New Study: Medicare Part D Pays Pharmacies Far Less than Medicaid But Costs Patients More

By Devin Stone

Plummeting payment levels have forced many community pharmacies out of business in recent years and threatened many others with the same fate. As a result more areas, particularly rural ones, are left with fewer, if any, convenient pharmacy options. Sunday’s launch of the Medicare Part D open enrollment period offers a timely opportunity to reflect on the program’s impact on community pharmacy and patients of all ages.

It’s been commonly understood that reimbursement rates are higher for pharmacies under Medicaid than through Medicare Part D. One study by Norman Carroll in 2008 attributed a 22% reduction in net income for the average community pharmacy to Part D. In addition, NCPA’s recently published Digest found that for the third year in a row Part D has consistently provided independents with the lowest gross margin as a percentage of sales.

One way to calculate the loss to community pharmacies from Medicare Part D is to look at prescription drug claims processed for dual eligibles (those covered under both Medicaid and Medicare Part D) in 2005, and then to compare their claims for the same prescription drugs again in 2006 once Medicare Part D went into effect. This has been done by Angela Winegar et al, in a recent study published in the Journal of the American Pharmacists Association (JAPhA).

Without any surprise the authors found that reimbursement rates were lower under Medicare Part D than through Medicaid. When comparing the two programs in 2005 dollars, the implementation of Part D brought a 19% reduction in average total reimbursement for independent pharmacies.

But patients and taxpayers often don’t see those savings. Although third party claims were lower under Part D for the Winegar study, the authors found that an “analysis of patient payments indicated that dual-eligible patients had to pay $4.63 more per prescription (in 2005 dollars) under Medicare Part D.”

Despite the lower pharmacy reimbursement rates in Medicare, one landmark study requested by then-House Oversight and Government Reform Committee Chairman Henry Waxman (D-Calif.) found that Part D prescription drug prices are actually higher than Medicaid’s. The main reason stems from the fact that Medicaid is more effective in securing rebates from pharmaceutical manufacturers than pharmacy benefit managers (PBMs) are when operating on behalf of Part D plan sponsors. Due to this fact, it has been estimated that $86 billion in savings could occur over the next decade by having dual eligibles purchase their drugs through Medicaid rather than through Medicare Part D. Having these dual eligibles purchase their drugs through Medicaid would also provide community pharmacies with a higher reimbursement for services rendered.

To be clear, the reason pharmacy costs are so much lower under Medicare part D is that community pharmacies are often presented take-it-or-leave-it contracts from PBMs that don’t even cover break-even costs. For patients, such dramatically lower pharmacy reimbursement can severely reduce access to a community pharmacist. This is more pronounced for independents that do a disproportionate share of their business through Medicaid and Medicare Part D. As the authors in the Winegar study noted:

“Of all community pharmacies, independent pharmacies are likely to experience the greatest financial impact from decreased reimbursements because they are more dependent on prescription sales than chain, grocery store, or mass merchandise pharmacies. Furthermore, independent community pharmacies have less bargaining power, possibly resulting in lopsided negotiations with Part D sponsors.”

Despite the critical role played by independents in areas with large Medicaid and Medicare Part D populations, these independents do not have the same leverage as chains that are needed to negotiate with PBMs. If left unchecked, the big three PBMs will continue to acquire smaller PBMs and gain more market share, while these independents will see their payment rates fall even further. At the same time, PBMs will continue to profit from spread pricing and other practices that are detrimental to the pocketbooks of plan sponsors.

If you haven’t seen it already, CVS Caremark and Medco Health Solutions have posted their lucrative 3rd quarter earnings. For patients, many are seeing their local community pharmacist close their doors because the PBM isn’t willing to compensate adequately to allow the pharmacy to break even. In 2008, 166 independent community pharmacies serving as the only retail pharmacy in their neighborhood had to close their doors, without any other retail pharmacy taking their place.

The time is now for reform that helps to preserve the access of patients to a local, highly trained, community pharmacist.

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