Author: Bruce A. Semingson, RPh
Independent retail pharmacies can thrive in today's competitive market-if owners commit to changing their business models.
Mr. Semingson is chief operating officer of American Associated Pharmacies (AAP), a national, full-service cooperative of independent pharmacies combining United Drugs and Associated Pharmacies, Inc.
According to some national industry sources, including IMS Health and the National Association of Chain Drug Stores, among others, independent pharmacies are experiencing decreases in the number of prescriptions dispensed as well as in overall revenue growth. Meanwhile, most chain and supermarket pharmacies are experiencing revenue increases from 3% to 5%. What does this mean for independent pharmacies?
Several key factors are driving changes in prescription count and revenue:
• The economy.
High unemployment causes patients to lose medical benefits. While some unemployed individuals are eligible to enroll in Medicaid, physician group practices are reporting decreases in office visits.
• Expansion of restricted and limited pharmacy benefit manager (PBM) networks.
These networks offer payers smaller, less convenient retail networks in exchange for lower reimbursement rates. Restricted networks move prescription volume from nonparticipating pharmacies as well.
• Expansion of CVS/Caremark Maintenance Choice Program.
Patients can only utilize a CVS retail pharmacy or Caremark mail-order for maintenance prescriptions.
• Increases in the number of cash prescriptions.
Walmart’s $4 generic prescription program has had a major impact on the marketplace. It triggered a response from all segments of retail pharmacy, the most common being generic 90-day supply programs retailing for $9 to $12 per prescription.
• Significant marketwide increases in 90-day supply prescriptions at retail.
These are driven primarily by Medicare Part D prescription programs. One 90-day supply prescription represents 3 previous scripts.
• The continuing loss of specialty prescriptions to mail-order and/or specialty pharmacy providers.
Impact of Generics
Conversions of brand prescriptions to generic prescriptions are also an important factor on the revenue side of the equation. Generic dispensing rates are now at 60% to 70% in the majority of pharmacies. Some pharmacies dispense 80% generic prescriptions. Revenues decrease 75% to 80% when a generic is dispensed instead of its comparable brand. However, one must remember that the return on investment is greater and the profit margins are comparable.
But all is not negative.
In business, one learns to fully understand the market before making decisions or before reacting to what seem to be negative trends.
Despite retail pharmacy’s challenges today, there are many opportunities on the horizon. Here are some worth considering. For one, approximately 76 million baby boomers—those individuals born between 1946 and 1965—are beginning to retire. Many of those retirees will require prescription drugs to treat their conditions.
Second, the health care reform legislation passed in March 2010 will expand medical coverage to tens of millions of uninsured citizens, which will generate millions of new prescriptions. One million patients, on average, generate 700,000 prescriptions per month.
Also, a refill reminder program will provide significant new growth potential for all pharmacies. Poor patient adherence on maintenance drugs is one of America’s biggest health care challenges. Creation of an adherence program not only benefits patients, but adds new pharmacy revenue. There are numerous refill reminder programs on the market—and all pharmacies should enroll their chronically ill patients.
A growing revenue stream, medication therapy management programs, will add profit dollars to prescription transactions. The majority of these pharmacist-certified programs are through Medicare Part D programs, but others are available.
During the next 5 years, approximately $90 billion brand name products will transition to generic equivalents. These conversions spell “opportunity,” providing that your third-party contracts are managed well and your generic Cost of Goods is competitive.
Eye on the Future
In the future, retail pharmacy will remain extremely competitive. PBMs, medical insurance companies, employer groups, and government-sponsored programs will continue to demand additional price concessions on the cost of prescription drugs. Ultimately, the source of these concessions will be manufacturers, distributors— and retail pharmacies.
Retail pharmacies will need to modify their business model in ways to expand their revenue, increase productivity, and grow their earnings. Although new revenue is the catalyst for business success, revenue without a profit margin will suffocate a business in short order. Pharmacy business owners must be very cautious when entering into high volume, low margin agreements, however, and keep a close eye on the industry as a whole to make the best decisions for their independent pharmacies.