Pharmacies

Navigating the Networks

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What preferred networks mean for independent community pharmacy

Preferred networks took a new level of prominence with Medicare Prescription Drug Plan options in 2014. As expected, open enrollment for Medicare plan year 2015 revealed that this trend will continue into the coming year and likely into the future.


Many independent pharmacies are concerned about what the preferred network trend means for their ability to access patients and thrive in a very competitive market. Independent pharmacies who find themselves in a non-preferred situation can continue to fill prescriptions for their current patients, but they will need to focus on the health and wellness of their patients to differentiate themselves from pharmacies who could potentially fill the same prescriptions at a lower copayment.

Growth of preferred networks
Preferred networks incentivize members to shift prescription volume to pharmacies that provide lower costs for the health plan. Plan members retain the ability to use their pharmacy of choice, but will see lower copayments or reduced coinsurance amounts when using preferred community pharmacies.

The first preferred network plans emerged in 2011 with co-branded prescription drug plans (PDPs) like the Humana-Walmart and the Aetna-CVS plans. In 2012, there were seven preferred network plans, and for 2013, four out of 10 seniors enrolled in one of the 16 health plans that offered a preferred network design1.

The following year, we saw preferred pharmacy networks begin to dominate the Medicare Part D landscape. More than triple that of the prior year, there were 56 preferred network plans in 2014. As a result, three out of four seniors chose a plan with a preferred pharmacy network option2.

Open enrollment for 2015 began on October 15, 2014 with an astounding 66 plans with preferred networks. These 66 plans operate 870 regional PDPs, out of an overall total of 1,001 regional PDPs. In other words, 87% of PDPs have a preferred network in 20153. The growth of preferred networks is clear, but what isn't clear is what that means for the independent community pharmacy. Identifying the areas of opportunity among this trend starts with an understanding of preferred networks versus broad and restricted networks.

Broad, restricted and preferred networks defined
Broad networks are pretty straightforward. They include any willing provider in the country. With more than 60,000 retail pharmacies across the United States, that means numerous options for patients. In the past, plan sponsors wanted as many pharmacies as possible so that beneficiaries had as many choices as possible for their pharmaceutical needs.

On the opposite end of the spectrum are restricted networks, where a pharmacy is either in-network or out-of-network, and patients can only use those pharmacies that are in-network . In-network pharmacies are likely to see a greater number of patients, particularly if competitors are out of network. With restricted networks, pharmacies are also likely to see greater patient retention, since there are fewer choices available to the patient, and better operating efficiencies, assuming the pharmacy is filling more prescriptions with the same fixed costs. The disadvantage is that reimbursements under a restricted network are going to be lower, thereby eroding gross profit.

Preferred networks, like restricted networks, are designed to shift market share, but in this case consumers are incentivized by lower copays. The advantages and disadvantages of preferred networks are similar to those of restricted networks. There is the potential for a preferred pharmacy to see an increase in both foot traffic and patient retention; however, preferred pharmacies also sacrifice profitability by accepting lower reimbursement rates. Non-preferred pharmacies, or those in the broad network, can still fill prescriptions for plan members at a higher copay, and non-preferred pharmacies receive a higher reimbursement for their services.

There is one exception with regards to lower copays when it comes to Part D preferred networks. Low income subsidy (LIS) patients pay the same copay regardless of the whether they choose to use a preferred or non-preferred pharmacy. Approximately 30% of Medicare beneficiaries are LIS, and independent community pharmacies typically service a higher percentage of this population4.

When preferred networks aren't always "preferred"
Participating in preferred networks isn't always an option. Plans often do not offer independent community pharmacies the opportunity to participate in their preferred networks. One reason is that plan sponsors may be looking for national presence which they can more easily access through a national chain. Some preferred networks demand unrealistic guarantees, such as generic dispensing ratios, that would be very difficult for many independent pharmacies to achieve. Failure to meet these guarantees can result in significant "claw backs" where the plan pulls dollars back from the pharmacy. These types of penalties can be financially devastating to an independent community pharmacy. Other demands imposed by the plan could be to require preferred pharmacies to offer over-the-counter products like vitamins and cough and cold products at a reduced price, or even for free.

Other times, the increase in prescription volume needed to break even with a preferred network just isn't realistic. Consider this example. A pharmacy participates in a Part D plan and fills approximately 2,000 scripts per year for the plan. The average gross profit per script is $10, creating annual an annual profit of $20,000. Suppose the plan decides to offer a preferred network. The average gross profit per script under the preferred network drops to the $4 - $5 range. This equates to an annual profit of $8,000 to $10,000, resulting in a loss of $10,000 to $12,000 annually. Under the preferred network arrangement, the pharmacy would have to fill 2,000 to 3,000 more prescriptions just to break even. An increase in prescription volume of 100-150% is not very realistic, and therefore the preferred network would not be a feasible option for the pharmacy. Consider also that the pharmacy could lose some of its current prescription volume under the broad network and still come out better than they would under the preferred arrangement5.

This however doesn't alleviate the concerns many independent pharmacy owners have about losing patients to preferred networks. What can be done? What approach should an independent pharmacy take?

Balance is essential for independent community pharmacies to survive in today's environment. Independent community pharmacies should participate in some preferred networks so that they can offer their patients low cost options, but they do not want to be in every preferred network. Doing so will cannibalize their gross margins. It is important to note again that non-preferred pharmacies can still fill prescriptions for those patients participating in a preferred network plan. Although patients may pay a higher copay, many patients are willing and able to pay more to have their prescriptions filled at the pharmacy of their choice. Nevertheless, preferred networks create a need for non-preferred pharmacies to differentiate themselves on quality and value.

Independent pharmacies operate on a strong desire to serve their communities. But the best service doesn't need to come at the lowest cost. The new age of healthcare requires providing patient care and serving the health of your community above all else.

Differentiate on quality
Many patients will pay a little more for added value, convenience and better health. Pharmacies that differentiate themselves by improving the health and wellness of their patients while delivering a personalized customer experience will not only retain customers in a highly competitive environment, but they will also create channels that attract new patients to their pharmacy.

According to a study conducted by NCPA, 89% of independent community pharmacy patients reported a high level of connection with their pharmacist6. It's these invaluable connections to patients and their families that will continue to drive patients to the same pharmacies they have used for years. Those pharmacies leveraging their clinical expertise and embracing a patient care operating model will be most likely to succeed in a market where preferred networks are commonplace.

That same study indicated the biggest predictor of medication adherence was the patient's connection to their pharmacist6. Pharmacies must develop and integrate effective medication adherence initiatives such as medication synchronization programs, refill reminders and medication reviews into their practice. Independent community pharmacies are uniquely positioned to improve medication adherence, impact the quality of care and create better outcomes. To consumers, these activities are worth paying a little extra.

Help your patients navigate Part D open enrollment
Part D open enrollment provides a great opportunity for pharmacies to plan a medication review with their patients, and as part of that, help them identify plan options that are right for them based on their current prescription medications and budget.

It is important for Medicare patients to review their prescription drug coverage every year, as drug formularies and costs can change on an annual basis. Independent pharmacies are well positioned to assist patients with this process. Pharmacists can employ tools that help patients identify the most affordable plans that best meet their needs. Beneficiaries tend to choose a plan based on plan premiums and star ratings. Explaining plan distinctions including specifics around pharmacy copayments means unmatched value to the patient.

Independent pharmacies have built their businesses on relationships within their communities. Those relationships are now more important than ever. Despite changing market conditions, a value-based business model and foundation will position independent pharmacies to thrive well into the future.

If you haven't already, start talking to your patients. Open enrollment ends on December 7, 2014.

 

1 http://www.drugchannels.net/2013/10/exclusive-for-2014-more-than-70-of.html

2 http://www.drugchannels.net/2014/01/for-2014-3-out-of-4-seniors-choose.html

3 http://www.drugchannels.net/2014/10/exclusive-for-2015-almost-9-out-of-10.html

4 http://kff.org/medicare/report/medicare-part-d-in-its-ninth-year-the-2014-marketplace-and-key-trends-2006-2014/ 

5 Based on data from InSite, AmerisourceBergen Drug Corporation's proprietary pharmacy knowledge base and analytics system, used to measure and compare pharmacy performance.  InSite collects, organizes and analyzes pharmacy claim and other business transaction data directly from participating pharmacies to provide peer benchmarking and other performance metrics for pharmacies.  

6 http://www.ncpa.co/adherence/AdherenceReportCard_Full.pdf 

 

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