Setting a Successful Pharmacy Pricing Strategy: Usual & Customary Price and Other Factors to Consider
Whether an independent pharmacy or a part of a chain, pharmacy managers are faced with managing the delicate balancing act between collecting maximum reimbursements from third-party payers and offering competitive drug pricing to patients who do not have insurance. As part of any business, prescription pricing plays an important critical role in a pharmacy’s revenue and overall success. There are several factors that pharmacies can consider when determining their Usual and Customary pricing strategy. From Average Wholesale Price (AWP), Maximum Allowable Cost (MAC), drug Acquisition Cost (AC), to drug pricing software solutions, the time devoted to customary pricing is critical and not something to be overlooked. When working on your pharmacy pricing strategy you can evaluate drug pricing software to aid in the process.
The usual and customary price, otherwise known as the cash price of the medication or the price of prescriptions at retail, affects reimbursement when billing prescriptions to a Prescription Benefits Manager (PBM). A low U&C could result in being paid less than the rate contracted with the PBM.
On most contracts, the reimbursement model will pay the lesser of:
- Average Wholesaler Price minus a percentage, plus a dispensing fee or
- Maximum Allowable Cost plus a dispensing fee or
- The pharmacy’s usual and customary price
There are a few drug pricing strategies which work well for pharmacies that help set the U&C pricing:
- Competition-Based Pricing – This strategy uses the competitor’s pricing as a benchmark by pricing drugs below competitors, the same as competitors, or slightly above competitors (Decker, n.d.). You might want to consider this strategy if your pharmacy is located relatively close to a competing pharmacy or chain store. For example, you may decide to price match drugs found on Walmart’s $4 list.
- Cost-Plus Pricing – This pricing is determined by setting how much profit margin you will make after drug and operating costs are taken into consideration. A simple equation would be: Cost of Drug + Operating Cost + Desired profit = Selling Price. If you wanted a 10% profit margin, it might look like this: $100 + $11.341 + $11.13 = $122.47.
- Value-Based Pricing – When it comes to healthcare, some patients are willing to pay more for added value. As a member of the patient’s healthcare team, the pharmacist is responsible for the safety of the patient taking prescribed medication. By building a trusting relationship, the pharmacist plays a key role in managing the cost of their prescriptions, addressing drug-related concerns, and contributing to the patient’s overall health outcomes (Erowele, n.d.). This in turn creates loyalty and a willingness to pay higher prices in exchange for exceptional service.
When deciding which drug pricing strategy, or combination of strategies to use, it is important for pharmacies to understand that as part of the third-party contracts, a pharmacy is required to include the usual and customary price when submitting a prescription claim for reimbursement.
Setting the right drug pricing strategy requires a disciplined approach to knowing your costs, the average wholesale price and maximum allowable cost for drugs at all times. Most pharmacy dispensing systems will allow you to upload current average wholesale price and drug acquisition cost files, and this information can be used to help define your usual and customary price. However, knowing the maximum allowable cost poses a bigger challenge since it varies across each PBM for each medication.
As a result of the often-times large spread between AWP and drug acquisition cost, and the variances found in the U&C from pharmacy to pharmacy, PBM’s needed a way to reconcile the differences and still allow for the pharmacy to receive a reasonable profit margin (Brent J. Eberle, 2008). The response to this is the MAC price. Each PBM develops their own maximum allowable cost list, and while there may be similarities for which drugs appear on the list, no two lists are identical. This means the pharmacy owner must find a way to juggle between many different MAC lists, while maintaining a consistent and competitive usual and customary pricing structure.
Most pharmacy dispensing software offer a way to help manage the U&C through pricing tables. The software will come with a few built-in price tables, but each pharmacy can create and manage their own. These tables provide the ability to configure the pharmacy software to calculate the usual and customary by adding a markup or markdown to either the average wholesale price or the drug acquisition cost. By using the AWP, which is typically higher than the MAC, one can reasonably assume the U&C will also be higher than the MAC.
As with many aspects of running a profitable pharmacy, setting and implementing a drug pricing strategy can consume a significant amount of time. Even in the smallest pharmacy, drug pricing can be a full-time job; add the complexity of third-party contracting and the time requirements can easily grow to require the hiring of dedicated personnel. Net-Rx’s Price-It Rx program takes this work off your hands through real time cash pricing claim adjudication.
While this helps in making a tedious task more manageable, there is still a need to keep a close eye on which medications are reimbursed at the usual and customary price from PBMs and compare them against the medications your uninsured patients are purchasing. Net-Rx’s EditRx reports identify previously billed claims paid at the usual and customary price. Using this information arms the pharmacy owner with the ability to make informed decisions on drug pricing strategies that consider cash prescriptions and third party claims.
Pharmacy pricing strategy should be weighed carefully as an integral part of running a profitable pharmacy. However, it can be a complex and time-consuming balance to determine the ideal U&C price when considering AWP, MAC, drug acquisition cost, against the amount of third-party payer reimbursement and what un-insured patients are paying out of pocket. Leveraging dispensing software solutions and up to date pricing tables can help guide your strategy along with the expertise of your Net-Rx Analyst, who can help develop a customized pricing program through PriceIt-Rx and offer guidance on how increase profitability by identifying claims paid at less than your contracted rate.
If you would like to learn more about how Net-Rx™ services and tools can you help you define and manage your usual and customary pricing strategy, please chat with a live representative now or contact us at email@example.com.
Vicki started her pharmacy career in 2002 as a pharmacy technician in a local retail pharmacy. She joined Net-Rx in 2005 as an Account Analyst, and she enjoyed consulting on pricing strategies, finding billing opportunities and helping pharmacies resolve claim rejections. After getting her BA in Personnel Psychology, she moved into management. When not working, Vicki enjoys spending time with family, hiking, and learning about photography.
Brent J. Eberle, R. A. (2008, December 1). Your PBM’s MAC list impacts your bottom line. Retrieved from Managed Healthcare Executive: https://www.managedhealthcareexecutive.com/view/your-pbms-mac-list-impacts-your-bottom-line
Decker, A. (n.d.). The Ultimate Guide to Pricing Strategies. Retrieved from HubSpot: https://blog.hubspot.com/sales/pricing-strategy
Entis, L. (2019, April 9). Why Does Medicine Cost So Much? Here’s How Drug Prices Are Set. Retrieved from Time: https://time.com/5564547/drug-prices-medicine/
Erowele, G. (n.d.). Why is building a relationship with a pharmacist so important? Retrieved from Sharecare: https://www.sharecare.com/health/health-care-basics/pharmacist-relationship
Joey Mattingly, P. M. (2012, June 20). Understanding Drug Pricing. Retrieved from U.S.Pharmacist: https://www.uspharmacist.com/article/understanding-drug-pricing
The Art of the Claw-Back. (2016, November 27). Retrieved from The Thriving Pharmacist: http://www.thethrivingpharmacist.com/2016/11/27/the-art-of-the-claw-back/
1The National Associate of Chain of Drug Stores (NADS) reported an average operating cost of $11.34 for each prescription in the 2011-2012 Chain Pharmacy Industry Profile (Joey Mattingly, 2012).