The average cost of dispensing medicines may be higher than most pharmacists think, and this imperils business sustainability in the current climate, Bruce Annabel believes
During the past five years I have analysed the dispensary costs of forty pharmacies in different locations to work out what it costs to dispense a prescription.
My reason for doing this was to gain an understanding of what price disclosure and pharmacy script discounting would do to the net profit delivered by the dispensary. That’s because the dispensary delivers a disproportionately high sales and net profit contribution and if price cuts and self-inflicted price discounting went too far it was possible income per script could approach the cost of dispensing it.
In fact without the AHI introduced on 1 July 2015 with 6CPA many pharmacies would have come close to break-even due to the amelioration of the mark-up base.
My analysis concluded that the average cost to dispense a script was $9 although while some are lower others can be anything up to $12 depending on a multitude of factors such as sales/m2, stock storage system, rostering, staff roles (ie: use of dispensing technicians or not), management quality, location (high rent centres v strip and provincial) and business leadership quality.
Currently pharmacy enjoys income mainstay fee base of $10.56/script (dispense fee $7.02 + AHI $3.54), high cost drug fee, safety net discretionary fees and the premium free incentive. In addition, although flagging badly, supplier trading terms can be added but these will continue falling as price disclosure runs its course.
However, while not done and dusted the worst is over. Currently Pitcher Pharmacy client data shows GP dollars (income) earned per script will be down to an average of circa $11.60 after 1 April 2017 price cuts. That means on average the dispensing net profit has shrunk to $2.60/script which is why majority of pharmacies have been cutting back on staff and hourly rates wherever they can to preserve profitability and cash flow.
Of course that’s a short term approach and can do a lot of longer term damage to the business.
To make life more difficult for some owners I see a number of pharmacies aggressively price discounting earning income per script of between $10 and $11 which makes commercial life even more difficult, unless alternative genuine net profit generating income streams are in place.
Almost two years ago I wrote an article in the July 2015 edition of AJP on this subject. These messages are even more relevant today. Click Retail Matters to see this article
The key points are:
- On average it costs $9 to dispense a prescription based on my analysis
- Income per script has shrunk to $11.60 leaving net profit contribution of $2.60/script
- For those aggressively price discounting the position is worse
- Australia is a high cost country (wages including penalty rates, regulatory burden, major shopping centre rents, shop fitting, energy to mention a few) impacting all businesses and pharmacy is no exception
- The 6CPA mainstay fee structure is good and price disclosure will in the near future bring income per script down to that level as trading terms evaporate.
The solutions include:
- Drive costs out of the dispensary process by changing process, stock storage systems, layout, introduce dispensing technicians and change the pharmacist role to patient engagement and professional service
- Eliminate unnecessary script price discounting
Seek income from services and existing pharmacist professional service opportunities particularly, although not limited to, high margin s3/2, other non-dispensary health departments, minor ailments and avoiding discounting advice/recommendation driven products and services such as vaccination.
Bruce Annabel is a pharmacy business consultant and Adjunct Professor of Pharmacy Management, QUT