What Is a Pharmacy’s Actual Cost of Goods?

What Is a Pharmacy's True Cost of Goods?

Inside: A pharmacy’s true cost of goods is shrouded in complicated terms and incentives that most pharmacies don’t fully understand. Learn what you’re really paying for your inventory, and how you could be paying a substantially less.

How well do you know your wholesaler contract?

Whether you realize it or not, the answer is: less than you think. Wholesaler contracts are notoriously complex. Although many prime vendor agreements are about 30 pages long, many pharmacy owners only ever see a few pages of a pricing exhibit before they sign.

And most don’t pay attention to the contract after they sign it.

How do you know you’re getting the best cost of goods if you don’t know everything in your contract?

Failure to understand the ins and outs of your contract leaves you without negotiating power and without the ability to earn a lower cost of goods with the right purchasing strategies. That failure can result in anywhere from thousands to hundreds of thousands of lost dollars to the bottom line each year.

What Is a Pharmacy’s Actual Cost of Goods?

Discover five little-known contract factors that are affecting your money now. When you understand how all of these factors affect your cost of inventory, you can take control and boost your bottom line.

1. Your generic price file isn’t standard

Unlike brand name products, there isn’t a standard pricing database for generics. Wholesalers make up their own pricing for these medications and provide you a rebate based on that price.

So, you may be getting 50 percent off, but that’s off their base price, which could differ from a competing wholesaler. If their base price for a medication is a lot higher than another wholesaler’s base price, you’re not actually getting the best deal. The price of generic drugs is also likely to change—sometimes three or four times a day! If you get a drug for a steal one day, there’s no guarantee you’ll get the same great price the next day.

In order to know if you’re getting a good deal on generics, you have to be aware of what other wholesalers are charging and what other pharmacies are paying.

2. Surprise substitutions can cost you

When the wholesaler is out of the brand name product you ordered, they’ll send you a substitute. While this may seem like a slight inconvenience, below the surface a lot more is happening that affects your final cost of goods.

These substituted products are often not on your source list, which means they are not rebatable and they don’t count toward your generic compliance. They are also typically far more expensive—you’ll likely be paying between 15 and 20 percent higher than what’s stated in your primary contract for the substituted product.

To prevent this issue, turn off automatic substitution. That way you can review the order before you get the raw deal. Likely, you’ll be able to find the drug you’re looking for at a better price anyway from BuyLine, an online secondary pharmaceutical ordering service with competitively priced brands, generics, over-the-counter (OTC) products, refrigerated products, and controlled medications (certain qualifications apply).

RELATED: Common Purchasing Mistakes That Cost Pharmacies Thousands 

3. When you save on brands, you pay elsewhere

Big brand discounts are a flashy method wholesalers use to win your business. But getting those discounts doesn’t mean you’re saving money overall.

Wholesalers are good business people. Just like you, they need to earn a profit to continue to best serve their clients. One financial problem they have to overcome is their loss on brands, which they sell to pharmacies below cost. To make up for that, they’ll shift around some other contract terms to ensure that they can stay profitable. That might manifest in lower percentage rebates, higher generic prices, increased substitutions, and more.

The bottom line: There’s a lot more to a good deal than the brand discount. Don’t let that shiny object distract your attention from the rest of your contract terms.

4. You might not be getting what you signed up for

Even with a contract in place, mistakes happen. You might not be getting discounts that were negotiated for, or items could be invoiced for the wrong price.

In 2016, PBA Health tracked more than $1.6 million in pricing discrepancies for its ProfitGuard pharmacies.

Without tools and technology in place to monitor and validate everything on your invoice, that money will probably evaporate without you ever knowing that anything was wrong in the first place.

To prevent this seemingly undetectable loss, you’d have to become a master of your invoice, tracking every item that comes into your store and verifying that you are getting the discounts and prices you were promised.

If that seems like it would take up a lot of time you could be spending on other parts of your business, you’re right.

RELATED: How to Maximize Rebates and Profitability on Pharmacy Inventory

5. Your actual cost of goods depends on a host of complex factors

A host of factors influence a pharmacy’s total cost of goods beyond the sticker price. Most of the factors are interdependent—changing one affects another. All of them depend on the pharmacy’s buying behavior.

These are some those factors that could influence a pharmacy’s cost of inventory:

  • 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

To truly achieve the lowest cost of goods, you need to fully understand the details of every one of these factors. And then, you need to continuously monitor and optimize every factor simultaneously every month. If you aren’t already doing that, then you aren’t taking full advantage of your contract arrangement and could be paying substantially more for your inventory than you should be.

Make these contract factors work for you, not against you

When you go it alone, it’s nearly impossible to keep track of all the ways your contract is doing you a disservice. But ProfitGuard works to get independent pharmacies the most profitable contract terms and leverages them to get the most out of your contract. The expert negotiators and consultants know every in-and-out of wholesaler contracts, so they can ensure you’re getting the best terms at every level of your contract — not just brand price.

And you’ll get even more advantages after the contract is signed, including a highly sophisticated (but incredibly simple to use) purchasing tool to maximize your rebates and profitability—by making sure your contract works for you instead of against you. In fact, the ProfitGuard program could save the average pharmacy more than $15,000 a month.

No matter what, you’ll get a better cost of goods than you have now–guaranteed.

Want to learn how?


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Elements is written and produced by PBA Health, a buy-side solutions company.

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