Lifecycle of a Prescription

The Lifecycle of a Prescription

The Lifecycle of a Prescription

Pharmacy ownership can take many paths.  There are pharmacy owners who are the only full-time pharmacist on staff, while other owners work as full-time pharmacists with additional staff pharmacists. There are part-time pharmacists, owners who are not pharmacists at all, and many who own multiple locations.  In every case, the fact still remains: they own a business which just happens to be an independent pharmacy.

In years past, when pharmacies were paid cash from a customer, the business model was fairly simple: customers paid cash at the time they received their medications.  As the years have gone by and with the introduction of non-cash paying models such as third-party insurance plans, the methods pharmacies rely on for payment have changed. This ultimately adds more layers to the process, which affects the cash flow and profitability of the pharmacy.  In this article, we will look deeper into the lifecycle of the prescription once it is presented to the pharmacy by the patient. What is the reimbursement process?  There are some pharmacy owners who don’t realize the complexity of the different components of this process, causing them to feel a lack of control and frustration.

Reimbursements ARE Revenues – They Are Synonymous:  

According to the recently published 2016 NCPA Digest, 91% of prescriptions are dispensed through third-party plans (i.e. commercial, Medicaid, Medicare, other) often administered by Pharmacy Benefit Managers (PBMs).  This leaves the remaining scripts being filled as cash at the time the prescription is dispensed.  This means a large portion of the pharmacy revenues may be directly related to the reimbursements of the pharmacy.  Therefore, I suggest pharmacy owners look at reimbursements and revenues as one-in-the-same.  Adding to the importance of understanding the relationship between these two is the fact reimbursements are not paid at the time of sale.  This means a significant amount of your revenues may be tied up in Accounts Receivable for a period of time.

Research AND Action – It Takes Both:

It is important to realize the impact the reimbursement process may have on an independent pharmacy.  Independent pharmacy owners are very busy filling prescriptions and managing their pharmacy operations, but it is crucial they also monitor ALL of their reimbursements.  When thinking about reimbursements, I like to view it as a two-part process.  The first part is the “research” to understand several factors such as: where are the reimbursements coming from, when are the reimbursements being paid, how are these reimbursements being paid, and were you paid the amount you were truly owed.  The second part is to take “action” when tracking the reimbursements from the time the script has been dispensed to when the funds are in your bank account.  In doing your research, you will confirm the proper reimbursements were paid to your pharmacy, paid on time, and paid the correct amount and if you were not, it requires action on the part of the pharmacy to collect missing or underpaid reimbursements.

What Exactly Are You Researching?

In a perfect world, the pharmacy would dispense a prescription to a patient and be paid the appropriate amount for that prescription via cash or a combination of a co-pay and reimbursement from a third-party.  In the event a patient is a cash paying customer, you receive your payment at the time of dispensing the prescription; however, if the patient is using insurance the pharmacy may receive a co-pay at the time of the transaction with a period of time before receiving their negotiated rate from the Pharmacy Benefit Manager (PBM).  During this third-party process, there are several ways a pharmacy may not capture the appropriate amount of reimbursement.  Here are some examples:

Input error at the pharmacy – when a technician or pharmacist is entering the prescription and patient details, an error may cause a claim to be rejected or not submitted to the third-party accurately. This can lead to a potential loss of reimbursement.  An example of this may be an incorrect DAW (dispense-as-written) code or an incorrect NDC (National Drug Code).

Cash pricing – since cash paying customers at the pharmacy represent a small percentage of actual customers; many pharmacy owners do not properly monitor their cash pricing.  However, the cash price, also known as the “U&C” or Usual & Customary price, may affect the amount a PBM may reimburse for a particular prescription.

Price updates – an extension of cash pricing, but ensuring the Average Wholesale Price, or AWP, is current in the pharmacy system to ensure proper payment from the third-party.  Many PSAO negotiated rates are based on an “AWP minus” calculation making AWP a crucial piece of the process.  Other reimbursement methods may be calculated off of WAC, Wholesale Acquisition Cost.  Therefore, price updates can impact the revenues of the pharmacy.

DIR Fees – Direct and Indirect Remuneration Fees may be paid differently per each Pharmacy Benefit Manager (PBM).  For instance, one PBM may account for DIR Fees at the time of dispensing while another may collect the DIR Fee at a later date.  Not understanding how these fees are collected by each PBM may cause incorrect calculations in the amount of reimbursement the pharmacy should receive.

Where Do You Start?

There are hundreds of third-party plans available. You as the pharmacy owner need to decide which plans you want to participate in and understand the reimbursement model of each.  As mentioned earlier, the pharmacy owner is quite busy wearing all the hats of an owner, and it may be time consuming or overwhelming to negotiate and read every plan.  You may want to consider utilizing a Pharmacy Services Administration Organization (a.k.a. PSAO) which is an organization the pharmacy may join to manage the administrative duties and negotiations of third party payment contracts with the PBMs.  The PSAO is an organization comprised of a group of stores that would provide your single pharmacy, or a small group of pharmacies, the power to be in a larger group of member pharmacies to help that PSAO negotiate a better overall reimbursement rate for the members or gain access to narrowed networks.  They are handling the majority of these negotiations on behalf of the pharmacy; however, there still may be a small subset of plans that need to be directly negotiated between the pharmacy and third-party.  As an owner, you have access to these organizations, and pharmacies who enlist the services of a PSAO are usually in a better position to gain patient access and reimbursement.

The Logistics of the Script Once Dispensed

The Switch:

Every independent pharmacy should be utilizing the services of a switch company.  The switch is what routes the third-party prescription claim to the PBM or health plan associated with the prescription.

The Switch


Within seconds, the script leaves the pharmacy, goes to the switch and then is received at the proper PBM.  At that point, the claim is accepted/denied, sent back to the switch, and ultimately sent back to the pharmacy.  During this process, there are many checks-and-balances taking place as the script is being reviewed by all parties.  Items such as the dispense-as-written (DAW) codes, National Drug Code (NDC), Average Wholesale Price (AWP), and others are verified.

Pre-Adjudication Editing:

During this process many pharmacies use a tool to ensure the best reimbursement when submitting the prescription to the PBM for review.  The program is called a Pre-Adjudication Edit which will, for lack of a better term, detour the script prior to being received by the PBM to ensure accuracy of the claim.  The Pre-Adjudication Edit will review items such as DAW codes, NDCs, AWPs, and many other components to ensure the best reimbursement outcome on each script.

pre-adjust edit



As previously mentioned, with 91% of prescriptions being filled through Medicaid, Medicare Part D, or other third-party plans, the pharmacy will be reimbursed after the actual prescription is dispensed to the patient.  This means a large amount of a pharmacy’s revenues will be tied up in Accounts Receivable.  Therefore, it is crucial to understand where your reimbursements are coming and when they have been paid which can be done by reconciling third-party claims.  This is called “reconciliation”.  In years past, this was a manual process. Someone would take the report with a ruler and go line-by-line to verify what was actually paid versus what was supposed to be paid.  Good news in today’s world, there are many reconciliation offerings to the pharmacy to automate this process.  Not only is this process automated, but many of the reconciliation services available provide a central-pay type system to pay via direct deposits at the pharmacy level.  These services often allow the pharmacy to see when their claims have been paid and/or if they are outstanding.

Post Script Review:

At this point, you have submitted your claim to the Pharmacy Benefit Manager (PBM) and have received your payment.  Many pharmacies may not feel the need to review the prescription claim any further; however, there are reasons you may still want to review the claim for accuracy.  If the pharmacy utilizes the pre-adjudication and reconciliation services, there is a greater chance the pharmacy was paid the proper amount, but it may not have captured all errors along the way.  Therefore, a post script review may be necessary to ensure the pharmacy was paid correctly.  If, for some reason, the pharmacy did find an underpaid or incorrect claim, they may have the ability to reverse and rebill the PBM to have it corrected and be paid the proper reimbursement.

Utilize the Resources Available:

As mentioned throughout, there are many solutions and services available to help the pharmacy throughout the entire lifecycle of the prescription.  It would be recommended to research what may be available through the vendors and partners at the pharmacy.  There is a good chance the pharmacy is already partnering with a company who can provide one or more of these services with a minimal investment to the pharmacy.  Let these services do the research for the pharmacy and then allocate the appropriate staff and time to the action which should yield increased or proper reimbursements.

It All Starts with Revenues:

An Income Statement (a.k.a. P&L) starts with revenues as the top-line and is then reduced by drug costs and operational expenses to determine the Net Profit of the pharmacy.  If the pharmacy is not capturing the proper reimbursement on each prescription, this will lead to a loss in revenues.  As a result, since the drug cost, your labor, utilities, and all other expenses didn’t change, this means less Net Profit and ultimately less cash flow available for the pharmacy.

The entire lifecycle of the prescription is manageable and can be positively impacted IF the pharmacy takes the proper approach to ensure correct payments on not only one or two scripts, but EVERY prescription filled at the pharmacy.


Mike Bollinger is Senior Loan Officer of Pharmacy Lending at Live Oak Bank based in Wilmington, NC. Reach him at or 504.453.9726.