Independent Pharmacies: Not Dead Yet

January 12, 2019

High-touch care models and boutique offerings can differentiate stores and bolster business.

The number of independent pharmacies in the United States continues to slowly decline. In 2011 there were 23,106 independent pharmacies; by 2017 that number dipped to 21,909, according to NCPA Digest.

Chris Paddison, partner in the health practice at A.T. Kearney, a global management consulting firm, expects the number of independents to continue to decline. “Many large retailers are making attractive offers for independent owners to sell their businesses,” he says. “Many independent operators are older and looking for an exit, while younger pharmacists are less attracted to the risk and return of ownership.” He projects the number of independents to fall below 20,000 before 2025.

Tom Block, vice president and head of the global pharmacy practice at Dunnhumby, a customer data science platform, also predicts fewer independent pharmacies will exist in the future due to competition from drug chains, supermarkets, and mass merchants that have reached into many geographic areas that independents previously served. However, he doesn’t expect them to disappear.

In fact, he says many new independents will open and flourish. “We’re seeing a resurgence in independent operations as customers look for more unique offerings and services,” he says.

Independent pharmacies still represent a significant portion of U.S. pharmacies, and no single pharmacy chain has more stores than all independents, which represented 35% of all retail pharmacies and a $77.6-billion marketplace in 2017, says B. Douglas Hoey, RPh, MBA, CEO of the NCPA.

Hoey is optimistic that independents will reap some success by implementing new policies, ideas, and business models focused on hands-on patient care, such as medication counseling and in-person delivery. “In many ways the market remains hungry for the kind of services independent community pharmacies provide that big box stores are not equipped for,” he says. “Community pharmacists don’t have to wade through corporate red tape or run things by a distant corporate office. They can make decisions that work for them and their patients.”

Challenges Independents Face

A number of issues threaten independents’ viability and ability to provide patient care, however. Medicare part D plan sponsors and PBMs extract DIR fees from community pharmacies, usually months after a transaction rather than deducting them from claims on a real-time basis.

“These retroactive clawbacks make it difficult for community pharmacists to operate small businesses when they don’t know whether or not they will break even on a transaction until months later,” Hoey says.

PBMs are also the decision makers for all facets of pharmacy reimbursement, which consistently declines every year. There are occasions when a pharmacy’s acquisition costs to procure generic prescription drugs are subject to dramatic and sudden price spikes. But PBM corporations lag in updating Medicare administrative contractor reimbursements paid to pharmacies-sometimes for months-and continue to pay pharmacies the older procurement cost rather than the higher current procurement cost, Hoey says. This triggers huge, unsustainable losses on these prescriptions.

Another challenge is that PBMs steer patients to mail-order or to brick-and-mortar pharmacies they own. They do this through mandates, copay incentivizing, or limiting brick-and-mortar pharmacies’ ability to dispense 90-day supplies of prescriptions, Hoey says.

Furthermore, consolidation among healthcare giants has led to fewer choices for patients and plan sponsors. “Although companies claim that cost savings will benefit patients and health plan sponsors, evidence from previous consolidations suggests otherwise,” Hoey says.

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Opportunities to Be Had

Despite challenges, independent pharmacies can increase revenue by using technology and customer analytic software to understand the value of each customer, what motivates them, and how to optimize relationships. These insights provide businesses such as pharmacies with the ability to make better decisions around cash pricing, product promotions, and assortment as well as improve medication adherence, Block says. They can be combined with customer engagement activities such as personalized marketing and communications that allow a business to communicate the most relevant messages and offers to each customer and create a differentiated experience.

“While every pharmacy owner would like to treat each customer with the same high level of attention, only so many resources are available,” Block says. “These insights can help drive decisions, such as whether to make a late-night delivery to a specific customer versus investing in late deliveries for everyone.”

Although the front of a store is typically a limited space in both product and productivity, independents can use technological insights on their most valuable customers to help turn precious but often underused real estate into an incremental and high margin sales generator, Block says. Some pharmacies have focused on boutique beauty and skincare offerings, while others have prioritized home medical equipment.

Owning Two or Three Pharmacies

Despite the number of independents declining, owning more than one pharmacy is actually a growing trend. In the 2018 NCPA Digest, for the first time the number of stores per owner surpassed two. “Pharmacy owners can aggregate their buying power through committed purchasing, which enables them to lower their prices,” Hoey says. “Another reason is that established independents usually prefer not to sell out to a chain and instead keep their legacy alive by selling to another independent in or near their community.”

Todd Evers, RPh, owner and pharmacist at Evers Group of Pharmacies in Collinsville, IL, says certain overhead costs are required in running a business: accounts payable, accounts receivable, human resources, information technology, and marketing. “Having multiple locations helps to spread out the costs,” he says.

Karen Appold is a medical writer in Lehigh Valley, PA.

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