The prime vendor agreement that determines your pharmacy’s cost of goods isn’t exactly a beach read.
Most prime vendor agreements are 30 pages or more, and they are stuffed with jargon and complicated incentive structures. The first few pages of exhibit pricing might give you an idea of what the terms imply, but if you don’t dig into the complete contract, you could be missing out on opportunities to save money and maximize rebates.
To consistently achieve the lowest cost of goods, you have to truly understand the terms that are detailed in your prime vendor agreement.
As you dig in, look out for these factors that can have a big effect on your bottom line.
What determines your cost of goods sold?
Look past obvious cost-cutting terms like brand discounts to get a better idea about how your cost of goods will be calculated every month.
Prime vendor agreements use a host of terms to determine costs, which means you can’t always trust the sticker price. These factors all work together, and if one of them changes, it can have a ripple effect on all the other terms.
Here are the main terms you need to be aware of in your prime vendor agreement:
- Generic rebate based on generic compliance ratio
- Generic rebate based on generic dollar volume
- Brand discount
- Brand discount based on volume
- Additional performance/program related incentives
- Current pricing and availability
- Specified contract items
- Designated specialty items
- Pay terms
- Total dollar volume commitments
- Percentage of volume commitments
All these factors are important, but the most important number to know is your Generic Compliance Ratio. The terms of most prime vendor agreements will reward you for purchasing generics — the more generics you buy, the higher your rebate will be.
Familiarize yourself with the breakdown of the generic rebate structure to maximize your rebate every month. When you take advantage of these terms, you can see several thousand extra dollars in rebates every month, adding up to hundreds of thousands of dollars every year.
How does your generic file price compare to others?
Brand products have a standard pricing database, but generics are a whole other ballgame. Because there’s no pricing standard for generics, your prime vendor sets its own prices.
This can make it very difficult to understand if you’re actually getting a good deal. Your generic rebates and discounts may sound steep, but it’s all relative. A 25 percent discount listed in your prime vendor agreement could seem great, but that’s only if you don’t realize the prices are 50 percent higher than they are at competing wholesalers.
The prices for generics also change frequently — often multiple times a day — which means the good deal you got this morning might not be available to you this afternoon.
To get the lowest cost of goods, you have to do your due diligence. Find out what other wholesalers are charging and what deals your fellow independent pharmacists are getting to find out if the terms in your prime vendor agreement stack up. Or, partner with a Group Purchasing Organization that has unique insight into pricing because they get to see every kind of contract from several wholesalers (well, some of them do).
Is your wholesaler holding up their end of the bargain?
You order hundreds of items from your primary wholesaler every month. When you look at the invoice, are you getting every incentive and discount promised to you in your prime vendor agreement?
While wholesalers don’t intentionally overcharge you, with such complex terms and so many orders, mistakes do happen. In 2016, PBA Health uncovered over $1.6 million in pricing discrepancies for their client pharmacies.
To catch these errors, you have to know your prime vendor agreement inside and out.
How do substitutions factor in?
When your primary is out of a product you ordered, what happens? In many cases, they’ll automatically send you a substitute.
This might seem like a good thing — you still get what you need, after all. But that small change could end up being extremely costly.
Substituted items are often not on the source list detailed in your prime vendor agreement, which means they aren’t eligible for rebates, nor do they count toward your generic compliance. They can also be much more expensive — often 15 to 20 percent more than what you’d pay for the item you originally ordered.
All these things compound so that when you get substitutions, you could miss your generic compliance tier, get a smaller rebate, and pay more.
To avoid this pitfall, turn off automatic substitution. This will give you a chance to review the suggested substitution and look around at secondary suppliers like BuyLine for a lower-priced alternative.
How can you get the best terms on your prime vendor agreement?
As an independent pharmacy owner, you have a lot on your plate. In between serving patients and managing your pharmacy, you probably don’t have time to sift through all the jargon in your prime vendor agreement and pick apart every single invoice to ensure you’re getting the absolute best cost of goods.
And even if you had unlimited time to devote to the task, you’re only human. You would probably still make a few suboptimal purchasing decisions.
Fortunately, you don’t have to agonize over every purchase if you have ProfitGuard® from PBA Health. ProfitGuard has proprietary software that uses the information from your prime vendor agreement to help you make the best purchasing decisions. It calculates how much a purchase will affect your overall cost of goods and makes recommendations on which NDCs to buy in order to maximize your rebates.
ProfitGuard will also flag mistakes on your invoice to ensure you are getting the prices you agreed to in your contract every single month.
When you sign up with ProfitGuard, you will also get better terms in your prime vendor agreement from the start. PBA Health’s expert negotiators will solicit bids from multiple wholesalers to get you incentives and discounts that are tailored to the needs of your pharmacy.
A Member-Owned Company Serving Independent Pharmacies
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy-side of their business. Founded and owned by pharmacists, PBA Health serves independent pharmacies with group purchasing services, wholesaler contract negotiations, proprietary purchasing tools, and more.
An HDA member, PBA Health operates its own NABP-accredited secondary wholesaler with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products — offering the lowest prices in the secondary market.