December 15, 2020
Inside: Learn how to take advantage of your pharmacy contract terms to maximize your rebate every month.
Inventory is by far the largest expense that independent pharmacists face every month. But unfortunately, since that cost is tied to a series of complicated contract terms and incentives, that expense can also be extremely unpredictable.
Gaming the system to get the absolute lowest cost of inventory can be a challenging and time-consuming headache. But there are a few tricks available that can help you make the most of your contract incentives. Here’s what you need to know.
When pharmacies think about options to reduce their cost of goods, the solution may seem obvious: find cheaper deals. It’s true that your wholesaler might not always have the best price on a drug, so you look for a better deal from a secondary supplier.
But saving $100 off the sticker price is a decision that could end up costing you more in the long run. First of all, the time you spend combing through dozens of secondary sites searching for the best possible price is time that you could be spending doing something else, like counseling patients or doing important administrative work. If you play this bargain hunting game for every single purchase, you’re going to end up wasting several hours of labor every week.
And even if you do manage to find the absolute best prices on every single drug (wasting valuable time in the process), you still won’t end up with the lowest possible cost of goods. Your wholesaler contract has many terms that impact your overall cost, which include:
Because of all these contract terms, you can’t take a drug’s sticker price at face value. You might end up saving a few bucks by buying from a secondary supplier and then miss out on even more money from your contract incentives.
By spreading out your purchases across many different secondary suppliers, you will almost certainly miss out on the volume benefits you could receive from your primary wholesaler.
You can save money by selectively purchasing from secondary suppliers, but you need to be aware that too many secondary purchases will chip away at your rebate potential.
With all the different terms in your wholesaler contract that determine your cost of goods, it probably seems impossible for a layperson to master them all. But if you concentrate on just one factor, you can make a big impact on your inventory costs.
That factor: your Generic Compliance Ratio. It may come in different names such as Monthly Source Compliance Rebate or Generic Rebate.
Wholesalers make most of their money on generic medications, so they encourage pharmacies to buy more with a rebate based on their Generic Compliance Ratio.
You might be familiar with this incentive, but it’s possible you’re underestimating just how much money you could be saving by paying attention to your pharmacy’s generic purchases.
The Generic Compliance Ratio is roughly determined by this formula:
Generic Compliance Ratio = Generic Purchases / Total Rx Purchases
Wholesalers determine the rebate you earn from your generic compliance with a matrix structure. If you’re on the low end of generic compliance, around 10 percent, you might receive a 10 percent rebate. But if you are on the high end of generic compliance, around 23 percent, your rebate might jump up to around 33 percent, depending on your arrangement.
For the average pharmacy, getting into that top rebate category could mean more than $15,000 in rebates every single month.
Because you always want to remain in that top tier for generic compliance, you have to be careful about purchasing generics from secondaries, even when the sticker price is cheaper.
If you make one too many purchases from secondaries, it could knock you down from the top rebate tier to the second rebate tier. While that might not seem like the end of the world, you could lose as much as $4,000 in rebates, wiping out any savings you made on those secondary purchases.
Maxing out your generic compliance will certainly help your pharmacy save money, but that is only one part of the pricing puzzle. You also must account for a host of factors and incentives that are interdependent (changing one affects another) and unique (all of them depend on the particular pharmacy’s buying behavior and contract terms). Without understanding how every single purchase at any moment affects your overall arrangement now and at the end of the month, you can’t know how much the true cost of any item is. To truly achieve the lowest cost of inventory, you need to continuously monitor and optimize every factor simultaneously every month.
The good news is there’s technology out there that can help you. ProfitGuard offers a total purchasing solution in the form of its Navigation report, which provides all the information you need to make optimal purchasing decisions every day.
It uses predictive data to maximize your savings, using a modeling program that takes into account all your contract incentives, volume commitments, personal preferences, and more. Then, it presents you with a targeted model for purchasing that will lead you to the biggest rebate possible.
The Navigation report comes to you every single day in an email report, which shows you where you’re at with your volume commitments and generic compliance, then recommends which NDCs and dollar volumes you should purchase from your primary wholesaler.
Think of it as a GPS, laying out a path to maximum profitability.
Many ProfitGuard pharmacies who take advantage of the Navigation tool have achieved an average savings of 6 percent on their total prescription volume. For a pharmacy that has the NCPA-average cost of goods of $2,768,280, that’s a savings of $166,096.
What would you do with another $166,096?
PBA Health is dedicated to helping independent pharmacies reach their full potential on the buy side of their business. The member-owned company serves independent pharmacies with group purchasing services, expert contract negotiations, proprietary purchasing tools, distribution services, and more.
An HDA member, PBA Health operates its own NABP-accredited (formerly VAWD) warehouse with more than 6,000 SKUs, including brands, generics, narcotics CII-CV, cold-storage products, and over-the-counter (OTC) products.
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