Cover Story - Independents still see half-full glass

December 16, 2002

Coming off of a succfessful 2002, independent pharmacy owners anticipate a slight business downturn in 2003, according to Drug Topics' annual business outlook survey.

 

COVER STORY

Independents still see half-full glass

There are plenty of reasons to be pessimistic—Medicaid reimbursement cuts, Rx discount cards, a Medicare drug benefit, an economy limping along, gathering war clouds—and yet the vast majority of independent pharmacy owners are upbeat about their business prospects in the year ahead.

Seventy-seven percent of our independent respondents predicted that 2003 will be a good-to-excellent business year. Nearly half (47%) think their prospects are good; while 25% anticipate very good news; and 5% think 2003 will be excellent. On the downside, 21% think the economic winds will blow up only fair results and 2% are anticipating poor returns.

In spite of a so-so economy, the majority of independents think Americans will continue to engage in their favorite contact sport—shopping. Sales will go up next year said 66% of our respondents, who pegged the average increase at 11%. One-quarter of independents think sales will stagnate, and 9% foresee sales cooling off an average of 8%.

Most independents don't see any big sales bounce. The best prospect for large sales growth is behind the prescription counter, said 16% of our respondents. Moderate or small sales growth will be generated by the front-end and Rxs, according to about three-quarters of our respondents. Sales of Rx data to market research firms or drug companies and on-line sales were cited as sources of moderate to small growth by about 30%.

What the gods of capitalism giveth in the form of more sales, they also taketh in the guise of rising overhead. Fifty-nine percent of independents think their cost of doing business will increase next year, up an average of 7%. Another 39% think they can hold the line on operating expenses, while only 2% foresee a dip, down an average of 8%.

As the biggest single cost center, pharmacist salaries will continue to push overhead upward next year, by an average of 7%, according to 83% of our independent respondents. Eastern independents pegged pharmacist pay raises at 8%, compared with about 5% in the West.

Economics 101 teaches that sales minus expenses equals the good stuff, as in net profits. And 42% of independents expect to generate more good stuff next year, pegging their average net profit increase at 8%. About one-third expect net profits to remain level, while 23% are bracing for a downturn averaging 7%.

Ringing out the old

Before 2002 started, 63% of independents had expected this year to produce good to excellent business results. Imagine their delight now that 78% have reported that business is just fine, thank you. Specifically, 42% of those polled think 2002 will end up producing good results, 29% said it will be very good, and 7% believe they will tally excellent totals. Only 20% said this year will be fair, and 2% are doing poorly.

Half of our independents reported a poor (6%) to fair (44%) business climate in their area. On the upside, 41% think the climate is good, 8% think it's very good, and 1% rated it as excellent. Consumers are still ready to spend, according to the 59% who rated consumer confidence as somewhat to very positive.

Business boosters

The demise of rival pharmacies and dispensing more prescriptions were the business boosters most frequently mentioned by our respondents. Some also mentioned the arrival of more generic drugs on their shelves, bringing with them better margins; others mentioned serving more aging customers and retirees with disposable income.

One Texas independent benefitted from a hot and humid summer that sent front-end sales soaring along with the temperature. And an owner in Michigan benefitted when a bridge closed and traffic was rerouted through his part of town.

"More compounding, more good employee attitudes, more DME sales, lower expenses, more IVs and enteral feeding, and a radio audience," were all favorable factors cited by an owner from Missouri.

An independent in Virginia had an unlikely business benefactor. "The pharmacist at the competing drugstore keeps running people off," said the chief supervising pharmacist.

Business bummers

Peering into 2003, 90% of independents foresee that Medicaid reimbursement cuts will have a negative business impact, and 74% think prescription discount cards are going to be a drag. The specter of hard-pressed states extending Medicaid rates to Medicare patients was also cited as a negative force.

The prospect of more Medicaid reimbursement cuts was cited by 28% of independents as the single biggest challenge their pharmacy will face next year. And 24%, with the HIPAA (Health Insurance Portability & Accountability Act) heebie-jeebies, are worried that complying with Uncle Sam's patient privacy standards is going to prove costly to their bottom lines. However, more independents have apparently gotten a handle on HIPAA, as 52% of last year's respondents cited the new regulations as a hurdle. Other 2003 challenges cited included the pharmacist shortage (17%), chain competition (14%), and drug shortages (5%).

Of course, it wouldn't be our annual business outlook without independents griping about the growth of mail-order pharmacy. Many respondents commented that pharmacy benefit managers and their mail-order programs continue to try to choke off more of their revenue streams.

Like old soldiers, cash-paying customers will continue to fade away next year, accounting for only an estimated 18% of the average independent's pharmacy business. Medicaid will bring in 26% of the average independent's business, but Uncle Sam will be dwarfed by the private third-party 800-lb. gorilla that represents 54% of the pharmacy pie.

Shorthanded

Speaking of negative influences, 85% of independents said there is a shortage of pharmacists in their area of the country. Among those who took note of a shortage, 69% said it's somewhat severe, 25% think it's extremely severe, while 6% think it's not at all severe.

The pharmacist drought may be worst in the East, where 97% of our respondents said there is a shortage, compared with 83% in the South, 79% in the Midwest, and 84% in the West. On the other hand, more Western independents (46%) rated the pharmacists drought as extremely severe, compared with 18% in the East, 22% in the South, and 24% in the Midwest. When it comes time to hire a pharmacist, 69% anticipate difficulty filling the slot.

Manpower shortage or not, 83% of independents do not expect to be hiring another pharmacist in 2003 anyway. Twelve percent expect to add to their R.Ph. payroll, and 5% anticipate handing out pink slips.

The vast majority of independents will not be hanging out the "technician wanted" signs next year, as 74% of our respondents indicated they will not be hiring additional techs. However, 24% will be on the hunt, while 2% anticipate cutting their technician roster.

Technology and beyond

Independent pharmacy's uptake of technology will continue to lag next year, as 87% of our respondents do not employ automated dispensing, and only 3% of them plan to automate in 2003. Only 6% have a central fill operation, but only 3% of those without central fill plan to add the capability next year.

The Internet is more widely accepted, as 61% of independents have in-store access to the Net and 45% have their own Web sites. Among independents that currently do not have a Web presence, 12% plan to enter cyberspace next year.

More than three-quarters of respondents hosting a Web site allow their customers to refill prescriptions on-line. And 55% sell a variety of products, such as over-the-counter medications, Rxs, and sundry items. Interestingly, 22% of independents said they accept scripts sent directly to their computer. Among those who don't accept such Rxs, 17% expect to get with the e-script program in 2003.

Next year is bound to visit upon pharmacy that old curse about living in interesting times. The GOP-controlled Congress tackling a Medicare Rx benefit, the sputtering economic engine, and state budget-cutters hacking away at Medicaid reimbursement are just some of the factors that will keep independents awake many nights in 2003.

Carol Ukens

 

 

Where areindependents' net profits headed?

Net profits20022003
Increase42%42%
Remain the same3735
Decrease2123

 

 



Carol Ukens. Cover Story - Independents still see half-full glass.

Drug Topics

2002;23:60.