Washburn & Associates

Medicare Changes

The new Medicare Part D plan is aimed at assisting the Medicare/Medicaid patients with the raising costs of drugs. It provides consumers choices, but it has also created confusion. The consumer is confused about the multitude of available plans. The pharmacy owner is confused because there isn’t any certainty about how drastic the impact of the new plans will be on the pharmacy industry.

For the past six months Jack Washburn, the CEO & President of Washburn & Associates, has been attending meetings around the country both in person and by teleconference related to gathering information and obtaining an understanding of the new program and how it will impact the retail pharmacy. The results of these meeting is that Jack now knows, that very few people in the industry can explain the full impact, or for that matter fully understands the program.

What is expected of the new Medicare Part D program is that the impact will create a sizable reduction to the pharmacy owner’s gross margin when filling Medicare/Medicaid scripts. Pharmacy owners in some states should actually expect to take a loss when filling a script under the new program. Larger stores will be able to absorb the losses. Smaller stores, especially those with high script counts covered by the new plan will have difficulty staying in business.

There are 43 million Americans on Medicare. The new changes are expected to save the average customer $700 per year. With 43 million using the program that is over $30 billion dollars per year that that pharmacy owners collected in the past, which is now out of the system. Great for the consumer – but definitely hurts the bottom line of the pharmacy owner.

Since a large majority of the Medicaid seniors already have their entire prescription needs covered by Medicaid, the new plan will not be generating new sales. On top of that, 20 million seniors who are not currently covered and have been paying cash (and the higher margins) will now be on the plan with dramatically reduced margins and in some cases losses for the pharmacy owner. There is further expectations that some seniors may also change their buying behavior by shifting away from independently owned pharmacies and move to the chain pharmacies who can provide guidance and convenience.

Larger chain drug stores are implementing training seminars and developing specialists who can assist the customer. They have the budget to do this - the smaller independent owner does not.

Reduced reimbursements will have greater affects on the independent than the chain. Most chains are resigned to the fact that their Rx departments will become a “lost leader.” They will concentrate their efforts on consolidating stores, driving more customers into their larger stores, and making their profits off the front-end merchandise.

Pharmacies that refuse to service patients with these Medicare plans will not only lose the Rx sales, but will also lose any front-end sales the customer would have purchased. The strategy of refusing to accept Medicare customers will allow a pharmacy owner to maintain profit percentages, but the overall result will be fewer customers, and lower net profits.

To top off the bad news, Jan. 1, 2006 is only the first round of reductions in reimbursements. It is expected there will be additional cuts during the next 2 years.

The overall results from the new Medicare plan will be a pharmacy industry that makes less money than in the past. Any business that makes less money is going to see its value reduced. A reduction in value has already been seen with larger publicly traded pharmacy chains. Each independent will be valued on its own merits. However, with all things considered, expect a steady decline in the value of all independently owned pharmacies.