2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies

by Adam J. Fein, Ph.D.
(213 page downloadable PDF file; Published January 2015)

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In 2014, the pharmacy industry continued to evolve. Amid this change, understanding the implications of the industry’s evolution has never been more crucial. The 2014–15 Economic Report on Retail, Mail, and Specialty Pharmacies—our sixth edition—remains the most comprehensive tool available for analyzing the economic and business realities of the U.S. pharmacy industry. Click here to download the free report overview.

The 2014–15 Economic Report on Retail, Mail, and Specialty Pharmacies will help you master the latest data and concepts about the complex interactions within the pharmacy distribution and reimbursement system. The report was researched and written by Adam J. Fein, Ph.D., one of the world’s leading experts on the industry and author of the influential Drug Channels website. It synthesizes a wealth of statistical data, research studies, financial information, and his unique business consulting experience into a definitive, nonpartisan resource.

The report is essential for pharmaceutical manufacturers, wholesalers, pharmacists, pharmacy owners, benefit managers, managed care executives, healthcare policy analysts, investors, consultants—anyone who wants to understand and benefit from this ever-changing industry. After reading the 2014–15 Economic Report on Retail, Mail, and Specialty Pharmacies, you will be able to:

  • Describe the U.S. pharmacy industry’s overarching structure
  • Identify the largest participants in the pharmacy industry
  • Distinguish the different dispensing formats for prescription pharmaceuticals
  • Identify key participants in the specialty pharmacy market
  • Explain specialty pharmacies’ services for patients, manufacturers, and payers
  • Explain the factors influencing the pharmacy industry’s growth
  • Compare growth trends among different dispensing formats
  • Describe the relationships between Pharmacy Benefit Managers (PBMs) and pharmacies that participate in a PBM’s network
  • Explain how third-party payers affect a pharmacy’s economics
  • Summarize the primary methods of estimating a pharmacy’s ingredient costs
  • Distinguish among services that pharmaceutical wholesalers provide to larger and smaller pharmacies
  • Identify typical per-prescription profit margins of generic vs. brand-name prescriptions
  • Explain why and how pharmacy profitability from a generic drug varies over its lifecycle
  • Distinguish between the profitability levels of retail vs. mail pharmacies
  • Define key trends affecting the pharmacy industry’s future

This year’s report has been completely updated, revised, reorganized, and expanded. It contains the latest financial and industry data, along with detailed information about the strategies and market positions of the largest public companies—CVS Health, Express Scripts, Rite Aid, Walgreens Boots Alliance, Walmart, and others. Beyond updating all data and information from previous editions, this 2014-15 edition includes many new elements, such as:

  • A new Chapter 3, with expanded, in-depth analysis on specialty drugs and specialty pharmacies
  • A revised Chapter 4, which integrates our analysis of pharmaceutical payment and pharmacy benefit management
  • New reimbursement comparisons for different dispensing channels (mail vs. retail vs. specialty)
  • All-new material on globalizing retail and wholesale markets
  • Highlights of the new track-and-trace federal law
  • New details on wholesalers’ pricing and discount models to pharmacies
  • New analysis of the changing relationships between larger pharmacies and wholesalers
  • Expanded competitive analysis of health systems and physician practices that dispense specialty drugs
  • And much more!

The report analyzes the industry in seven major chapters. The chapters are self-contained and do not need to be read in order. We include extensive internal references to help you navigate the entire document and customize it to your specific needs. (These references are clickable hyperlinks in the PDF document.) There are also more than 300 endnotes, most of which have hyperlinks to original source materials.

Please note that purchase of the 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies indicates agreement with the terms and conditions of the End User License Agreement (EULA). License terms, purchaser’s name/email, and a unique transaction ID will be added to the secure PDF file upon checkout. You must purchase a Department/Team or Corporate License if you want to share the report with other people in your company. Upon request, we will refund duplicate purchases of a Corporate License from the same organization.

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LICENSE TERMS

Pembroke Consulting, Inc., d/b/a Drug Channels Institute, grants to Purchaser, and Purchaser hereby accepts, a limited, terminable, revocable, nontransferable, nonexclusive, nonsublicenseable license to access and use the 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies only in accordance with the End User License Agreement. License terms, purchaser’s name/email, and a unique transaction ID will be added to the secure PDF file upon checkout. We offer three License Options:

  • Single User License: This license allows for use of this report by one individual person. This person may use the report on any computer, and may print out the report, but may not share the report with any other person or persons. Unless a Department/Team License is purchased, a Single User License must be purchased for every person who wishes to use the report within the same organization or enterprise. Buyers who infringe upon these license terms are liable for a Department/Team or Corporate License fee.
  • Department/Team License: This license allows for use of this report by up to 10 (ten) employees within the same organization or enterprise. Each of these employees may use the report on any computer, and may print out the report, but may not share the report with any other person or persons unless a Corporate License is purchased. Buyers who infringe upon these license terms are liable for a Corporate License fee.
  • Corporate License: This license allows for use of the report by an unlimited number of employees within the same organization or enterprise worldwide. Each of the employees within this organization or enterprise may use the report on any computer, and may print out the report, but may not share the report with any other person or persons outside the enterprise or organization.

The 2014-15 Economic Report on Retail, Mail, and Specialty Pharmacies is protected by copyright law. Unauthorized reproduction or distribution of this report, or any portion of it, may result in severe civil and criminal penalties, and will be prosecuted to the maximum extent of the law. This report may be cited in commercial documents with full and appropriate attribution. Nothing in this license is intended to reduce, limit, or restrict any rights arising from fair use under copyright law or other applicable laws.

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TABLE OF CONTENTS

Introduction and Guide to This Report

Chapter 1: Industry Overview

  • Defining the Practice of Pharmacy
    • Products That Pharmacies Dispense
    • Top Traditional Therapy Classes and Average Prescription Costs
    • Regulation and Supply Chain Security
  • Pharmacy Industry Participants
    • Outpatient Pharmacy Dispensing Formats
    • Other Outpatient Dispensing Formats
    • Differences Among Outpatient Dispensing Formats
    • Pharmacy Employment and Salaries
  • Market Size and Share
    • Revenues and Number of Pharmacies
    • National Market Share by Company in 2014
    • Regional Market Share and Smaller Drugstore Chains
  • Pharmacy Industry Trends and Report Overview

Chapter 2: Changes in Pharmacy Industry Structure

  • Prescription Drugs and Healthcare Spending
  • Overall Industry Growth
  • Long-Term Trends
  • 2013 Growth Trends
    • Market Changes by Dispensing Format
    • National Retail Chains
    • Independent Drugstores
    • Mail Pharmacies
  • Clinical and Healthcare Services
    • Retail Clinics
    • Medication Therapy Management (MTM)
    • Provider Status

Chapter 3: Specialty Drugs and Specialty Pharmacies

  • Defining Specialty Drugs
    • Common Characteristics of Specialty Drugs
    • How Payers Define Specialty Drugs
    • Top Specialty Therapy Classes and Average Prescription Costs
    • Trends in Specialty Drug Spending
  • Defining Specialty Pharmacy
    • Clinical and Data Services
    • Accreditation
  • Specialty Market Participants
    • Overview
    • Health Plans and PBMs
    • Independent Specialty Pharmacies
    • Retail Pharmacies
    • Hospitals and Physicians
  • National Market Share for Specialty Pharmaceuticals
    • Mergers and Acquisitions Among Specialty Pharmacies
  • Channel Strategies for Specialty Drugs
    • Manufacturer-Defined Dispensing Networks
    • Specialty Hubs
    • Payer-Defined Dispensing Networks
    • Payers’ Specialty Pharmacy Strategies for Provider-Administered Drugs

Chapter 4: Pharmaceutical Payment and Pharmacy Benefit Management

  • Payment for Prescription Drugs
    • Role of Pharmacy Benefit Managers
    • PBM Industry Structure
    • Relationships Between PBMs and Plan Sponsors
    • Formulary Development and Management
    • Rebate Negotiation with Manufacturers
    • Clinical Management Services by PBMs
  • Consumer Copayments and Coinsurance
    • Commercial Health Plans
    • Medicare Part D and Medicaid
    • Manufacturer Copayment Offset Programs
  • Relationships Between PBMs and Pharmacies
    • Retail Pharmacy Participation in Payer Networks
    • PBM-Pharmacy Negotiations
    • Smaller Pharmacies and Pharmacy Services Administration Organizations

Chapter 5: Prescription Reimbursement by Third-Party Payers

  • The Basics of Prescription Reimbursement
    • Reimbursement Methodologies for Estimating Drug Costs
    • Dispensing Fees
    • Service and Data Fees
  • Reimbursement for Brand-Name and Specialty Prescriptions
    • Wholesale Acquisition Cost (WAC) and Average Wholesale Price (AWP) List Prices
    • Why List Prices Are Used for Brand-Name Prescription Reimbursement
    • Average AWP Discounts for Pharmacy Reimbursement
    • Retail vs. Mail Reimbursement Rates for Brand-Name Drugs
    • Why Mail Pharmacies Accept Lower Reimbursements
  • Reimbursement for Generic Prescriptions
    • Challenges for List-Price Benchmarks
    • Maximum Allowable Cost (MAC) Limits
    • Controversy over MAC Limits
    • Medicaid and Federal Upper Limits
  • Acquisition Cost Reimbursement
    • Average Acquisition Cost (AAC) in State Medicaid Programs
    • National Average Drug Acquisition Cost (NADAC)
    • Direct-to-Payer Acquisition Cost
  • Manufacturer Sales Price Methods
    • Average Manufacturer Price (AMP)
    • Average Sales Price (ASP)
  • How Prescription Reimbursement, Formulary Rebates, and Consumer Copayments Affect Plan Sponsor Costs

Chapter 6: Relationships with Pharmaceutical Wholesalers

  • Wholesalers’ Channel Role for Pharmacies
    • Overview of Pharmacy Purchasing Strategies
    • Cost-Minus Pricing of Brand-Name Drugs to Pharmacies
    • Influence on Pharmacy Reimbursement
  • Largest Wholesale Suppliers
    • Full-Line Wholesalers
    • Specialty Distributors
  • Relationships with Independent Drugstores
    • Wholesaler Services for Independent Pharmacies
    • Wholesaler Relationships with Pharmacy Buying Groups
    • Wholesaler Generic Programs for Retail Pharmacies
  • Wholesalers’ Role in Pharmacy-Dispensed Specialty Drug Distribution
    • Specialty Products with Limited Pharmacy Networks
    • Specialty Products in Open Distribution
  • Large Retail Chains and Mail Pharmacies
    • Wholesale Suppliers to Largest U.S. Pharmacies
    • Changing Relationships Between Wholesalers and Retail Chains
    • Walgreens-AmerisourceBergen Relationship
    • Rite Aid-McKesson Relationship

Chapter 7: Pharmacy and Prescription Profitability

  • Overall Drugstore Gross Margins
    • Industry Averages
    • Large Drugstore Chains
  • Pharmacy Per-Prescription Profits
    • Sources of Per-Prescription Profits
    • Average Prescription Gross Margins
    • PBM Per-Prescription Profits from Network and Mail Pharmacies
    • Pharmacy Profits Under Acquisition Cost-Based Reimbursement
  • Lifecycle Profits for Generic Drugs
    • Single-Source, Brand Only Period
    • Exclusivity Period
    • Post-Exclusivity Period
    • Maturity Period
  • Retail Generic Drug Discount Programs
    • Overview of Discount Programs
    • Profit Impact

Chapter 8: Economic Trends and Outlook

  • Healthcare Reform and the U.S. Outpatient Pharmaceutical Spending Outlook
    • Summary
    • The Outlook for U.S. Outpatient Pharmaceutical Spending
    • Payment for U.S Outpatient Prescription Drugs
    • The Evolving Generic Marketplace
  • Summary
    • The Generic Outlook
    • Generic Drug Purchasing Organizations
    • The Unexpected Generic Inflation Challenge
    • Medicaid and AMP-Based Federal Upper Limits
  • Narrow Pharmacy Benefit Networks
    • Summary
    • Pharmacy Benefit Network Models
    • Preferred Networks in Medicare Part D
    • Cost Savings and Pharmacy Profits in Narrow Networks
    • The Outlook for Narrow Networks
  • The Specialty Boom
    • Summary
    • The Shift to Specialty Drugs
    • Projected Growth in Specialty Drug Trend
    • Pharmacy Industry Revenues from Specialty Drugs
    • The Outlook for Biosimilars
  • Pharmacy Participation in the 340B Drug Pricing Program
    • Summary
    • Overview of the 340B Program
    • The Role of 340B Contract Pharmacies
    • Flow of Funds with a Contract Pharmacy
    • Profits from 340B Prescriptions
    • The Outlook for 340B Contract Pharmacies
  • Globalization of Retail and Wholesale Drug Channels
    • Summary
    • Global Expansion by the Large Pharmacies and Wholesalers
    • Overview of Global Pharmaceutical Markets
    • European Pharmacy Markets

APPENDIX: The AWP Rollback

Acronyms and Abbreviations

Endnotes

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LIST OF EXHIBITS

Exhibit 1: Average Revenue per Equivalent Outpatient Prescription, 1998-2013
Exhibit 2: Top 10 Traditional Therapy Categories and Average Prescription Cost, 2013
Exhibit 3: Timeline of DSCSA Requirements for Pharmacies (Dispensers)
Exhibit 4: Average Annual Number of Prescriptions per Pharmacy, by Dispensing Format, 2013
Exhibit 5: Average Annual Prescription Revenue per Pharmacy Outlet, 2013
Exhibit 6: Median Wait Time to Fill a Prescription, by Dispensing Format, 2013
Exhibit 7: Customer Satisfaction with Pharmacies, by Dispensing Format, 2014
Exhibit 8: Primary Reason for Pharmacy Selection, by Dispensing Format, 2013
Exhibit 9: Pharmacist Employment and Salary, by Dispensing Format, 2013
Exhibit 10: Overview of U.S. Pharmacy Market, 2014
Exhibit 11: Largest 15 U.S. Pharmacies Ranked by Total Prescription Revenues, 2014
Exhibit 12: Market Share by Chain, Top 20 U.S. Metropolitan Areas, 2012
Exhibit 13: Top 10 Regional Chain Drugstores, by Total Prescription Revenues, 2013
Exhibit 14: Share of U.S. National Health Expenditures, by Major Spending Category, 1973-2023
Exhibit 15: U.S. Prescriptions, Annual Total and Growth, 2003-2014E
Exhibit 16: U.S. Drugstore Revenues, Year-Over-Year Change in Total Revenues, 1999-2013
Exhibit 17: Share of Revenue Growth by Dispensing Pharmacy Format, 2003 vs. 2013
Exhibit 18: Number of Pharmacies by Dispensing Format, 2003 vs. 2013
Exhibit 19: Change in Total Prescriptions Dispensed, by Pharmacy Format, 2003-2008 vs. 2009-2013
Exhibit 20: Average Number of Prescriptions Dispensed per Location, by Dispensing Format, 1992-2013
Exhibit 21: Number of Prescriptions by Dispensing Format, 2012 vs. 2013
Exhibit 22: Prescription Revenues by Dispensing Format, 2012 vs. 2013
Exhibit 23: Year-Over-Year Change in Same-Store Prescription Count, January 2012 to December 2014
Exhibit 24: Number of Independent Pharmacies, 1990-2013
Exhibit 25: Share of Mail Pharmacy Revenues, By Company, 2014
Exhibit 26: Equivalent Mail Prescriptions, Annual Total and Growth, 2003-2013
Exhibit 27: Number of U.S. Retail Clinics, 2004-2014
Exhibit 28: Largest Retail Clinic Operators, 2014
Exhibit 29: Providers of Medication Therapy Management Services, 2013
Exhibit 30: Factors Determining Health Plan Classification as Specialty Therapy, 2013
Exhibit 31: Specialty Drugs as a Percentage of Payers’ Pharmacy Benefit Spending, by PBM, 2013
Exhibit 32: Top 10 Specialty Therapy Categories and Average Prescription Cost, 2013
Exhibit 33: Commercial Drug Trend, Traditional vs. Specialty Drugs, By PBM, 2013
Exhibit 34: Examples of Pharmacies Dispensing Specialty Pharmaceuticals
Exhibit 35: Locations with URAC Specialty Pharmacy Accreditation, 2008-2015E
Exhibit 36: Fastest-Growing Private Specialty Pharmacies, 2013
Exhibit 37: Employer Perceptions of Specialty vs. Retail Pharmacies
Exhibit 38: Health Systems and Physician Practices, by URAC Specialty Pharmacy Accreditation Status, 2014
Exhibit 39: Oral Oncology Volume, By Dispensing Channel, 2014
Exhibit 40: Pharmacy Revenues and Market Share from Specialty Pharmaceuticals, by Company, 2014
Exhibit 41: Leading Specialty Hub Providers
Exhibit 42: Payer-Mandated Usage of Specialty Pharmacies by Oncologists, by Product Type, 2010-2013
Exhibit 43: Infused Therapy Sourcing at Oncology Practices, by Distribution Channel, 2014
Exhibit 44: Source of Payment for Outpatient Prescription Drugs, 2013
Exhibit 45: Change in Expenditures for Outpatient Prescription Drugs, by Payer, 2012 vs. 2013
Exhibit 46: Consumers’ Out-of-Pocket Spending Share of Outpatient Prescription Drug Expenditures, 1963-2013
Exhibit 47: PBM Market Share, By Total Equivalent Prescriptions, 2014
Exhibit 48: Common Pharmacy Benefit Plan Designs
Exhibit 49: Type of Rebate Arrangement for Traditional Brand Medications, by Employer Size, 2014
Exhibit 50: Average Flat Guaranteed Rebate Amount per 30-Day Equivalent Brand-Name Prescription Type, by Dispensing Format, 2014
Exhibit 51: Government Programs, Average Rebates as Percentage of Retail Drug Price
Exhibit 52: Distribution of Cost-Sharing Formulas for Prescription Drug Benefits in Employer-Sponsored Plans, 2004 vs. 2014
Exhibit 53: Average Copayments by Prescription Drug Tier, Employer-Sponsored Plans, 2004 vs. 2014
Exhibit 54: Average Copayments by Prescription Drug Tier, Bronze vs. Platinum Health Insurance Marketplace Plans, 2015
Exhibit 55: Cost-Sharing Arrangements for Prescription Drug Benefits in Employer-Sponsored Plans, 2014
Exhibit 56: Manufacturer Copay Offset Programs for Brand-Name Drugs, 2012 vs. 2014
Exhibit 57: Largest Pharmacy Services Administration Organizations, by Members and Ownership
Exhibit 58: Payer Methodologies for Computing a Pharmacy’s Estimated Acquisition Cost (EAC)
Exhibit 59: Average Dispensing Fee for Brand-Name Prescriptions at Retail Pharmacies, 1999-2014
Exhibit 60: Methodology Used to Compute Average Wholesale Price, by Publisher
Exhibit 61: Single-Source Brand-Name Drugs, Comparison of Per-Unit Pricing Metrics and Pharmacy Acquisition Cost, Medicaid
Exhibit 62: Reimbursement of Brand-Name and Specialty Prescriptions, Percentage of Average Wholesale Price, by Dispensing Format, 2014
Exhibit 63: Percentage of AWP Billed to Employers for Brand-Name Prescriptions, Retail vs. Mail, 1999 to 2014
Exhibit 64: Generic Drugs, Comparison of Per-Unit Pricing Metrics and Pharmacy Acquisition Cost, Medicaid
Exhibit 65: Reimbursement of Generic Prescriptions, Percentage of Average Wholesale Price, by Dispensing Format, 2014
Exhibit 66: Average Acquisition Cost Methodologies for Pharmacy Reimbursement Used by State Medicaid Programs, 2014
Exhibit 67: Example of Net Prescription Economics for Payer
Exhibit 68: Determination of a Pharmacy’s Brand-Name Drug Acquisition Cost from a Wholesaler
Exhibit 69: Drug Distribution and Related Revenues at Big Three Wholesalers, CY2013
Exhibit 70: Full-Line Wholesaler Sales, by Type of Customer, 2013
Exhibit 71: Average Full-Line Wholesaler Inventory Levels, by Product Type, 2013
Exhibit 72: Specialty Distributor Sales, by Type of Customer, 2013
Exhibit 73: Estimated Market Share with Independent Pharmacies, by Wholesaler, 2013
Exhibit 74: Pharmacy Franchise and Marketing Programs of Large Drug Wholesalers, 2013
Exhibit 75: Pharmacy Buying Groups and Primary/Preferred Wholesaler Relationship
Exhibit 76: Alternative Channels to Specialty Pharmacies in Limited Networks
Exhibit 77: Largest U.S. Pharmacies and Their Primary Wholesale Suppliers
Exhibit 78: Overall Gross Margins for Chain and Independent Drugstores, 1993-2012
Exhibit 79: Total Gross Profits for Chain and Independent Drugstores, 2001-2012
Exhibit 80: Overall Gross Margins for Drugstores, by Company, 2013
Exhibit 81: Average Prescription Gross Margins at Independent Drugstores, 2006-2013
Exhibit 82: Diplomat Pharmacy, Per-Prescription Revenues and Profits, 2011-2014
Exhibit 83: Average Retail Pharmacy Gross Margin per Prescription, Brand-Name vs. Generic Drugs, 2012
Exhibit 84: PBM Gross Margin per Equivalent Script, by Channel and Drug Type, 2012
Exhibit 85: Lifecycle of Per-Prescription Gross Profits, Brand vs. Multi-Source Generic
Exhibit 86: Lexapro (10 mg tablet), Pharmacy Acquisition Cost per Pill, Brand-Name vs. Generic, July 2012 to April 2013
Exhibit 87: Examples of Pharmacy Acquisition Cost, Brand-Name vs. Generic Drug, 2014
Exhibit 88: Projected Growth in National Health and Outpatient Prescription Drug Expenditures, 2011-2023
Exhibit 89: Median Prescription Expenses per Person, by Age, 2012
Exhibit 90: Source of Payment for Outpatient Prescription Drug Expenditures, 1973-2023
Exhibit 91: Change in Total Expenditures for Outpatient Prescription Drugs, by Payer, 2013 vs. 2023
Exhibit 92: Generics, Share of U.S. Prescriptions, 2003-2018
Exhibit 93: Projected Brand Revenues Lost to Generic Launches, 2009-2017
Exhibit 94: Top Brand-Name Drugs Facing Generic Competition, 2015-2017
Exhibit 95: Share of U.S. Generic Purchasing Volume, By Organization, 2014
Exhibit 96: Generic Drugs, Change in Pharmacy Acquisition Cost per Unit, November 2013 vs. November 2014
Exhibit 97: Summary of Pharmacy Benefit Network Design Options
Exhibit 98: Retail Pharmacy Participation in Major Medicare Part D PDPs with Preferred Networks, 2015
Exhibit 99: Express Scripts’ Client Savings from Alternative Pharmacy Network Designs, 2013
Exhibit 100: DIR Fees for Medicare Part D Preferred Cost-Sharing Pharmacies, 2015
Exhibit 101: Top 10 U.S. Drugs, 2013 vs. 2020
Exhibit 102: Drug Trend Forecasts, by PBM, 2014-2016
Exhibit 103: Total Spending on Specialty Drugs, by Product and Benefit Type, 2012-2018
Exhibit 104: Total Number of 340B Contract Pharmacies, 2000-2014
Exhibit 105: 340B Contract Pharmacy Locations, by Chain, July 2014
Exhibit 106: Flow of Funds and Product for 340B Contract Pharmacy Network
Exhibit 107: Hypothetical Profits to a 340B Entity for a Third-Party Prescription Dispensed by a 340B Contract Pharmacy
Exhibit 108: Global Pharmaceutical Spending, by Country/Region, 2013 vs. 2018
Exhibit 109: Generics, Share of Prescriptions, Major European Countries, 2013
Exhibit 110: Number of Pharmacies, Major EU Countries, 2013

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