The times have, perhaps, never been more challenging for independent drug store operators. Yet, many are finding a path to success by expanding into new, more profitable areas of business and exiting from unprofitable ones, as well as strengthening their community ties and maintaining tight control of their expenses.
Independent pharmacies generated $75.8 billion in revenues in 2018, according to the 2019 National Community Pharmacy Association Digest, but their profitability is decreasing amid reimbursement pressures from third-party payer and government plans. The unpredictability of DIR fees — direct and indirect remuneration — for dispensing prescriptions under Medicare Part D have been particularly onerous for pharmacy operators.
“There is tremendous profit pressure on the pharmaceutical side of every independent pharmacy,” said Dave Wendland, vice president of strategic relations at Hamacher Resource Group. “You cannot have a conversation with a pharmacist today who doesn’t talk about DIR fees.”
Those and other pressures on independents have been reflected in store closures. The NCPA research showed that the number of independent pharmacies in the United States declined to 21,767 in 2018, down from 22,478 in 2014, a net drop of more than 700 locations. A separate study by the University of Illinois at Chicago, published last year in the Journal of the American Medical Association, showed that independents in poor, inner-city locations that serve a high percentage of patients using Medicare and Medicaid have been particularly hard-hit.
Kurt Proctor, senior vice president of strategic initiatives at NCPA, however, said that retail stores of all types have been under pressure, and pointed out that independents have been opening new locations as well.
“The economics are certainly tight for many, and you do see some closing,” he said. But, he added, the changing nature of the industry, with its shift away from a reliance on prescription dispensing into more of a “longitudinal care” model centered on other services, may also be leading some older pharmacy operators to leave the business.
“I think there are some owners who are saying, that, ‘As this change happens, I’m too late in my career and I’m not really going to go down that road,’” Proctor said.
At the same time, he said, NCPA continues to see interest from young pharmacists seeking to become independent owners and embracing new models of care, such as CPESN networks that seek to help pharmacists generate revenues for playing a role in reducing costs in the system.
Those independent pharmacists who are choosing to remain in business are making tough economic decisions about which third-party networks it makes sense for them to join while simultaneously expanding their cash-based offerings and seeking profitable niches that satisfy a need in their trade areas.
Jeff Scherr, president of Apple Discount Drugs, which has five locations in Maryland, said one of the main strengths of independent pharmacy is the high level of customer service these operators can provide. “Our competitors — the big-box stores and the chains — have really become convenience stores that operate with a pharmacy in the back,” he said. “The pharmacy brings the people into the store, and while they’re there, they’re making other purchases, and the stores are generating revenue and profit from that.”
In order to remain competitive, Apple has diversified into related healthcare lines, including durable medical equipment, or DME; medical oxygen; drug compounding; diabetes counseling; and other services. “We’ve created these niches that have certainly helped us,” Scherr said. “The tough part is you can generate revenues, but you’ve got to make a profit. We’re not talking about hitting home runs. We just want to be able to show a profit so we can continue to provide these services for people.”
Scherr said he has had to exit some lines of business that had been covered by Medicare, such as diabetic test strips and ostomy bags, simply because they were unprofitable in the long run.
“Some of the things we as pharmacists do are great moral decisions, but terrible business decisions,” he said. “We care about the patients and the customers, but staying in these lines of business becomes much more difficult as time goes on.”
Likewise, Michael Kim, owner of the Grubb’s Pharmacy chain in Washington, D.C., said he has exited from some PBM networks that simply were not profitable.
“You can’t survive if they are going to reimburse you less than what you’re paying for your cost of goods, and that’s pretty much how the contracts are written,” he said. “It’s a tough decision because you’re going to lose patients, but we’re not a nonprofit.”
NCPA’s Proctor said that many pharmacies may find that although they may lose some customers at first from exiting certain contracts, they could gain some of them back in the long run as loyal customers either change insurance plans in order to remain with their favorite pharmacy or employers switch their benefit programs to satisfy the demands of their workers.
Independents form new PBM
Michael Kim, the owner of Grubb’s Pharmacy in Washington, D.C., is seeking to take on large PBMs with a new network of independent pharmacies that will seek to compete in the Medicare Part D marketplace.
His new venture, Indy Health, is seeking to create “innovative alternatives” to traditional Medicare Part D plans, as well as a new PBM with supplemental health services.
“If you can’t beat them at their own game, what’s the next best thing? You’ve got to join them and try to provide something better than what they have, especially for independent pharmacies,” Kim said, citing the exclusion of independent pharmacies from the preferred networks of PBMs.
“We’ve got to turn the tables around on the big guys and say, ‘This plan is an independent pharmacy preferred network, and the big chains are not preferred,’” he said.
Indy Health, which was formed by a group of about 10 independent pharmacists from around the country, is planning to roll out its first offerings later this year for the 2021 plan year in about five states. Kim said he hopes the plan will attract additional investors and expand to all 50 states eventually.
“Hopefully it’s going to provide a better reimbursement for independent pharmacies, and we’re looking at possibly having no DIR [direct and indirect remuneration] fees included in this plan as well, which is going to be huge,” he said.
He also said that while he is hopeful that regulators eventually will solve the challenges that PBMs present to independent pharmacies, he doesn’t expect relief to come soon enough. “Too many businesses are going to go out of business by the time something comes around, or it’s just never going to happen,” he said. “So, the next best thing is to just enter the arena and play their game, and just do it better than they have been doing.”
Expanding into New Business
One of the areas where Kim has grown his business is through an expanded assortment of CBD product offerings.
“There are plenty of revenue streams over the counter that I think many pharmacies are going toward, and CBD products would be one of those revenue streams,” he said. “It’s about focusing on things that you know you’re going to make a profit on, and nobody’s going to come back and take it back from you later on.”
As far as the profitability of prescription dispensing, Kim said, “I think it’s just very hard to win at dispensing prescriptions nowadays,” Kim said. “I feel like it’s a losing battle. You have to turn your attention to what you can do and what you can control because you can’t control the PBMs at this point.”
Kim said profit pressures also have forced him to reduce his staffing by about a dozen employees in the last few years. “That changes lives, which is not something that I want to do, but it was a necessary decision that I had to make,” he said.
Proctor said staff cutbacks are a decision many pharmacists may have to face, although he suggested opportunities also might exist for some personnel to be retrained for different responsibilities, or for responsibilities to be shifted in a more cost-effective way among employees. For example, some tasks that are performed by pharmacists could be turned over to technicians.
“You’ve got to make sure that you’re deploying the resources that you have efficiently, and if you have too many resources, then you need to make adjustments there too, of course,” he said.
Proctor agreed that many independents are finding opportunities in such niche businesses as weight-loss counseling, injectable medicines, disease state management and offering a wide range of vaccines, among other offerings. “You certainly see many pharmacies doing very well with things like CBD, where the pharmacist engagement with the patient is very important,” he said.
Wendland agreed that such offerings as smoking cessation programs, diabetes education, and other forms of “holistic care beyond traditional over-the-counter medicines” could be profitable niches for independents to pursue. “Are there vitamins, dietary supplements, natural products, or CBD-based products that could help keep people well through better counseling and service offerings?” he said. “That to me is one of the ways to differentiate, and it’s a big opportunity.”
Perhaps the biggest opportunity for independent pharmacies is to reconnect with their communities to ensure that they are meeting the needs of the local customers and the local medical care providers in the market. “You have to know your own local marketplace, and what’s available there and what isn’t,” Proctor said. “Is there a need that you could step in and fulfill?”
In terms of partnering with physicians and others in the local healthcare community, he said pharmacists need to understand the goals that those medical professionals are seeking to achieve and to identify not only ways to help them, but also how to share in the revenues related to those services.
Independent pharmacies may also need to rethink their store layouts and assortments, Wendland said. “Do you have the right products in the right place at the right time?” he said. “Maybe there’s an ethnic switch in the neighborhood, and you need to start carrying kosher products, or halal products, or maybe products that cater to lifestyle diets, and you have not kept up with the times. It’s a big opportunity to reassess how to differentiate by being relevant to your neighborhood.”
Kim, for example, said he has been seeking to customize the offerings at each of his company’s locations. At his store in the affluent Georgetown area, he offers a line of high-end, imported brushes and combs from Italy that can sell for as much as $250.
Technology is another area of opportunity that independents need to consider, Wendland said, citing not only the need for an online presence, but also a robust social media plan and an e-commerce strategy that helps satisfy consumers’ demands for fast delivery or pickup of products. In addition, he said pharmacists often need to better promote their own capabilities, which might not be a skill that comes naturally to them.
“Pharmacists have a really good story to tell, and they keep it under a bushel basket,” Wendland said, “so we encourage pharmacists to tell their story more appropriately.”
He suggested using the “About Us” area of the website, for example, to focus on things that are important to the customer, such as how the pharmacist can be a partner in many of life’s challenges. In-store communication of all of the auxiliary services offered also is important.
Overall, Wendland said he’s encouraged by a lot of what he’s seeing in the independent pharmacy channel. “I am impressed with some of the energy that’s coming into independent pharmacy today,” he said. “There are new owners who are emerging. We’ve had great conversations with pharmacies that have been acquired by extremely business-savvy individuals, who recognize that they want to reinvent the experience, focused on self-care or focused on well-being and prevention.”
In addition, he said there are young pharmacists with an entrepreneurial spirit who don’t want to work for a large chain or a big-box merchant.
“They’re really building from the ground up an entirely new experience for the constituency that they want to serve,” Wendland said.
Kim sees ongoing challenges ahead for independents, but he’s hopeful for the long-term future of operators like himself. “I feel like if you can survive the storm, then on the other side it’s going to be a better pharmacy environment,” he said. “But it’s a rough storm and not everyone’s going to survive, unfortunately, especially if you’re not making changes to your business to find other revenue sources.”