Indie pharmacy’s strong roots bolster industry amid downturn

BY Jim Frederick

Independent pharmacy has been slammed hard by the continuing slide in prescription-dispensing profits, a dismal economy and powerful chain store competitors. But with their strong ties to local communities and the patients they serve, most are weathering the storm and may emerge stronger than ever.

That’s the hopeful prediction from pharmacy leaders and advocates, and there’s evidence to back it up. “Community pharmacy is on the move,” asserted Bruce Roberts, EVP and CEO of the National Community Pharmacists Association. He pledged at the organization’s annual meeting for independent pharmacists last fall that “community pharmacy will not be an afterthought in the healthcare reform debate.”

Citing the independents’ strong patient relationships, their role as health-and-wellness innovators and the growing power of NCPA’s political action committee, Roberts said he foresees “a future of having community pharmacists front-and-center in the healthcare system and our industry recognized as a political powerhouse second to none."

“For too long, community pharmacy was an afterthought,” he noted. “Now that is changing. It must continue to change until we are recognized for our rightful role as managers of the pharmacy benefit who treat every patient as a person, not a covered life.”

To reach that goal, small-scale pharmacy owners will first and foremost have to ride out today’s operating challenges. The 2008 edition of the NCPA Digest, underwritten by Cardinal Health, counted 23,318 independent community pharmacies operating in the United States at the end of 2007, marking a slight drop from the 23,348 counted at the end of the previous year. The tally includes “all pharmacist-owned, privately held businesses,” noted the Digest, including “single-store operations and other independent, pharmacist-owned operations, such as regional chain, franchise, compounding, long-term care, specialty and supermarket pharmacies.”

“It is important to note,” added the 2008 report, “that this independent community pharmacy industry still represents 40% of all retail pharmacies in the U.S. and an $84 billion marketplace.”

What’s more, even small-scale, owner-operated pharmacies are increasingly bolstered by sophisticated high-tech pharmacy systems, including robotic dispensing tools in some stores and market-pricing analytics. Those tools, coupled with the support most independents derive from their wholesale suppliers and membership cooperatives, have helped assure the stability and economic vitality of the independent pharmacy market in spite of the difficulties of a brutal economic recession and chain competition.

Indeed, independently owned pharmacies remain the wellspring of customer-oriented service and personalized care in the pharmacy setting. Owner-operated pharmacies also remain the bedrock of first-line patient care in many small-town settings.

“More than 50% of independent community pharmacies are located in an area with a population of less than 20,000,” the 2008 Digest reported.

Nevertheless, the independent segment of pharmacy remains the most vulnerable to the forces roiling all of pharmacy retailing: the power of pharmacy benefit management companies to dictate terms and reimbursement levels; steadily shrinking profit margins for prescription drugs, particularly generics; intense competition; a funding crisis for all healthcare services; and, most recently, an economy on life support.

The impact of those forces has made independent operators the canaries in the coal mine of 21st century health retailing. “In 2006, the profitability of [independent] pharmacy took a strong hit,” noted the 2008 Digest, when a sobering 22.9% of owner-operated pharmacies operated at a loss. That same year, “more than 1,100 pharmacies ended up closing their doors,” according to the report.

“In 2007, independent community pharmacy saw a slight improvement compared with the previous year,” the Digest continued, “with 19.2% of pharmacies operating at a loss.”

Average per-store sales at mom-and-pop pharmacies also remained flat at roughly $3.6 million, after peaking at $3.75 million in 2005, according to Digest researchers. The culprit, they reported, is “prescription volume staying constant, as well as a decrease in the average cost of a prescription due to an increased generic utilization rate.”

Indies did see some improvement in gross profit margins in the most recently tracked fiscal year, up 0.4% to 23.2%, according to researchers. And median net operating income increased by 0.97% to 2.97%, thanks to better management of costs and other factors.

Nevertheless, there’s no question that the recession is weighing heavily on smaller drug retailers, said independent pharmacy owner Steve Morton. “We’re certainly starting to see some of the economic impact,” he said. “There are patients who are making choices to either delay prescription refills or not get them at all, sometimes just to save a co-payment. We’re also seeing that in our medical community here, where people are delaying getting to the doctor when they should.”

One effective way to respond to the economic crisis, he said, is to get out in front of it by branching into other potential revenue streams and building patient loyalty by going outside the four walls of the pharmacy.

“When I talk to other independents, it always surprises me that some of them haven’t reached into providing services to assisted-living facilities,” observed Morton, who is president and CEO of Morton Pharmacy, a 13-store independent pharmacy operation based in Neenah, Wis. “They’re completely retail-based and waiting for the customer to come to them, versus going out and seeking customers and referral sources that would send them business.”

“For us, a full third of our business is caring for patients in some type of facility, whether it be a nursing home, assisted-living facility, a developmentally disabled home or even an independent-living kind of complex. That’s generally business that gets sent to us, … and it’s the fastest-growing area of our pharmacy,” Morton told Drug Store News.

Pharmacy owners, he added, “seriously need to look at long-term care or the assisted-living markets because, as those patients enter those facilities, if you’re not the pharmacy of choice for that facility, you’re going to lose them. And you may have served that patient for the last 40 years.”

Morton acknowledged the valid concerns pharmacy operators have in serving nursing homes, which demand a more complex business and service model. However, he said, “You don’t have to go into the nursing home business. You can just provide services into assisted-living or developmentally disabled homes, which are no where near as complex as far as the consulting roles go.”

The ability of nimble independents to exploit their close relationships with patients and service capabilities will be key to community pharmacy’s future, other retailers agreed. “In tough economic times, you’ve got to continue to be great at what you are, and what independents are great at is providing patient care,” said Tim Canning, president of McKesson’s 2,000-store Health Mart pharmacy franchise operation for independent owner-operators. “They need to leverage that advantage to make sure they can weather the storm.”

The dour state of the economy — and the fiscal crisis in healthcare funding in general — may even give a boost to independent pharmacy over the long run, Canning argued. “For pharmacy in general — and particularly the independent pharmacies — I think the current economy is going to position them as an important healthcare provider,” he asserted.

“The counseling independent pharmacists provide, as far as adherence to medication regimens and other things, is going to be even more important,” Canning added. “Some people will be concerned about their ability to pay for their drugs at this time, and the independent can counsel them on low-cost generic alternatives.”

Added Chad Hammerstrom, CEO of Pill Box Pharmacy, an 11-unit pharmacy operation in Oregon, “I think it’s important to operate in niches that the big boxes aren’t playing.”

Those big-box chain stores remain the toughest competitive challenge for independents, observed Hammerstrom, who is also president and CEO of Net-Rx, a provider of back-end business and consulting services for more than 3,000 independent and small-chain pharmacies.

But therein lies opportunity. “We offer something different from what they can provide,” he told Drug Store News. “We’re focused on more community-centered initiatives, working with local city employers to build additional patient-management programs in diabetes and other disease states.”

Despite the regulatory and accounting difficulties that come with selling durable medical equipment, Hammerstrom also sees opportunity for independent pharmacy in that business. “Accreditation is actually creating opportunity for independent pharmacy to become more knowledgeable in the DME sector,” he asserted. “Although going through the process and training staff to be knowledgeable in that home health arena is going to be a bit of a pain, there’s an opportunity for independents to thrive in that business.”

“I do believe the need for knowledgeable people in that sector is going to be required at the community level, and it’s an opportunity where you can grow some expertise and be a vital member of the healthcare community,” Hammerstrom added.

As for Walmart’s promotion of $4 generics, which upended the low-price and commodity end of the prescription business, “It definitely has had some impact,” particularly in the early stages of the promotion, said Hammerstrom. However, he said, “We feel we offer more, and we’ve chosen not to play that game.”

Instead, he added, “We’ve focused on explaining the differences in our care and services, and with that I think we get more of the patients with complicated conditions and special needs. So the physicians we work with send us the customers who really need the pharmacist to be involved in their health care. So we may not be picking up that customer looking for the $4 prescription, but we’re growing in other areas because we’re still focused on the patient care side.”

“We’re price-competitive,” he added. “We’re just not going to play the $4 game.”

Pill Box’s stores range in size from apothecary-style pharmacies of 1,000 sq.ft. or less, to full-scale drug stores as large as 11,000 sq.ft. with large front ends. The company’s business model encourages what Hammerstrom said is a strong focus “on customer service and loyal patients” through community-focused services like home delivery, offered at each of the stores, and unit-dose packaging for elderly patients “to help them manage their meds.” The company’s 11 stores are corporate-owned by Pill Box Drug Inc., he said, but each pharmacy manager operates as a part owner in the company through a stock purchase program.

“We’re not viewed as a chain. Though we have a number of locations, our model is to have pharmacy owners in each location who buy into the corporation, so there’s a real sense of community,” Hammerstrom explained. “At the end of the day, a chain is never going to be able to compete with us from a customer-service perspective.”

Pill Box also works with local employer groups “to partner with them for prescription benefits, and tie them to a preferred network of our stores,” he said. That direct outreach to local employer-sponsored health plans — which also provides additional on-site services like flu shots for employees where they work — is key to “keeping that business local and helping us compete against mail order,” he added.

“We see that as a huge opportunity, where you can maintain that prescription business,” despite the power of PBMs to dictate pharmacy networks and services, added the executive. Pill Box also has upgraded its larger stores with “comfort zones … for a more enjoyable shopping experience,” Hammerstrom said, including coffee bars in some units, more comfortable seating and even plasma-screen monitors.

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Rhode Island develops prescription savings program for residents

BY Alaric DeArment

PROVIDENCE, R.I. Residents of Rhode Island can save an average 30% on prescription drugs using a card issued to them free of charge.

The card, RIRx, is similar to prescription drug cards issued in several states already through a non-profit program administered by United Networks of America. The cards are accepted at more than 54,000 national and regional pharmacies, according to the program’s Web site,

The Greater Providence Chamber of Commerce will seek to create awareness and distribute the cards.

“The cost of healthcare is a top concern for Rhode Island’s residents,” chamber president Laurie White stated. “With unemployment on the rise, due to the stalling economy, many individuals and families are finding themselves without health insurance.”


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Anti-crime measures in Congress win strong endorsement from NACDS

BY Jim Frederick

WASHINGTON Congress is moving on two fronts to combat organized crime against pharmacies and other retailers, generating strong praise from chain pharmacy leaders.

The National Association of Chain Drug Stores Friday issued a letter to Reps. Brad Ellsworth, D-Ind., and Jim Jordan, R-Ohio, in support of their introduction of H.R. 1173, the Organized Retail Crime Act of 2009. The bill would define organized retail crime and expand fraud statutes to include the illegal use of gift cards, Universal Product Code labels, or radio identification transponders.

The Ellsworth-Jordan bill also recommends that the United States Sentencing Commission review and amend the sentencing guidelines for convicted organized retail crime offenders.

H.R. 1173 has gained bi-partisan backing from co-sponsors including Reps. Arthur Davis, an Alabama Democrat, and Republicans James Sensenbrenner Jr. of Wisconsin, John Kline of Minnesota and Mike Rogers of Michigan.

“This strong bipartisan legislation will help to stem the growing problem of organized retail crime, by providing much needed clarity within the U.S. criminal code to prosecute such criminal behavior as a federal felony, including facilitation of such illegal activities,” NACDS president and CEO Steve Anderson told lawmakers in his letter Friday. “As you know, organized retail crime is responsible for over $30 billion in losses annually, resulting in increased costs for merchants, higher prices for consumers, and lost tax revenue for state and local governments. In addition to increased costs faced by retailers to cover losses and investment in additional security measures, consumers are placed at risk when package tampering occurs on consumer health care products, such as infant formula and OTC medications.”

NACDS, Anderson pointed out, “has long advocated for federal legislation that treats theft committed by organized, professional crime rings as a federal felony, especially since much of the stolen product is transported across state lines.”

Besides arming federal law enforcement officials with “the authority to pursue and prosecute individuals who engage in such criminal activities,” Anderson noted, the Ellsworth-Jordan bill “also targets criminals’ use of online marketplaces to sell the fruits of organized retail crime to unsuspecting consumers and establishes specific and narrow obligations for operators of online marketplaces.”

The chain pharmacy organization also endorsed H.R. 1166, the E-Fencing Enforcement Act of 2009. In a letter sent Friday to Rep. Bobby Scott, D-Va., who is chairman of the House Subcommittee on Crime, Terrorism and Homeland Security, Anderson thanked Scott for introducing the measure.

“Your legislation will help to stem the growing problem of the use of online marketplaces by criminals to redistribute stolen merchandise, including those obtained through organized retail crime,” Anderson told the lawmaker.

H.R. 1166 would prosecute the electronic fencing of stolen products, and empower retailers to seek relief against high-volume sellers who engage in the e-fencing of stolen merchandise.


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