Trials and Tribulations in Pharmacy Part 1

It’s been a while since I have written an article. My previous articles were focused on steps for starting a new pharmacy; I felt that I could help impart what I had learned to help others join the independent pharmacy community.  However, I started this blog in the hopes that it would become a forum for pharmacists to discuss issues affecting our profession without regard to your practice setting.

Pharmacy practice continues to evolve and as pharmacists we need to adapt to all the changes that are happening in our profession.  Pharmacy has been in the news a lot lately, most of which puts our industry in a bad light. Pharmacies and pharmacists seem to take the blame for everything, from the increasing prices of prescription medications to the President and DEA’s declaration of war on dispensing of controlled substances. I thought perhaps hearing our side (i.e. the pharmacist’s side) of things on these issues may be helpful.  So here goes.

Let us address the pricing issue first.  Drugs typically move from manufacturer to wholesaler to pharmacy and finally to the patient (the end user).  Drug prices are mostly set by manufacturers which then are negotiated with wholesalers and chain drug stores (for a discussion of this topic please see the following articles: Newsweek’s “How Prescription Drugs Get Their Prices, Explained”, and US Pharmacist’s “Understanding Drug Pricing”).  Most chain drug stores (including some grocery stores with pharmacies) tend to have their own warehouses and purchase directly from manufacturers.  This allows them to forgo the middleman (i.e. pharmacy wholesalers) and negotiate directly with manufactures using the chain’s large numbers and economies of scale to obtain better prices for their purchases.  In addition chains and grocery stores who do not own warehouses can use their large scale to negotiate discounted prices with wholesales such as McKesson, Amerisource Bergen, Cardinal Health, and others.

An independent pharmacy owner has no such advantage.  An independent pharmacy cannot negotiate directly with the myriad of manufacturers and must deal with pharmaceutical wholesalers to obtain medications for resale.  When starting a new pharmacy you have very little negotiating power with the wholesalers.  You are offered very little in the form of discounts until you reach higher volumes whereby you are moved into a better discount category with the wholesaler.  But don’t kid yourself, the discount does not come close to what a chain store gets for the same product.

I also find that independent pharmacies seem to charge lower prices for medications than chain drug stores.  An independent pharmacy owner is often at a handicap when setting prices for their medications.  Most independents rely on suggestions from wholesalers, setting prices based on the wholesaler’s comparable pharmacy pricing in their area, or use preset pricing schemes offered by their computer software dispensing program.  In addition, a pharmacy owner’s limited resources will not allow him/her to conduct thorough market research in setting their prices.  As a result the overall independent pharmacy prices tend to be lower than chains.  For example, I may charge $15.99 for a generic Z-Pak, but the same product costs upward of $30 to $40 at a chain store.

Patients seem to have the misconception that independent pharmacies have higher prices.  They fail to take the whole picture into view. For example, a number of chains offer a listing of medications at reduced prices (e.g. $4.00 or $5.00 for a 30 day supply of a popular generic blood pressure medication), while the same product may cost 1 or 2 dollars more at an independent pharmacy.  What patients fail to see is that the chain’s prices on other products (generic or otherwise) are so much higher that it negates the savings customers get from the listed reduced price products.  I had a patient come to my pharmacy where the patient bought a total of 4 medications (2 on the reduced price list and 2 others not on the list) from a chain store and the price paid for all 4 was $25 to $30 more than what it would have cost the patient had they bought the medications at my pharmacy without discounts.

So far, the comments above have been relating to cash paying customers. This segment of the pharmacy patient population, however, continues to diminish in size.  Even before the advent of Obamacare, the percentage of patients using prescription insurance to pay for the medications was on the rise. Insurance customers comprise between 95 to 97 percent of a pharmacy’s patient population.

Most patients are enrolled with a third party plan which contracts with a pharmacy benefits manager (PBM) to administer the purchasing of medications and negotiate the prices paid for pharmacy services and items.  When negotiating drug prices, the PBMs use a myriad of pricing formulas in order to drive the cost of medication as low as possible.  Chain drug stores are often in a better positon to negotiate with PBMs due to their large size and ability to negotiate better prices from manufacturers and wholesalers.

Independent pharmacies, however, have no such luxury; they must often join co-ops and buying groups (a loose association of independent pharmacies banding together to obtain better prices for medications often organized by or a subsidiary of a wholesaler), who contract with a Pharmacy Service Administrative Organization (PSAO) to negotiate reimbursement contracts with PBMs on behalf of the independent pharmacy.  But, how confident are you that your PSAO is negotiating contracts with the independent pharmacy’s best interest at heart?  How many times have you been forced to provide medications at a nominal profit or even worse at a reimbursement that is below the actual cost of the medication?

Some major PBMs such as Express Script, CVS Caremark, and MedImpact require independent pharmacies to contract directly with the PBM and will not go through a PSAO for contracting.  In such cases, there are no negotiations involved.  The independent pharmacy is sent a contract with a preset “negotiated” reimbursement price structure which they must either accept or refuse.  The independent pharmacy is left with the option of accepting reimbursements that are at or below the cost, leaving them with profit margins that are not sustainable.  Is it a wonder we are seeing more independent pharmacies closing their doors?

There is a lot more to talk about regarding pricing and this post does not even scratch the surface, but I hope it is enough to start a discussion.  On the next post, I will be addressing some of the controlled substance dispensing issues plaguing pharmacies today.

Posted in Benefits Managers, Business Development, Controlled Substances, Entreprenuership, Pharmacy, Pricing | Tagged , , , , ,

Do you need an MBA to own a pharmacy?

The short answer to this question is “No!”  A better question is “Do I need business management experience or knowledge to own a pharmacy?” The answer to this question is an unequivocal “Yes!!”  Most pharmacy schools prepare their students for a broad-based general clinical practice.  Although some schools have begun to offer business courses or joint PharmD/MBA degrees, most business or managerial training is left to the eventual employer.  Chains and other retail establishments (e.g. grocery stores or mass retailers) offer little or no training to pharmacists promoted to managerial positions, and often limit such training to nothing more than scheduling the staff.

So where do you gain the necessary knowledge and experience to run a pharmacy?  There is no easy answer to this question.  The true answer lies in how motivated you are to own your own pharmacy!!  A highly motivated individual will seek answers wherever they are available; be it obtaining an MBA or just taking a few courses to educate themselves in operating a business.  At a minimum the following skills are necessary:

  1. Ability to write and execute a business plan. The business plan is a document describing your business goals and means of achieving them.  Your business plan must include:
    1. Description of the business, its owners and managers, products and services offered, and the potential market;
    2. Analysis and plan for marketing, performing, and selling the products or services;
    3. Resources needed for completing the plan and the anticipated results. (Opening a pharmacy: “A How To Guide”)
  2. Understand and use financial data to manage business operations. Must be able to produce and use income statements (i.e. a summary of the financial operations of the business) & balance sheets (i.e. a list of assets and liabilities of the business) to evaluate and manage profitability of the business.
  3. Ability to promote the business. Must be able to identify and develop a plan to market the new pharmacy in the potential market.  Requires ability to find a potential area and target audience, identify the competition, and use advertising and promotion strategies.
  4. Ability to manage and develop staff. Managing staff begins with developing clear policies and procedures to prepare for and respond to day-to-day issues that may arise in the course of operating a business.  An employee manual sets forth the standards you expect from each employee.  Keep in mind that both documents are living, breathing entities and may need adjustment, clarification, or modification as your business grows.

The above list is not exhaustive; there are many more considerations that go into owning your own business.   However, it all starts with you!!  The more you are motivated and the more you prepare yourself the higher the chances of success.

Posted in Business Development, Entreprenuership, Management, Marketing, Pharmacy | Tagged , , ,

Pharmacy Benefit Managers—A Big Hurdle to the Future of Independent Pharmacy

A Pharmacy Benefit Manager (PBM) is a third-party administrator responsible for processing and paying prescription drug claims.  PBMs manage the use and cost of prescription drugs sold to members by establishing and managing formularies (list of covered medications), negotiating discounts and rebates with manufacturers and contracting with pharmacies.

The rise of PBMs from small companies handling medical claims in the 70s to publicly traded corporate giants with revenues exceeding $250 billion dollars has been nothing but spectacular, with 70% of all U.S. prescriptions being controlled by 3 players—Express Scripts, CVS/Caremark and OptumRx (The Big 3). The meteoric growth of PBMs has allowed them to control where their patients purchase medications (with many patients being forced to use the PBM’s own mail-order pharmacies), what medications members are allowed to take (by using therapeutic interchanges, mandatory generic programs or requiring prior authorizations for non-formulary or step therapy products), and how much pharmacies are reimbursed for these medications (often at rates below or at an independent pharmacy’s cost).  Please see Katherine Eban’s 2013 article in fortune magazine titled “Painful prescription: Pharmacy benefit managers make out better than their customers” and NCPA’s “PBM Revenue Streams & Lack of Transparency

When establishing a new pharmacy most PBM or third-party contracts are handled by your Pharmacy Service Administrative Organization (PSAO).  As described in the earlier post, PSAOs act on behalf of their members to contract, process, reconcile and settle claims for prescriptions with third party payers and PBMs.  Although some PBMs allow processing of claims through a PSAO, they will not contract with the organization and require new independent pharmacies to apply and contract directly with the PBMs themselves.  Express Scripts, CVS/Caremark and MedImpact are among the largest PBMs with this requirement.  The new pharmacy must complete a questionnaire, provide documents, and pay a fee for the processing of its application.  When the contracts are received by the pharmacy, they are often very arbitrary with no room for negotiations (a “take it or leave it” approach).  At times, if a pharmacy wants to offer a specialized service (e.g. compounding), they must either undergo further certification at a substantial cost or must promise not to provide and bill such services to the PBM under the threat of termination if such a claim is discovered to have been processed and paid for by the PBM.

As The Big 3 continue to grow and swallow their smaller counterparts, the independent pharmacy industry must also change to accommodate this challenge.  Pharmacy chains such as Walgreen and CVS have been mirroring the PBMs by merging into bigger and bigger conglomerates (e.g. Walgreen & Rite Aid merger resulting in a super chain with over 9000 stores) creating huge economies of scale and bargaining power to deal with the shrinking but more powerful PBMs.  The constant assault on the traditional sources of revenue for an independent pharmacy by PBMs and competitors is fostering creative approaches by independents to find non-traditional revenue streams, such as pharmacy provider and prescribing status.

I don’t have a solution to this or other challenges yet to come, but I believe the adaptability of an independent pharmacist is his/her biggest asset, therefore, he/she must use this strength to its fullest capacity to forge forward.  I created “Independent Pharmacy Review” to offer a forum, where we as independent pharmacists can discuss and use our creativity to answer today’s challenges and those yet to come.

Posted in Benefits Managers, Entreprenuership, General Topics, Management, Pharmacy, Services, Wholesalers | Tagged , , , , , ,

Wholesalers, Buying Groups & Franchises–More Choices, More Headaches

Choosing a wholesaler can be a daunting task for a new pharmacy owner.  Prices, services and special offerings are all factors to consider in your choice of a wholesaler, but the most important factor is your comfort level in building a working relationship with your wholesaler.   Therefore, you must carefully consider all the factors that are important to you and interview the potential wholesaler candidates to make sure they are equipped to help you succeed in your endeavor.

Wholesalers offer a gambit of services and products including prescription and over-the-counter medications and products, third-party contracting, franchise opportunities, buying groups, training resources and technology bundles. In effect, a wholesaler can be a one-stop shop for all the products and services you may need to run your pharmacy.  The NCPA guide to “Opening a Pharmacy: a “How to” Guide” offers a list of questions to ask while interviewing your wholesaler candidates.

Franchises offer a cookie cutter approach where a pharmacy entrepreneur uses an established business model offered by the wholesaler or franchisers to open a new pharmacy under the franchise banner.  An example of this is the HealthMart brand offered by McKesson Pharmaceuticals.  The franchiser either sells you a business model with a comprehensive marketing plan, third-party program, and signage in exchange for royalty fees based on a percentage of your gross sales, or charges a fee for the business model and requires you to purchase all your supplies and products from the franchiser’s company or parent wholesaler exclusively.  Although this approach may offer more structure and guidance to a novice owner, it takes away the freedom to customize your practice to your vision of what a perfect pharmacy should be.  For a complete discussion on pharmacy franchises please see “Pharmacy Franchises:  Should you join one?” in the September 4, 2006 issue of Drug Topics.

Another option for an independent pharmacy owner is to join a buying group also known as Independent Pharmacy Organizations (IPO) or Group Purchasing Organizations (GPO).  Think of these groups as a co-operative, where the GPO or IPO uses the purchasing power of their member businesses to obtain discounts and rebates from vendors and manufacturers.   Although some GPOs and IPOs have their own warehouses, they usually contract with a specific wholesaler to provide products and services not available through the buying group.  The main consideration in joining a buying group is cost of membership and the level of discounts or rebates available from the GPO.  As with wholesalers you should interview the buying groups to see if they are a good fit for your pharmacy.  Again, the NCPA guide to “Opening a Pharmacy: a “How to” Guide” offers a list of questions for GPO interviews.

Your relationship with your wholesaler, buying group, or franchiser is an important one and may last the duration of your business, therefore, choose carefully. A wholesaler or buying group can be changed if they cannot meet your needs or expectations after opening your store, but it is much harder to move away from your franchise agreement.

Posted in Benefits Managers, Entreprenuership, General Topics, Management, Pharmacy, Sales, Services, Wholesalers | Tagged , , ,

Location, Location, Location!!!

There are a number of decisions you must make before opening your own pharmacy, but none are more important than choosing the perfect location!  The adage “Location, Location, Location” has never been truer than when you are opening a new business.  You must carefully asses the city, the neighborhood, the potential storefront, the competition, and many more factors before finalizing a location for your pharmacy.

The search for the property starts with narrowing down the city in which you want to serve.  The size and demographics of a city can dictate the services you provide at your pharmacy.  Larger cities offer a more expansive demography allowing you to offer more niche services such as compounding and senior care programs.  On the other hand, you will be facing more competition from national chains and other pharmacy entrepreneurs in your area.  Whether you provide traditional, complementary, or alternative medicines will largely depend on the demographics of your chosen location.  The age, gender, ethnicity, family size, income, education level, and attitude of your potential patients can dramatically affect the type of services you offer.

Patient demographics aside, you must consider the mix of prescribers in your target area to see if they will help support the type of pharmacy you want to open.  The number and variety of practices around your site will help determine the mix of services you offer your patients.  The prescribers’ receptiveness to a new pharmacy and potential new services goes a long way toward making your pharmacy successful.

Once you have narrowed down the general area for your pharmacy, the next step is choosing the actual site for your store.  Stop and consider whether you will be leasing or purchasing the site for your pharmacy.  This is a huge consideration and one which we can spend a long time discussing, however, we will leave this subject for the future (information on this subject is available at “Buying vs. Leasing Commercial Real Estate” and “The Pros & Cons of Leasing vs. Owning”).  Either way, a real estate agent may be helpful in locating sites that fit your budget, space, distance, zoning and other requirements.  Competition from national chains and other independents in the area should be considered before finalizing a location.  Even if a site seems perfect, don’t get too attached until you have visited a number of other locations and weighed their pros and cons before reaching a final decision.  Keep one or two locations as back-up in case your first choice becomes unavailable or you are not successful in negotiating a lease.  See SBA’s “Tips for Choosing Your Business Location” and “10 Things to Consider When Choosing a Location for Your Business” for some suggestions on this subject.

Assuming you have decided on leasing the site for your pharmacy and you have finalized the location, the next step is to negotiate the lease agreement.  A real estate agent or a lawyer specializing in commercial leases may be helpful in negotiating a lease.  If you are using a real estate agent make sure they are representing you and not the lessor in the negotiations.  Leasing considerations include:

  • The rental rate and terms such as:
    • Common area maintenance,
    • Responsibility for maintenance of heating and air conditioning,
    • Responsibility for building repair and maintenance,
    • Flat rates vs. rates tied to sales,
    • Length of lease and dates and amount of rate increases, if any, and
    • Renewal options.
  • Remodeling allowances usually offered in the form of a reduction or free rental rates for the build-out period of your pharmacy.
  • Expansion options should your business needs grow beyond its current location.
  • Traffic flow and availability of parking on site.
  • Technology considerations such as availability of cable or high speed modem and multiple phone lines.

Your pharmacy’s location deserves careful consideration.  I have seen pharmacies fail in locations that seemed perfect for a retail business but not suitable for a pharmacy.  Be careful, consider every option and evaluate every factor.  Your success or failure depends on this choice, so take your time to make sure the location is right for your pharmacy.

Posted in Entreprenuership, General Topics, Management, Pharmacy, Sales, Services | Tagged , , , ,

Alone or with Partners, That is the Question!!

There is a lot of issues to consider when choosing the legal structure of your pharmacy business. You can organize your business as a Sole Proprietorship, Partnership, Limited Liability Company, S Corporation, or a C Corporation.  Which form you choose will depend on your vision of what you want to do with your business and the amount of flexibility or personal liability you are willing to undertake.  There is no set formula here and one form may evolve into the other depending on the needs of your business as it grows in profits and complexity.   I am not here to discuss business forms and their advantages and disadvantages; for that you can buy “Opening a Pharmacy: A “How To” Guide” from NCPA and read to your heart’s content.  What I want to talk about is whether you should run your pharmacy alone or with partners.

When I considered opening my pharmacy, I was a little worried about going it on my own.  It took a lot of courage to open a business, not knowing how successful  I would be or where my next dollar was going to come from.  You can plan and organize all you want, but it is still scary!!  One of my good friends was lucky enough to buy an existing pharmacy and develop it into a very successful business.   The success did not come cheaply, however, resulting in a lot of stress and health problems. She looked to hire other pharmacists, but for one reason or another she was not able to keep them. In the end, the lack of support and the resulting stress forced her to sell her business to a chain pharmacy.

I, however, have been lucky enough to go into business with two of my pharmacist friends as partners.  I’ve known and worked with both for over 15 years, but I still had to really think hard on whether I wanted to have them as my business partners.    Getting along as friends or co-workers is a different situation than having someone as a business partner.  The way I look at it, business partners are like spouses, you have to be able to live with each other for a long time and in this case divorce is not an option because not only your life but your livelihood is at stake.  Like a marriage you have to be able to discuss any issue with your partners and put your heads together to come up with solutions to problems you may face in your business.  Multiple heads make for creative solutions and once decisions are made, the support from the other partners is invaluable.  You will also find that projects are easier and better accomplished when divided between multiple people and not one person alone.

You may get the feeling that I am advocating for partners, and you are not wrong.  However, I want to make sure to applaud and encourage all the solo pharmacy owners out there as well.  Whether you choose to go it alone or with partners be ready for lots of hard work and make sure you have at least a basic understanding of all aspects of your business and be willing to step out of your comfort zone to learn what you need or ask for advice.

Posted in Entreprenuership, General Topics, Management | Tagged , , , , , ,

Pharmacy Entrepreneurship: What does it take to succeed as an independent community pharmacy?

The decision to become a pharmacy entrepreneur was a not an easy one for me.  Owning my own pharmacy was a scary proposition!! I would have to leave a secure, well paid position as the pharmacy manager of the busiest pharmacy at a regional grocery chain, to fulfill my dream of owning a retail pharmacy.  I would be entering a business environment with declining net margins on prescription drugs, increased competition from mail order pharmacies, and flat or declining prescription dispensing. Add to that a sluggish economy and we have the makings of a nightmare.  I would have to be crazy to make this move!!

Well, I guess I’m crazy!!  Not only did I become a pharmacy owner, but I also started from scratch!! Yup, I opened a brand new pharmacy with zero (I mean $0) initial sales.  I cashed out my 401(k), sold my stocks, begged and borrowed and joined two other equally crazy pharmacy professionals to open ANSR Pharmacy.  And I will tell you that I would do it again in an instant!!

The thing I haven’t shared with you is that it took years of research, discussions, calculations, planning, and revisions before my partners and I were ready to take the plunge.  I believe that success in any business requires motivation, determination, imagination, creativity, and the ability to embrace change.  I also believe it is necessary to take calculated risks based on facts and experience, while mitigating risks by weighing costs and benefits and acting quickly but judiciously.  A successful business is built around the owner’s strengths and his or her flexibility to adapt to changing business environments.

Independent pharmacies have been evolving for years, expanding on the traditional dispensing model by adding patient care services and products, pharmacy compounding, specialty drug dispensing, and medication therapy management. We must continue to embrace change and seek opportunities and innovations to further the future of pharmacy practice.

Posted in Entreprenuership, Pharmacy | Tagged , , , | 1 Comment