The lion sits down with the lambs

Drug Store News, Feb 20, 1989 by Bruce Buckley

The lion sits down with the lambs

Alex Grass has been invited this year to address a somewhat (for him) unusual audience: the National Association of Retail Druggists. That an association representing independent pharmacists would seek out Rite Aid's chief executive as a keynote speaker is evidence that an issue of overwhelming proportions must be at stake. When lambs sit down with a lion, it isn't because they admire his table manners.

In the case of Alex Grass, the issue is third-party reimbursement. Grass and his company - the largest and one of the most aggressively growth-minded of drug chains - have led the fight to reintroduce sanity into the setting of third-party payment rates.

Adequate reimbursement is an issue that unites every faction in the retail drug industry, precisely because it involves the survival of the industry. Rite Aid has seen its third-party prescriptions grow steadily, both in sheer numbers and as a percentage of total pharmacy business. Today, that percentage stands at 42 percent. In the not too distant future, Grass says it will reach the high 60s or low 70s.

Since last fall Grass has been sounding the alarm about the damage that reimbursement at AWP minus 10 percent or 20 percent does to the bottom line. The Rite Aid chairman released a study showing that the chain - arguably the best in the country at cutting both deals and costs - actually loses money at average wholesale price less 10 or 20 percent. The cost analysis disclosed figures normally kept confidential. Grass says he released them because he wanted to alert others to the long-term harm that overly zealous cost containment efforts were having on the industry.

Grass promised last fall that the chain would no longer accept third-party plans that resulted in losses. Since then the chain has made good on its promise. In Baltimore, where Rite Aid holds a commanding share of market, the chain was able to force a reversal of a threat to cut third-party reimbursement rates for 46,000 city workers.

The chain has continued to play hardball with other third-party payers. It used newspaper ads to tell workers covered by the United Mine Workers health and pension plan that it would no longer fill their prescriptions if the UMW plan insisted on cutting reimbursements. It said it would no longer honor PCS cards for two plans covering thousands of employees in Ohio, Pennsylvania, New Jersey and Delaware.

Now NACDS is about to launch a industry-wide study to document the true cost of third-party reimbursement levels on its members. A preliminary survey form has been devised, and the finished questionnaires should be going out within weeks. The object of the study is to provide ammunition for the argument that further assaults on the already thin margins provided by third-party business will drive out drug store participants, force increases for a dwindling number of cash customers and ultimately threaten the survival of many operators. Grass's campaign is gathering steam.

The Rite Aid chairman says he has received a lot of encouraging letters of support from other drug store operators, many of them independents that stand to lose more than Rite Aid as third-party administrators seek to squeeze costs for all they're worth. So maybe it's not so surprising that they asked one of the industry's lions to come break bread with them.