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Market forces affect pharmacy bargaining power with health insurers

Pharmacy trade associations object to the "take it or leave it" contracts of health insurers, who they say demand high quality from pharmacies but reimburse them at lower rates. They want exemptions from current anti-trust laws that prohibit independent pharmacies from collectively bargaining with insurers because these laws leave independents with no alternative except to close or merge with a chain. Paradoxically, existing anti-trust laws may have led to increased concentration in the retail pharmacy industry and the loss of innovative services provided by independent pharmacies, concludes a study supported by the Agency for Health Care Policy and Research (HS09541).

University of Iowa researchers, led by John M. Brooks, Ph.D., modeled the bargaining power of pharmacies and insurers in price negotiations based on pharmacy claims data from several sources and a provider/insurer bargaining model. Their analysis showed that pharmacy bargaining power increased with the number of pharmacy employees per capita in a market area and when pharmacy ownership was concentrated in a market. Conversely, greater insurance presence in the market, as measured by the percentage of prescriptions in a market that are attributable to the insurer, resulted in lower pharmacy bargaining power with the insurer.

A higher percentage of independent pharmacies in a market lowered pharmacy bargaining power, yet independent pharmacies appeared to have greater bargaining power individually than chain pharmacies. Independents may have higher average costs than chain pharmacies, making it impossible for independents to accept reimbursements as low as those accepted by chain pharmacies, explain the researchers. Insurers appear to take these circumstances into consideration when offering contracts to independent pharmacies. They may negotiate at first with larger chains willing to accept lower reimbursements and then successively add smaller chains and independents at higher reimbursement levels until their population is covered.

For more details, see "Factors affecting bargaining outcomes between pharmacies and insurers," by Dr. Brooks, William Doucette, Ph.D., R.Ph., and Bernard Sorofman, Ph.D., R.Ph., in the April 1999 Health Services Research 34(1), pp. 439-451.

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