The myth of the “go it alone” independent community pharmacy

Most people believe that independent community pharmacies are individual “mom and pop” proprietorships standing alone in the face of drug manufacturers, pharmacy benefit managers (PBMs), and health plans. But the reality is most independent community pharmacies are part of little-known collective bargaining groups called pharmacy services administrative organizations (PSAOs), which leverage their membership (i.e., the pharmacies they contract with) to negotiate contracts with other parties in the pharmaceutical supply and payment chain. PSAOs also provide a wide range of business services to all types of pharmacies, which are necessary to run a successful pharmacy. PSAOs effectively stand between most independent pharmacies and the rest of the business world, including payers and PBMs. From billing support to information technology purchasing and implementation, PSAOs basically run many of the core back office operations for many pharmacies.

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Key Findings

  • Pharmacy services administrative organizations (PSAOs) are little-known but powerful collective groups that contract with pharmacies 
  • PSAOs negotiate pharmacy network contracts and perform many core back office operations for their pharmacies
  • About 83% of independent pharmacies contract with a PSAO
  • Over 75% of independent and small chain pharmacies contract with PSAOs owned by the “Big Three” wholesalers (Amerisource Bergen, Cardinal Health, and McKesson)
  • PSAOs lack transparency, and there is almost no federal or state oversight of them

Figure 4. Percentage of Independent Pharmacies using PSAOs, by State

What is a PSAO?

The primary service that PSAOs perform for their members is collective negotiation of the contract terms with PBMs. This generally involves a variety of elements including: negotiating reimbursement from the PBM to the pharmacy for prescription drugs; a pharmacy’s participation in a PBM’s pharmacy network; dispensing fees; and reimbursement for other services (e.g., conducting medication therapy management), including value-based payment (VBP) initiatives and quality metrics. 

PSAOs often also perform four additional core services for their member pharmacies – described in Table 1 below. Not all PSAOs preform all of these core services for all of their member pharmacies; however, many pharmacies choose to outsource much of their business operations to their contracted PSAO.

Table 1: Detailed description of core PSAO services

Primary Services: Contract Negotiations with PBMs and Plans

  • Network access – First and foremost, this is about getting the pharmacy into the network of the plan(s) supported by the PBM. Generally, plan enrollees must pay higher cost sharing for using out-of-network pharmacies. Thus, network access will drive more plan members to a pharmacy. In some product lines (e.g., Medicare Part D) there may also be a preferred pharmacy network. Preferred pharmacies have lower cost sharing compared to base network pharmacies
  • Contract terms – Negotiation of key contract terms, such as reimbursement rates, billing requirements, payment frequency, recoupment process/overpayment clauses, audit clauses, value-based/quality payment adjustments, including direct and indirect remuneration (DIR). DIR is a CMS regulatory term for any payment made by a manufacturer, pharmacy, or other party to the PBM or plan sponsor in Medicare Part D (42 CFR §423.308)
  • Reimbursement terms – dispensing fees, pharmacy-provided services, reimbursement related to quality metrics and value-based arrangements
  • Credentialing – verification of pharmacy and pharmacy technician licensure, pharmacy liability insurance validation, monitoring the Health and Human Services (HHS) Office of Inspector General’s (OIG) List of Excluded Individuals/Entities (LEIE; aka the Exclusion List), registration with the Drug Enforcement Administration’s (DEA) Diversion Control Division, and validation of compliance with other applicable regulations

Contracting wholesalers

  • Acquisition of prescription drugs from wholesalers – some PSAOs are wholesalers and most of the others facilitate business relationships with wholesalers to negotiate for, purchase and deliver prescription drugs to the pharmacy

Billing Support

  • Prescription drug billing – claims review and editing tools designed to improve reimbursement accuracy and reduce payer auditing risks. These tools, usually a software as a service (SaaS) may be in-house at the PSAO or facilitated by them through a special business relationship with a vendor. PSAOs may manage all other aspects of billing, including receiving remittances from PBMs and manage matching claims with payments
  • Medical services and medication therapy management (MTM) billing – as pharmacists continue to gain “provider status” they are now billing for clinical services (e.g., blood sugar testing, vaccine administration, and blood pressure checks) and MTM, that often are paid outside the normal pharmacy prescription drug billing systems. PSAOs typically facilitate vendor automation of these processes
  • Audit support – documentation reviews, consulting, and analytic assistance with payer audit preparation, production of discrepancy reports and filing appeals with payers and government agencies

Information technology

  • Purchasing IT – internal PSAO products or group vendor purchasing of hardware and software solutions for a wide range of pharmacy business needs including desktop and laptop computers, accounting systems, patient information databasing, financial transactions including in-store use of credit cards and centralized electronic funds transfers (EFTs) of all third-party insurance payments, and prescription drug inventory, ordering, and tracking systems
  • Internet and digital support services – creation and maintenance of websites, online ordering systems, smartphone applications, and tools to help Medicare patients choose a Part D plan during the annual election period (AEP)
  • Telehealth/pharmacy – software that allows for remote video-based direct patient counseling or collaboration with other healthcare providers
  • Clinical tools – for example, electronic care plans and patient records so that pharmacies can better participate in care coordination and medication synchronization (Med Sync) tools for patients that have been prescribed multiple treatments for chronic conditions at different times during the month. Med sync allows patients to obtain refills on a single day convenient to them and has been associated with greater treatment adherence

General Business Support

  • “Front store” sales support – typically an independent pharmacy is also a retail convenience store, selling a wide range of consumer goods and over-the-counter (OTC) non-prescription drugs and supplements. PSAOs often group purchase these items at a discount or may co-brand in franchising contracts. For example, the Good Neighbor Pharmacy (AmerisourceBergen) franchise has a branded vitamin and supplement program 
  • Misc. – often PSAOs help source business insurance products, assist with marketing the independent pharmacy, and may also engage in both state and federal government advocacy

Pharmacy performance analytics

  • Quality analytics – support for value-based payment arrangements. Typically, will include trend reports over time, comparisons with a peer pharmacy group, payer level statistics to monitor opportunities for bonus payments or risks for downward adjustments, and outlier reporting to help identify patients who need extra assistance. Many are using the EQuIPP™ performance information management tool. Performance measures within EQuIPP™ are calculated using paid prescription drug claims data, medical claims, and member eligibility data hosted from PBMs.
  • Financial analytics – dashboards and predictive analytics around revenue, profit, and administrative expenses

Figure 5. Total PSAOs supporting Independent Pharmacies, by State

The current PSAO landscape for independent pharmacies

The Government Accountability Office (GAO) published a report indicating that around 80% of independent pharmacies contracted with PSAOs as of 2012. To examine the current landscape of PSAOs we leveraged 2019 self-reported data from pharmacies to the National Council for Prescription Drug Programs (NCPDP) concerning their business relationships, including ties to PSAOs. In 2019, about 83% of independent pharmacies reported using a PSAO (see Figure 4). This suggests a modest increase in PSAO involvement over time compared to the 2012 GAO analysis.

There was some variation by state, but in all states at least two-thirds of their independent pharmacies contracted with a PSAO (see Figure 4).

Conclusions

The vast majority of independent pharmacies contract with PSAOs, which perform important functions such as negotiating contracts on behalf of their member pharmacies with PBMs. Little is known about PSAO organizations and the important role they play in the pharmaceutical supply chain due to a near-complete absence of government oversight at any level. Policymakers should consider applying reporting requirements to PSAOs as they do for other entities in the health care ecosystem.