A common refrain from independent pharmacists is that they don’t have control of their pricing. This is mostly true. Most of a pharmacy’s revenue is determined according to a formula called “lesser of logic” (which I’ve previously argued should be illegal, at least in part, due to its upward pressure on pricing generally). Under this system, a pharmacy’s reimbursement (and the patient copay during a deductible or coinsurance phase of their benefit) is the lowest of 4 numbers:

1) The pharmacy’s submitted charge for the prescription.

2) The pharmacy’s submitted “Usual and Customary” (cash-pay/out of pocket) price

3) The Average Wholesale Price of the product minus a contractual discount plus a contractual dispense fee

4) A PBM-determined Maximum Allowable Cost (MAC) plus a contracted dispense fee.

Most generic medications are paid using option 4) MAC plus a (usually nominal) dispense fee, so the MAC for each product dispensed (the MAC list) is the main determinant of a pharmacy’s financial well-being. Pharmacy owners technically CAN lower their submitted prices, but in my experience, few pharmacists realize this or have the technical capacity to do so, let alone the economic incentive to WANT to do so. When all of the margin that funds your operations comes from a fraction of prescriptions with large margins, and the rest of the prescriptions are at or below cost, why would you ever want to cap your reimbursements on those items? That’s economic suicide! It shouldn’t be like this, and it wasn’t always like this, but today, pharmacy reimbursement is disturbingly similar to playing the slots at a casino - you lose most of the time, and win big sometimes, and maybe, just maybe, you can beat the house for a little bit, but eventually the house always wins. If you say “no, I’ll only make $20 maximum per prescription,” the pharmacy is doomed, because now the MAXIMUM margin is $20, and you still have all of the losses and below cost of dispensing prescriptions to make up - which is not possible - the average margin will be far below the pharmacy’s cost to dispense. In other words, in a world where >95% of all prescriptions are reimbursed by a PBM, the 5% of prescriptions that don’t touch a PBM will have much higher prices than they would in a functioning market (hence GoodRx et al, which let people access PBM pricing without insurance, and allow pharmacies to maintain the fiction of their outrageous U&C prices, for a fee).

The frustration from most pharmacy owners and independent pharmacists is that they have no idea what the MAC is for any item until they submit a claim, and they have very little faith in the fairness or reality-basis of the process of MAC setting. PBMs will respond that they make MAC lists available to network pharmacies upon request. I’ve requested and received such lists in the past, but the process to send and receive these lists (let alone use them) is far too labor-intensive today. It involves sending an email to a PBM’s MAC team, receiving back a list a day to a week later, only to have it be at least partially out of date by the time the pharmacy receives it. The pharmacy then is confronted with “what do I do with this list?” It’s a giant excel file that is useless without processing.

This, though, is a solved business problem. It’s precisely the same problem as getting pricing information from a wholesaler, and the solution is the same. Nearly every pharmacy in the country receives an ANSI X.12 .832 catalog file from their wholesaler(s) every day. Their computer system processes that information and gives a cost of each item in that catalog in a computer-digestible format. Pharmacies rely on these catalog files to inform their sourcing decisions (which brand to buy, which wholesaler to use, which package size to buy, whether to buy product that expires in 3 months or much later) every day. These files often contain errors (mainly package size errors in my experience – birth control notoriously has records with 1x1 tablet instead of 1x28 tablets, or 3x28 tablets, some wholesalers use oz instead of mL in their catalog files, some format their catalogs wrong 128 tablets instead of 1x28 tablets), but with a little effort to correct those errors on the receiving end, they are invaluable in running a financially sustainable pharmacy practice. (sidebar, I renew my call for any company wishing to sell to pharmacies to make your computer systems compatible with .832 catalog transmission - cough emerson, cough pcca, cough orthomolecular, cough cough faire, cough every greeting card vendor ahem).

Nearly every state has passed laws regulating the MAC list process – requiring pharmacies to be able to appeal the pricing used on a specific claim, regulating how quickly those appeals can be processed, what kind of information has to be provided to deny an appeal, etc. Given how much legislative effort has been spent regulating this process, and how ubiquitous this type of law is, I’m frankly amazed at the fact that no state has ever required these lists to be sent to pharmacies regularly in a bulk process using something like a .832 file type. No PSAO seems to have negotiated this kind of term into their PBM contracts either.

The current process for MAC setting and pharmacy pricing generally feels to me as a generally and deliberately obfuscated process. Pharmacies don’t reveal their pricing information to PBMs until a claim is sent, and PBMs don’t reveal their pricing information until a claim is processed. (sidebar for anyone in the PBM/insurance industry who may know – what % of claims are transmitted to your PBM/plan using basis of COST determination (field 423-DN) 06 (MAC list)? I know that I personally transmit 0% of claims using that basis of cost code - and what % of claims are paid using basis of reimbursement code 04 U&C?)

Imagine how different things could be if we used .832s to transmit pricing information from PBMs to pharmacies and back. Here are a few potential consequences:

1) Pharmacies could triage utilization management claim rejections based on the pricing information – it’s incredibly frustrating to me when I do the work to help a patient get a Prior Authorization for a product only to find that either a) the patient copay is far higher than the patient can afford or b) the pharmacy is unable to source the product at a price lower than the MAC. If pharmacies had access to MAC prices before getting a paid claim, they could reasonably estimate the patient’s out of pocket liability and discuss alternative therapies BEFORE going through the work of hassling a physician and medical assistant to get a prior authorization approved, preventing a fair amount of wasted effort in the status quo system on the part of the plan, the physician and the pharmacy.

2) Pharmacies could reasonably adjust their U&C pricing downwards without fear of missing out on additional revenue. The current “lesser of logic” pricing scheme gives pharmacies every incentive in the world to set their U&C prices in the stratosphere. Many pharmacy systems will recommend a price schedule for generics that is the full AWP of a product plus a substantial markup, which results in pharmacies regularly submitting U&Cs that are utterly ridiculous and useless to anyone – for example, prior to my intervention to look at the submitted pricing, my practice submitted a U&C of ~$1200 for a 30 count bottle of ondansetron 8 mg tablets – that’s insane, given that ondansetron has a NADAC of ~$0.10/tablet, or $3 for 30 tablets. (I’ve since adjusted it to a much more reasonable and appropriate figure). But under lesser of logic, that kind of U&C makes business sense, because who knows if some random MAC list wouldn’t pay $1000 for those 30 tablets?

3) Price comparison tools like GoodRx could actually be informed by PHARMACY-set pricing instead of PBM contract arbitrage. Pharmacies could transmit .832 files to PBMs (or better yet, health plans and price comparison sites directly!) of current U&Cs for each item, allowing the pharmacy’s pricing to actually inform the decision making of plans (formulary, PBM selection, preferred networks, etc) and patients, rather than being a nearly non-entity outside of lawsuits accusing pharmacies of inflating their submitted U&Cs.

There are probably even better technical solutions to this problem of MAC and U&C transparency than transmitting daily .832 files (such as Application Programming Interfaces similar to those used by Amazon sellers, which also inform in-stock/out of stock, among other possibilities, such as UM requirements, formulary tiers, etc - man it would be nice to have plan-specific tiering information readily available pre-adjudication, and I know that all of this info is already available via various web interfaces and parts of medicare.gov - pulling that info into a pharmacy software package in a useable format would be beautiful), but this solution is one that I think could be operational with relatively little effort – pharmacies generally already have sftp connections to PBMs for obtaining their remittance advice files (.835), and using those existing connections to publish MAC prices to pharmacy computer systems seems to me to be a relatively simple proposition vis a vis building new API systems to push-pull this data.

There are probably some issues with doing this from an operational standpoint – primarily the fact that large PBMs maintain multiple MAC lists for different clients and networks, and associating the right MAC to the right BIN/PCN/Group/Network may be difficult to implement at the pharmacy level. However, I think that the practice of maintaining multiple MAC lists is illegitimate anyway, and should be done away with. If $5/tablet is the MAXIMUM allowable cost for one plan and one pharmacy, it should be the MAXIMUM for all plans and pharmacies for a given PBM.

To those who would oppose this kind of process – this is how open markets work. Closed/controlled markets like the current PBM model allow substantial margins to be taken by those who have access to all of the price information – with mystery comes margin, after all. Monopolists across industries seem to try to control the flow of pricing information in their market (see the beef market, for example, or DoorDash, or Uber.) Open transmission of price information is essential to any open market economy, and preventing pharmacies from obtaining readily useful price information is fundamentally opposed to market economy principles. If PBMs truly function to lower prices, then providing price information to allow pharmacies to set more rational U&C price points (and strategically setting U&C LOWER than MAC price points, such as when there is a large spread between actual cost and MAC providing an opportunity to attract more business through pricing decisions, especially from high deductible plan beneficiaries who pay full negotiated price) should be top of mind for PBM entities operating in good faith.

In summary – the proposal here is this: MAC prices should be published in their entirety to pharmacies via .832 catalog or a similar computer software-digestible format as often as they are changed.

Ramblings of a pharmacist

On catalogs and MACs