How Narrow Networks Are Changing Pharmacy

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What community pharmacies need to know about participating in preferred and performance-based networks

Narrow pharmacy networks are growing as payers use these networks as a way to help control drug spending. It is important for community pharmacy owners to understand why narrow networks are increasing; how the criteria for inclusion in narrow networks is changing to include not just reimbursement, but also performance; and how community pharmacies can succeed in this environment.

Don’t Forget Payers

As a pharmacist, you probably view the individual patients and families you serve as your customers. And they obviously are important; they’re who you interact with face-to-face on a daily basis to help improve their health. But your other big customer is the payer — health plans or the PBMs to which they carve out the administration of pharmacy benefits. PBMs control access to patients by determining how much of the cost of a prescription to cover when a patient purchases from you — which means health plans strongly influence your store’s bottom line.

Because PBMs have such influence, you need to work as hard to meet their needs as you do to meet the needs of individual consumers.

Creation of Narrow Pharmacy Networks to Control Costs

Increasingly, PBMs are using more tightly controlled pharmacy network models to achieve additional drug spending savings. Narrow networks aren’t a new concept in healthcare; this is the logic behind preferred provider organizations (PPOs) and health maintenance organizations (HMOs) where preferred or exclusive providers agree to special pricing terms, hoping to realize increased volume. Their rapid expansion is catalyzing change in retail pharmacy.

Types of Pharmacy Networks1

  • Open pharmacy network. In open networks, consumers’ copayments and out-of-pocket costs are identical regardless of which pharmacy in the retail network dispenses the prescription. Open pharmacies are the most broad and often include the more than 60,000 retail pharmacies in the U.S.
  • Narrow pharmacy network. With narrow networks, consumers receive financial incentives to use particular pharmacies that offer lower costs and/or give payers greater control. Pharmacies that participate in narrow networks are willing to accept reduced reimbursement rates in order to boost store traffic. There are different types of narrow networks. Two of the most common terms you hear are:
    • Preferred pharmacy network. Consumers can choose any pharmacy in their plan’s network, but pay a lower out-of-pocket cost when they choose to get their prescription filled from preferred pharmacies — which usually represent 20% to 50% of all retail pharmacies — and pay more out of pocket if they buy from a non-preferred pharmacy. For example, a consumer may have no copayment on certain drugs if a prescription is filled at a preferred pharmacy and a $5 copay if filled at a non-preferred pharmacy in the network.
    • Limited pharmacy network. In this more restrictive model, consumers can only use the specific pharmacies or dispensing formats designated as part of the payer’s limited network. The model gives payers the greatest degree of economic control, as they will only include pharmacies with the lowest costs and highest service levels. Limited networks are typically 50% to 80% smaller than an open network, usually having fewer than 20,000 pharmacies.

Growth of Narrow Networks

For Medicare beneficiaries. In 2014, it is expected that preferred pharmacy networks will dominate Medicare Part D drug plans. It’s estimated there will be 56 Medicare Part D plans having preferred pharmacy networks, up from only 16 in 2013, and 72% of nearly 1,200 regional prescription drug plans are expected to have a preferred network.2

In 2013, more than 4 out of 10 seniors were enrolled in a Medicare Part D drug plan with a narrow pharmacy network design.3 And, most seniors (85%) were satisfied with their preferred pharmacy plan, especially the cost savings from lower premiums and copays.4

For individuals with commercial insurance. Although slower in their adoption, commercial health insurance plans are moving to also adopt narrow pharmacy network models, primarily choosing to use preferred networks. Walmart, the third-largest retail pharmacy, estimates that 25% of its 2012 prescription volume came from participation in narrow networks, up from just 1% in 2009. CVS Caremark’s Maintenance Choice is the most prominent limited network, with more than 1,000 commercial plans accounting for 14.5 million covered lives using this narrow network.5

Inclusion Criteria for Narrow Networks: Quality and Performance Playing a Greater Role

PBMs select pharmacies to include in preferred pharmacy networks based on specific, measurable criteria, including geographical coverage, cost and quality of care. A pharmacy’s participation in a PBM’s narrow network has been primarily based on its willingness to accept reduced reimbursements.

If you don’t think that price matters to payers and consumers, think again. While a preferred or limited network may cause consumers a small degree of inconvenience in fewer choices of pharmacies at the lower prescription cost, many consumers say they would be willing to switch pharmacies for even very small monetary rewards. In one national survey, 85% of consumers said they would switch their pharmacy to avoid higher copayments. Historically, consumers have considered only service and location when choosing a pharmacy, but narrow networks are teaching consumers to shop for prescriptions by price.6

Recently, the healthcare industry has been migrating away from a fee-for-service reimbursement model and moving to fee-for-performance. With health plans (and their PBMs) increasingly being rated and compensated based on quality, they are adding and considering quality and other performance measures as they form narrow networks for all types of providers, including pharmacies. For example, CMS has begun rating (“Star Ratings”) and providing substantial financial bonuses to health plans based on their ability to measurably impact care outcomes. For PBMs, this means that instead of being measured solely on how effectively they drive down costs, they must also demonstrate improved patient outcomes in order to receive reimbursements and earn cash incentives. You won’t get paid simply for providing a service, such as dispensing a drug. You will be paid for achieving a desired outcome, such as the patient taking a medication correctly for the prescribed amount of time and other quality measures related to adherence.7 Network inclusion based on performance is the future for pharmacies. (To learn more about how pharmacies can affect payers’ quality ratings, see Star Ratings Explained.)

Why Community Pharmacies Should Care about Networks

There are multiple reasons that community pharmacies should care about networks, and actions that community pharmacies can and should take.

  • Be part of networks. Previously, there was hesitation about networks among some community pharmacies due to the lower reimbursement. But narrow pharmacy networks are here to stay. They are growing in importance to payers, the major retail chains are participating, and to help ensure continued access to large numbers of patients, it can be in the best interests of community pharmacies to be part of networks.
  • Develop and implement strategies to grow revenues. The theory behind network participation is that while reimbursement on prescriptions may be lower, network participants may see higher traffic. Pharmacy owners need to focus on how to turn this traffic into increased revenue and loyal customers. Areas of focus may include:
  • Understand the performance-based participation criteria. Network participation is no longer just related to reimbursement rates; it is increasingly about quality and performance. Pharmacies that don’t measure up won’t be included in and will be dropped from narrow networks. For community pharmacies, it is important to understand the types of performance criteria desired and the capabilities viewed as important, such as adherence programs and counseling services.

After understanding these performance criteria, it is important for every community pharmacy to “Know Your Numbers” in terms of how you currently rate on these pharmacy-related measures that impact a health plan’s star ratings and reimbursement (and potentially your inclusion in future networks). Becoming an expert in areas such as medication management of chronic conditions and using refill reminders, online refills and dose packaging are other ways to improve adherence and medication-related positive outcomes.

The landscape has changed rapidly and significantly. Narrow pharmacy networks are a reality. The challenge for community pharmacies is to understand this reality, evolve — as successful community pharmacies have always done — and figure out how to adapt and prosper in this new landscape.

Note: The information provided here is for reference only and does not constitute legal advice. We make no representations with regard to the content’s comprehensiveness. You are solely responsible for investigating and complying with all applicable laws that govern the operation of your business.
1 Adam J. Fein, “The Big Squeeze,” Pharmaceutical Executive, Pharmacy Benefit Networks, May 2013.
2 For 2014, More Than 70% of Medicare Part D Plans Have a Preferred Pharmacy Network, Drug Channels, October 15, 2013.
3 Adam J. Fein, “The Big Squeeze,” Pharmaceutical Executive, Pharmacy Benefit Networks, May 2013.
4 Pharmaceutical Care Management Association, A Survey of Seniors About Their Medicare Part D Preferred Pharmacy Network Plan, May 2013.
5 Adam J. Fein, “The Big Squeeze,” Pharmaceutical Executive, Pharmacy Benefit Networks, May 2013.
6 Ibid.
7 Ibid.