New Avalere Health Study Reveals Substantial Variation in PDP/PBM Reimbursements for Most Commonly Prescribed Drugs in Long Term Care Settings

DATE: November 17, 2015

SCPC Says Findings Undercut Argument MAC Pricing Correlates to Actual Market Conditions; Raises Broader Questions About PBM Pricing Practices and “Free for All” of Mergers and Acquisitions

Washington, DC – Amid growing scrutiny of Pharmacy Benefit Manager (PBM) pricing practices, along with increasing concern from Congress, regulators and consumer groups about the rapid pace and broader implications of U.S. health sector mergers and consolidations, the Senior Care Pharmacy Coalition (SCPC) today released a new analysis of long term care (LTC) pharmacy transaction data.

The analysis, sponsored by the SCPC and conducted by Avalere Health, reveals increasing reimbursement inequities for LTC pharmacies driven by Maximum Allowable Cost (MAC) pricing methodologies, which are used to pay for a substantial majority of drugs dispensed by independent LTC pharmacies to patients in LTC facilities. Under Medicare Part D — the largest payer for prescription medications in LTC facilities – Prescription Drug Plans (PDPs) and the PBMs that administer the plans (and which often are owned by the PDPs or a shared parent company) use a MAC pricing formula to establish reimbursement rates for a majority of generic drugs independent LTC pharmacies dispense to elderly Medicare beneficiaries.

In particular, the results demonstrate substantial variation in pricing among Medicare Part D PDPs and the PBMs that administer those plans, and that independent LTC pharmacies, on average, lose money on more than 60% of prescriptions for generic medications dispensed in LTC facilities. The Avalere Health summary concludes that “the business model for LTC pharmacies may be unsustainable in the long-run, if generics continue to represent an increasing share of medications dispensed, with a majority reimbursed at negative margins.”

Alan G. Rosenbloom, President and CEO of SCPC, stated, “While the changes under MAC pricing should be based on actual variations in relevant market conditions, this does not appear to be the case in a variety of instances according to the actual transaction data. This opaque and hidden pricing methodology allows PDPs and PBMs to set and change payment rates for generic drugs without advance notice to LTC pharmacies and others — and does not require them to publicly disclose why reimbursement rates are changed.”

Rosenbloom acknowledged that the Centers for Medicare and Medicaid Services (CMS) established additional transparency requirements that will become effective January 1, 2016, but nonetheless expressed concern that these new requirements “do not go far enough to assure that independent LTC pharmacies know what they’ll be paid, and the market-based reasons for pricing changes.” He also noted that transparency alone might be insufficient to create a fair negotiating playing field between independent LTC pharmacies and PBMs, since transparency does not necessarily lead to any actual change in pricing policies or practices.

“Transparency is a crucial first step, but more Congressional and regulatory scrutiny and oversight may be warranted as step two,” Rosenbloom continued.

The SCPC also noted that the Avalere Health findings more broadly undercut the argument that MAC pricing reflects actual market conditions as intended, and significantly undermines the free market premise and intent of Medicare Part D. “The dramatic variation in payments for medications under MAC pricing methodology – which literally changes on a daily basis, and which differs substantially between PBMs – strongly suggests prevailing market conditions do not drive pricing changes,” Rosenbloom stated.

“This is inconsistent with the free market principles upon which the Part D program is based, and has had significant adverse effects on LTC pharmacies and their ability to compete effectively, and fairly, in the marketplace.” In fact, unlike other aspects of the Part D program, MAC pricing formularies are not subject to negotiation between PBMs and pharmacies; they simply are created and imposed on pharmacies.

While the lack of MAC pricing transparency and shrinking MAC reimbursements are an issue across both the retail and LTC pharmacy sectors, Rosenbloom noted LTC pharmacies are distinctly different from retail pharmacies, because their operating costs are significantly higher than those of retail pharmacies due to greater clinical, operational, legal and regulatory requirements with which they must comply.

According to recent published reports, the cost to dispense medications in LTC settings is 30% to 35% higher than in retail settings. Further, the vast majority of LTC pharmacies provide medications exclusively to patients in LTC facilities, which means that these pharmacies do not earn ancillary revenues from selling convenience items and other products directly to consumers, as do retail pharmacies. The result, according to Rosenbloom, is that “MAC pricing variability, unpredictability and apparent disconnect from true market conditions make the situation even worse for independent LTC pharmacies.”

The following are the nature of the four analyses, and the specific findings:

Analysis #1 – Trends in Key Financial Indicators for Generic and Brand-Name Drugs

Finding: MAC price reimbursement plus dispensing fees is often less than pharmacy acquisition costs plus cost to dispense for generic drugs – meaning, on average, LTC pharmacies lose money for generic medications they dispense at MAC pricing under Part D. 

Analysis #2 – MAC Pricing Variability for Top Generic Drugs and Payers

Finding: MAC prices paid for the same generic drug on the same day by different payers vary considerably, which, SCPC believes, raises significant questions concerning the relationship between price variation and actual market conditions.

Analysis #3 – Percent of Drugs Dispensed that Are Generic vs. Brand-Name

Finding: The percent of prescriptions and total days supplied by generic drugs has increased to 87%.

Analysis #4 – Percent of Generic Drug NDCs with Negative Margin

Finding: On average, LTC pharmacies lose money on more than 60% of the generic prescriptions they dispense, equaling more than 50% of all prescriptions they dispense under Part D.

Industry consolidation background: While the Avalere Health analysis does not evaluate the impact of consolidation, it should be noted that during the period studied (Q3 2013 through Q1 2015), the five major PBMs consolidated into three, leaving only three major players dominating the marketplace – Caremark (a CVS Health company which also owns Omnicare, the largest LTC pharmacy in America by a wide margin, a large specialty pharmacy, and its own Medicare Part D plan), OptumRX (a United HealthCare Company, which also operates a number of Medicare Part C and Part D Plans, and is a large Medi-Gap insurer) and ExpressScripts (also the largest mail-order pharmacy in America).

With two major mergers of leading health insurers – which also operate Medicare Part D plans – currently under federal scrutiny, Rosenbloom said, “The ongoing consolidation in the health care marketplace should be evaluated closely for its potentially adverse impact on competition in the LTC pharmacy sector, particularly its implications for patient access to adequate networks for LTC pharmacy services, and for independent and community-based LTC pharmacies that offer local services and jobs across the country.”

Concluded Rosenbloom: “Dramatic variations in day-to-day reimbursement within and among the leading PBMs administering Part D plans are not reasonably explained by market conditions, and validate the view that non-transparent, secretive pricing methodology and other PBM practices warrant increased discussion. We are not claiming this new data is determinative, but we believe it raises serious questions and has ominous implications for free-market principles in general, and for LTC pharmacies and their elderly patients in particular. In this specific instance, we maintain that the rapid pace of U.S. health sector consolidation is having a negative impact on independent LTC pharmacies and the elderly consumers who depend upon and benefit from their unique clinical, consultative and supportive services. Moreover, the findings raise yet another red flag and cautionary note about the wider implications of the merger and acquisition free-for-all now underway.”

Last month, SCPC released another Avalere Health study, Long-Term Care Pharmacy: The Evolving Marketplace and Emerging Policy Issues, representing the most detailed analysis of the nation’s growing LTC pharmacy sector since Medicare Part D was implemented in 2006. The study highlights the beneficial clinical services provided by LTC pharmacies that can help to advance high quality care and Medicare cost savings.

The SCPC represents companies that own and operate independent LTC pharmacies in 40 states, serving over 400,000 residents in skilled nursing facilities (SNFs) and assisted living facilities (ALFs) daily. To learn more, visit

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