The $1 Christmas gift you didn’t want

Woman opens Christmas gift and is unimpressed

The $1 pharmacy co-payment discount is about as welcome as a lump of coal in a Christmas stocking for many pharmacists, writes Mal Scrymgeour… is your strategy in place yet?

It’s happening again. It’s nearly Christmas, and so it’s a good time to reflect upon the most useless or unwanted gifts we have ever received.

A buddy of mine said his wife wanted diamonds for her Christmas gift. So he gave her a pack of playing cards. They are no longer married. It turns out you can get gifts wrong.

For me, I think the most unwanted Christmas gift was a small, yet still frustratingly large, grandfather clock. Living in a flat in London at the time, I would have had to move out just to accommodate the stupid thing, it was that big.

And just precisely what I’d do with a grandfather clock of any size is a question that never seemed to trouble the person giving the gift to me.

However, in the grand tradition of unwanted gifts, I re-gifted it the following year. I simply tucked it in a cupboard for a year and forgot about it until I determined who I could give it to the following Christmas.

In retrospect I was probably the receiver of a re-gifting myself, although I’ve never been brave enough to ask. The gift giver has, almost tellingly, never asked about it since. For all I know that same clock is now in its 17th year of being re-gifted.

In some ways it is probably a kind of foster grandfather clock, passing through many cupboards along the way.

Anyway, time moves on—as the grandfather clock would know, and its purpose has become somewhat ornamental, as it’s been replaced by digital clocks. That’s the problem with some things, time catches up and you simply can’t change progress. It happens faster than we’d like.

All this brings to mind the Government’s unwanted gift to pharmacy—the $1 co-pay discount, starting on January 1st.

I have written about this previously and the subject matter has been re-printed a couple of times by others, which is splendid as it might have given you the opportunity to pause and think about the options. It’s a bit like deciding who to give a grandfather clock to: it requires some careful thought.

It’s timely to review the impact of just dropping the $1 co-pay. If you give the co-pay away the impact is likely to be around $0.40—$0.55 per script, depending on who you refer to. It doesn’t sound much, but it is more important that you might think.

The AHI from the Agreement added approximately $1.40—$1.50 to the average script. That’s the good news.

The bad news is that various other things have eroded this income. The amounts vary depending on the source, but broadly, the cuts on October 1st wiped around $0.40 off this number.

So we are down to $1 from the AHI. If you drop a further $0.50 (taking a midpoint from the Co-payment impact) off this amount you are down to a mere $0.50.

On April the 1st you can expect another $0.30 or thereabouts to drop off, meaning that after the excitement of the AHI we are almost back to where we started.

A smarter option would be to reduce the impact of the co-pay because there’s not much you can do about the other elements.

Oh, and just to add into the mix you’ve got OTC lines being reduced on January 1st too. Potentially codeine might be re-scheduled in a year from now too.

Minimising the agony by deciding your strategy for managing the co-pay is much more important that it might at first seem.

Let’s what we mentioned last time as some rules to consider employing:

  • Don’t discount the general co-pay as a basic rule.
  • Discount concession co-pays on a selective basis only.
  • Select the most price-sensitive SKUs impacted by the $1 co-pay.
  • You needn’t reduce every item by the full $1.
  • Explain to customers that it’ll take longer for them to hit the Safety Net. For some, this will be a significant consideration.
  • If they are not a frequent/loyal customer, the challenge is to make them become one. Consider: asking to keep their scripts on file so that you can look after their them and reward their loyalty; offering them the opportunity to join your loyalty club (assuming you have one); joining your script reminder service; making use of MedAdvisor; and undertaking a MedsCheck.

Here’s some new thoughts to add into the mix:

  • Don’t discount the co-pay at all. I have a couple of clients who say that their service is so good that there is no need to. And these pharmacies do indeed have good service, so they are not being arrogant. They have a pharmacist on the shop floor at all times who always hands scripts out to patients and discusses the needs of each patient. I’m sure they’ll have the odd question asked of them, but they are formulating strategies and techniques to handle it. I suspect they’ll both be successful. If you adopt this strategy, be extremely careful. You don’t need to lose too many of your bigger patients and this theory is out of the window. But still, it’s a strategy.
  • Pass the full co-payment on, BUT, have a pharmacist on the shop floor recommending other products to help the patient. It may just also help offset the margin decline. This includes MedsCheck, MedsAdvisor as mentioned above but also clinical intervention, substituting products where appropriate, Dose Administration and recommending compounding or clinics if you have these.
  • Issue vouchers. The first time I heard about this idea was from a pharmacist in WA, and I promised I’d tell no one. That was until half a dozen others in various parts of the country told me they had exactly the same idea. So it’s no secret then, and I can share it. The idea being that vouchers for $1 are issued to be spent back in the pharmacy on non-script items. Three benefits accrue – first, not all vouchers are redeemed. Secondly, you still make margin on whatever the item is the customer is buying, so you are not losing an entire $1 at all (you can make it on purchases over $10 and exclude promo items if you wish). Finally, it encourages them to come back into the pharmacy to redeem the voucher.
  • Issue additional points through your loyalty program. Again the benefits explained above with a voucher also occur with this initiative too.

Overall, you need to make sure you look after your major customers especially well. Losing them is a recipe for disaster.

Some clients I know have taken the time to meet their top 100 to 200 customers and explain precisely what is happening. They make sure that these most important customers are not disadvantaged and can take the co-pay if they wish.

It’s a smart strategy to engage customers at that level. This is a form of defending your position through attack, and this is a form of attack that I like.

Other than discount model pharmacies, removing price as the competitive differentiator should be where most of the focus is. It’s achieved by differentiating your service, maximising the convenience factor in your pharmacy (hours, layout etc), stock the range of products customers want and develop services that are attractive to your customers and having a pharmacist(s) permanently at the front engaging patients and delivering a genuine health solution service focused on health outcomes is what really makes a difference.

It’s your choice, but make sure that whatever path you take you make a fully informed decision. It’s also worth acknowledging that this isn’t a one size fits all solution: different strategies will work in different businesses.

In short, you can accept the gift coming your way and live with it. Make the right decision whatever that might be for your business.

Just make sure you think it through carefully before deciding. Once you accept your Grandfather clock, you are stuck with it. Or you can re-gift. Choose wisely. Merry Christmas.


Mal Scrymgeour is the founder of retail consultancy Zumo Retail Ltd.

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  1. Jarrod McMaugh

    Great article Mal. Always a good mix between useful information and wry humor. And in this case, a good amount of both

    • Jarrod McMaugh

      Ahh, looks like the voucher/loyalty care option is not going to be legal. What a shame.

  2. JimT

    if other businesses in town are giving the $1 discount , I don’t think offerring something else is workable….customers will just go elsewhere, and may not come back at all??!!

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