Bruce Semingson, R.Ph.

The concept to establish pharmacy services administrative organizations (PSAOs) for independent pharmacies emerged in the 1980s. The objective was to aggregate large numbers of independents and negotiate prescription-dispensing contracts with PBMs (pharmacy benefits managers), Medicare/Medicaid programs, and health plans. For purposes of this article I will group these under managed care organizations (MCOs). The actual formation of PSAOs did not take place until independents experienced the loss of patients (market share) to chain pharmacies because MCOs found it advantageous to negotiate with centrally administered networks of pharmacies. It was also efficient and profitable for these PSAOs, acting as chains, to negotiate more competitive prescription pricing in exchange for increased store traffic and prescription volumes. The concept of preferred networks emerged at this time.

Today essentially all independents and small chains are members of PSAOs that negotiate and administer prescription agreements and represent the majority of the pharmacy’s revenue.

Today essentially all independents and small chains are members of PSAOs that negotiate and administer prescription agreements and represent the majority of the pharmacy’s revenue. Exceptions include fee-for-service Medicaid programs and a few national MCOs such as Humana. The table on page 13 shows the PSAOs that responded to a survey I recently conducted. It includes the number of pharmacies in their network(s) and contact information. These entities represent approximately one-third of the retail pharmacies in the country.

Understanding the PSAO Structure

PSAOs have different ownership types, such as co-operatives (member owned), GPOs (group purchasing organizations), and wholesalers. Co-op and wholesaler-owned PSAOs dominate the market today.

PSAOs have changed significantly since their early days. The “pass through” models, in which PSAOs negotiated contracts and then permitted their members to choose one, are gone. They proved to be of little value to MCOs. MCOs desire the efficiency of single-source contracting, compliance, and administration offered by PSAOs, as well as their competitiveness.

Today successful PSAOs are known as the compliant models, where they negotiate an agreement with the MCO and the pharmacies are required to participate. They are essentially “virtual chains.” If the PSAO does not reach an agreement with a particular MCO, then they are required to notify their network and each pharmacy can seek an individual agreement.

PSAOs are explicitly authorized to negotiate and enter into contracts with MCOs on behalf of member pharmacies through agreements between the PSAO and its pharmacy members. Following the negotiation of an MCO contract, PSAOs use varying procedures for approving or rejecting the contract. Some have established guidance policies authorized by a board of directors or advisors; others authorize their executive staff or key personnel to make all decisions.

Pharmacy Competition Still Central

Independently owned businesses are competitors, whether the business is a single pharmacy or a chain of pharmacies. The Federal Trade Commission (FTC) exists primarily to enforce many federal laws and regulations with the primary goal of fostering competition, resulting in lower prices and a greater number of goods delivered to more people. Regulations restrict the sharing or fixing of prices, colluding to restrain trade, boycotts (refusal to negotiate), and many other practices. Rules and regulations of the FTC are complex and a subject for an attorney or a person with expertise in this area.

However, PSAOs have been operating for many years and they have not been restricted, per se, by the FTC. In fact, the FTC has published little information about PSAOs on their website. Another federal agency, the Government Accountability Office (GAO), published an extensive document on the number, role, and ownership of PSAOs in January 2013 ( At the very least this is an acknowledgement of PSAOs and their functions within the prescription marketplace.

Other PSAO Services

PSAOs offered many services to the managed care industry. Among them are pharmacy and personnel certification and credentialing; centralized administration, claim payments; and resolution processes for issues such as claim underpayments, audits, and patient complaints.

Pharmacy credentialing is a major component of PSAO services. It includes licensure and liability insurance validation; network compliance with federal HIPAA, fraud, waste, and abuse regulations; DEA registration and status; and identification of pharmacies/pharmacists with licensure restrictions. In addition, this procedure collects demographic information about each pharmacy — its owners, finances, and key employees.

Credentialing requirements were expanded under the Affordable Care Act, which has led to an industry-wide collaboration among MCOs, PSAOs, chains, and independents to develop and standardize a set of credentialing data into a single source. The National Council for Prescription Drug Programs (NCPDP) is managing this effort via the new “NCPDP resQ” program. Independents manage and certify the data about their business via the NCPDP website. Their PSAO can assist its members with the electronic transfer of much of the data predicated on the approval of each independent.

In addition to the management of credentialing and compliance, PSAOs also offer many services to independent pharmacy owners, including provision of available contract terms and conditions, management of claim payments, industry updates and education, member services “help desk,” advocacy for independents (especially in politics), market entry/expansion strategies such as access to specialty drugs. Pharmacies should gain a full understanding of the services available in the PSAO market prior to joining a PSAO or as a method of evaluating their current PSAO relationship.

Key PSAO Services

Electronic centralized claim payments are an integral component of PSAO-MCO agreements. Centralized payments are a process where the MCO electronically pays the PSAO for prescriptions dispensed by its network pharmacies according to the terms of their agreement. In turn, the PSAO electronically pays its network, along with remittance data (explanation of benefits, or EOB). Some PSAOs transfer funds the same business day received; others pay two, three, or more days after receipt of funds. Some PSAOs also offer claim payment tracking/reconciliation services. In addition, PSAOs may have the right to deduct payment of PSAO fees and/or audits requiring repayments.

IT Innovation and Service Excellence

Rob McMahan, CEO, Arete

Thoughts from Arete Pharmacy Network’s CEO Rob McMahan on how IT-based innovation and service excellence combine to address:

• Narrow networks and access to patient lives.
• The expansion of quality performance measures from Medicare to Medicaid and private pay.
• PSAO onboarding and compliance processes.

Read Rob’s Thoughts

PSAOs need to provide information about their book of business to their members. Key information includes reimbursement terms, MCO service area and clients, claim processing data such as BIN and PCN numbers, patient benefit information such as formularies, and 800 “help desk” contact information for each MCO. Much of this information is confidential and cannot be disclosed to anyone other than the participating pharmacies. Secure websites are the most common vehicle for sharing contract information. All PSAOs have developed policies to disseminate this important information while protecting the confidentiality components of agreements.

Educating participating pharmacies about current market conditions and strategies for the future is an important component of some PSAO programs. The retail prescription market is in the process of changing at record speeds. One only needs to mention the words DIR (direct/indirect remuneration), performance and preferred/narrow networks, and independents are at full attention. Chains have implemented plans to address each of these issues, and independents should expect the same from their PSAOs.

The Centers for Medicare and Medicaid Services (CMS) star ratings for Medicare Part D plans and DIR fees are here to stay. Performance is quickly becoming a new standard for participating in certain MCO networks and is often accompanied by per-claim DIR fees. Over 75% of the Medicare Part D plans have preferred cost-sharing/narrow networks where their beneficiaries receive lower out-of-pocket costs at selected pharmacies known as “preferred pharmacies.” Pharmacy participation in preferred networks requires the pharmacy to accept lower reimbursement and to pay a per-claim “participation fee.” However, most of these plans have performance benchmarks, where a pharmacy has the potential to earn “bonuses” when they exceed quality measures. PSAOs that address these challenging issues and guide their pharmacy network will survive.

PSAOs also have membership requirements. Some require participation in wholesaler purchasing agreements and others are strictly fee based. Independents need to review these requirements, along with the services offered to determine which PSAO is best for their business plan.

While the new hurdles of DIR fees and performance standards are challenging, independent pharmacy owners will find a way to survive when they leverage the centralized services of a well-run PSAO as if it were their own “corporate headquarters.” CT

Bruce Semingson, R.Ph., is President of Pharmacy Perspectives, providing consulting services for all business components of retail pharmacy. He also specializes in all aspects of Medicare Part B and Part D, including CMS retail pharmacy regulations, medication therapy management (MTM) programs, reimbursements, pay for performance, preferred/narrow networks, and STAR measurements and ratings. The author can be reached at