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Dr. Urmie is an associate professor in the Health Services Research Division at the University of Iowa College of Pharmacy. She received a B.S. in pharmacy from the University of Wisconsin and worked as a community pharmacist prior to returning to the University of Wisconsin for graduate school, where she received an M.S. in pharmacy administration and a Ph.D. in social and administrative sciences in pharmacy. Her teaching interests include insurance and reimbursement in pharmacy, health insurance, the US health care system, health policy, and pharmacy management. Her main areas of research are prescription drug insurance and consumer preferences related to health care use.

After completing this chapter, readers should be able to

  1. Discuss the history of third-party reimbursement for prescription drugs and its impact on pharmacy management.

  2. Understand the basic principles of third-party reimbursement for prescription drugs and define commonly used reimbursement terminology.

  3. Evaluate the financial impact of third-party reimbursement on the pharmacy using an average net profit comparison, a differential analysis, and a pro forma analysis.

  4. Identify the broad range of factors that a pharmacy manager should consider when evaluating a third-party contract.

  5. Discuss issues related to third-party reimbursement for prescription drugs.

Natalie Hawkins, the pharmacy manager at Good Service Pharmacy in Tipton, IA, opens her mail and sees that Better Health Insurance has sent a new contract. Natalie had heard about the possibility that Better Health might stop using the average wholesale price (AWP) as the basis for their prescription drug reimbursement. She was anxious to see what Better Health was going to use as the basis of their new reimbursement formula.

Better Health is one of the pharmacy's major insurance plans, providing prescription drug coverage for 20% of their patients. Since Better Health significantly decreased their reimbursement rate a few years ago, Natalie worries about the effect of further decreases. As she reads the new contract, she discovers that Better Health is switching from an AWP-based reimbursement formula to a wholesaler acquisition cost (WAC) formula and the new reimbursement rate is WAC plus 2 percent plus a $1.00 dispensing fee. Natalie has no idea how the new reimbursement rate compares with the old reimbursement rate of AWP less 18 percent plus a $1.00 dispensing fee. She worries that the insurer is just trying to decrease the reimbursement.

Natalie wonders whether Good Service Pharmacy should still participate in the Better Health plan. After all, what signal would she be sending to other insurers and pharmaceutical benefit managers (PBMs) if she accepts a very low reimbursement rate? Good Service Pharmacy might become “Poor Service Pharmacy” or even go out of business if all its third-party contracts had such low rates. Then Natalie remembers Mrs. Anderson, a 78-year-old woman with Better Health Insurance, who has been coming to her pharmacy for over 20 years. Natalie has spent many hours over the years talking with Mrs. Anderson about her medications, and she ...

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