Estimating the Impact of Medicare Part D on the Profitability of Independent Community Pharmacies

BACKGROUND: Medicare Part D provides insurance coverage for prescription drugs to elderly and disabled consumers. Part D accounted for 24% of prescriptions dispensed by independent pharmacies in the first year of the program (2006). To date, the impact of Part D on independent pharmacies has been explored only in small, qualitative, or non-peer-reviewed studies. OBJECTIVES: To develop preliminary estimates of the impact of Part D on independent pharmacies profitability. METHODS: A financial model was built to examine the impact of Part D on pharmacy profitability. A key input value was the gross margin percentage for Part D; the midpoint of estimates reported in the literature was used as the base-case input value. The remaining model inputs were derived from 2 non-peer-reviewed published sources: (a) the National Community Pharmacist Association (NCPA)'s survey of independent pharmacies, which provided financial data for the year prior to Part D implementation (2005); and (b) IMS Health national market research data, which provided information about changes in prescription drug utilization from 2005 to 2006. Model estimates represented a typical independent pharmacy, defined using mean values for financial measures in 2005 as reported by NCPA. The model examined the impact of Part D on the proportion of prescriptions reimbursed by other sources (private third-party insurance, Medicaid, and cash payments by patients); pharmacies overall prescription gross margin; the number of Part D-induced prescriptions; the number of prescriptions lost to mail-order pharmacies; and net income before taxes. Key values and assumptions were subjected to one-way and probabilistic sensitivity analyses. RESULTS: The model indicated that implementation of Part D resulted in a mean (SD) 22% (4%) decrease in net income before taxes. This change was primarily the result of an absolute 0.7% decline in the gross margin for all prescriptions. The lower overall gross margin resulted from lower reimbursement on Part D prescriptions. In the typical independent community pharmacy, Part D induced an increase in utilization of an estimated 427 prescriptions but 229 prescriptions were lost to mail-order pharmacies. The results were most sensitive to Part D reimbursement rates. Even under the most optimistic assumptions, Part D decreased net income. However, even under the least favorable assumptions, the typical independent pharmacy remained profitable. CONCLUSIONS: Part D reduced the profitability of the typical independent pharmacy by an estimated mean (SD) 22% (4%) in 2006. This reduction resulted primarily from the lower Part D reimbursement rates.