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Narrow Pharmacy Networks Widen Payer Savings

pcma2013coverIn earlier pieces we talked about the trend towards narrow pharmacy networks and the recent decision by Tricare to use such networks.  Now we have a new report from Visante quantifying just how much narrow pharmacy networks could save payers.  And the number is breathtaking.  The report, which was prepared for the Pharmaceutical Care Management Association, says that expanded use of narrow pharmacy networks could save Medicare, Medicaid, and commercial payers $115 billion over the next ten years.

The report describes the three types of pharmacy networks now being used: open networks; preferred networks; and limited networks.  Open networks are open to all pharmacies willing to offer basic discounts to the plans – this is now the most widely used type of retail pharmacy network.  Preferred networks involve a select group of pharmacies within a broader network, and they agree to give plans bigger discounts and to give enrollees smaller copays/cost sharing when the enrollees choose the preferred pharmacies.  According the report, use of preferred networks is growing and can reduce prescription costs by approximately 5% compared to open networks while still meeting Medicare’s pharmacy access standards nationally.  Limited networks allow enrollees to choose from a limited group of drugstores and, compared to open networks, can reduce costs by up to 10% or more.

What’s behind the potential savings from narrower pharmacy networks?  According to the report, there are now so many pharmacies in the United States – more than 61,000 – that they easily exceed the combined number of locations of the omnipresent Burger King, Domino’s, Dunkin Donuts, KFC, McDonald’s, Pizza Hut, Taco Bell, and Wendy’s chains.  With so many pharmacies, the field is ripe for creating competition.  Because pharmacies make money from selling both prescription and non-prescription items, they will often be willing to reduce their prescription prices to plans in exchange for the increased foot traffic that being in a network brings.  Payers are figuring this out and are asking pharmacies to compete with each other in order to be part of a network.  This is the same strategy smart car shoppers have long used to get the best price by having dealers bid against each other. 

Let’s be clear though about the impact of the competition created by narrow pharmacy networks – there will be winners and losers.  The winners will, of course, include the payers who could be saving $115 billion over the next ten years.  And the winners will also include the pharmacies nimble enough to reduce their costs so they can make competitive bids to join a narrow pharmacy network.  The losers will be non-network pharmacies who will lose market share to the more efficient network pharmacies. The losers are likely to see reduced sales and profitability, which is the way economic markets are supposed to function. 

It’s hardly surprising that pharmacies as a group prefer a system that otherwise could be expected to direct some $115 billion in bloated spending to them over the next ten years.  So, they are doing whatever they can to fend off the drive for payer cost savings.  The report describes how pharmacies “have an economic incentive to minimize the competition and discounting required to join pharmacy networks and often pursue legislation, regulation, and litigation to undermine the ability of payers to implement preferred and limited pharmacy networks….”  For example, pharmacies seek to have adopted “any willing pharmacy” laws or regulations that force plans to contract with pharmacies willing to meet plan terms.  These “any willing pharmacy” provisions undercut the ability to get pharmacies to bid competitively because bidders will know that they won’t necessarily get increased market share – since any other pharmacy can simply match the bid after the fact.  In other cases, pharmacy interests urge politicians to establish Medicaid prescription drug payments by rule rather than allowing market forces to determine the payments.  And, the pharmacies have brought numerous lawsuits aimed at blocking Medicaid and Medicare from implementing preferred and limited pharmacy networks.

We know that as a nation, we can’t afford to let health care costs continue to grow out of control.  So ideas for driving down costs – such as by using narrow pharmacy networks – are not just welcome, they are crucial.  But we should not expect the change to narrow pharmacy networks to come easily; the vested pharmacy interests will likely continue to do whatever they can to preserve their current profits – at the expense of health plans, consumers, and the national good.  This is a fight that is worth having.