If you are a covered entity evaluating multiple vendors for in-house pharmacy buildout, you have likely received a unique pricing structure from each vendor, and in most cases a financial model capturing Year 1 to Year 3 pharmacy P&L with each showing dramatically different Net Proceeds/ Operating Margin profiles. There is no easy way to compare varying fee structures and models to make an informed decision. While your financial objective is simple (pick the right pricing model and vendor that will result in the best returns to the entity), the internal assessment required to arrive at the decision is not as simple. It involves running some of your own analyses, understanding the underlying assumptions in each model, unpacking the hidden costs and looking beyond just the stated percentages to the actual dollar amounts.
At Alchemy we have learned of these nuances by assessing customers’ fee structure with current vendor and their lower than promised Net Proceeds. In this blog post we share some of those insights and things to watch out for, that will help you with your vendor selection process.
In-house pharmacy vendor fee structures can broadly be classified into two - three common categories though each vendor might name and bill them differently.
- Dispense Fee: A percentage or fixed dollar component of the insurance collectible
- Staffing Costs: A dollar fee associated with staffing your in-house pharmacy (Salary, Bonus, Benefits)
- Operating Expenses: A dollar fee associated with operating the in-house pharmacy (computer supplies, travel, recruiting, etc.)
Dispense Fee
Dispense Fee is typically a portion of the Insurance Collectible/ PBM payment amount on the drug dispensed. This fee is structured either as a fixed percentage OR a fixed dollar amount OR a combination of both driven by NDC or type of script.
Watchouts:
- If the Vendor P&L is built off of a blended average for Revenue/ Rx dispense fee calculation in the model can be inaccurate, making this fee look favorable compared to the other vendors’ model
- If the dispensed units in the P&L are not representative of your drug mix, it is likely that the total dispense fees calculation is off resulting in favorable net proceeds for one vendor vs. the other
- When comparing variable (% or Dollars) vs. fixed dispense fees, you can be tempted to pick variable because it is favorable at a unit level. However, extrapolating it to your actual total prescriptions by NDC might make fixed dispense fee favorable
Example: Below examples show how mix (units) can lead to different dispense fee totals. In the first image you would pick Vendor 1 but the second image shows how just 10 more units of a higher dispense fee drug can flip the outcome.
Solution:
- Pick one month worth of your Rx data at the dispensed NDC level and corresponding insurance collectible and apply the fee structure for each vendor against your actuals to see realistic monthly dispense fee total under each vendor
- If you have a highly variable drug mix month over month, repeat this exercise for at least a quarter worth of data and validate which model might be most favorable for your expected growth plans
Staffing
In a managed in-house pharmacy setting, vendors passthrough staffing fees for a combination of staff including but not limited to pharmacist in charge, pharmacists and technicians. Total volume and the type of volume processed are key drivers of staffing composition.
Watchouts:
- While some vendors charge just the base salary component, others may passthrough bonus and benefits too
- While some vendors tend to keep the team lean and highly productive utilizing them for a multitude of activities such as inventory management, claims management, clinical pharmacy programs etc., others can have additional staffing for these activities which will drive your pharmacy staffing cost up
Solution:
- Ask clarifying questions if staffing composition is unclear in the vendor proposal
- Understand how bonuses are determined and if you as the owner/ CEO/ CFO will have a say in determining these
- Calculate the numbers for your pharmacy
Operating Expenses
Operating expenses are expenses associated with running the in-house pharmacy. We have seen the most variability with this fee line item across vendors not only with the count but also with the total dollars associated with each line item.
Watchouts:
- Understand the various components of OpEx if this fee is not itemized in the financial model. Listed below are some examples:
- For example, Management/ Administrative Fees is added under this line which is on top of the dispensing and staffing fees. It can be upwards of $150-$200K per year for an average sized pharmacy
- Client Services/ Relations fees which is separate from Management/ Administrative fees
- Travel expenses both pre and post implementation
- Understand specific line items that can drive OpEx up or down as your operation expands
- Year 1 vs. Year 3 can be drastically different as you move from implementation to steady state to growth
- Understand choice: Confirm if you have a choice to remove/ own some of the expenses
- For example it is cost effective to own office supplies, internet, telephone etc., and the clinic is better equipped to choose the best use of their funds
Solution:
- Break down operating expenses for each vendor and run different scenarios - implementation, steady state and growth that can help you see the most effective price structure that will work in your favor
Example: Image below captures operating expenses line items and how each vendor may or may not charge for some of these.
Bringing it all together
- Gross Profit (GP) = Pharmacy Revenue - COGS
- Net Proceeds/ Operating Margin = GP - (Dispense Fee + Staffing + OpEx)
- Calculate total Net Proceeds for at least one month of your Rx data by applying each vendors fee structure so you can compare them side-by-side
- Compare and contrast the % of Revenue each vendor takes as part of their fees and the % of revenue net proceeds represent
At the end of the day, you should be able to hold your pharmacy partner accountable with two numbers/questions→
- What are my 340B net proceeds (into my bank account) as a percent of pharmacy revenue?
- What are my 340B net proceeds (into my bank account) as a percent of gross profit (i.e. 340B net savings)?
At Alchemy, we take pride in protecting the safety net for providers who serve the most vulnerable and underserved communities. We understand the value higher Net Proceeds add to your business and community and have structured our pricing with this in mind. We run tight and lean pharmacy operations to fuel our shared success.
Alchemy runs a free of cost ROI Analysis for any entity interested in answering if an in-house pharmacy model is suitable for their business. Drop us a line at Hello@alchemyhealth.com if you are interested.
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