PHARMACY ECONOMICS 101

I feel very gratified when I write a blog and I get responses which support my perspectives, but equally I appreciate it when some reactions are opposed.  I am sometimes accused of being biased. True, I am biased and I freely confess it.  I have some strong biases and I call them ‘as I sees them’.  Sometimes I am accused of being incorrect; if this happens, it is not intentional and I appreciate being corrected.  “Correct” of course is often a matter of opinion…which is OK too.

My piece today is likely to invite reactions both opposed and in agreement; it’s my take on how the pharmacy economic model works today, especially pertaining to big corporate pharmacy chain operations.

The general opinion out there is that the old dispensing model, i.e. churning out as many prescriptions as possible in the shortest period of time, is no longer economically viable.  Factory production, assembly line and robotic are some of the descriptions used.  In addition, the point is made that the considerable skill set and knowledge of pharmacists is wasted under these conditions.

Pharmacy payers, both government and 3rd party, are likely to continue to put downward pressure on the price of pharmaceuticals.  Elimination of generic rebates, PPNs (preferred provider networks), formularies…the tools are endless and new ones will likely be created.

If all of these external forces were not enough, pharmacy retailers self inflict further injury to themselves through discounting of professional fees.

All of these factors together represent money out of the pharmacy economic equation.

Countering all of these factors are the new paid clinical/professional services which are now funded by governments to varying degrees province by province:  Medchecks, flu shots, pharmacy opinions, all of which represent money in…but not nearly enough to balance against the money out.   Futile attempts to rebalance the equation results in tactics like quotas on professional services and performance metrics, which are universally abhorred by pharmacists and provide poor value to government payers.

So if all of this so far is to any degree correct, why would any rational business want to go into the business of retail pharmacy?  How do these big chains, after making huge capital investments, make any money?  Why would a successful grocery operation like Loblaw spend billions to buy Shoppers Drug Mart if the pharmacy business produces such low return on investment?

I suggest that the answer is that although the actual dispensing of ethical pharmaceuticals may have become less and less profitable, the business of retail pharmacy or food drug combos is indeed quite profitable.

It is well documented that when a pharmacy department is introduced into a grocery store environment, the sale of grocery items (not counting any pharmacy related SKUs {stock keeping units}) goes up by an average of as much as $100,000 per week.  This is as a result of the increased traffic produced by the attraction and presence of the pharmacy department.   Some large merchandisers, Target being a good example, consider the pharmacy department a critical component of their ‘guest experience’.  I have seen some billboards proclaiming “Target…a pharmacy with a department store attached”.

Within days of the official Loblaw takeover of SDM, Shoppers stores were drop shipped President’s Choice Decadent Chocolate Cookies; a signal to the SDM customer to anticipate a full complement of these popular PC products in the near future.  One could argue the rationale of promoting the consumption of high sugar/fat products in an environment whose function is to counter the two biggest health problems we are experiencing today: diabetes & obesity…but leave this aside for now.

The presence of a pharmacy department in any retail environment means the sale of a whole bunch of stuff which is not prescriptions per se.  OTCs are the biggest example, some of which like cough syrups have nothing to do with health.  Then there is ColdFX, copper bracelets, fat flushes, homeopathic products, NHPs, flu shot enhancers,  many vitamins, energy supplements, meal replacements etc which also provide little or no benefit, but which are heavily advertised and promoted on TV and elsewhere.  Whether these and the many other products like them have any efficacy or not is not the point.

The point is that the consumer/customer associates these products within a pharmacy environment and he/she goes to the drug store to purchase them.  In fact, a pharmacy is chosen by the producers and retailers of these products in order to provide a level of perceived efficacy to what more knowledgeable consumers know is junk.  These products are known to have very high margins…50% or more. The pharmacy/pharmacist are used as leverage to sell the products.

Back to the economics.  Let’s take an extreme example to illustrate the point.  One pharmacist working 12 hours at $50/hr (a little high I know) = $600 plus all other allocated costs, say another $900 = $1,500 total.  In this extreme example, say not a single Rx is filled in the 12 hour period so sunk costs are the total of $1,500.

To reach a breakeven point, a mere $4,500 of DSTM (drug store type merchandise) at a margin of 33% has to be achieved.  Of course reality suggests that some number of prescriptions would be filled in the 12 hour period and that actual sales of DSTM would be far higher than $4,500, but the example illustrates the point that it does not take much in the way of DSTM sales to offset the costs of the actual pharmacy itself, pharmacists included.

 

 

 

 

This is why PPNs (preferred provider networks), and flu shots  by way of example, are so valuable to Big Retail Pharmacy, not for added Rx volume, but for the extra traffic dragged through the store enhancing the opportunity to sell more DSTM, as well as regular grocery/deli/prepared foods etc.

The pharmacy and the pharmacists are essentially a loss leader in many cases, hence my confessed bias against this type of environment for professional pharmacists to have to practice in.

Challenge me if you wish, but I don’t believe any person with a degree as difficult to achieve as pharmacy (soon to be a PharmD) should be used as a loss leader.

I welcome both your bricks and roses.

 

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