In-sourcing retail pharmacy

An untapped opportunity for provider-sponsored plans

With increases in drug prices and shifts from volume to value-based care, provider-sponsored plans can potentially earn substantial revenue gains by in-sourcing retail pharmacy.

Positioning for clinical, financial, and quality-based success in the shift to value-based care

​Provider-sponsored health plans (PSPs) are gaining market presence due to an increased focus on cost reduction and shifting incentives toward a value-based care model. By operating a PSP, providers stand to benefit from better integration with their communities, more effective management of population health, and higher alignment of care delivery goals through shared savings payment arrangements. While there are several risks that providers must consider when moving into non-traditional care delivery—namely, that a provider must assume the majority (or all) of the financial risk for insuring a patient population—there are also considerable opportunities, including bundled payment incentive programs, home health care services, and increased transitions to ambulatory care settings. While these opportunities are appropriate depending on provider and patient type, one typically untapped opportunity for financial benefit in operating a PSP is to in-source retail pharmacy.

With increases in drug prices and shifts from volume to value-based care, providers stand to earn substantial revenue gains by in-sourcing retail pharmacy. Providers can then leverage a revamped co-pay structure to financially incentivize plan members to utilize the in-house pharmacy and capture more pharmacy dollars for the system. By retaining pharmacy dollars, the PSP is positioned to help decrease expenses while improving patient and employee experience through on-site retail pharmacies, and providers are in a position for clinical, financial, and quality-based success.

Back to top

Utilizing an in-house retail pharmacy: Insights and analytics

​Throughout the health care value chain there are three key transaction points that drive the total cost of drug delivery:

  • Acquisition cost: the cost for the pharmacy to purchase the drug from a distributor or manufacturer
  • Insurance/health plan payment: health plan pre-defined payment to the pharmacy to cover a portion of the drug cost
  • Patient co-pay: the patient’s remaining financial responsibility

By utilizing an in-house (either on-site or mail order) retail pharmacy, a health system can achieve cost savings on each driver: 

  • Decrease acquisition cost by leveraging existing distribution and manufacturer contracts and reducing/eliminating any third-party commercial pharmacy mark-ups
  • Retain income when patients fill prescriptions, since the PSP insurance payment to the pharmacy for the cost of the prescription is kept within the same health system and parent company
  • Provide financial benefit to patients and the community through improved access and reduced co-pays for each drug

The overall cost of a prescription can be lowered by leveraging an in-house retail pharmacy in more ways than one. Specific price levers that can be reduced through this mechanism include: when a drug is procured from a third-party commercial pharmacy; and when a drug is procured from an in-house retail pharmacy. In an example involving the in-house retail pharmacy, the total prescription cost is approximately 25 percent lower than the cost of a third-party commercial pharmacy transaction.

Back to top

Related thinking on provider-sponsored plans

Executive perspectives on provider-sponsored health plans

Key benefits of on-site retail pharmacies

On-site pharmacies can also enable robust transformation of the patient health care journey, increase patient satisfaction, and drive better qualitative outcomes:

  • Filling prescriptions on-site can be more convenient for patients who seek a more efficient discharge process rather than filling prescriptions at an off-site location, thereby streamlining a patient’s health care pathway and improving the overall experience. 
  • By re-structuring patient co-pays, health systems can reduce cost barriers and improve access to drugs. 
  • By having transparency when prescriptions are filled, physicians and care managers have the potential to improve medication adherence by implementing medication therapy management programs, which in turn can positively impact outcomes and reduce readmissions. 
  • As a result of direct access to a patients’ electronic health record, an in-sourced pharmacy can enhance health care data integration.

Back to top

Key considerations

Health care provider executives looking to in-source retail pharmacy should consider:

  • Are space and resources available? 
  • How do we currently track prescriptions paid to third party commercial pharmacies?
  • Can we quantify the opportunity by drug and plan member? 
  • Can existing technology be optimized to support new volume? 
  • How should we establish and implement a targeted co-pay structure?
  • Are there contracting opportunities for better pricing to further reduce acquisition cost? 
  • How can data and analytics be assimilated to continue identifying areas of opportunity?
  • How can data and analytics drive predictive modeling in areas outside of pharmacy?

Back to top

About the Sustaining Success series

The demand to derive greater value from health care is urgent and pervasive. Leading hospitals and health systems are identifying performance improvement strategies which transcend traditional cost reduction and respond to new payment models. Providers that increase value will be the most competitive. Organizations that fail to improve value and protect future margins are likely to encounter growing pressure.

This digest of articles shares examples of how health care providers are pursuing value through both short- and long-term initiatives within the dimension of performance improvement. Providing a view beyond traditional cost cutting methods, the series places a data-driven lens focusing upon how providers can utilize data analytics to identify and implement innovative solutions.

Visit the Sustaining Success series archive to explore the current digest of analytics-based perspectives on performance improvement in health care.

Back to top

Did you find this useful?