Background 

Retail pharmacies are brick-and-mortar stores that are open to the public, either as standalone stores or within a grocery or big-box store; they may be part of a chain or operated independently. Retail pharmacies offer access to a healthcare professional that can provide information and resources about health conditions and may be seen as an alternative to more expensive sites of care for patients with non-urgent needs. National trends show pharmacies experienced a net decrease in locations of 2.1% between 2018 and 2021.  

Closures in areas with few pharmacies may result in pharmacy deserts that require individuals to travel a long distance to access a pharmacy. A recent study found that almost 5% of US residents live in a pharmacy desert, defined as at least one-third of an urban area’s population living more than one mile from a pharmacy, more than five miles for a suburban area, and more than ten miles for a rural area. Another study that defines a pharmacy desert as an area with no retail pharmacies within a ten-mile radius found that 46% of US counties have a pharmacy desert; these counties were likely to have a higher social vulnerability index and fewer primary care providers. 

In recent years pharmacies have been navigating financial challenges, largely due to declining reimbursement rates across payers, including Medicare, Medicaid, and commercial insurance. Numerous sources document ongoing challenges that have reduced the payment rates or the margins that pharmacies are able to obtain for the prescriptions they fill. New Avalere Health primary research indicates factors beyond reimbursement further contribute to challenges facing pharmacies today.  

Pharmacies must manage administrative and regulatory requirements, which often change and can vary by state, and respond to new policy mandates, such as those implemented under the Medicare Drug Price Negotiation Program implemented under the Inflation Reduction Act (IRA). 

Recent drug pricing policy developments, most notably Medicare drug negotiation, will create increased financial pressure on pharmacies in response to changes to cash flow. Effectuation of negotiated Maximum Fair Prices (MFPs) is expected to create cashflow and operational challenges for pharmacies because there will be a retrospective reconciliation between the pharmacy’s purchase price and the reimbursement received under the Part D plans for the negotiated drugs. As MFPs are implemented, payment processes between manufacturers, plans, and pharmacies will need to be assessed to ensure negotiated drugs are adequately reimbursed. Furthermore, tariff policy may affect the availability and cost of drugs or drug ingredients in the near term, and changes to US drug pricing policy such as a Most-Favored Nation model would affect how drugs are priced and purchased. 

In light of heightened concern surrounding pharmacy, Avalere Health conducted interviews and a survey to better understand the challenges independent pharmacies face beyond reimbursement pressures and what measures they are taking to maintain financial viability. 

Avalere Health conducted semi-structured interviews and fielded an online survey to understand the challenges that independently owned pharmacies face and how they are adapting to maintain financial viability. For the purposes of this research, an independent pharmacy was defined as a retail pharmacy with fewer than 10 locations. 

Results 

Business concerns 

Survey respondents reported that drug reimbursement, drug shortages, and generic drug profitability are their top three business concerns (Figure 1). Drug reimbursement—specifically, pharmacy benefit managers reimbursing brand drugs at less than acquisition cost—was identified as the greatest concern, with one-third of respondents ranking this as their highest concern and 62% of all respondents ranking it in their top three concerns. The survey findings were consistent with those of the interviews, with several pharmacy owners emphasizing the importance of stocking the correct mix of drugs. 

Figure 1. Pharmacy business concerns

One quarter of survey respondents indicated that their greatest concern was shortages of highly utilized drugs, with 63% of all respondents placing this in their top three concerns. While pharmacists do not have direct control over supply chain challenges and drug shortages, 96% of survey respondents indicated that there is a role for pharmacists to play in mitigating related challenges. However, meaningful barriers exist to these efforts. For example, pharmacists may need to contact a prescriber to change a patient’s medication to an available product, which may be complicated by formulary restrictions and differences in out-of-pocket costs. 

Generic drug profitability was ranked in the top three by more than half of respondents (57%), and implementation of the IRA was a top-three concern for 38% of respondents. 

Reimbursement levels and generic drug profitability have led to variation in pharmacy purchasing practices (i.e., brand or generic) and wholesaler contractual arrangements. The generic drug market has many distributors and manufacturers providing equivalent products. Pharmacies are incentivized to purchase generic drugs at the lowest possible price because pharmacy benefit managers often pay a maximum allowable cost for all generically equivalent products, which may be lower than the price available to a specific pharmacy. This can result in a small margin for pharmacies. Nearly all survey respondents (95%) report using multiple wholesalers to acquire generic drugs, which aligns with interviewees’ expressed willingness to comparison shop to acquire generic drugs at the lowest cost. 

Adaptive practices to pursue financial viability 

Results suggest that independent pharmacies use different stocking practices for generic and brand drugs (Figure 2). Most survey respondents (69%) said they keep two to four weeks of generic inventory in stock, while more respondents are likely to either order brand drugs when needed or stock less than two weeks of inventory (58%). 

Figure 2. Brand and generic inventory in stock

In response to increased pressures, surveyed independent pharmacies are taking a variety of measures to ensure financial sustainability, trying new strategies and expanding their service offering to remain nimble in an evolving marketplace. The survey also revealed that independent pharmacists are increasingly interested in providing new services to increase operating margins and adapt to changing market pressures (Figure 3). The most common services to be offered were home delivery (77%), seasonal vaccinations (e.g., influenza, COVID-19) (71%), drug compounding (69%), medication synchronization (67%), and routine vaccinations (e.g., Tdap, shingles) (65%). 

Figure 3. Pharmacy services offered 

Both interviewees and survey respondents emphasized that their ability to practice at the top of their license—providing clinical services beyond filling prescriptions—underlies their pharmacies’ ability to diversify service offerings. The majority (73%) of survey respondents are located in states where pharmacists can perform diagnostic testing; of those who are able to test, only 61% are allowed to initiate treatment based on the results. 

Finally, in response to concerns about policy, 81% of survey respondents indicated familiarity with the Medicare drug negotiation component of the IRA. Of those, most indicated an intention to expand their health-related (61%) and non-health-related (57%) services. Because of the potential cash flow and reimbursement risk for negotiated drugs, 11% of negotiation-knowledgeable respondents anticipate not stocking products on Medicare’s list of negotiated drugs, and 12% anticipate ceasing participation in Medicare Part D (a National Community Pharmacists Association report found a higher percentage). Most respondents (61%) anticipate engaging with vendors to negotiate longer payment timelines. 

Conclusion 

Low reimbursement and shrinking financial margins have created additional pressure on pharmacies that has resulted in pharmacy closures nationally. Pharmacies are likely to face heightened financial and operational burden in the wake of Medicare drug negotiation and emerging policies such as the Most Favored Nation executive order and tariffs on pharmaceuticals. In response to the evolving policy and market landscape, independent pharmacies are expanding clinical and non-clinical services to maintain viability in the marketplace. As new policies are explored, policymakers will need to assess how broader drug pricing policies could directly implicate the financial sustainability of pharmacies and continued availability of treatments for patients. 

Methods 

Avalere Health conducted interviews with independent pharmacy owners (N=9) and supply chain experts (N=5) to understand pharmacy challenges related to: 

• Drug shortages 

• Supply chain management 

• Pharmacy reimbursement 

• IRA Implementation 

Learnings from the interviews informed the survey design, which was fielded to 100 independent pharmacies. There were 91 respondents, including 51 pharmacy owners and 40 pharmacist managers. Respondents included individuals with primary or shared responsibility for drug inventory and management, as well as profit and loss. Survey respondents were asked questions across a variety of topics, including purchasing strategies and dynamics, drug shortages, service offerings, and implementation of Medicare MFPs. Within each topic area, survey respondents were asked to rank key business concerns from least to most concerning, identify purchasing and stocking practices (e.g., brand and generic inventory kept on hand), and identify how current service offerings may change in response to Medicare drug negotiation. 

Funding for this research was provided by the Healthcare Distribution Alliance. Avalere Health retained full editorial control. 

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