Business bites: blood and cuts

old-fashioned straight razor to illustrate Andrew Topp piece

How do PBS price cuts resemble the impact of a particularly nasty shave? And how can you minimise the damage? Bruce Annabel & Mal Scrymgeour explain

Shaving cuts are a nightmare. Those men who shave their faces with a blade will know that you will never cut yourself shaving unless you are running late for work or an important appointment. Inevitability you are wearing a white or light blue sh113irt that shows the blood stains in a startling manner for all to see. Sometimes you are in the car before you notice your blood stained collar.

All day you show off your injuries. All of this could have been avoided if you were more prepared – if only you had shaved earlier and were more cautious you wouldn’t be running around with pieces of toilet tissue stuck to your face as you try to stem the bleeding.

The embarrassment of not managing obvious cuts brings us rather neatly to the 1 October price cuts. The price cuts are like shaving. You knew they were coming and if you handled the process incorrectly it would have hurt. Don’t worry there’s still time to deal with the pain if you do so quickly and another opportunity to get it perfectly right in less than six months’ time by pre-preparing before the next cuts are inflicted on 1 April 2017.

In their August ‘Indicative Economic Impact Analysis’ statement, the Guild estimated the cut impacting the ex-manufacturer price by $0.81c per script of which approximately $0.30c/script will be worn by pharmacy in the form of reduced generic and wholesaler trading terms. For an average pharmacy that dispenses 55,000 scripts per annum, that equates to about $16,000 lost profit per annum. That’s a cut that hurts.

The impact will of course vary between pharmacies depending on specific circumstances and script volumes. We know of one well managed larger pharmacy group with excellent data management skills has calculated the impact is over $0.40c per script.  

The biggest reductions applied to blockbuster drugs Atorvastatin and Rosuvastatin followed mostly by large cuts to fixed dose combination drugs that include Alendronate, Simvastatin, Irbesartan, Metformin and Perindopril.

However, while pharmacy profits are wearing the lesser portion of the cuts this time, through the AHI fee limiting the downside, you are not immune from them and doing nothing isn’t an option. That’s because this cut was the first under the ‘Simplified’ price disclosure method causing massive blood and cuts being inflicted back up the supply chain from which pharmacy is definitely not immune:

The top five knock on impacts include:

  1. Significantly curtailed generic trading terms
  2. PBS item de-listings
  3. More common stock outs
  4. Price rises.
  5. Reduced bottom line net profit, cash flow and valuation

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