Perry Drug cuts 3rd-party co-payment discounts to preserve its profitability - Perry Drug Stores

Perry Drug cuts 3rd-party co-payment discounts to preserve its profitability

PONTIAC, Mich. -- Perry Drug Stores has struck a risky blow for higher margins at the prescription counter by eliminating the co-pay discounts it has offered its third-party customers for most of the past two decades. Other chains have been quick to follow.

"We are faced with eroding margins and the need to run a profitable business," said Mike Winkelman, vp-pharmacy operations at Perry. Winkelman said with the cost of prescription products and the cost of operations rising, and no adjustments of reimbursement rates by the third party, the chain felt that eliminating co-pays would be an obvious answer.

Winkelman said chains typically discount 50 cents to $1 off a co-pay of $2 to $3. "When we approach the third-party administrators for an adjustment on reimbursement rates, their attitude is that we are silly to ask when we are discounting co-pays," said Winkelman. "By eliminating the discount, we are able to approach them with cleaner hands, so to speak."

Other chains quickly followed suit. Arbor, which was offering discounts on co-pays for three of the over 40 plans the chain did business with, dropped the discounting within two weeks of Perry's announcement.

"Eliminating the discounts was something Arbor had been thinking about for some time," said a spokesperson for the Troy-based chain. "Today's competitive edge comes from prices or the loyalty that exists between the pharmacy department and the customer. In today's market, it is an anachronism to discount co-pays. Discounts were a marketing tool to build the pharmacy department. It served its purpose, but it's no longer feasible."

Chains originally started discounting the co-pay to generate third-party business 20 years ago when the automobile companies began to offer prescription plans to their employees, said Winkelman. Now that third-party business is so pervasive, particularly in the Michigan market, the co-pay discounts no longer serve as a draw.

Other chains, concerned about customer reactions, are still considering the move or are eliminating the co-pays on a market-by-market basis. A spokesperson from K mart said that the chain is leaving the decisions up to the pharmacy manager in each store, a move which is consistent with K mart's general approach to local pricing strategies.

Concord/Wrigley Drugs, a 12-store chain based in Pontiac, has been considering the move across the board, but has implemented the elimination on a store-by-store basis.

Winkelman reported that there have been a "handful of objections from customers." Those situations have been handled by pharmacists. A memo describing the "eroding pharmacy margins and the need to do a profitable business" has been made available to customers with questions, according to Winkelman. An Arbor spokesperson said the chain has received no complaints about the eliminated co-pays. "People would rather see the elimination of the 40 cent- to 50 cent-discount than a raise in the price of their prescriptions. Customers understand that we have to make a profit," he said.

Although Winkelman said he was pleased by the support of other chains, such as Arbor and Farmer Jack, Cary Levy, vp and director of pharmacy for Concord/Wrigley, said that independents "have not moved as quickly as we would like them to."

"One third of our co-pays are full price," he said. "We would love to be at full price for all co-pays, but where volume has been affected, we will continue to discount."

Mike Major, head pharmacy specialist for Meijer, Inc., a Grand Rapids-based discount chain, said the company would prefer not to comment on the issue.

Luigi Deboni, director of pharmacy for F&M, could not be reached for comment.

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