First off, I’m sorry. No rants in months. I’ve neglected the one business I’m so very passionate about - Woodstock Vitamins. Today we begin again.
The primary reason behind our silence is the subject matter of today’s rant. It’s pharmacy. Our core business at 3 of our 4 locations. Our profession. Our motivation for opening our biggest, nicest location yet. And the reason for our closing of that location a short year and change later. Pharmacy has been on a downward spiral for us practitioners for a decade now.I’m going public today with my griefs against my industry. I’m hoping this is eye opening for everyone out there.
We’re closing our Lake Katrine location. It’s not doing what it needs to do, sure, and we didn’t execute quickly enough. But that accounts for about 25% of the actual reason for closing. The balance (75% for those counting along at home) is because the medical industry is a hot mess right now. Mergers and acquisitions is the name of the game. This year was the biggest year in history for mergers and buyouts in the healthcare world. Fewer and fewer players are becoming increasingly huge, 2400 pound gorillas.
Here’s our current reality:
- Private doctor groups are rare. Everyone has to join bigger and bigger groups to survive, as their reimbursements for their services fall and the overhead to stay on top of all the regulation and billing rises.
- Big pharmacy chains are hurting
- Target, with thousands of stores, sells to CVS
- CVS is changing 80 some stores in our area from 24 hour to non-24 hour stores.
- Rite Aid, the number 3 pharmacy chain in the country, sells to Walgreens
- Walmart, the now number 3 pharmacy in the country, reports prescription growth yet dramatic drops in profits
- Small pharmacy chains are scratching their heads and wondering what to do next. Grocery stores, 200 store operations, all are debating the future of pharmacy services.
- Independent pharmacies are REALLY suffering. Consolidations are happening. Buyouts are happening. Less profitable lines of service (like medical equipment or compounding - more on that later) are being shut down.
All of this is happening because reimbursement rates for services are falling at a rapid pace. Sure, we’ve seen everything fall year after year - usually a 2-5% drop. Around June, it was like we jumped off a cliff. By July, we dropped 12.5% - corresponding to hundreds of thousands of dollars across our stores.
Keep in mind, we’re doing more. More prescriptions. More happy patients. Less money. Mrs.Smith gets 10 prescriptions a month. We used to make a fair profit on each one - 8 to 12 dollars, with an average of 15. Now, there are many “Mrs.Smith’s” out there where we will make $10 TOTAL on 10 prescriptions. It’s insane. Many prescriptions pay out less than a dollar. Even if we bought drugs for a penny a bottle, we’re still only making $1 for a prescription, which costs $13 or more to dispense.
What It's Like To Own an Independent Pharmacy
I like to give a few analogies to help people understand what my business is really like. Because as an outsider, we make certain assumptions of what business is and how they work.
For example, when I tell people we aren’t doing so hot or we have a dismal outlook, people always say “But you are so busy!” As we all know, there is a difference between busy and profitable. We are still both, but I don’t know many businesses that get busier and make less and less money at the rate we do.
Let’s take one of my favorite, local, family businesses - Smith’s Hardware. An amazing family business. They have many modern obstacles - competing against the big guys mainly - and I’m sure it poses many challenges. They have Lowe’s, for example, and we have CVS.
Imagine for a moment, that Lowe’s actually dictated what they COULD charge for a hammer. Say a hammer is $10 and costs them $6. That’s a normal, healthy margin and a fair price. Imagine Lowe’s saying “The highest you can charge for that hammer is $7.” Wait, what? Don’t I decide what my price should be? “Not if you want to sell hammers at your store.”
We have pharmacy benefits managers (PBMs), like Express Scripts or Caremark, that we must submit all our claims to. They dictate how much we can charge for the products. Guess who owns Caremark? CVS, the number one pharmacy chain in the country. Read it again. The number one - the market leader - now can dictate what EVERYONE gets paid for their services. In an area like the Hudson Valley, an overwhelming majority of claims are processed through Caremark.
Back to our local hardware store. Imagine now that Lowe’s starts saying the following: “OK, so your hammer is only worth $7. If a customer comes in for one, they’ll pay $5 and we’ll send you the $2.” That’s how pharmacy works. We get paid a copay from the patient, which now is usually pennies if not free, and the majority of the money comes about 2-6 weeks later from an insurance company. This isn’t a BIG deal, because lots of businesses have situations like this (called accounts receivable).
What IS a big deal is if Lowe’s said to Smith’s: “If someone comes to you to buy a hammer, the most you will get is $7. A customer at your store will pay $5. If that customer comes to us, it’s free.”
Yup. “Preferred networks” where magically the pharmacy that owns the benefits manager is the preferred pharmacy. This is how a business like ours, that has cared for some families via independent pharmacies for decades, loses customers. Would you pay $80 with me or $10 with them? $70 is a lot of money - and a real-life example of a decision one of our customers had to make.
We have our competition dictating how much we can get paid and who can do business with us.
They’ve won as much market share as they can. Now they are stealing the rest.
We don’t set copays. We can’t just “raise prices.”
And the big question I’ve wrestled with: In the end, do our service levels and customer loyalty really matter? Of course they do. But the system is broken if people are forced to go with providers they don’t like that can’t provide service levels that we can.
The Cost of Drugs
Everyone knows the story of that one CEO guy who took the life-saving medicine and jacked up the price a bazillion percentage points, right?
He was a great story - a cocky, hedge fund youngster who doesn’t have respect for anything except money.
Here’s the real story - this price jacking is going on EVERY SINGLE DAY. The worst offenders are keeping it on the down low, and no one really has noticed.
The cost of 20-year-old generic drugs has been steadily rising over the past year or two. Drugs for blood pressure, cholesterol, pain - all these staple drugs that tens of millions of people take - have gone from pennies a pill to quarters or more. To the untrained eye, a 10-20 cent increase per dose, which is like $10-$20 per bottle, isn’t much. In most cases, however, the increase is the same percentage wise, if not more, than the price increase for that AIDS drug by the cocky CEO guy.
Here’s the thing. These drugs are “cheap” and crucial. Insurance companies HAVE to pay. These aren’t name-brand, “Me Too” drugs that are looking to gain market share that your insurance can deny for something cheaper…These ARE the cheaper alternatives. These are everyday meds. And this is the strategy - take our cheap, necessary drugs and slowly increase the price. And no one notices. Copays don’t increase - so the consumer is not aware that the med they take is now 3-5 times the cost.
It’s silly stuff too. Hydrocortisone (a steroid) or antifungal cream was costing like $200, up from less than $10. Heck, we can make a bucket of these things for a few bucks in our compounding lab!
This is why Walmart is hurting.
Walmart was the gasoline on the fire of what’s going on now. They started the “race to the bottom” for drug reimbursements. They started taking $4 for a month of medications, reducing the pharmacy transaction to a cost of the pills - completely ignoring the professional aspect of it. It costs money to have a licensed pharmacist correctly fill, verify, and educate you on a medication. Walmart set their pricing as if none of that mattered. And for them, it didn’t - it got people into the store so they made up for it on those sales (heftily, I might add).
In order to make money on a $4 plan, a pill must cost about 12 cents or less. Well, when they started doing this the doses were a penny, so they made a good profit percentage plus their front store sales. Now, their $4 plans are less and less profitable because of the cost of drugs.
There was another side effect of the $4 program. Insurances started to lower reimbursements everywhere. “If they can afford it, so can everyone else” is what it felt like. Then, copays started to fall to below $4 (copays were traditionally at the absolute lowest $5). Low or no copays mean less money in the register. And now with the even more dramatic insurance reimbursement drops, many of their claims are paying out at $3 or less. (In our stores, we get paid 32% of the time at $3 or less, and it costs us over $13 to fill each prescription!)
Walmart started this landslide. Now, getting paid less than a quarter for a medication is common. Vials, labels, or the cost of personnel to dispense isn’t even a factor with insurance companies. And it hurts.
Walmart is getting hit on their own $4 program, which represents a majority of their cash business. Now, just like us, they are getting paid nothing from insurances on the rest of their business. Which is bittersweet; they’re a large reason for the radical drops. I’m glad they get to suffer a bit too.
And They Keep Kicking Us While We Are Down
We do custom medication compounding for humans and animals. We’ve been doing this for 7 years now. It was always a successful niche for us. It generated extra revenue and provided a needed, local service for our customers. We were the first PCAB accredited group in the region, and the 7th in the state. We are passionate about it. Well, we were passionate…
This one is to blame on independent pharmacies. In 2014, it became easier to bill for compounds. Every ingredient was reimbursed for, whereas in the past it was only the most expensive ingredient. The pharmacy benefits managers weren’t prepared for what this would really mean.
What it meant was that shady compounding pharmacies popped up all over the place, billing expensive topical pain gels for THOUSANDS of dollars. The compounds weren’t even effective - they just used the highest cost options, and lots of them to maximize reimbursements. Compounds that cost maybe $50-100 to make were getting paid at $5000 or more.
What’s worse, the pharmacies started giving direct and indirect kickbacks to doctors. A “whatever the hell we call it it’s really just a kickback” fee of $100-200 per prescription was fairly common. I guarantee this isn't some distant problem - I'd bet the farm that there are doctors around here who have participated in those schemes.
PBMs finally got smart. What do they do? What happened in school when one kid acts like a jerk? The whole class gets punished. The PBMs essentially closed down ALL COMPOUNDING. They have ridiculous requirements for getting a contract. Reimbursements are down. Audits are up. Many of us lost 50% or more over the past year because of it. What was once a profitable niche is now a high liability with little return.
Then there are the compounding pharmacies that did sterile. Well, the FDA is visiting them because of the meningitis outbreak a few years back now. Many of them are either jumping ship or reducing their services. Do you think a small, independent business can afford the dollars it needs to survive a FDA raid?
Some of you may have experienced an unintended consequence of all this: inventory out of stocks. We used to keep a big inventory - we could afford it! Now, our inventory HAS to be kept next to nothing. Look at it like this: if we are getting paid $1 for a drug, if we over-order by a single $10 bottle, we’ve killed the profit from 10 prescriptions.
We’ve cut where we can and as a result some service levels have dropped to the lower end of acceptable. We’ll be working those up, for sure, and I’m sorry for any problems it has caused anyone. Now I hope you understand why.
Hate it or love it, we need universal healthcare. Consider it just from an overhead perspective...
How much does it cost to pay managers and executives to run the hundreds or thousands of insurance companies? How much of their budget goes into marketing and acquiring customers and contracts?
Let’s just look at pharmacy. I buy a drug at $10 a bottle. My friend might get that same bottle for $12. Walgreens may buy it for $8. “Oh it’s based on volume - that’s fair!” I don’t think it’s correct. Here’s my question: Why does anyone pay anything but a single price for a drug?
In my opinion, it’s all the same drug. It should be the same price for everyone. Yeah, sure shipping would be more for me if it comes from California, and different manufacturers may have different prices, but what the heck? Why is there such a discrepancy? Why is it such a game?
Universal healthcare with fixed costs on drugs.
Here’s the worst part. You’re a human, right? The rest of us are all humans. If we humans need a medication, that medication should cost us the same price. In our world, if I have 40 people on a drug with 40 different plans, I’ll get paid 40 different rates. My buddy in Plattsburg will get his 40 different rates based on the 40 different plans for his area.Same drug, same strength, same humans.
Universal healthcare with fixed reimbursement based on a service.
This oversimplification is intended to show how much excess goes into this whole process. It is too complicated and there are too many people between providers and patients making a huge profit for what mounts to essentially shuffling paper from one pile to another.
Can’t We Lobby?
Independent pharmacies represent 25,000 locations nationally, or the combined number of the top 3 chains. In NY alone, independents account for over $3 billion in purchasing.
But we can’t be united. I don’t know the full deal, but independent pharmacies are not allowed to negotiate together. It’s “collusion” and it’s essentially a big pile of BS. It’s almost completely a result of lobbying against us from chains and the big money in pharmacy.
If we could, we’d be a force to reckon with and could influence change. Independents consistently have higher care levels and customer service. We provide for the most remote areas and offer services that chains won’t or can’t.
But all 25,000 of us are really on our own here.
Is the Dream Gone?
The deck is certainly stacked against us and it seems as if it is accelerating.
Our vision for Village Apothecary was expanding to a 3 store operation and changing the processes to support 5-7 total pharmacies. We were lining up to buy 2 existing practices and potentially add new location over the next few years.
Not anymore. The cuts have made it so we can’t afford managers or bookkeepers. It’s back to bare minimum staff and Neal doing all the management.
I’ve talked to dozens of owners over the past year about this. Many of us who chose to expand in 2015 are really feeling the pain. Pharmacy banking groups have stated they stopped funding most startup pharmacies.
What are new pharmacists coming out of school to do? Well, they will be getting a wake up call on graduation day. When I graduated just 12 years ago we were getting $30,000 sign on bonuses and were guaranteed a position at over 6 figures a year. Now, most have no guarantee of a job. My prediction is pharmacist salaries will drop in response to the schools pumping out new grads that can’t find jobs and the falling revenue in the industry. I think this is great for owners, not so much for pharmacists.
Pharmacists in the near future will have limited opportunity for entrepreneurship. Much like doctors. Sure there will be niches that many can occupy, but not on the scale of today.
Where do we go from here?
The point of this is two fold:
Speak our mind about this crappy industry
Help everyone understand what is really going on in our world.
What I DON’T want is fear or worry. I’m doing enough of that for everyone.
Our goose is laying smaller and smaller eggs. The rule makers (the top 3 chains) are suffering, just as we are. This is a huge problem. We are on the wrong side of it all due to our size.
The biggest lesson for me is the effort vs reward doesn’t work for new pharmacies. I’ve put the big white flag in the air for surrender on my plan - growing pharmacy - as the effort to “win” is greater than the reward. The triplets are 6 and the baby is 2. I can’t keep “pushing a river” with a young family.
We can and will continue to survive in Saugerties and Woodstock. If our eggs are smaller, we eat less and have to do more to optimize.
We will be putting our new found “free time” back into our Woodstock Vitamins brand.
Our resolution for 2016: If the broken healthcare industry is redefining what a pharmacy is, we will define what a pharmacist will be.
In my mind, we will be the pharmacists focused mostly on wellness and prevention. Our knowledge in self-care and disease management and medicines will come to the foreground. I want to be the pharmacist that brings integrity to the natural products industry. Maybe, just maybe, I can help other pharmacists who are struggling with these times to provide our Vitality services in their stores.
“What Can I Do?”
The people I’ve told this story to have always asked how they can help. Here are a few ideas:
- Complain. Tell your HR people, insurance company, elected officials, whoever will listen that it is unfair. You want a choice and you choose us.
- Learn. Read up on the problems our current system is in and all the proposals to actually fix it.
- Spread the word. Now, more than ever we need the support and love. Tell your friends and family to give us a shot.
- Engage. I’m going to get the classes going again and start running my mouth again about supplements in blogs and rants. Please come to classes, share with friends, and read!
Just trying to keep it real...
Neal Smoller, PharmD
Owner, Pharmacist, Big Mouth