Drug Inventory Costs and Profit Margins

Drug Inventory Costs and Profit Margins

Drug acquisition costs continue to rise. Meanwhile, pharmacy reimbursement rates hold steady and often fall in relation to the overall budget and percentage of inventory and acquisition costs. Gross profit is the monies from revenues minus the costs of goods sold (inventory), while net profit is the gross profit minus operating costs percentage, and net profit percentage is net profit divided into sales. Net profit percentages for community pharmacies have largely continued a downward trend. Updates on drug costs sometimes do not come rapidly enough, and pharmacies end up paying much more for certain drugs than the PBM contract stated or via the most recent update in drug price.  

Vega et al examined national average drug acquisition costs published by CMS from 2012-2015.1 They identified generic and branded drugs with the highest percent increases in price, and margin and margin percentages for claims adjudicated through 4 major payers (PBMs). The top 50 generic drug price increases ranged from 474% to over 18,000% with highest prices seen in tetracycline, niacin, captopril, and chlorpropamide. The top 50 branded drug price increases ranged from 63% to 391%, with the highest increases seen in Edecrin, Eurax, and Neopro. The margin for generic drug claims adjudicated ranged from -$237.11 to -$1,105.96. The margin for branded drug claims adjudicated ranged from $272.42 to $360.17. Gross margin percentages ranged from nearly -16% for generic drugs from one PBM to 7.9% for branded drugs adjudicated through a different PBM. They discussed the PBM “spread” as the difference between how much a PBM bills an employer for a drug’s cost versus how much it reimburses the pharmacy for the drug’s cost. The researchers describe policy issues to address but also discuss  the need for pharmacies to be shrewd purchasers of the inventory they purchase, be mindful of therapeutic interchange programs that result in diminished profits and even losses to the pharmacy, and to be mindful of the pharmacy’s financial position at all times.

Pharmacy managers/owners must be aware of drug price increases and stay on top of those, as reimbursement rates might be set for months at a time without recognizing rapid increases. Managers must also know their cost of dispensing in determining whether to accept and potentially negotiate the terms offered them by a PBM. This also creates the impetus for them to perform routine financial check-ups of the business by examining various profitability, liquidity, and inventory turnover ratios.

Additional information about Financial Reports can be found in Pharmacy Management: Essentials for All Practice Settings, 5e. If you or your institution subscribes to AccessPharmacy, use or create your MyAccess Profile to sign-in to Pharmacy Management: Essentials for All Practice Settings, 5e. If your institution does not provide access, ask your medical librarian about subscribing.

1Vega AD, Meola PP, Barcelo JR, et al. Commentary on current trends in rising drug costs and reimbursement below costs. Manag Care. 2016;25:41-49.

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Go to the profile of Shane Desselle
over 3 years ago

Therapeutic interchange supposedly gives pharmacists more autonomy but is actually costing them money.