R. KEITH CAMPBELL'S PRESCRIPTION PRICING :

NEEDS PHARMACISTS' ATTENTION

Introduction
Pharmacists now know what it feels like to be hit by a "MAC" truck. However, in analyzing the final MAC regulations, they could have been worse. One of the most distressing aspects of regulations is the fact that dispensing fees are left totally to the discretion of the state, and although HEW has requested that fees be related to operating expenses and reflect a fair profit, there are no guidelines or requirements to ensure fair fee reimbursement to pharmacies. If pharmacists do not immediately determine what a fair dispensing fee should be, based upon prescription department expense data, and make this information known in a statistically valid manner to the state departments of social and health services, they will definitely find themselves in another prescription pricing predicament.

The objective of this paper is to point out problems in prescription pricing and to describe a process to collect and analyze prescription department expenses that are necessary in calculating a professional fee.

Problems in Prescription Pricing

There has not developed a system for pricing prescriptions that is satisfactory to the individuals involved. Consumers, third party planners and pharmacists all seem to be upset about the subject of prescription pricing. Prescription pricing as a professional function, business necessity, profit energizer, and socio-economic problem continually finds itself in one predicament after another as forces both external and internal to pharmacy come to bear upon it (1). It would appear to be the simplest act of the pharmacist's varied tasks. However, it is often the most complex. Uncontrollable external factors, such as competition, government controls, the legal framework of pharmacy, manufacturers' policies, insurance-designers budgets, and professional ethics affect the pharmacist-manager's determinations of prescription prices.

Many statistics and facts are relevant to the prescription pricing dilemma in which pharmacists find themselves:

1. Americans spent $2.2 billion for prescription drugs in 1960, $7.5 billion in 1971, and by 1980 the figure is expected to be well over $10 billion (2).

2. By the late'70's, between 70-80% of the nation's prescriptions will be paid for by someone other than the patients to whom they were written (2). The number of third party prescriptions increased 27.5% in 1970 (3).

3. Pharmacists are prohibited by the Sherman Antitrust Act to collectively voice their position with respect to third party prescription reimbursement programs. This results in administrators dictating a flat fee for services based upon their budgets, rather than negotiating a fair fee that considers the pharmacist's expenses and professional services (4).

4. Net profit in community pharmacies dipped to 3.7% of sales in 1974, compared to 4.1% in 1970. Gross margin declined, while cost of goods sold increased (5). Pharmacists are continuing to experience a squeeze on profits.

5. Total medical care prices increased at a rate about twice that of other necessities (such as food, clothing, and housing) for the period 1963-1969. There were however, considerable differences in the rates of price increases among various types of medical care services within the medical profession. At one extreme, semi-private rooms increased in price by 87.6%. At the other extreme, prices of drugs and prescription medications increased by only .5% over the same period. Prescription charges actually decreased 4.7% between 1963 and 1969 (6).

6. Since many expenses of the prescription department are variable or shared by other departments, it is difficult to allocate and determine actual prescription department expenses.

7. To the consumer, any prescription price is psychologically too much when the choice of alternatives is between an unwanted condition and an unwanted expenditure to rectify it (1). Consumers have negative connotations concerning prescription pricing. Most people accept data to support what they want to believe and reject factual evidence to the contrary (7).

The above statistics help to highlight the dilemma facing the pharmacist. The pharmacist is faced with decreased net profit, increased expenses, a poor understanding of prescription expenses, increased third party prescriptions, an inability to negotiate the fee offered to him by third party planners, an increasing demand for his dispensing and drug consultant services, and a consumer who is making an unwanted expenditure and thinks that any price for medication that is too high.

Virtually any price for an unwanted product or service is an unwelcome expense. Few people want to be ill and pay for health care services. It is for this reason, among others, that the great interest in drug prices has occurred. The pharmacist must face this problem squarely. The Academy of General practice in its November, 1973 newsletter suggested the following methods to counteract the negative consumer reaction to prescription pricing:

1. Have a place to display data on prescription price trends, being sure to compare prescription prices to other sectors of health care.

2. When the professional fee is used, explain that the medication is being sold at cost and then explain the reason for a professional fee.

3. Point out to consumers how little rising costs have actually affected prescription prices.

4. Indicate the many costly services that are being provided at no extra charge.

5. Show how inexpensive a prescription is as compared to a stay in the hospital.

6. Don't wait until the patient asks about prescription drug prices; discuss it with him before it becomes a problem.

7. There is no good evidence that consumers will not switch their buying habits nor will they react in a negative way toward price posting. It may well be that it is time to stop being defensive and take some positive steps in this direction. In any event, one thing seems evident. Posting of prices done in a professional fashion is one technique that the pharmacist may employ effectively and to his advantage.

In studying prescription pricing, it doesn't take one long to come to the conclusion that pharmacists have failed in their efforts to inform the public, the government, and other health professionals as to their professional reimbursement methods.

The Pharmacist's Dilemma

Since pharmacy services provide on the average 47.9% of the community pharmacy's total revenues, one might assume that particular attention is devoted to the economics of prescription department activities. Unfortunately, this would be a fallacious assumption. A majority of those who are responsible for the management of community pharmacy have concerned themselves with running the organization rather than managing it. Pharmacies have been content when total revenue is sufficient to meet expenses and provided what they considered to be a reasonable return (8). In those instances where some prescription department data has been maintained, it has usually been limited to the number of prescriptions received. Consequently, there is limited data available which could be used to review the economics of the practice of pharmacy. The owners of community pharmacies should be concerned about this lack of data because of 1) its relation to the efficient management of the pharmacy and 2) its utility in relation to private and public prescription payment programs.

Although departmental data should be recognized as essential to efficient management, it would appear that the managers of community pharmacies typically rely upon intuitive judgment without the benefit of supporting, organized operating data for the prescription department. This is particularly disturbing in view of the fact that research efforts to determine the causes of failure always indicate that poor management, under various subclassifications, is the most frequent cause for failure (9,10).
One explanation of the pharmacist's resistance to analyzing the expenses in the prescription department and determining the burden rate (average cost of filling a prescription) is that he is deficient in managerial and accounting education. The pharmacist is trained as a professional to safeguard the health of his patients. However, also is put into a position of facility managerial responsibility in which he has not bad sufficient training. This results in frustration to the pharmacist and a resistance to managerial analysis of his prescription expenses because of poor business background. This dilemma has resulted in a lack of analysis of prescription expenses that yields confusion and misunderstanding of prescription pricing. The pharmacist, if he chooses, may hide behind this dilemma. He can refuse to analyze his prescription department operating expenses and let third party administrators dictate reimbursement fees. On the other hand, he may take a positive approach to the situation and systematically determine his prescription department expenses, his burden rate, and his professional fee.

The Professional Fee

Renewed emphasis on the pharmacist to accurately determine a professional fee had resulted from the following pressures:

1. The Maximum Allowable Cost (MAC) regulations.

2. The consumerism movement demanding prescription price posting.

3. The threat of prescription advertising.

4. Clinical pharmacy's involvement of the pharmacist as a drug information specialist. Programs are beginning to develop where the pharmacist is paid for his professional knowledge, rather than his distributive function. Thus, a need results to pay the pharmacist for his professional service.

5. Third party prescription programs need factual pharmacy expense information to develop fair reimbursement programs.

6. The determination of a burden rate and a professional fee forces the pharmacist-manager to analyze his prescription expenses in detail.

7. With reference to brand selection, the professional fee system allows a pharmacist to add his fee for professional services to the actual cost of the medication, and this eliminates the temptation to use higher or lower price drugs because the pharmacist can make more of a profit.

8. The use of the fee system enables the community pharmacist to more effectively compete with the discounters.

9. The fee system focuses attention on the pharmacist's professional services and eliminates the retail pharmacist from taking responsibility for manufacturer's pricing systems. Since the fee is added to the cost of the medication, the patient is better informed as to what part of the prescription is for professional services and what part is for the cost of the ingredients (11).

10. The fee system emphasizes the fact that the functions performed by a pharmacist in dispensing medications or professional services require specialized knowledge and judgment and a degree of responsibility greater than that associated with mere commercial transactions. The cost of providing prescription services is not a function of the cost of the physical ingredients. The prescription drug is not an ordinary product of commerce capable of being bought and sold by anyone. If the pharmacist accepts the false idea that a prescription is a mere commodity how can he expect the patient to believe that it is not?

11. Since the cost of providing pharmaceutical service is not a function of the ingredient cost of the medication, the use of a markup system results in those patients requiring higher cost medications subsidizing those medications that are at a lower cost. A professional fee focuses on the patient, while the markup system focuses on the commodity.

12. The professional fee may result in an improvement in the physician-pharmacist relationship in that physicians understand a professional fee. They believe in being paid for what you know and do, as opposed to what you sell (12).

The major negative reactions to the professional fee result from anxiety produced by having to make a change in the pharmacist's normal business routine. Proponents of the professional fee can argue effectively against any of the disadvantages to the professional fee. With the professional fee, costs are allocated more intelligently than with a gross margin concept. The professional service is separated from the cost of the commodity, pharmacists feel more professional, and it is easier to determine the prescription price. At present, those pharmacists who have switched to the professional fee have found that the advantages greatly outweigh the disadvantages (13). Once the cost of filling a prescription has been determined, it is quite possible that the major difference between the fee system and the percentage markup system are only academic and have no pragmatic value. Whichever method of pricing prescriptions is used, either markup or professional fee, a variety of cost factors are involved and must be covered by the final selling price. The major advantage of the professional fee method results from the fact that, in order to determine the burden rate, one must make an honest effort to analyze and allocate prescription expenses.

A Practical System for Isolating and Organizing Prescription Department Expenses

Suggest to a gathering of pharmacists that they should each determine a professional fee for their prescription filling services based on the cost of providing those services, and you are likely to start a discussion of the fact that they are not accountants. The very suggestion elicits a defense based on the false premises that the costs involved are not easily determined and further, that they as pharmacists could not easily perform t he calculations involved.

The fact of the matter is that each of the costs involved in operating the prescription department is known to someone that works for the pharmacy or is performing services for the pharmacy and that all the calculations can be performed using mathematics of a ninth-grade level or below.

The problem is that when a pharmacist sets about to calculate the cost of filling an individual prescription in his prescription department the necessary information is usually in several places and the people who can provide it are not available. To solve this problem, the pharmacist needs to collect and keeps own data.

For some strange reason, just mentioning "a set of books" to individuals who do not normally work with them conjures an image of elaborate accounting records similar to those used by General Motors or International Telephone and Telegraph. Since the information needed here is known and entered in the accounting records of the firm by someone, all that the pharmacist needs in order to isolate and organize the operating data and cost of the prescription department is a single entry ledger book of convenient size. A spiral notebook, bound ledger, laboratory write-up book, or wholesaler wantbook will serve the purpose (cost $0.00 to $1.50).

To prepare a record set, proceed as follows:

1. Rule a sufficient number of pages with a one-inch column on the left of the page for the date; a one-inch column on the right for the dollar amount; to the left of the dollar amount column, a two-inch column for referencing the source document; and the remaining large column is used for a description of the cost. An illustration is shown.

2. Head one page of the ledger (or more if a large number of entries is anticipated) with the title of each cost center.

3. As the cost in each center arises, the individual who enters these costs in the firm's books communicates the information to the pharmacists so that he may enter it in the ledger. (See Tables I and II.)

4. When the hour arrives to the calculate the cost of filling a prescription, total the accumulated costs in each cost center and proceed through the prescribed formula. Burden rate (average cost of filling a prescription) = total pharmacy department expenses/# of prescriptions (see Table III).

Using this system, entries similar to the following might be recorded.

The operation of this system will be most effective if the following ideas are applied:

1. Entries should be made as soon to the occurrence of a cost as convenient (i.e., every time a payroll is paid, every time prescription supplies are purchased, when depreciation expense is determined by the accountant at the closing of the books).

2. Always use enough lines to adequately describe the event at hand when making entries in the ledger.

3. Though some costs are minimal (not material in the jargon of the accountant), including them makes the record more complete, precise, and authentic.

The employee-pharmacist may discover that his employer does not want some of the information that would be gathered using this plan in the hands of his employees. Usually such restrictions on information are imposed for good reason. In such an even, the pharmacist should persuade management of the value of knowing the prescription department costs per prescription. The pharmacist should them cooperate by providing that information for which he is the source to the individual or department that will collect the information. Management will usually be willing to provide the prescription department staff with the per prescription costs when the calculations have been completed.

The above represents a simple system for the collection of costs incurred in the operation of a pharmacy prescription department. The conscientious use of this system will markedly diminished the difficulties encountered in calculating prescription department professional fees, burden rates, and break even points.

TABLE I. COST CENTERS, DOCUMENTS, AND PERSONNEL SOURCES

This table associates with each cost center the most likely document(s) and individual(s) within the pharmacy that will provide information about the cost.

* only for those costs actually paid by the pharmacy

TABLE II. PERSONNEL SOURCES OF PRESCRIPTION DEPARTMENT EXPENSES

TABLE III. NUMERICAL VALUES NEEDED FOR CALCULATIONS OF BURDEN

(See "The Calculation of a Professional Fee")

Average annual prescription department inventory

Average annual pharmacy (total store) inventory

Number of prescriptions dispensed in the time period under study. (This is the number of prescriptions filled less the number of prescriptions not claimed and hence returned to stock.)

Space occupies by prescriptions department in square feet.

Space occupied by pharmacy (total store) in square feet.

Time spent in prescription department by each employee per day period. < As a percentage of total employment time.>

Volume of prescription department in the time periods under study in dollars. (This value is isolated by the prescription key on the cash register.)

Volume of pharmacy (total store) in the time period under study in dollars.

The Calculation of a Professional Fee

Each pharmacist can determine his professional fee on the basis of his prescription and operating records. If the above system of collecting data is used, one can easily summarize this information on a monthly basis to determine the actual cost of filling a prescription. It should be evident that an important prerequisite to the adoption of a professional fee is properly kept records in the pharmacy. Haphazard adoption of a "fee" will not only be meaningless, but can economically disastrous. When properly arrived at, however, the fee method is economically sound and has useful predictive values in prescription operations (14).
There are a variety of methods for determining the professional fee for a particular pharmacy (15-18). Two relevant methods of determining a professional fee include:

1. The leveling procedure.

This procedure is based upon the following assumptions: a) The same number of prescriptions will be dispensed the coming year as were dispensed the past year; b) Expenses incurred per prescription dispensed will remain constant; and c) the rate of return on the investment is satisfactory. The formula (using last year's figures) is as follows:

The Average Professional Fee Per Prescription = {(Total Prescription Dollar Value) - (Total Acquisition cost of medication Dispensed)} / Total Number of Prescriptions Dispensed

This method is very simple to calculate. You just take your total sales in the
pharmacy and subtract from this the total cost of prescription goods sold and divide by the number of prescriptions to determine a professional fee. This fee, if applied to all prescriptions dispensed, will provide the same gross margin as was received the previous year-the gross margin that was needed in order to pay the operating expenses incurred by the pharmacy practice plus a return on the investments. As time passes, it might become necessary to adjust the fee as expenses change and/or the number of prescriptions dispensed changes. A simple method to determine the professional fee by the leveling method is to list the first 50 new prescriptions filled for a period of six consecutive months from the previous year. With this method, you list the actual acquisition cost and the selling price, before taxes, of 300 prescriptions. You then total the actual acquisition cost column and the selling price before taxes column and subtract the actual acquisition cost from the selling price. You then divide this figure by 300 to get the average professional fee necessary to give you the same gross margin as you received the previous year.

Selling Price before Tax ($1500) / Actual Acquisition Cost ($300) = Professional Fee

600/300 = $2.00

This method will give you a general idea concerning the professional fee that you need to charge. It is in no way accurate and should be used only for comparison with a fee determined by the allocation method.

2. The allocation method. The form proposed to determine the cost of dispensing a prescription that follows was adopted from the Kansas form employed by the State Department of Social Welfare. Kansas has been using a variable professional fee for several years for the reimbursement of Medicaid prescriptions. The variable professional fee is a professional fee determined from the true cost of filling a prescription for each individual pharmacy. This professional fee will vary from pharmacy to pharmacy due to the varying cost of each one. The selling price of a prescription to the consumer is the cost of acquisition, plus the professional fee. This professional fee consists of three main elements. They are the professional time, the allocated overhead expenses, and the net profit or net income. The break-even consists of the professional time plus the allocated overhead costs. When you have ascertained the break-even, you have found the true cost of filling a prescription, which is defined as the burden rate.

The form to determine the cost of dispensing a prescription is divided into five major parts. Part I is a general data section which will furnish information necessary for the prorating of various proportionate costs for the prescription department on the basis of inventory and square footage. Parts II and III concern the salaries and wages for professional and other personnel involved in the prescription department. A percentage involvement method of reporting is provided for personnel working only a portion of their time in, or for, the prescription department. Part IV relates to various annual direct prescription expenses and involves such items as containers, labels, licenses, professional dues and subscriptions. Part V relates to various annual proportionate expenses. These proportionate expenses are prorated on the basis of inventory and square footage with a specific percentage computed from the general data in Part I.

After all of the prescription department expenses have been allocated, one can then divide this by the number if prescription sales ratio are the variable expenses and are associated with sales such as donations, bad debts, accounting, other miscellaneous advertising, delivery, freight expense, office expense, collection expenses, sales returns, and the percentage of the manager's administrative time spent in duties such as bookkeeping, writing checks, etc.

The expenses which are allocated to the prescription area ration are fixed expenses such as store rent, fixture and equipment depreciation, utilities, personal property taxes, insurance, maintenance and laundry, travel, and repairs.

The prescription inventory ration expenses are bank charges, inventory texts, insurance, inventory spoilage, and miscellaneous expenses which are not placed under one of the other ratios. Keep in mind that the expenses of each individual pharmacy are different, and the professional fee for each pharmacy would have to be different also. A single universal fee would not produce the same net profit percentage for each pharmacy. In this prescription cost determination, the expense of each various professional service is considered.

The form is rather long and is similar to filling out an income tax return. It is hoped that you will not let the time and effort that it takes you to fill out this form excuse you from determining the cost of dispensing a prescription. In a more positive sense, each of you who fills out the survey form will learn a great deal more about your pharmacy, and one of the major advantages of determining your professional fee will be in making the analysis of your prescription department. Furthermore, the information is critical in determining the proper reimbursement from third parties.

The information you calculate should be sent to your state association executive director for compilation and use by the state association's Third Party Committee in meetings with the Department of Social and Health Services.

See Additional Survey pages.