Sunday, October 19, 1997

Pharmacies feel pinch of managed health care

By BRIAN BETHEL

and DOUG WILLIAMSON

Staff Writers

Independent pharmacies are weathering what they consider a tide of oppression, while their chain-owned counterparts continue to grow.

But both types of pharmacies are feeling the pinch of managed health care, giant drug manufacturers and mail order companies.

"Our No. 1 problem is discriminatory pricing by drug companies," said Don Bunton of Smith Pharmacy in Munday. "They give HMOs and mail order companies like AARP extra-low prices. It is ridiculous, and I cannot figure it out."

Phillip Schneider, director of public affairs at the National Association of Chain Drugstores, agrees that managed health care has created challenges for all pharmacies.

"Both independent and chain pharmacies have reimbursement rates for health plans," he said. "The problem is we have seen those reimbursements continually whittled away by managed care plans."

Chains are better equipped to handle those challenges, he said. But the industry as a whole is getting squeezed.

"Simply put, an independent store generally doesn't have the capability to withstand some of the declines in reimbursement rates, and generally doesn't have a broader base across which to spread its costs."

In an age when the expected number of prescriptions filled has jumped by 57 million -- up to 2.64 billion -- in five years, that means many independents are having to give up the fight and close their doors.

Of the 52,000 community retail pharmacies in America, more than half, 32,000, are chain-owned. And there is every indication that number, which used to be quite opposite, will continue to expand.

PROFITS AND PRESCRIPTIONS

As with any business, pharmacists need to make a profit to survive. Traditionally, drug dispension, not Norman Rockwell soda fountains and such, put meat on pharmacists' tables.

About three out of every four visits to the doctor result in a prescription being written, Schneider said.

But pharmacies are having to deal with denial of access to discounts offered to HMOs, mail-order companies and hospital pharmacies, and in some cases, even denials of specific drugs.

"What we have is a display of third-party forces creating trouble for the industry," said Todd Dankmyer, senior vice president for communications with the National Community Pharmacists Association.

"What we see is more business being leveraged to mail-order pharmacies and restrictions on where customers can get their prescriptions filled."

The challenge of simply making a profit is extreme, said David Watson of Watson Pharmacy

"My gross profit today is down 50 percent from seven years ago, and that translates directly into net profit," he said. "... Drug companies sell a 100-count bottle to me for the same price they sell a 1,000-count bottle to mail order companies."

Watson said his overhead on an average prescription is $5.50, but managed care plans will only recognize $2.50-$3 overhead.

"HMOs in the Abilene area have capped my profit as a drug store at 8.5- to 9-percent," he said.

The price difference to consumers is often extreme, Bunton said.

"Here is an example with the Texas Teacher Retirement System," he said. "I can fill a 34-day prescription and you would have an $8 co-pay for generics or $16 co-pay for name brand. If you go to their mail order house, you can get a 90-day prescription and pay $2 and $10 respectively.

"They are buying the drugs so much cheaper. My advantage is that I can get it out to you today, and you don't have to wait 10 days to get it in the mail."

Chain pharmacies have some advantages in that they are not necessarily tied to just prescriptions, and they generally can take the declining reimbursements from managed care a bit better, Schneider said.

"Managed care will continue to be the dominant method of paying for medication," he said. "Right now it accounts for two out of three prescriptions filled, and by 2000 it will account for 90 percent. It's here to stay, and both independent and chain pharmacies are going to have to learn to live with it."

But Dankmyer thinks consumers will help independents return to some of their former glory.

"I think we're seeing the pendulum swing a little on this part of the problem," he said. "I think they've pretty much bottomed out on these compensations -- they certainly can't go much lower. There's a movement away from some of the exclusive provider networks as well, and that's good news for independents."

Consumers have proven they would rather go to an independent or other local pharmacy rather than have to send away for medication, he said.

TAKE 'EM TO COURT

Drug prices have traditionally been a point of conflict for all pharmacies, and pharmacists say it became so bad the drug store industry had to band together to do something about it.

Independents, cooperatives and chain pharmacies collectively sued drug companies a year and a half ago -- and won.

The drug companies appealed, and the drug stores won again. But little has come of the victory.

"They had until September 1997 to do something (to change the way they were conducting business)," Watson said. "They haven't."

Drug companies say HMOs and mail order companies help move their market share much more than drug stores can, Watson said.

"When you come into a drug store and pay cash, you are subsidizing everyone who uses an insurance card, an HMO or mail order company."

Dankmyer said he thought results would come eventually, but that progress would be slow.

"I think we will see independent pharmacies have access to the better prices drug companies offer some providers," he said. "It's going to happen, but the key is: Can you hang in there and make enough money until it does?"

Eleven of the 20 drug companies that were sued settled. They are American Home Products, Bristol-Myers Squibb, Eli Lilly, Glaxo Wellcome, Knoll, Merck & Co., Pfizer, Schering-Plough, SmithKline Beecham, Warner-Lambert and Zeneca.

Companies that have not settled and are anticipated to go to trial in March are Abbot Laboratories, Ciba-Geigy (now Novartis), Forest, Hoechst Marion Roussel, Johnson & Johnson, Pharmacia & Upjohn, Rhone-Poulenc Rorer, Novartis and Searle.

A PLAN FOR ACTION

With the pricing battlegrounds still drawn tight and close, both independents and chain stores are having to diversify.

"The biggest challenge is being willing to change," said Larry Pittman of Barnes and Williams Pharmacy. "The name 'independent pharmacy' suggests this might run into big obstacles.

"It is difficult to change when you are not playing on a level field. When drug companies sell a trainload of a medication to someone at a price, I ought to be able to buy it at the same price. I can't."

To help make ends meet, Pittman owns two other businesses -- a cutting horse training operation and a cattle feed business.

For small pharmacists to survive, they need to find a niche market and stay with it, said Arlyn Kloesel, former assistant dean of the University of Texas' pharmacy school and senior lecturer.

"Texas is largely rural-based, and that's something the independents can use to really find a place in a market that tends toward bigger and bigger," he said. "Home health care, for example, is a market most chains don't care to get into, but it can be a gold mine for the independent pharmacies."

Steve Owen and his wife Connie have done just that. Maintenance for home health care for acute and chronically ill patients is now a big part of their business.

The couple owns Owen Pharmacy and Owen Total Medical Supply.

Their company, which has expanded in recent months to include a full medical supply operation, provides IV, nasogastric and respiratory equipment and medication. They are on call 24-hours-a-day, 7 days a week.

"We developed a one-stop shop for patients, covering not just medication, but also their medical equipment needs," he said. "It is a well-thought-out marriage. This way makes it easier for us to monitor patients, rather than getting pieces of the puzzle from several different places."

The Owens both have gone through additional certification training to be able to provide the extra services.

To help cover the overhead at his store, Bunton has expanded with a large gift department, casual ladies clothing lines, nurses uniforms and a wedding registry. Still, about 75 percent of his business comes from the pharmacy counter.

Even chain stores have to diversify, Schneider said.

"More and more, they have become a shopping destination point," he said. "Chain pharmacies are carrying more and more basic household items. With the lifestyles people lead today, they want to get more done in one stop."

Many chain pharmacies are moving to free-standing locations for that very reason, Schneider said.

A MATTER OF SURVIVAL

The pharmacy landscape is still uncertain and in many ways treacherous, especially for independents.

"We are losing independent drug stores at a 40-per-week rate until 1996 when we only lost 1,072," Bunton said.

"The corner drug store made the drug companies what they are today," Watson said. "... We are like good mechanics, barbers, beauticians and service stations. The big boys are trying to kill us off. ... HMOs and insurance companies and mail order companies have come in and bitten off part of our business, a big part."

Things are a bit better on the chain side of things, Schneider said.

"Chains can offer longer hours, are often more accessible and can adapt to demographics and changes marketing mixes quickly," he said. "All of those are growth factors. For our part, we're pretty optimistic about the future."

But everyone in the pharmacy industry is aware that things need to get better, Bunton said.

"I wrote a prescription the other day and charged $62. I made about $2 profit on it."