For as long as many in the infusion business can remember providers have set their list (Usual and Customary) pricing as some function of AWP (Average Wholesale Price). Over the years AWP has been a good friend. Even if a company could not buy very well AWP generally afforded a dependable margin of about 25 percent.
But a recent court ruling threatens to change all of that. Soon the AWP markup over WAC (Wholesale Acquisition Cost) will drop from 25 percent to 20 percent. Experts suggest that will reduce retail pharmacy margins by about four percent. (In addition to that Medicaid is looking at changing how it reimuburses for generic drugs.)
As health care costs continue to climb insurance companies and Pharmacy Benefit Managers are looking to create savings any way they can. And one can be sure that the need to fund health care reform will continue the push reimbursement downward. With medication margins coming down and dispensing fees continuing to ignore the real costs of filling a prescription, pharmacies and infusion companies have all the reason they need to support NHIA’s legislative efforts related to Medicare reimbursement for infusion.
Unfortunately, the AWP issue is only the first of what will be many attempts to reduce costs. Just like hospitals, at some point, maybe sooner rather than later, infusion providers will be forced to come up with more defensible pricing strategies. Historically, there has been a tendency to create list pricing by applying a multiplier to AWP and calling it the list price and then using large discounts to convince payers they were getting a great deal. Add in some combination of per diem rates and therapy and/or dose specific pricing matrices and profitability was likely to occur more often than not.
Infusion providers like other health care providers should not underestimate the potential negative impact of health care reform. Covering up to 45 million uninsured while lowering costs to pay for it will affect every provider. Once that happens profitability will no longer be something that just comes out in the wash. Profitabilty will have to be planned one patient at a time starting at the front end of the transaction. That means that expected costs of service must be matched to expected reimbursement and then managed to a plan of cost parallel to the plan of care. The first step is identifying all of the costs of providing care and accurately applying them to each case. To do this providers will need data, especially activity reports. Then an Activity Based Costing Analysis must be done. (This is not time studies.) The second step is to develop a new list pricing methodology that takes into account all activity costs, supply and equipment costs and payer reimbursement practices. The game has changed. For payers it is about net price not net discounts. For providers it is about net margins as a function of reimbursement and costs.
What to do:
Today: Resolve to create an internally predictable relationship between your actual costs of doing business and your list pricing.
Next Week: Identify the data reports needed to begin a change in your approach to list pricing.
Next Month: Plan when to perform an Activity Based Cost Analysis.
Month After Next: Complete the Activity Based Cost Analysis.
By Year End: Create new list pricing and develop the Plan of Cost model
Beginning of 2010: Implement your integrated Plan of Care/Plan of Cost model.