Flat Dispensing Variance

In PBM managed contracts among retail pharmacies such as, Bob’s Pharmacy, the PBM often in most instances will reimburse the pharmacy a flat rate dispensing fee for each prescription filled in addition to an added reimbursement amount for the actual product dispensed that can be based upon a percentage of the Average Wholesale Price (AWP). This price reimbursed for a drug may be different than the initial price that the retail pharmacy paid the drug wholesaler who supplied the drug to be dispensed. Overall the flat dispensing fee paid by the PBM should be fair and reasonable along with comparable to the pharmacy’s actual cost to dispense (CTD). In order to keep my response condensed I will just focus on the main dispensing fee reimbursed.
In examining the concept of economies of scale vs.
diseconomies of scale we see that with economies of scale the cost advantage will rise based on an increased output of goods (dispensing of prescriptions) in which for this example with each prescription dispensed beyond an average cost and output threshold we would expect the per-unit fixed cost to become lower and the marginal profit gains to increase with increased output. Conversely in the concept of diseconomies of scale we would expect to exhibit the effect of rising marginal costs occur with the increase production of outputs resulting in lower marginal profits obtained. In the case of diseconomies of scale, for this example, every prescription dispensed beyond the average cost and output threshold would result in an increase of marginal costs to dispense each prescription unit as output increases. For the pharmacy to achieve economies of scale, then it must occur at all dispensing
volumes.

In order to evaluate if this scenario exhibits economies of scale vs.
diseconomies of scale we would need to focus in specifically on Bob’s calculated cost to dispense value and compare with the total reimbursement of dispensing fees by the PBM contracts divided by total number of prescriptions dispensed over a given time period, perhaps a time horizon of 2 years. To calculate the total costs reimbursed by the PBM contracts the pharmacy would need to sum up all dispensing fees paid over the given time period among all contracted PBMs. This number can then be divided out by the total number of prescriptions dispensed over the given time period. This number obtain will be the average dispensing cost that is reimbursed per prescription dispensed. We can then compare this value with Bob’s obtain value of the average cost to dispense. The initial cost to dispense value calculated by Bob is considered to be the minimum average cost that is required. If the average dispensing value as calculated based on the PBM reimbursement dispensing rate is greater than that of Bob’s based on the same number of dispensed prescriptions we would see that a profit is obtained. However, if the amount calculated for reimbursement is lower than Bob’s calculation we would see a negative profit obtained. Though additional factors and costs can be added or factored in to change the loss of profit we would still be exhibiting diseconomies of scale for the cost to dispense. To calculate different cost to
dispense amounts based on increased or decreased production volumes Bob would need to recalculate his original figure based upon new data that would be used to assess a different volume of drug dispensed and then compared again with the dispensing rate reimbursed from the PBM. In Bob’s new calculation for example, in increase prescriptions dispensed he may have to factor in higher overhead and personnel costs which would affect the end minimum average cost to dispense a higher volumes of prescriptions.