AAP understands that every independent pharmacy is different. Both the customer mix and product mix are unique to your pharmacy, so one purchasing option will not work for all owners. AAP Pharmacy Business Advisors have the tools to analyze your business and help you choose the right model for your pharmacy.
- How do I optimize my pharmacy purchasing?
The first step is to make sure you are a member of the most beneficial buying group. Every buying group is different when it comes to price negotiation and rebates.
- Who is AAP’s national primary wholesaler?
AAP works with Cardinal Health. In 2023, we negotiated a new PVA that changed the pharmacy inventory purchasing market.
AAP offers three different PVA options to optimize your pharmacy’s inventory purchasing plan.
Option 1. Basic: This option is designed to enhance a pharmacy’s cashflow by not waiting on rebates. Enjoy lower upfront invoice prices on Generic Rx, plus Brand Rx pricing that is not based on compliance or purchase requirements.
Option 2. Alternative: If your Brand Rx sales are growing and your store is struggling to meet a compliance ratio, this option is for you. The Alternative plan offers select Brand Rx carveouts to make your brand purchasing easier. Reduce the negative disruption of expanding brand sales while maintaining access to competitive generic invoice pricing and rebates.
Option 3. Standard: This option is designed for those interested in a traditional arrangement, including competitive Brand Rx invoice pricing with the opportunity for additional brand discounts, and competitive generic invoice pricing with monthly rebates.
- How do you find the best option for your business?
The first thing to acknowledge is that the numbers and terminology may be confusing. Cost plus, cost minus, PVAs, AWPs, rebates, discounts, reimbursements, Generic-to-Brand Ratios (GBR), Generic Compliance Ratios (GCR) and Purchase Compliance Ratios directly affect how much money you spend and how much you save. Your Pharmacy Business Advisor can help guide you through the jargon and what it means to you.
- How can you be sure you have been presented a better deal?
Ask the supplier: Can they effectively demonstrate, using numbers specific to your business, that what they offer will provide your inventory requirements at the lowest net acquisition cost? Understand it can be difficult to get a straight answer, especially if you don’t know what to ask, but it’s important that you do get the answer.
- Should you go with a buying group or get a deal directly with the wholesaler?
Many independent pharmacy owners utilize a Group Purchasing Organization (GPO) as they bring the benefit of market intelligence and experience, plus a combined purchase volume to a supplier and leverage a lower cost of goods for all GPO members.
A single pharmacy or a group of commonly owned pharmacies can also contract with a supplier independent of a group, but rarely will this aggregated volume be able to secure a deal better than a GPO when considering all dollars that impact the bottom line.
- How is the cost of goods calculated?
The cost of goods is at the center of any purchasing agreement. Brand and generic pharmaceuticals are inevitably intertwined, and each supplier will have a distinct pricing system to manipulate these costs to its profitability requirements.
Pharmacies in the recent past were billed at “Cost Plus” which is Wholesale Acquisition Cost (WAC) of brand pharmaceuticals plus a percentage added to WAC, such as WAC +2%. Today, almost all pharmacies are billed at “Cost Minus” which is the WAC of brand pharmaceuticals minus a discount, such as WAC-4%. It is important to note that these percentages work in conjunction with generic pharmaceutical volume, so keep track of them as volume changes.
For example, a cost minus brand pharmaceutical is likely to increase in discount, or become less expensive, as generic pharmaceutical volume increases. For a brand pharmaceutical that is at a cost of WAC- 2.65% at $1,000-$20,000 in generic pharmaceutical volume, it might drop to a cost of WAC-4.25% at $20,000-$50,000 in generic pharmaceutical volume if slotted in a matrix system (an escalating discount/and or rebate scale that is driven by generic pharmaceutical purchase dollars or total store sales volume).
- How does the Generic Compliance Ratio affect your purchasing?
A common misconception is that every generic pharmaceutical item purchased is eligible for the negotiated generic rebate percentage. Generally, only generics purchased from the supplier’s Generic Contract portfolio are eligible for a rebate.
Items purchased outside the portfolio are not eligible for rebates and do not count in the GCR calculation toward the brand pharmaceutical discount. The number of Stock Keeping Units (SKUs) in the Generic Contract file will vary greatly from supplier to supplier.
Some contracts may not mention a GCR but rather a GPR, or Generic Purchase Rate. A GPR is a requirement to purchase a percentage of generic pharmaceuticals from the supplier, typically, 95%. Under a GPR and/or BPR, Brand Purchase Rate obligation, a pharmacy is also required to provide complete dispensing data, so the supplier can monitor what is dispensed versus what is purchased.
- Do suppliers offer a price match guarantee?
Some suppliers do offer price matching, but often the price match is a worse deal. Pay attention to the difference in net prices when price matching an item vs. the rebate from the same item bought at a supplier’s regular price because the item may be excluded from the rebate.
Another way a price match can hurt you is when a supplier is out of an item in its Generic Contract program and a substitution is made for the next lowest priced item, matching the price of the contract item within some elastic formula. This sounds good except these items may not be eligible for rebates and may not count toward the GCR requirement.
- Why do suppliers require compliance agreements?
Compliance agreements are yet another way a supplier ensures that your pharmaceutical purchase volume comes from its distribution centers. A compliance agreement may require the purchase of a minimum percentage of total volume to qualify that vendor as the primary supplier to your pharmacy. This makes purchasing from other distributors less likely or even punitive.
Compliance agreements often are linked with generic pharmaceutical rebate percentages, brand pharmaceutical discounts and program fees. No matter your pharmacy’s volume, there will likely be a purchase compliance component. Don’t trust, know! The penalty for not reaching contract compliance can include a reduction or loss of generic pharmaceutical rebates and increased brand pharmaceutical COGs.
- Do suppliers give a signing bonus?
Some pharmacy owners request a “signing bonus,” dollars to purchase technology, Saturday deliveries, or other incentives. These perks don’t come free. A supplier will build the cost associated with these requests back into the deal in the form of higher brand pharmaceutical pricing, higher generic pharmaceutical pricing, lower rebates, and/or additional “net billed” items. Free is never actually without cost.
- What is the difference between a purchase contract and an agreement?
Today the industry norm from a primary supplier is a three-year purchasing contract for the agreed upon terms and conditions for brand pharmaceutical cost of goods, generic pharmaceutical rebates, etc. Three years is a long time in our rapidly changing industry.
Brand pharmaceutical price increases/decreases, generic pharmaceutical price deflation/inflation, PBM contracts and market competition all require independent pharmacies to have flexibility to adjust to market conditions whenever necessary. A termed agreement severely limits that option. As long as “up front” cash is not taken as a condition of the deal, a “termed” agreement with a supplier should not be signed
- Why does a pharmacy need to sign a non-disclosure agreement?
Some owners are asked to sign a Non-Disclosure Agreement (NDA) before they are presented an offer from a supplier or group. An NDA does protect the disclosing party’s confidential information but may prevent the signer from having the ability to properly analyze the offer. Just because the NDA is required does not make it the best offer and the terms of the NDA may make it impossible to know.
- What questions do you need to ask about a new deal from a supplier?
Whomever your supplier and whatever your deal, make sure you’re getting a straight answer about the numbers involved and how they apply to you.
Also, familiarize yourself with supplier terms below, as these are often areas where presenters rush through to mask any less-than-ideal variables that could significantly impact your pharmacy.
AAP’s Pharmacy Business Advisors can help you optimize your pharmacy purchasing. Contact them today to learn how to make