Retail pharmacies are a vital healthcare useful resource for sufferers within the United States, however monetary challenges have led to bankruptcies and retailer closures in recent times. Legacy drug-pricing fashions have been one space the place retailers have struggled. These fashions haven’t been capable of adapt to shifting drug mixes, and because of this, gross margins from pharmacies have declined. This has had a major impression on the general retail pharmacy enterprise as a result of most retail chains right this moment generate 80 p.c of their income from the pharmacy, versus 20 p.c from the entrance retailer.
Today, retail pharmacies rethinking their pricing buildings are exploring a brand new different: cost-based reimbursement fashions. These fashions may higher align the costs of prescriptions with underlying enter prices and the providers that pharmacies present. They may additionally doubtlessly present larger transparency throughout the board, bringing much-needed simplicity to a fancy system. By serving to retail pharmacies handle monetary challenges and forestall additional closures, these fashions may enable sufferers to proceed accessing care from these vital healthcare sources.
In this text, we define conventional retail pharmacy reimbursement fashions and supply an summary of the headwinds the pharmacy {industry} faces, constructing on earlier McKinsey analysis. We then look at the place cost-based reimbursement fashions stand right this moment and what questions relating to their implementation stay to be answered.
Retail pharmacy is at a vital inflection level
Pharmacy is a central part of US healthcare, with complete prescription drug income reaching $683 billion in 2024. Retail pharmacies play a very giant position, receiving 13 billion visits per 12 months nationwide, or a mean of about 270 million affected person visits per week.
Despite its significance in US healthcare, the retail pharmacy ecosystem has been marked by immense change and challenges in recent times. The conventional retail pharmacy shelling out market has skilled larger gross margin compression than many different segments of the US healthcare {industry}, pushed by declining reimbursement and rising working prices, together with rising labor prices pushed by ongoing pharmacist labor shortages. At the identical time, many retail pharmacies are locked into long-term leases for prime-location actual property.
In the face of these monetary headwinds, pharmacies throughout the United States have begun to shut, affecting sufferers’ entry to in-person remedy pickup and the healthcare providers supplied by native pharmacies. About 9,000 shops have closed since 2017 throughout all pharmacy sorts, together with about 3,000 chains, 2,500 independents, 1,500 supermarkets or grocers, and 1,400 mass retailers (Exhibit 1). Looking forward, some chains have introduced further anticipated closures, together with Rite Aid, which has declared chapter and has offered the pharmacy providers of most of its shops.
As they search for methods to handle these challenges, pharmacies discover themselves in a bind. Historically, retail pharmacies have mitigated shrinking margins per prescription by rising their total volumes (for instance, by way of preferred-pharmacy insurance coverage networks) and labor power productiveness. However, retailers have exhausted many of these methods: In 2025, 84 p.c of Medicare prescription drug plans had some type of preferred-pharmacy networks, versus 7 p.c in 2011. More not too long ago, retail pharmacies have meaningfully invested in automation applied sciences and effectivity improvements to regulate rising working prices—similar to Walgreens’ 2021 funding in iA to assist pharmacy automation initiatives—but they nonetheless face monetary pressure.
Neither conventional methods (similar to rising labor power productiveness) nor newer methods (similar to automation and innovation) appear to be ample by themselves to handle the monetary challenges. However, there should still be a option to revive the pharmacy {industry} by rethinking conventional pricing fashions.
What is conventional pricing within the pharmacy {industry}?
In the pharmacy {industry}, pricing is a fancy system involving a number of events. Drug producers, insurers, and retail pharmacies all have an effect on how a lot insurers and sufferers pay for prescriptions. Pharmacy profit managers (PBMs) had been established
within the Nineteen Sixties to coordinate between these events and assist with pricing (see sidebar “Pharmacy benefit managers in the pharmacy ecosystem”).
Historically, PBMs negotiate drug reimbursement charges for pharmacies based mostly on the typical wholesale value (AWP) of a drug, an industry-standard pricing benchmark (see sidebar “What is drug reimbursement?”). Contrary to what its title might suggest, the AWP usually represents neither the typical nor the wholesale value however is moderately a broadcast benchmark (traditionally based mostly on the usual markup for a branded drug’s listing value of 20 p.c).
Under this conventional mannequin, pharmacies generate the bulk of their margin on generic medicine, whereas they break even (or lose cash, in lots of instances) on branded medicine. This is as a result of generic medicine usually have a extra favorable unfold between their acquisition prices and their reimbursement charges from PBMs, and due to this fact higher web margins. As a outcome, retail pharmacies function underneath a pricing dynamic referred to as “cross-subsidization,” during which they compensate for damaging margins earned on branded medicine with optimistic margins earned on generics.
Pharmacies’ conventional pricing fashions have been challenged by ongoing headwinds
Traditional pricing fashions had been created underneath completely different circumstances which can be now not at play right this moment. Cross-subsidization labored properly for retailers when generic volumes had been rising quickly and new generic launches had been occurring as branded medicine misplaced exclusivity. However, generic shelling out charges have plateaued in recent times (Exhibit 2). The slowdown in generics shelling out is one of the most important components behind retailers’ monetary difficulties right this moment.
The rise in GLP-1s and different common branded medicine has exacerbated the problem. Branded medicine launch at increased listing costs, so the quantity of generics wanted to cross-subsidize manufacturers will increase as the quantity of branded medicine grows. Today’s curiosity in branded medicine, particularly GLP-1 medicine, may improve, particularly in the event that they grow to be lined by Medicare and different strains of enterprise. This would additional compress retail pharmacy margins.
As conventional pricing fashions make much less monetary sense, different issues have additionally come into focus. Under conventional reimbursement fashions, last reimbursement doesn’t all the time replicate the underlying value of items offered (COGS)—that’s, the value that wholesalers cost to retailers. This has created inconsistent pharmacy margins and affected person value shares throughout merchandise, particularly at low greenback quantities (Exhibit 3). This irregularity, mixed with the broader complexity of pharmacy pricing as an entire, has contributed to buyer confusion and mistrust within the system.
To compensate for this disconnect between reimbursement and COGS, a completely new market has emerged for direct-to-consumer, prescription low cost providers similar to GoodRx, SingleCare, and WellRx. These largely off-benefit providers—initially designed for the uninsured however more and more utilized by insured sufferers in place of their advantages—negotiate with PBMs and pharmacies to supply reductions on drug costs at varied pharmacies. The emergence of these providers has elevated affected person visibility into remedy value variations throughout channels and has allowed for larger scrutiny into conventional pricing fashions.
New pricing fashions have begun to take maintain
As pharmacies have grow to be more and more financially challenged underneath conventional reimbursement fashions, some have begun exploring new cost-based reimbursement approaches.
Instead of tying pharmacy reimbursements to the typical wholesale value, these fashions calculate drug reimbursement based mostly on how a lot it prices a pharmacy to accumulate a drug (COGS), plus further charges and markups to cowl prices similar to pharmacist counseling, shelling out, and delivery.
By tying prices to COGS, not the typical wholesale value, cost-based reimbursement means retailers don’t must depend on cross-subsidization of branded and generic medicine. It additionally creates a extra clear, constant, and predictable margin earned per prescription disbursed, with alternatives down the street to match profit protection to respective prescriptions (Exhibit 4).
Cost-based reimbursement alone doesn’t essentially improve or lower margin, however it may well enhance margin composition in a pair of methods. First, decreasing cross-subsidization can create extra predictable margins. Second, pharmacies can use this enhanced visibility into their value to fill prescriptions for clearer, extra productive conversations with PBMs.
Some gamers have already constructed methods based mostly on cost-based reimbursement. For instance, Mark Cuban Cost Plus Drug Company (MCCP) carries about 2,300 merchandise primarily by way of on-line channels, with reimbursement based mostly on their acknowledged underlying drug prices. CVS Pharmacy transitioned its industrial, Medicare, Medicaid, and money low cost contracts to the CVS CostVantage cost-based reimbursement mannequin. PBMs have additionally began to develop their very own cost-based fashions to make use of with employers, insurers, and pharmacies, similar to TrueCost (Caremark) and different newly introduced fashions from different PBMs.
PBM cost-based reimbursement fashions are nonetheless nascent, however their adoption might speed up within the coming months and years as shoppers and different stakeholders more and more name for adjustments to PBM reimbursement practices. For instance, West Virginia now requires reimbursement for prescribed drugs and pharmacy providers to be above the nationwide common drug acquisition value (NADAC, a voluntary survey-based pharmacy acquisition value index) and established a preset skilled shelling out price. Still, some employer and medical insurance plans have raised issues with current state laws on PBM reimbursement, stating that it may improve healthcare prices.
Cost-based reimbursement fashions are exhibiting early promise, with some excellent questions
Cost-based reimbursement exhibits promise, although it might have an effect on every of the vital gamers throughout the pharmacy worth chain in another way. For retail pharmacies, PBMs, plan sponsors, and sufferers, just a few questions stay.
Retail pharmacies
Cost-based fashions can take away cross-subsidization, defend towards future combine shifts, and permit for extra clear, predictable margins per drug disbursed. In addition, pharmacies can keep margins on medicine whereas passing alongside financial savings on drug prices (similar to for generic medicines) from wholesalers or producers to stakeholders throughout the worth chain.
However, pharmacies will nonetheless want to barter with PBMs on the ultimate complete drug reimbursement and mitigate total script-level margin compression. They can even must proceed to drive elevated operational efficiencies.
If cost-based reimbursement expands to grow to be the industry-wide mannequin, there might be {industry} want for a common cost-index benchmark. Pharmacy gamers similar to MCCP and CVS Pharmacy use their very own particular person COGS to find out costs, but when cost-based fashions take off extra broadly, extra pharmacies may discover different value bases that these fashions may doubtlessly use—similar to NADAC, predictive acquisition value, wholesale acquisition value, or a completely new value index.
If cost-based fashions achieve prominence, pharmacies ought to search to reply the next questions:
- How will total reimbursement ranges unfold underneath new fashions? Will pharmacies have the ability to keep constant reimbursement ranges, or will historic tendencies prevail?
- If pharmacy prices and community entry grow to be more and more predictable underneath cost-based fashions, how will pharmacies present an enhanced worth proposition for sufferers? Will pharmacies more and more must be centered on affected person engagement, comfort, personalization, scope of healthcare providers, and innovation?
PBMs
As retailers undertake cost-based reimbursement plans, PBMs will probably must undertake these fashions in tandem. Although cost-based reimbursement between pharmacies and PBMs helps create transparency in a single half of the drug ecosystem, PBMs will nonetheless must navigate their very own contracts and value ensures with plan sponsors and employers. These usually come up for renewal each three years, whereas contracts between PBMs and pharmacies are sometimes shorter in length and due to this fact might be negotiated sooner.
If they develop cost-based reimbursement methods, PBMs might want to wrestle with the next questions:
- If extra PBMs create their very own cost-based fashions, how will PBM-driven cost-based fashions combine or coordinate with pharmacy-driven cost-based fashions?
- How will pharmacy community designs and community ensures provided to employers change? How will consultants consider competing cost-based reimbursement proposals?
- How will PBMs handle the danger of value fluctuations for his or her shoppers as underlying drug prices change?
Plan sponsors
Given that cost-based pharmacy fashions replicate solely the reimbursement of PBMs to pharmacies, these fashions have restricted direct bearing on affected person out-of-pocket prices. Instead, sponsors (similar to employers and well being plans) can have a task to play in creating transparency for sufferers by way of the broader design of plan advantages.
Plan sponsors can think about the next questions:
- How will plan sponsors purchase pharmacy providers from PBMs sooner or later (for instance, historic model efficient charge or generic efficient charge pricing versus newer cost-based preparations)?
- How will sponsors change their plan designs (if in any respect) on the eventual time of renegotiation, bearing in mind affected person visibility and out-of-pocket prices?
- In a cost-based world, as extra complicated model medicine are authorized and affected person demand will increase (because it has for GLP-1s), how will sponsors react to rising drug prices?
Patients
If cost-based fashions can create extra sustainable economics for retail pharmacies, pharmacies might be able to scale back retailer closures, and sufferers could also be extra more likely to keep entry to their native pharmacy of selection. The final impression on affected person out-of-pocket prices will depend upon how plan sponsors regulate plan designs.
Implementing cost-based fashions raises just a few questions relating to sufferers, similar to the next:
- Will employers and well being plans regulate plan designs to make sure transparency for sufferers?
- How will affected person out-of-pocket prices change, if in any respect?
Cost-based reimbursement fashions are exhibiting early traction amongst main PBMs, and so they may carry the pharmacy worth chain on top of things with right this moment’s shifting wants. As a vital step in constructing trust-based relationships amongst PBMs, pharmacies, plan sponsors, and sufferers, these fashions may result in much-needed simplicity to a fancy system.
