The gift that has stopped giving

Pharmacy’s time of delusion over cost cutting has ended, writes Mal Scrymgeour

I had a birthday not long ago. It was a day celebrated in some style. But it shouldn’t be really. You achieve birthdays by not dying. I suppose that is a cause for celebration in itself.

I’ve noticed people all treat birthdays differently. A number of folks ignore the day entirely. Others just pretend it’s a different number than the reality. A proud few and delighted to report the age they’ve achieved. Some people take the option of rounding down. It’s easy to round down – if for example you are 42, simply claim that you are a sprightly 38. It makes you feel invigorated and offers the chance to reflect upon a happier time in life. In short, there is a tendency for people to mess with the numbers and to delude themselves.  

This process of delusion is not just the preserve of birthdays. For example, some business owners decide to maintain an impressive net profit performance. Ideally you would grow sales, profit and customer numbers.

But for some, in order to maintain an impressive number, it is not uncommon for owners to delude themselves that they can maintain this number by simply cutting cost. Another method is to get more aggressive with suppliers or wholesalers and ask for more trading terms. Unfortunately, like rounding your real age down, this approach has a limited life span and cracks soon appear.

If we are honest, birthdays are achieved by simply remaining alive. Get that right and they keep rolling around. Lifting net profit results in pharmacy have largely been achieved by doing the same thing.  

Data shows that while dispensary income kept rising from 2010/11 to 2013/14, thanks to generous generic discounts, so too did net profit. In other words, by simply staying alive we made more money. But all that changed in 2014/15 when price disclosure finally caught up, causing net profit falling quite dramatically.

In a final year of deluded net profit happiness, the AHI fee that commenced 1 July 2015 gave dispensing income a reprieve until various cuts and changes neutralized the impact by 1 April 2016. Like a cold biting winter breeze, the unpleasantness and confronting reality of big price cuts hits us on 1st October 2016 followed by smaller cuts every six months. It’s like aging – there is an inevitability about it that is frightening. Previously, generic suppliers have helped bridge the gap, but this time there will be little meaningful change.

To explain further – if the October cut is say 80c per script and the average pharmacy might assume a lost net profit of between $20,000 and $35,000 per annum. An owner might decide to cover this gap by reducing labour and exit a pharmacy assistant (including on-costs) or half of a pharmacist hours. In most cases neither of these options are achievable given the existing workloads. Another favoured option is to cut back on stock holdings.

Doing either of these things is like using sellotape to pull back the wrinkles on your forehead. Everyone can see what you are doing and it doesn’t work – other very, very than briefly.

In short, attempting to cut your way to success in the long term is going to work. It always leads to falling profits which is the opposite of the intended outcome. I have witnessed many pharmacies going bust saving money. But to balance things out, there’s nothing wrong with reducing costs by implementing efficient practices and cutting waste but these are ‘hygiene’ factors and should be done as a matter of course. They shouldn’t be the only option considered.

There is only a couple of conclusions – you can’t just cut your costs to be successful and the other conclusion is you must grow patient visits in a profitable manner – ideally with increased productivity.  

So don’t be like the person who rounds down their age and deludes themselves. Understand that growing net profit is like growing older – it’s a good thing. After all, if you are not growing (older) the alternative isn’t palatable. Business isn’t any different.    

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