Principal versus agent in pharmacy and drug dispensing

Recognizing gross drug revenue when the pharmacy never actually controls the drug materially overstates both revenue and cost of sales even though net profit is unaffected, distorting margin percentages, revenue-based covenants and comparability with peers who correctly report net; this is a frequent finding in healthcare revenue audits given the mix of owned, consignment and specialty pass-through drugs on the same shelf.

Does the pharmacy obtain control of the drug before transferring it to the patient, bearing inventory risk and having discretion over pricing, or does the supplier retain that risk and reward until dispensing under a consignment arrangement? Does the entity have real latitude in setting the price charged to the patient or insurer, or is the price fixed by a third-party formulary regardless of the entity's involvement? Based on these indicators, should revenue be recognized gross as principal or net as agent for specialty and consignment drugs?

1) For each significant drug distribution arrangement, identify who bears primary responsibility for fulfilling the promise to the patient/payor. 2) Assess who bears inventory risk before transfer to the patient (loss, obsolescence, price changes), the supplier under most consignment and directly-shipped specialty arrangements. 3) Assess who has discretion in establishing the price charged to the patient or insurer, a fixed third-party formulary price is an indicator of agent status. 4) Weigh these control indicators together (not a single deciding factor) to reach a principal-versus-agent conclusion for each material arrangement type, since conclusions can differ across drug categories within the same pharmacy. 5) For principal conclusions, recognize gross revenue and a corresponding cost of sales; for agent conclusions, recognize only the net fee/commission as revenue. 6) Document the conclusion and revisit it if contract terms with a supplier change (e.g. moving from consignment to owned-inventory terms).

For agent arrangements, measure revenue at the net commission or margin retained (the dispensing/administration fee), with no gross-up for the pass-through drug cost; for principal arrangements, measure revenue at the gross amount charged with the cost of the drug recognized separately as cost of sales once control transfers to the hospital's inventory; ensure consistent measurement treatment is applied to all transactions within the same concluded category.

Disclose the basis for principal versus agent conclusions where dispensing arrangements are significant; present revenue and cost of sales consistently with the conclusion reached (gross for principal, net for agent) across all periods presented; disclose if conclusions differ materially across drug categories (owned formulary vs. consignment vs. specialty pass-through) and the resulting effect on reported revenue.

• Recognizing gross drug revenue and cost of sales for consignment stock where the entity never controls the drug before dispensing it, overstating both lines
• applying a single blanket principal/agent conclusion across all drug categories without assessing genuinely different arrangements (owned formulary stock versus consignment specialty drugs)
• focusing on a single indicator (e.g. who invoices the patient) instead of weighing all control indicators together
• failing to revisit the conclusion when supplier contract terms change from consignment to owned-purchase terms or vice versa.