SPECIAL REPORT

COSTCO PHARMACY DRUG TOPICS' CHAIN OF THE YEAR

This company is taking pharmacy services to new heights in an unlikely retail setting

Huge boxes of crackers and candy are stacked high on enormous shelves. Large packages of salmon fillet and baby lamb chops beckon from oversized refrigerated cases. TV sets are stacked as far as the eye can see. And in one corner of this gargantuan warehouse, an employee doles out samples of chicken potpie. Can a pharmacy be successful in this unconventional, no-frills setting that caters to wholesale club members?

The setting suits Costco Pharmacy just fine. From offering value-sized over-the-counter and prescription drugs to offering disease state management programs to rolling out automated technology to caring for its employees, the Issaquah, Wash.-based firm stands out as one of the top chains in the country. These achievements led Drug Topics to select the company as Pharmacy Chain of the Year for 2002.

History of chain

The first Costco Pharmacy opened in February 1986, three years after the birth of Costco Wholesale warehouses. "At that time, the pharmacy was a joint venture between Costco and myself," said Charles Burnett, senior v.p./general manager of pharmacy. "Within a year, Costco wanted to expand faster than I had the resources to expand, so we decided the company would take over the pharmacy. I came to work for Costco to run the pharmacy, and then we started adding more pharmacies."

Indeed, Costco, which became a public company in 1985, rapidly expanded to 36 states. Today, the chain boasts 272 pharmacies in the United States and by the end of 2002 that number is expected to grow to 300. The chain employs 650 pharmacists in the United States, and its total Rx and OTC sales soared to more than $1.2 billion for its latest fiscal year, which ended Aug. 31, 2001.

While pointing out that pharmacy has benefited from the company's growth—Costco's sales were close to $35 billion last year—Burnett added, "Our growth has been faster than the company's in general because our sales are growing at the rate of about 18% a year, and the company is growing at about 10%."

What's driving pharmacy's rapid growth? "More than 50% of our business is cash, so we cater to a lot of people who have no insurance. We attract a lot of those people because of price. They tend to be older people who don't have insurance, and they happen to be the ones who use the most prescriptions. We operate on very small margins, and our pricing is generally the lowest anywhere for everything we carry," said Burnett.

Emphasizing that Costco doesn't advertise because the company "does nothing that raises our cost if we can avoid it," Burnett said, "the warehouse clubs are known for low cost and high value. And that's what we are—a value-oriented company—and we try to provide the best value at the lowest possible price."

In keeping with this philosophy, Burnett explained that Costco carries only the leading brands in a particular category of goods, and they are offered in value sizes. Costco pharmacy intentionally stocks only 275 to 300 OTC SKUs, including vitamins and herbal products. "That number is minor compared with a typical drug chain, which has 500 to 800 SKUs. We carry the things most people want. If they are not high-demand items, we don't carry them," he said matter-of-factly.

Is it difficult for a pharmacy to maintain a professional atmosphere in a warehouse? "When I first started, I would have said, Yes," admitted Burnett. At the outset, he insisted the pharmacies be situated outside of the checkout area in the front of the stores. "I thought it gave it a more professional image, being self-enclosed in the front. It turned out that wasn't the case, so we put the pharmacies inside the stores. People have accepted this [warehouse atmosphere]; they know they aren't giving up any- thing to go to one of our pharmacies because we insist on giving good service and doing everything in a professional way. All of the OTCs are displayed in front of the pharmacies. There is bright lighting, and the area is kept very clean. Professionalism is in the people you have working in the pharmacy," he said.

Positioning pharmacy for the future

With an eye on increasing its professional demeanor and meeting customers' needs, Costco is gearing up to offer disease state management programs. To accomplish this, Costco is building consultation rooms in its new pharmacies and in many of its existing sites, it is replacing consultation windows with rooms. The rooms are outfitted with racks and counters that hold brochures on various disease states as well as the company's two magazines: Diabetes Today and Costco Pharmacy Health Guide. The latter offers information about various diseases and therapies. In most of the rooms, there is a video library so patients can watch educational tapes on topics such as diabetes, asthma, and women's health.

Michael Mastromonica, R.Ph., assistant general merchandising manager of pharmacy, said that prior to Costco's decision to launch disease management programs, the pharmacy hosted health fairs at the warehouses on Saturdays. Patients were offered cholesterol, diabetes, osteoporosis, skin cancer, and asthma screenings, which were conducted by persons contracted from outside of Costco. While the screenings helped increase awareness of the pharmacy, pharmacists were not involved.

"It was very successful for us. We just stopped it this year. We had done it for three years and wanted to do something different. We tried to determine ways in which the pharmacist could become directly involved. We hit upon osteoporosis because there was a very high level of interest in it and we could secure some funding to do it in the warehouses," explained Mastromonica.

While the screenings are still conducted by outside professionals on equipment brought into the pharmacy area, Costco pharmacists provide the patient consultations. "We wanted to create one-on-one relationships between the pharmacists and the members so they could sit down and discuss the results," said Mastromonica. Pharmacists who are interested in participating in this program are required to pass a written CE test and attend a live educational session.

More than 100 R.Ph.s have trained for the osteoporosis program. And Costco has conducted more than 20,000 osteoporosis screenings since 2000. "The vast majority of pharmacists like doing it because it gives them the opportunity to get out of the pharmacy and not worry about filling Rxs, while offering them the chance to work one-on-one with people," said Mastromonica.

Pointing out that Costco charges a minimal fee for the screening, which is subsidized by a vendor, Mastromonica insisted that the company is interested in providing service to its members and does not reap profits from these programs. Still he conceded, "It helps build business for us and our vendor partners, and it gives us an opportunity to promote the pharmacy and pharmacist."

Mastromonica noted that sales of calcium products have increased as a direct result of osteoporosis screenings. Citracal, which sponsors the screening, has seen its sales at Costco double in the past two years. Offering disease state management programs has also helped Costco's recruitment efforts. "Costco uses this as a recruitment tool," he said. "If you work at Costco, it's not just all about filling Rxs. We'll give you opportunities to work personally with patients. Students coming out of school today are especially excited about having the opportunity to do things like this," he said.

Costco is testing a screening program for stroke. Like the osteoporosis program, this one will rotate through various regions every six months. The program is designed to help people identify whether they are at risk for a stroke.

The screening includes a cholesterol test, conducted by a contracted professional. The pharmacist takes the patient's blood pressure and uses the reading in combination with answers to a patient questionnaire to discuss the patient's risk for stroke. "We take the pharmacist out of the pharmacy on that day and put him or her at a table to work with people. We hire another pharmacist for that day to dispense prescriptions, or we adjust the schedule so we don't make them jump back and forth," said Mastromonica. The stroke prevention program, which is being tested in the Northwest region, is slated to roll out to other regions in the near future.

Costco also sponsors disease management programs in diabetes and asthma. In addition, pharmacists who specialize in fertility management are listed on the company's Web site, and their services are promoted at their pharmacies.

Technological enhancements

Vic Curtis, Costco's assistant v.p./ general merchandise manager, was summoned two years ago to research and propose a design for automation. "We looked at several vendors and systems before we made our choice to roll automation out to 272 pharmacies. It's like jumping on a moving train. Where do you want to get on? Technology is always advancing. We had to address rapidly increasing Rx volume; that made it important for us to have an agenda sooner rather than later," he explained.

Costco selected Innovation Associates' PharmASSIST system as its automation vendor and is now in Phase I of its plans. This consists of automating 35 pharmacies this year. "This is a combined effort between us and Innovation to develop a custom workflow solution—we're working in a consulting capacity to help them understand the needs of pharmacy today. We're focusing on automating procedures, not just on automating the counting process," said Curtis. The hardware model Costco is using consists of two order entry workstations, two verification stations, a filling station, a bin management station, a customer look-up station, and signature-capture devices.

Curtis envisions the greatest benefit of automation to be enhancing quality of life for R.Ph.s and enabling the firm to retain and attract pharmacists. "The goal of automation is to free up pharmacists and allow them to use their education to consult with patients and participate in pharmaceutical care programs." Emphasizing that, until now, Costco has not been a PC environment, he said, "We went from zero PCs to seven per pharmacy—that's a huge number when you look at 272 pharmacies. Our IS department said it may well be the biggest project they ever tackled."

Costco will conduct four automation pilots in June. The target date for completion of automation in 35 pharmacies is April 2003. Ten of those will have 150 counting devices. Most of the 35 locations will have a new pharmacy design, and any pharmacies constructed in the future will have the new design. The older pharmacies will eventually be converted. Curtis said the system also features Rx tracking that instantly locates prescriptions every time they move from station to station. Additional software tools will be provided to give R.Ph.s access to the Internet and to an electronic compendium of drugs.

Craig Norman, assistant v.p. of pharmacy operations, said, "Automation and disease management are the cornerstone to our operation in the next five to 10 years. We've grown substantially, and our pharmacies are becoming very busy. It's important for us to offer automation support that will allow our locations to continue to grow without cramming more bodies into a small pharmacy. And we have to do that to remain competitive from a recruitment standpoint too."

Taking care of 650 R.Ph.s

In addition to supporting pharmacists by enhancing technology, Costco is very attuned to keeping employees happy. Noting that most of the company's locations are closed on Sunday, Norman said, "We are very unique in the chain drug industry. We have some definite quality-of-life advantages over the typical chain location that is open 13 hours a day, seven days a week. Most of our pharmacy managers are able to arrange their schedule so they work Monday through Friday with some alternating Saturdays. Most of our locations are open 10 a.m. to 7 p.m. Monday through Friday and 9:30 a.m. to 6 p.m. on Saturday. It's the type of job that lets you practice retail pharmacy in a progressive chain environment and still have time for your family and outside activities."

Norman also boasted that Costco offers a handsome bonus program for pharmacy managers, which ranges from $8,000 to $11,600 a year. "We have six operational categories that pharmacy managers have goals in, and we set those out toward the beginning of each fiscal year. The categories are sales, gross margin, generic utilization, inventory shrink, expense control, and a discretionary portion for an evaluation by regional supervisors," he said.

Yet another way the chain reaches out to pharmacists is by offering support personnel. "The key thing that distinguishes us from competitors is our ancillary help that allows them to do their job and give the service they want to offer," said Norman.

Burnett added, "We have not run into a problem recruiting pharmacists because we have a reputation as a good place to work. We have a very, very low turnover."

What of the future?

What will the future hold? Costco is set to open pharmacies in several new markets, including Indiana, Missouri, and Ohio. The firm is also expanding in Arizona, California, Florida, Hawaii, New Jersey, Pennsylvania, Puerto Rico, and Texas.

Commenting on the chain's success, Burnett credited James Sinegal, Costco president/CEO, as well as Costco's employees. Sinegal, he said, "had visions for pharmacy, for the company, and just about any innovation that we made was usually something that came out of his head. That's why we've grown the way we have. But we'd be nowhere without the people who work for us."

Sandra Levy

Sandra Levy. Costco Pharmacy: Drug Topics' chain of the year.

Drug Topics

2002;8:47.