Unpacking the Financial Impacts of Medicare Drug Price Negotiation: Analysis on Pharmacy Cash Flows

The introduction of Medicare’s drug price negotiation program represents a shift in pharmacy reimbursement dynamics, fundamentally altering cash flow patterns for pharmacies for some of the most utilized brand drugs for one of the largest payers to pharmacy providers. This analysis evaluates the impact on outpatient pharmacy operations from the Maximum Fair Price (MFP) program for Medicare by focusing on its financial impacts via assessing changes in cash flows and profitability.

While MFP aims to reduce costs for Medicare beneficiaries, pharmacies will face liquidity challenges due to delayed manufacturer refunds. Pharmacies, which currently receive reimbursement from pharmacy benefit managers (PBMs) soon after dispensing medications, will now experience a delay for drug manufacturer refund payments, potentially resulting in a weekly cash flow shortfall of $10,838.25 compared to prior operations.

Pharmacy profitability will also be affected to the tune of an estimated average of $59.58 per MFP-impacted claim, with an estimated annual revenue loss of $40,279.04 to $46,475.82 per pharmacy due to the elimination of estimated margins previously yielded on MFP medications relative to the MFP-based payments.

Pharmacies dispensing higher volumes of MFP drugs may experience greater financial strain, requiring greater operational adjustments.

The results of this analysis are dependent upon several assumptions, as the details regarding the Medicare Transaction Facilitator (MTF) are unknown. While our model is developed based upon national averages, we recognize that not all pharmacies operate the same. Our sensitivity analyses underscores the variability in financial impact based on historic reimbursement and prescription volume trends as well as the timing of manufacturer refunds.

As our newly released report demonstrates, the introduction of the Medicare drug price negotiation program presents a double-edged sword for pharmacies. While it offers the potential for long-term cost containment within the Medicare program as well as greater predictability in business operations, the immediate financial ramifications — particularly in terms of liquidity and profitability — pose substantial challenges. Pharmacies will need to navigate these complexities through strategic financial planning and operational adjustments to maintain viability in the evolving healthcare landscape.

At 3 Axis Advisors, we understand that health care is unnecessarily complex and exceedingly expensive. With precious financial resources and the care of our loved ones on the line, we believe that through a better comprehension of our system’s mechanics and incentives, a better healthcare system is possible.

Driven by our experience, innate curiosity, and passion for finding truth, we expose and simplify inefficiencies and cost-drivers in the prescription drug supply chain and work to remedy them through data-driven research and innovative solutions.

We hope that the insights contained in this report can build upon previous drug pricing research and help to better shorten the bridge between understanding and misunderstanding the nuances of the prescription drug supply chain.

A big thanks to the National Community Pharmacists Association for their support and sponsorship of this important drug pricing research.