A piece of the pie: Independents build new business models
Independent community pharmacies face unprecedented pressures in the form of national chain competitors and a drug-pricing system that’s stacked against them.
More than a third of the pharmacies in the country — about 35% — are independent pharmacies, according to data released last fall from the National Community Pharmacists Association. NCPA estimated that the number of independent pharmacies totaled 21,909 in 2017, down slightly from 22,041 in 2016.
Those independent operators that remain have found ways to survive and even thrive, however, often with revenue models that stretch beyond the dwindling margins they can expect to recoup for dispensing prescriptions. They are leveraging their strong community ties and high service levels, expanding their product assortments, and seeking to gain compensation for the value they add to overall patient care.
“Generally speaking, it’s a very difficult time for independent pharmacy,” said Tim Hamrick, president and CEO of Bessemer, Ala.-based American Pharmacy Cooperative Inc., a network owned by independent pharmacies that provides buying power and other benefits for its 1,800-plus members.
The main challenges these operators face are the prescription reimbursement structure and the difficulty in retaining customers in an environment that often encourages patients to go elsewhere for their prescriptions, he said.
On their own, small operators have little negotiating power with the large pharmacy benefit managers, and have often been forced into contracts that reimburse them below their costs for buying prescription drugs, Hamrick said.
“Our industry is a unique one, where your chain competitor next door is affiliated with the company that sets the reimbursement you receive for a prescription,” he said. “Even if the PBM isn’t affiliated with a retail pharmacy competitor, they all have their own mail-order pharmacies, and will design employer benefits programs to steer patients to their mail-order pharmacies, especially for more expensive and profitable specialty medications.”
Kurt Proctor, senior vice president of strategic initiatives and president of the Innovation Center at the NCPA, said that the PBMs drive more profitable patients to their own networks while shifting more complex cases where prescription adherence is low to other pharmacies. “They are anxious to push those patients to a different pharmacy,” he said.
Many independent pharmacies have found revenue-driving niches in such areas as weight loss programs or partnerships with local medical facilities that focus on specific illnesses, for example, Proctor said. Others might offer expanded front-end departments, and some might find their niche is their location itself, underserved by competitors.
Hamrick of APCI said successful independent operators are pursuing several strategies to remain competitive, including working to buy better from their wholesalers and leveraging technology to improve efficiencies and streamline inventories. “Most of all, they are increasing their focus on what has made this industry valuable in the first place — patient care,” he said.
Independent pharmacies “have personal connections to their patients that span decades,” Hamrick said. “So, we see that despite [the challenges], the independent pharmacist today doesn’t turn his or her back on patients.”
Health Care Beyond Prescriptions
Independent pharmacies need to deploy creative strategies that distance them from being reliant on filling prescriptions, while at the same time leveraging their capabilities to play an important role in the overall healthcare system, said Patrick Devereux, pharmacist at FMS Pharmacy in Bessemer, Ala.
“The more we can improve outcomes for patients and improve outcomes for health care as a whole, then we have a little bit of insulation, so we’re not depending on the revenue coming in from the PBMs,” he said. “We need to utilize opportunities to practice at the top of our license, and there are services that we can provide that have higher margins and are higher-impact services than simply dispensing prescriptions.”
FMS Pharmacy provides health screenings for some large self-insured employer groups in the area, for example. By administering finger-stick tests for cholesterol and glucose, and consulting with employees about ways to reduce the risk of diabetes and cardiovascular disease, the pharmacy can help employers reduce their own insurance costs, he said.
“It is something we can be paid for that delivers value to both patients and employers,” Devereux said. “These are models that are already working in both chain pharmacies and independent pharmacies, and these do not depend on PBMs.”
In addition, he said that PBMs cannot charge direct and indirect remuneration, or DIR, fees for these services. DIR fees, which are assessed after a prescription has been dispensed, can often wipe out any margins pharmacies might have generated on the sale, operators said.
Data from the 2018 NCPA Digest found that 79% of community pharmacies offer medication therapy management, or MTM; 70% provide immunizations; 57% perform blood pressure monitoring; and 53% furnish durable medical goods. “We are performing every clinical service that we can that is presented to us,” Devereux said. “We make sure none of those dollars are being left on the table, and none of those patients are being unserved or underserved.”
FMS currently is talking with a hospital system about providing chronic care management for its outpatient clinics, for example, and also is offering a diabetes education class for which it can bill Medicare without going through a PBM.
The pharmacy maintains a strong diabetes program in part through the relationships it has with local physicians, who refer many of their patients to the program, Devereux said. By providing outcome data to the physicians that showcases the impact its programs are having, FMS attracts additional referrals, he said.
Jim Spoon, owner of Spoon Drug in Tulsa, Okla., and the winner of the NCPA 2018 Willard B. Simmons Independent Pharmacist of the Year Award, said that having strong relationships with local physicians is key to the success of independent pharmacies.
“We work well with the doctors,” he said. “It’s important to look for those little niche areas where you can make a little extra money and support your business, so you can take care of people.”
Spoon Drug, which operates three locations in the Tulsa area — one under the T. Roy Barnes Drugry name — does “a little bit of everything,” including offering drug compounding services and support hose, as well as gift merchandise. “We’ll special order just about anything anybody needs,” Spoon said. “We take just about every insurance and try to encourage people to trade with us instead of doing mail order.”
One potential area for growth is around cannabidiol, or CBD, products. Spoon said his pharmacists are able to offer value-added counseling around CBD items, for example, because of their pharmacology expertise, compared with other stores selling CBD products where the staff might not have that same knowledge and insight.
Marketing can be a challenge for independent pharmacists, who are competing against the big marketing budgets of larger chains, but Spoon said he tries to leverage social media and also seeks to ensure that the company comes up at or near the top of local Internet search results.
Listening to Customers
Stacey Swartz, co-owner and pharmacist in charge at the Neighborhood Pharmacy of Del Ray in Alexandria, Va., said her company also has been expanding its offerings to shift away from being too reliant on revenues from filling prescriptions.
“We put in a full line of compression stockings, we have high-end vitamins, and we have high-end skin care,” she said. “These are things that can bring us more revenue, and we don’t have to worry about if insurance companies come back six months later and take that money back in their audit.”
She attends a lot of NCPA meetings to network with other pharmacists and to look for “the best ideas that are out there” to grow the business. The pharmacy also relies on its local customers for merchandising ideas. “They’ll come in and say, ‘I really wish you carried this’ or ‘I really wish you did this,’ and if it’s feasible and reasonable for us to do, we will bring it in,” she said, adding that she and her staff try to do whatever it takes to make the pharmacy experience “as stress-free as possible” for its customers.
“Having that reputation helps us to stay competitive, and I think that goes a long way,” she said.
Hamrick of APCI said independent pharmacists are “uniquely positioned” to succeed in an environment that values outcomes.
“Independent pharmacy has relationships and trust with its patients that have taken decades to build,” he said. “And due to these relationships, it’s independent pharmacy that is best positioned to help employers and government payers lower their overall healthcare costs. We just need to make it to the transition where pharmacy is getting paid to produce results for its patients and their payers.”
That is the rationale behind the formation of the Community Pharmacy Enhanced Services Network, a joint venture of the National Community Pharmacists Association and Community Care of North Carolina.
CPESN brings together dozens of local networks from around the country that focus on optimizing health outcomes. “There’s a tremendous opportunity for the medical side to save money by working with pharmacies, and there’s value that’s created there that can be recognized and paid for to those pharmacies,” Proctor said.
Community pharmacists need to make sure they are providing value to their customers, so that their patient relationships become so important to the healthcare community that the PBMs stand to lose by not including community pharmacies in their networks, he said.
“Doctors, care managers and others need to say, ‘What do you mean Joe’s Pharmacy’s not in the network? I rely on Joe’s Pharmacy to take care of my diabetic patients,’ for example,” Proctor said. “I think those who do those things have a potential for a very bright future,” he said.
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