Uncertainty and Motive in Pharmacy Dispensing Mark-Ups

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Recently we argued incremental (relative to brands) generic dispensing premia of roughly $5 / script ultimately will fall. This note addresses healthy criticisms of that note, particularly: 1) payors already know generic acquisition costs; and, 2) the generic dispensing premium is too small to matter

We argue that payors know average, but not drug-specific (much less dose- and dosage-form specific) acquisition costs, and that drug-specific knowledge is pre-requisite to efficient purchasing

The difference between the pharmacy re-imbursement benchmark of average wholesale price (AWP) and actual generic acquisition costs is wide-ranging, and the distribution is near-uniform around the mean. Thus pharmacy dispensing margins on any given drug are equally likely to be well above, or well below, the mean dispensing margin

If payors set AWP-X such that average generic mark-ups equal average acquisition cost plus a competitively efficient service margin, then pharmacies only want to fill half of the sponsors’ generic prescriptions. Thus AWP-X has to be set above a competitively efficient level

Under a cost-plus (e.g. average manufacturer price or AMP + X) formula, pharmacy dispensing margin is a constant value, which can be set far more precisely – i.e. in an AMP + X format, pharmacies’ generic dispensing margins can be set equal to a competitively efficient margin

Separately, clients raise the question of whether the incremental $5 per script generic dispensing margin is large enough to matter. We show that average brand rebates over time have hovered around this value, i.e. in a very real sense the PBM industry was built on $5 per brand prescription. We conclude that the additional $5 dispensing margin paid per generic script is material, particularly as generics become an ever more dominant percentage of total scripts

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