HomeMissionPolicyLinksContact UsLogin
LTCPA: Long Term Care Pharmacy Alliance Providing medicines to over one million of our nation's long-term care residents closeup of elderly face
A Study of Long-Term Care Pharmacy Dispensing Costs

Legislative Budget and Finance Committee
Pennsylvania General Assembly

December 2000

Summary and Recommendations
House Resolution 545 directed the LB&FC to study the relative adequacy of medical assistance reimbursement for pharmacies dispensing medications to residents of long-term care nursing facilities compared to pharmacies dispensing to traditional retail customers (see Appendix A). Currently, the Department of Public Welfare pays pharmacies the same amount ($4 per prescription) when dispensing to MA recipients in community retail settings and licensed nursing facilities.

House Resolution 545 did not direct the LB&FC to study the adequacy of DPW's overall pharmaceutical service reimbursement, and we did not attempt such an assessment. Act 1996-53 did, however, require the DPW to determine the cost of filling a prescription and providing pharmacy services, including reasonable profits, in the Medical Assistance program. PricewaterhouseCoopers conducted this study and presented its results in November 1998. The major findings of the PricewaterhouseCoopers study are shown in Appendix B.

Long-Term Care Pharmacy Service Requirements

All pharmacies are required to comply with a variety of laws and regulations and professional standards when dispensing medications. Federal statutes and regulations for the Food and Drug Administration (FDA) and the U.S. Department of Justice's Drug Enforcement Administration (DEA) have established basic standards for distributing and dispensing drugs. In Pennsylvania, pharmacies are only permitted to dispense controlled substances and other drugs to their ultimate user. An ultimate user is someone who has lawfully obtained the drug from the pharmacist for his own use or use by a member of his own household.

Compliance with basic federal and state standards requires pharmacies to perform additional activities when dispensing medications to residents of long-term care facilities. In a traditional retail setting, the pharmacy's responsibility for the drug ends at the point the customer takes control of the medication at the pharmacy counter. Residents of long-term care nursing facilities are often unable to travel to the dispensing pharmacy or control their medications while in the facility. As a result, dispensing pharmacies are required to utilize extended drug control and distribution systems when serving such residents.

Federal Medicare and Medicaid and state long-term care facility licensing standards also impose requirements that must be met by pharmacies dispensing to residents of long-term care facilities. For example, they must:

· Dispense drugs for facility residents in urgent and emergency situations.

· Supply the facility with emergency medication kits that are maintained and controlled by the pharmacy.

· Receive outdated, deteriorated, or recalled medications for disposal in accordance with acceptable professional practices.

· Provide monthly resident medication profiles to the nursing facility.

· Help ensure that the facility has medication error rates of less than five percent and that residents are free of any significant medication errors.

The federal Department of Health and Human Services (DHHS) has procedures to determine if its medication-related standards are met. For example, federal surveyors conduct what is referred to as a "medication pass observation" to detect several different types of medication errors. As part of their observations, for example, they check to see if nursing staff are administering residents' drugs on time-i.e., no more than 60 minutes earlier or later than the scheduled delivery time.

To help meet federal and state requirements concerning medication, nursing facilities typically use "unit dose" medication distribution systems, rather than bulk and vial systems. Decades of research have shown the advantages of unit dose systems in reducing the opportunity for medication errors and reducing medication error rates. Such systems, therefore, have been accepted as standard practice in health care facilities, including long-term care nursing facilities.

Unit dose dispensing systems provide medication ready for administration direct from the pharmacy. The pharmacy typically delivers the medication to the nursing facility in locked carts. Each resident's medication is delivered in packaging that specifically identifies the resident and the exact date and time the resident is to receive the medication. Such packaging conforms to federal labeling and drug storage requirements. Unit dose dispensing systems provide facility staff responsible for administering the medication with instructions for safe and proper administration. Such systems also provide for more efficient use of pharmacy and nursing personnel and improve drug control and drug use monitoring.

We surveyed a sample of Pennsylvania long-term care nursing facilities to review their experiences with unit dose distribution systems. The sample consisted of a mix of small, mid-size and large, for-profit, nonprofit, and county-operated nursing facilities throughout the state. All of the facilities, however, served either a high volume or high proportion of Medicaid recipients.

The survey responses confirmed what has been reported in prior national nursing home pharmacy research-unit dose medication distribution systems have become the dominant medication distribution systems used in nursing facilities. All but one of the nursing facilities responding to our survey relied on unit dose systems in whole or in part to administer medications to residents. Most respondents (18 of 21) had pharmacy dispensing services provided by pharmacies that are not operated by the facility. Typically, they reported receiving dispensing services from closed pharmacies that serve long-term care facilities but not the general public.

The directors of nursing at the responding facilities that had experience with bulk and vial and unit dose medication distribution systems were asked to compare these systems. They ranked unit dose distribution systems as significantly or somewhat better than bulk or vial distribution systems in areas such as medication error rates, ease of use for nurses, amount of time required for the medication pass, ease of tracking medications, accountability for controlled substances, record keeping, and infection control requirements.

When asked to identify the effects on their facility if the facility reverted to a multiple dose vial or bulk medication distribution system for Medicaid patients, directors of nursing reported multiple effects, including increased medication error rates, problems with accountability for controlled substances, the need for more nursing hours to be able to administer medication, and infection control problems.

Pennsylvania Long Term Care Pharmacy Providers' Added Dispensing Costs

The additional activities associated with pharmacy dispensing for residents of long-term care facilities result in added costs for pharmacies providing such services. Such added costs include:

· Cost of a 24 hours/7 days a week dispensing pharmacist and other labor costs associated with emergency and urgent dispensing services.

· Cost to supply and maintain emergency medication kits, including the cost to monitor the kit and to replace outdated and deteriorated medications.

· Costs associated with an extended drug control and distribution system, including the cost of locked drug carts, delivery expenses, creation of medication profiles and other resident medication records, maintaining a drug control inventory system for nursing facility residents, and proper drug disposal.

Dispensing pharmacies serving nursing facilities with unit dose dispensing systems also incur added costs for labor and packaging when repackaging drugs from bulk supplies and placing them in unit dose containers. They may also incur additional costs when acquiring drug manufacturers' unit dose products, as such products are often more costly than bulk supplies.

LB&FC staff surveyed all long-term care pharmacy providers in Pennsylvania to identify the costs associated with the above activities. The survey included several different types of long-term care provider pharmacies-i.e., those providing pharmacy dispensing services exclusively to residents of nursing facilities, community pharmacies providing dispensing services to residents of one or more long-term care nursing facilities and serving retail customers, and pharmacies operating within licensed nursing facilities.

Twenty-seven long-term care providers (42 percent of those surveyed) responded to the survey. These providers operate 71 pharmacies representing all geographic regions of the state, and some provide services statewide. Together the respondents served 78,076 skilled and intermediate nursing beds and dispensed a total of 9,156,815 prescriptions. As such, our respondents serve approximately 87 percent of the state's licensed nursing beds in freestanding private, non-profit, and county nursing facilities.

Those responding included five community pharmacy providers that dispensed to residents of long-term care nursing facilities, seven providers that operate within such facilities, and seven providers operating closed pharmacies. An additional eight providers operating a combination of community, closed, and/or
facility-based pharmacies also responded. We found:

· Community pharmacies responding to our survey typically served only one or two nursing facilities, with the closed pharmacies and those operating a mix of pharmacy types serving a much larger number of facilities (55 and 15 respectively).

· Pharmacies within long-term care facilities typically serve facilities that are much larger than those served by other reporting pharmacies. They served facilities with 372 beds on average compared with 148 on average for all respondents.

· Over half the prescriptions dispensed by the responding providers were for Medical Assistance residents. Pharmacies operated within nursing facilities tended to be operated by county government. Not surprisingly, they served a much higher proportion of Medical Assistance residents. Close to 80 percent of the prescriptions they filled were billed to the Medical Assistance program. This compares with 35 percent for the community pharmacies, 49 percent for the providers operating multiple types of pharmacies, and 57 percent for the closed pharmacies.

· Eighty-nine percent of all the medications distributed by the responding providers were distributed through unit dose distribution systems. The only pharmacies reporting primary use of vial or bulk distribution systems were those operated by nursing facilities. Forty-eight percent of the medications distributed in such facilities were distributed via bulk or vial distribution systems, with 52 percent distributed through a unit dose system.

· As shown below, providers reported total additional costs (i.e., costs beyond what would be incurred in a retail pharmacy) for long-term care dispensing of $2.87 per prescription. This includes the cost of emergency or urgent services, emergency medication kits, drug control and distribution, drug repackaging, additional costs to acquire manufacturers' unit dose products, and other dispensing related items. The lowest additional costs are reported by pharmacies operated by nursing facilities ($1.24 per prescription). The second lowest costs are for community pharmacies ($1.79). Closed pharmacies and providers operating more than one type pharmacy reported identical costs at $2.97 per prescription.

Additional Long-Term Care Dispensing Costs Reported* Per Prescription



Community Pharmacies

Pharmacy Operated

Closed Pharmacies

Multiple Types of



Serving LTCFs


Within LTCF


Serving LTCFs







Emergency or Urgent






Emergency Medication






Drug Control and
Distribution System






Drug Repackaging






Additional Drug Acquisition Costs for Purchase of Manufacturer's Unit
Dose Products................







0.01 0.02 0.02  0.00 0.01



$1.24 $2.97 $2.97 $2.87

*Weighted by prescription volume within and across provider types.
aOnly additional costs not incurred in a retail setting and not part of pharmacy consulting activities are included. b May not add due to rounding.
Source: Developed by LB&FC staff.

· The largest proportion of the added cost for long-term care dispensing is for drug control and distribution, accounting for $2.00 of the $2.87 added cost per prescription. Not surprisingly, providers serving the larger numbers of facilities-the closed and mixed type providers-incur much higher delivery expenses for regular, emergency, and urgent delivery, with such expenses accounting for the major differences in their drug control and distribution costs.

· Providers typically incur an additional $0.45 per prescription for repackaging of drugs for use in unit dose systems and $0.13 for additional costs to acquire manufacturers' unit dose products. Closed pharmacies with high volumes of prescriptions tend to have lower repackaging costs than community pharmacies serving one or two facilities ($0.38 compared to $0.74) and are more likely to have additional costs as a result of having to acquire manufacturers' unit dose products.

· Twelve providers responded to a question about differences in their charges for community retail and long-term care dispensing. Six of the 12 reported charging higher fees for dispensing to residents of long-term care facilities, including 3 providers that charged a dispensing fee that was higher than their reported additional costs.

The total additional cost of $2.87 per prescription is a conservative estimate. The cost does not include costs associated with complex billing for services provided to Medical Assistance recipients in institutions. In some cases, providers did not report an added cost, but indicated they provided the additional service. Some county-operated homes, which reported relatively low additional costs, indicated that their situation is not comparable to commercial pharmacies. Also, when deriving the typical added cost per prescription, we included in the total number of prescriptions all prescriptions for controlled substances, legend, and "other" drugs. If we had excluded the "other" drug prescriptions--which include over-the-counter medications--the additional cost per prescription would have been higher. For these and other reasons, the typical added per unit cost associated with long-term care dispensing is a conservative estimate.

Medical Assistance Reimbursement for Long Term Care Pharmacy Services


Like most states, Pennsylvania's Medical Assistance program pays for drugs that the public can obtain without a prescription as part of the nursing facility's
daily rate. The Department, however, directly reimburses pharmacies for prescription drugs dispensed to Medical Assistance residents of long-term care facilities.

Medical Assistance reimbursement for pharmacy services typically consists of two broad components--the estimated cost to the pharmacy to acquire the drug and a dispensing fee. DPW pays the pharmacy its combined drug acquisition cost and dispensing fee, unless the pharmacy's usual and customary charge to the public is lower. In such cases, DPW pays the pharmacy its usual and customary charge. Currently, DPW pays all pharmacies a traditional dispensing fee of $4.00 per prescription.

The Department establishes what it will pay a pharmacy for the cost to acquire the drug depending upon whether the drug is available from multiple drug manufacturers or from only one manufacturer that holds a patent for a name brand drug. The pharmacy's source for drug acquisition is not taken into account in DPW's pharmacy reimbursement. Drugs available from multiple manufacturers are often referred to as generic or multi-source drugs. Those available from only one manufacturer that holds a patent for the product are referred to as single source or brand name drugs.

Like most states, DPW pays for generic or multi-source drugs using a national price list prepared by the federal Department of Health and Human Services known as the Federal Upper Limit (FUL). The Department (through a contractor) establishes prices it will pay for other such drugs that are not listed on the FUL.

For single source drugs, the DPW pays the pharmacy based on the Average Wholesale Prices (AWP) reported by a DPW contractor. AWP is the average list price that a manufacturer suggests that drug wholesalers charge pharmacies. It is referred to as a sticker price because it is not the actual price that large purchasers normally pay. DPW, therefore, pays AWP minus 10 percent for the most common package size of the product.

Since September 1995, DPW has defined the most common package size of a drug for capsules, tablets and liquids available in breakable package sizes to exclude payment for manufacturers' unit dose products. Prior to that time, the Department covered the cost of manufacturers' unit dose products when such products were more costly.

While the cost of manufacturers' unit dose products is generally higher than bulk products, the FDA permits the reuse of such products in certain circumstances, thus eliminating unnecessary waste for high cost drugs. In Pennsylvania, state law permits the reuse of unused drugs in the manufacturer's original sealed container if they are returned intact, the pharmacy maintains records of all returns, and a full refund is given to the original purchaser.

The Department is aware that pharmacies dispensing to residents of long-term care nursing facilities perform additional activities. In a 1993 statement of policy, DPW discussed the dispensing pharmacy's provision of medication carts for drug storage, provision of treatment and medication forms, preparation of nursing facility reports related to drug usage, and provision of emergency medication kits. It characterized such activities as "ancillary enhancements" to the practice of pharmacy as defined in Pennsylvania's Pharmacy Act. As such, according to the policy, they may be considered acceptable practices and not kickbacks or bribes for referring individuals for Medical Assistance services.

Other States

LB&FC staff reviewed Medical Assistance policies for pharmacy reimbursement in 19 other states to determine how they address added long-term care dispensing costs. The states selected include states that DPW has used when considering the comparability of its pharmacy reimbursement. The 19 states also included several that reportedly had special arrangements for reimbursing the costs associated with long-term care dispensing. We found:

· Fourteen of the 19 states are like Pennsylvania in that they have a flat dispensing fee per prescription. Eight of the states (Florida, Idaho, Kentucky, Maryland, Missouri, South Dakota, Virginia, and Wisconsin) with flat dispensing fees have dispensing fees that are higher than Pennsylvania's. Six (California, Delaware, Michigan, Minnesota, Ohio, West Virginia) have lower fees.

· Nine states (Pennsylvania, Kentucky, Maryland, Missouri, South Dakota, Wisconsin, Illinois, New Jersey, New York) pay AWP minus 10 percent when paying for single source drugs. Eight states (Delaware, Florida, Idaho, Michigan, Ohio, West Virginia, Oregon, and Texas when it reimburses using AWP) have AWP discounts of 11 percent or greater. Texas does not typically rely on AWP to determine what it will pay pharmacies for their drug acquisition costs. Its payments vary depending upon the pharmacy's source for drug acquisition. Three states (California, Minnesota, and Virginia) have discounts of less than 10 percent.

· Eighteen states reimburse pharmacies directly when providing prescription drug services to residents of long-term care nursing facilities. One state, New York, includes the cost of some prescription drugs within its daily rate for nursing facility care. (High cost prescription drugs are not included in the daily rate.)

· Six of the 18 states (California, Delaware, Illinois, Ohio, Texas, and West Virginia) do not provide additional reimbursement for pharmacies dispensing to residents of nursing facilities. However, all of these states, with one exception (California), pay pharmacies for their costs to acquire manufacturers' unit dose products.

· Only California is like Pennsylvania in that it does not pay pharmacies serving long-term care facility residents for manufacturers' unit dose products. California, however, pays a higher rate than Pennsylvania to pharmacies for their cost to acquire drugs. California pays AWP minus 5 percent, compared to Pennsylvania's AWP minus 10 percent.

· Twelve of the 18 states that directly reimburse pharmacies provide reimbursement over and above their traditional dispensing fees for pharmacies dispensing to residents of nursing facilities. The 12 states include surrounding states such as Maryland and New Jersey, populous states such as Florida and Michigan, and other states such as Minnesota, Oregon, Virginia, Wisconsin, Missouri, Idaho, Kentucky, and South Dakota.

· Additional reimbursement takes the form of higher dispensing fees and/or repackaging fees for pharmacies providing unit dose distribution systems, and additional fees or credits for unit dose systems or providing 24 hours/7 days a week services and delivery. One state, New Jersey, pays the pharmacy a daily rate per resident in place of a dispensing fee. The rate paid the pharmacy varies according to the type of drug distribution system used and the extent of the services provided.

· All of the states are like Pennsylvania in that they provide for reuse of drugs in manufacturers' unit dose products if certain conditions are met. In addition, 16 states, including 11 of the 12 providing additional reimbursement for long-term care dispensing, allow for reuse of pharmacy repacked unit dose drugs in certain circumstances. Pennsylvania currently does not explicitly allow for such reuse. However, a recent bill before the General Assembly would permit reuse in selected facilities, including nursing homes. The proposed legislation provides for a crediting fee of not less than $3.50 and not more than $7.50 per prescription for a licensed pharmacist accepting any portion of an unused, returned prescription.


1. The Department of Public Welfare should consider adjusting its dispensing fee to take into account the additional activities pharmacies are required to perform when dispensing to residents of long-term care facilities. DPW currently pays the same dispensing fee to all pharmacies. We found, however, that dispensing prescriptions to residents of long-term care nursing facilities involves additional activities that are effectively imposed by Medicaid certification and state licensure requirements. Our survey indicates the average cost of these additional activities is approximately $2.87 per prescription. We should note that we did not attempt to assess the adequacy of DPW's overall payments to pharmacies for dispensing and drug acquisition costs. However, while drug acquisition costs can differ depending upon the pharmacy's source for the drug, we have no reason to conclude that there are significant differences in drug acquisition costs for the retail pharmacies as a group and long-term care pharmacies.

2. The Department of Public Welfare should consider modifying its method of reimbursing for drug acquisition costs to cover reimbursement for manufacturers' unit dose products. Pennsylvania is one of only two states of the 20 states reviewed as part of this study that does not reimburse for manufacturers' unit dose products when used in long-term care nursing facilities' unit dose drug distribution systems. The only other state that does not provide for such reimbursement pays a higher drug acquisition cost than Pennsylvania. Such systems are the standard of care now in use in nursing homes and, although not specifically mandated, in reality they are the only practical way that nursing homes can meet federal regulations for the administration of drugs in nursing homes.

3. The Department of Public Welfare should also consider adjusting its dispensing fee for pharmacies that dispense prescriptions to residents of other state-supervised residential programs. This study considered only the additional costs associated with dispensing to residents of long-term care nursing facilities licensed by the Department of Health and required to meet federal Medicare and Medicaid certification standards. We did not include the costs to serve those in DPW licensed personal care homes or other DPW licensed residential programs. Several pharmacists, however, informed us that they must perform many of the same additional activities for residents of personal care homes and DPW licensed children's residential facilities. They noted that because of the conditions of such residents and regulatory requirements, they must provide medications for such facilities through unit dose distribution systems. One noted that such systems are essential for such facilities since persons who are not licensed practitioners are involved in the administration of medications to residents. We recommend, therefore, that the Office of Medical Assistance consult with other DPW program offices to identify those state-supervised and sponsored programs where unit dose dispensing systems are effectively required. DPW should take steps to assure that such costs are reasonably covered in the reimbursement methods of the Medical Assistance program or other relevant DPW reimbursement sources.