The art of pricing prescriptions

Drug Store News, Feb 12, 1996

Over the past five years, prescription gross margins have plunged. From an average of 32 percent, chain drug's average gross margin on prescriptions has dipped 25 percent to 24 percent. And the trend shows no sign of reversing.

Chains have shown great determination and creativity in their quest to wring costs out of the system. Time and motion experts have redesigned chains' pharmacy layouts themselves to maximize efficiency. Technicians are another tool, as chains push their contributions to the limit. Technology is also a must, which Walgreens' technology testifies, as the behemoth chain works to increase its pharmacy efficiencies to 400 prescriptions a day from 250.

Razor-sharp pricing is another element in the equation. While third-party pricing is unalterable, retail pricing is not. Knowing an area's average retail price for a prescription with a high refill percentage can help a drug store sharpen its pricing strategy.

The statistics here, provided by McKesson's ProfitLink program, provide a snapshot of the pricing of the top 15 drugs (as measured by number of prescriptions) in two regions of the country. Each region represents an amalgam of prices from pharmacies in all settings--chain drug, mass, grocery and independent.

Pricing varies considerably from region to region.

On average, a 30-count prescription for Premarin (0.625 mg tablets) costs a southern region consumer $10.74, and a 100-count prescription costs $29.81. In the Midwest, acustomer will pay an average $12.43 for the same, and $32.36 for the 100-count.

The percent of cash to third party for the Premarin prescription is almost identical in the two regions, but the average third-party cash price varies, meaning a drug store charging $11 for a 30-count Premarin third-party prescription in the Midwest is locked into a contract below the local market's third-party average.

Knowing local market conditions such as these helps drug chains hone each location's pricing. In an effort to test sharp pricing, a drug store operator in the Midwest region prices its 30-count Premarin prescription higher than the $12.43 at $14. The operator then decides to lower the store's price to the retail average and watches to see what happens. But sales remain flat. The operator then knows there is no benefit to sharp pricing on this prescription.

According to ProfitLink director Michael Cannata, there is a sharp division between the top 200 drugs in a region, and the rest of the prescriptions. The top 200, he said, account for 60 percent of a pharmacy's volume (the top 100 comprise 40 percent), and can require the sharpest pricing. Once a drug falls out of the top 200, pricing may be softer. In any event, the pricing strategy of "set it and forget it" is long past.