HHS report reignites fight over profit margins in Medicare

Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking member Charles Grassley, R-Iowa, Friday said they would seek information from the Department of Health and Human Services inspector general about fees that community pharmacies incur when distributing prescriptions through Medicare Part D.

A new report from the department's OIG found that local pharmacies are paid by private drug plan sponsors about 18 percent more on average than the cost of acquiring the drugs, or about $9 per prescription. But that estimate did not include "dispensing" fees that reflect payroll and other overhead costs such as rent.

In its report, OIG indicated that dispensing costs appear to wipe out any profits made by local pharmacies. Using pharmacies' estimates of their costs, OIG estimated them to be about $9 per prescription on average, with individual reports ranging from $3 to $19. The Centers for Medicare and Medicaid Services expressed concern with OIG's estimate of pharmacies' dispensing costs because the number could not be independently verified. OIG's estimate of dispensing fees is not inconsistent with industry-funded studies showing them to be about $10 per prescription. Those costs vary widely between high-volume and low-volume pharmacies.

Baucus and Grassley are keenly interested in protecting low-volume rural pharmacies from being driven out of business. They have together championed several proposals to change Part D to allow require faster, easier payment to pharmacies.

Baucus said the OIG's estimate of pharmacy profits "doesn't tell the whole story. In addition to buying the drugs, pharmacies stock them locally, spend time and effort to fill the prescriptions, answer questions and check drug interactions." Grassley said the 18 percent profit margin is good news, but he wants the OIG to collect additional information on dispensing fees. "I am hopeful that, as with this study, the Inspector General will find that pharmacies should be operating in the black on Medicare Part D."

Community pharmacies say they are being forced to shut their doors because they are not reimbursed appropriately under Medicare.

"It certainly makes the point that our margins are razor-thin right now. We can't stand much more squeezing," said Charles Sewell, senior vice president of government affairs for the National Community Pharmacists Association. But the Pharmaceutical Care Management Association, which represents pharmacy benefit managers, including Part D plan providers, said the OIG report will put a damper on some of the community pharmacies' complaints.

"This is going to raise a few eyebrows among members of Congress who had been led to believe that independent pharmacies are doing much worse than this report shows," PCMA President Mark Merritt said. "Making 18 percent more than buying is more, by far, than people thought pharmacies were getting."

Sewell countered that independent pharmacies are operating on a 1.3 percent net margin. "That's not very good. If you want to invest in pharmacies, you'd do much better just to put the money in the bank."