaller retail chains and independent pharmacies to do likewise, recouping the loss associated with selling a generic drug at or below cost is not the same as the retail giants you mentioned.
Likewise a cursory review of the NADAC is also very misleading and does not provide a complete picture of the cost of medications and/or the cost of dispensing medications. This is primarily the case for two reasons. The NADAC is updated far less often than the actual prices of the medications are updating, which prices (as with many commodities) fluctuate substantially as a result of availability and many other factors. Secondly, the majority of insurers are not required to negotiate their contracts with pharmacies based upon the NADAC. Here again, larger retailers (especially the retail giants) are better positioned in terms of negotiating power to negotiate contract terms with the drug manufacturers which result in favorable profit margins.
You used the term “markups” in your inquiry. I would caution you against using that term with reference to the prices set by pharmacies for medications. In most cases, it is not applicable. Here’s why. Unlike with other commodities, pharmacies by and large do not “set” the prices for medications. Those prices are set based upon (1) the price of the medication sold to the pharmacy by the manufacturer and (2) a negotiated contract between the pharmacy and the insurers who typically pay for the medication. Also inaccurate is the assumption that the co-pay collected by the pharmacy on medications covered by insurance is in fact the profit of the pharmacy. The co-pay is collected by the pharmacy based upon the negotiated terms between the patient and their insurance company and off-sets the cost to the insurance company not the pharmacy. Often times the co-pay is substantially more than the profit made by the pharmacy. Pharmacies are primarily reimbursed by payment (by the insurers, Medicare, and Medicaid) of what is called a “dispensing fee.” Dispensing fees are tied to the contract between the insurer and the pharmacy and are often not associated with the actual cost of the medication. I therefore have to vehemently disagree with your expert’s statement regarding the co-pay being the “biggest profit” for pharmacies.
You asked what other factors contribute to the cost of drugs. Those factors are myriad and begin with the cost of R&D at the manufacturer’s level. Costs are further affected by factors such as availability/scarcity of the resource, competition, transportation, and demand. These are primarily the factors that the pharmaceutical industry considers when pricing drugs. Local pharmacies however are essentially given a price by their supplier based upon the price charged by the manufacturer. These pharmacies are then (often independent of that price) told how much they will be reimbursed for the sale of the medication by the insurers with whom they contract. Sometimes the reimbursement is actually less than the cost of the drug as a result of the failure of certain insurers to regularly update their reimbursement rates.
In addition to these factors, pharmacies must account for their overhead and the cost of providing high quality professional health care services. You may or may not be aware of the fact that pharmacists provide a very important health care service to their patients, a service that while connected to and resulting from the dispensing of medications, is integral to ensuring the successful treatment of patients (especially patients with chronic disease). Pharmacists are trained medication experts, prepared to provide their patients with comprehensive expertise in terms of the appropriateness of their medications, the use of their medications, and the interaction between their various medications. Often times these specialized services that pharmacists provide are under-sung. The bigger story, from my perspective, is that patients who collaboratively work with their pharmacist and the other members of their health care team (led by a physician) are substantially more likely to benefit from their treatment and to appropriately manage their health conditions. The trend toward the discount model of medication sales and delivery (mail order, etc.) while sometimes beneficial to the patient financially in the short term is all too often detrimental in the long term as a result of the lack of interaction between the patient and their medication expert/their pharmacist and the coordinating and consultative services the pharmacist can provide.