Mass. chains pressured to swallow drug tax – Medicaid Watch

James Frederick

BOSTON — Profitability has become an endangered species at the pharmacy counter in Massachusetts.

Facing the specter of possible legal action and investigation by the state attorney general, pharmacy chains in the Bay State have agreed to stop charging their customers a highly controversial $1.30 prescription assessment levied by the state and are now absorbing the cost of that levy themselves. Most have agreed to reimburse their patients for any taxes paid thus far since the levy went into effect at the beginning of the year, but are fighting hard to overturn the tax.

To add insult to injury, Medicaid and state health officials in Massachusetts told pharmacy representatives in a Feb. 14 meeting they are considering another 3 percent to 5 percent reduction in reimbursements for prescriptions dispensed to Medicaid patients. “We’re on the verge of being asked to absorb the second rate reduction here in two years,” said an angry Dan Haron, vice president of pharmacy and professional affairs or Brooks Pharmacy, which operates 165 drug stores in the state.

The move to swallow the pharmacy assessment apparently as triggered by Walgreen Co. Along with CVS, the chain was being scrutinized reportedly by Massachusetts Attorney General Thomas Reilly and other officials over the practice–common to almost all drug chains and independents in the state–of passing the new assessment onto customers. Although the legality all of the practice was never established fully, Walgreens reluctantly opted in mid-February to absorb the fee and to make the move retroactive for its customers.

“In our ongoing discussions about the tax … we concluded it’s in everyone’s best interest to no longer collect the tax from patients,” explained Dennis O’Dell, Walgreens vice president of health services. However, he said, “We will continue working with the state to eliminate this unfair tax.”

In this highly competitive market, the move quickly snowballed. CVS, Brooks Pharmacy, Stop & Shop Supermarket Co. and WalMart Stores quickly followed suit.

“We made the decision to absorb it,” said John Fegan, vice p resident of pharmacy for Ahold USA and its Massachusetts-based Stop & Shop division. “We suspended the collection of the payment with the idea of giving the legislature and [Gov.] Romney’s new administration a chance to work with us on this–along with the manufacturers. But we felt we were in compliance with the law, and that’s why we used the word ‘suspended.’ We felt we hadn’t done anything wrong” in collecting the tax from consumers.

CVS, which operates some 300 stores in the state, also quickly agreed to absorb the fee. But the company stated that it “will continue to have ongoing discussions with legislators and other policy makers regarding what we believe is an unfair tax.”

In a statement issued Feb. 18, Wal-Mart’s vice president of pharmacy, Frank Segrave, said, “While we strongly disagree with this tax, we have made a business decision in the best interest of our customers not to pass this tax along.”

Taken together, the new prescription fee and the threat of a new round of Medicaid cuts represent a staggering blow to retail pharmacy in Massachusetts and a worrisome precedent that could sweep into other states struggling to cover massive budgetary shortfalls amid rising health care costs and a sour economy. Indeed, Michigan is said to be contemplating a pharmacy assessment of its own, and Oregon is pushing a series of steep rate cuts for Medicaid prescriptions that could trigger the kind of pharmacy revolt seen in the Bay State last summer.

‘Death knell’ for independents?

That revolt–led by major pharmacy operators and independents who threatened to pull out of Massachusetts’ Medicaid program–was enough to force Massachusetts Gov. Jane Swift to modify a rate reduction plan to stem a tide of defections among providers. But the new tax–hastily adopted last fall amid an escalating budget crisis, and now forced back onto retailers–is likely to hit drug stores just as hard. Coupled with any further rate cuts for Medicaid patients, it could bleed already anemic gross margins enough to put weaker pharmacy competitors out of business.

“My guess is that this could be the death knell for a lot of the small independents,” said Fegan. “We really have no place to go when it comes to the reimbursement rate for Medicaid. We’re at the point where it is economically unfeasible to continue.

“Something has to be done to get everyone to the table and to talk this through, because … were at bare bones right now,” he asserted in an interview Feb. 20.

“I think it seriously challenges the model” of community pharmacy, agreed Haron. “My concern–not just for Brooks, but for all community pharmacy–is that we continue to face pressure in Medicaid rate-of-reimbursement reductions. And we have this pharmacy assessment tax, which appears to be unfolding now in some other states.”

Walgreens spokesman Michael Polzin was equally grim. “I don’t know what the break point is,” he told Drug Store News, “but every rate reduction and every tax we pay brings us closer to it. We’ll have to look at how all our stores perform with this $1.30-per-prescription tax. And if we get into a situation where we need to cut operating costs, we may have to look at things like reducing pharmacy hours or not opening locations.”

Polzin pointed out that Walgreens is “not contemplating that at this point. but those are all potential results.

Independent pharmacies, Polzin a reed, will be especially hard hit. “They get 80 percent of their revenues through prescriptions. It’s very difficult for them to make up for all of that with the other 20 percent and remain competitive.

“We just want the legislators to realize what that potential impact will be.”

Polzin said absorbing the tax will cost each of Walgreens’ stores in Massachusetts an average of about $10,000 a month. “With more than 90 stores, that’s about a million dollars a month.”

COPYRIGHT 2003 Reproduced with permission of the copyright holder. Further reproduction or distribution is prohibited without permission.

COPYRIGHT 2003 Gale Group

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