THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, June 5, 1995 TAG: 9506030192
SECTION: BUSINESS WEEKLY PAGE: 16 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY TARA TROWER, BUSINESS WEEKLY
LENGTH: Long : 180 lines
There was never any doubt in Gary Lawrence's mind that he would become a pharmacist. His father's store stood next to the neighborhood pharmacy and as a teenager he earned money making deliveries for the druggist.
Later he opened Lawrence Pharmacy in Chesapeake, where for 29 years he has filled prescriptions and answered questions. Every day regulars gather at the soda fountain to talk over a round of Coca-Colas. A steady stream of customers make their way to the pharmacy counter, pausing to examine other items along the way.
But independent pharmacists are are becoming increasingly rare. Over the past six years, 141 independently owned pharmacies in Virginia have closed. In 1994 there were about 450 left.
The problem is not just the standard competition with the large chain stores such as Farmco and Revco, according to area pharmacists. Sky-high prices from suppliers and pressures from insurance companies are eating away at independent druggists' already narrow profit margins.
Over the past two years, the typical independent has earned only 2.9 cents on each dollar worth of sales, the lowest profit margin of any retail industry, said Todd Dankmeyer, senior vice-president for the National Association for Retail Druggists in Dallas, which represents independent retail pharmacists.
The profit margin is even tighter on prescription drugs. Nationally, the average after-tax profit on a single prescription is 50 cents. That's compared to an average prescription price of $27.20.
``People think that pharmacists are making all this money,'' Dankmeyer said. ``They're not, the manufacturers and the insurance people are.''
In the last decade, the drug manufacturing industry has earned an after-tax profit of 13 percent, making it 2 percent more profitable than the average industry, according to the Congressional Budget Office. And the increasingly popular managed care programs have literally more money than they know what to do with, according to a Wall Street Journal report.
``The insurance companies and manufacturers are squeezing the life out of us,'' said Nat Jones, owner of Lakeview Pharmacy in Suffolk. After only two years in his own shop, Jones has become increasingly frustrated with the pharmacy business.
With his current volume of 75 prescriptions per day, Jones said he should make a decent profit with his small pharmacy inside Lakeview Medical Center. But with supply costs so high, he said that he isn't earning much more than he did while working for Revco.
Most independent druggists' woes stem from the manufacturers' practice of offering significantly lower prices to hospitals, nursing homes, and health management organizations. The price paid by independent retailers can differ by as much as 70 percent from prices paid by these preferred buyers.
Manufacturers argue that the preferred buyers purchase greater quantities than the independents, which allows them to receive volume discounts.
That argument does not hold water, said Boris Schwetz, owner of Arthur's Pharmacy in Norfolk. Schwetz, like many of the remaining independents, belongs to a cooperative to keep his costs down.
In theory cooperatives and buying groups should give the independents the purchasing power to receive the same bulk discounts as the preferred buyers. But, according to Schwetz and other pharmacists, this is not the case.
For example, North Carolina-based drug manufacturer Glaxo sells its respiratory drug Ventolin to the preferred buyers for $63.84. The company sells the same drug to community pharmacies for $183.71 - almost three times as much - according to NARD. In some cases pharmacies must pay as much as ten times the price given to other buyers.
``This stuff is not made out of gold or silver,'' said Schwetz. ``There is no reason that it should cost this much.''
Glaxo views the situation differently. Price discrimination, or offering different prices to different types of customers, is a common practice, said Nancy Pekarek, Glaxo manager for media relations.
``Whether it's jeans or cars, businesses offer different customers different prices,'' said Pekarek. ``It's in line with normal American business practices.''
Independent druggists as well as some chain stores disagree. Such price discrimination has become the subject of multiple law suits across the nation. Community pharmacies and the chain stores have charged drug manufacturers with price discrimination and antitrust violations.
In April, more than 200 independent druggists from Virginia joined the largest of these suits against 27 drug manufacturers and three mail-order pharmacies. The suit is scheduled to come to trial in Chicago in February.
While the druggists' lawyers concede that price discrimination is a common practice, they said the criteria that define the groups receiving the discounts are arbitrary and designed to explicitly exclude retail pharmacists as a group.
In addition to the high cost of supplies, independents face pressure from the insurance companies. According to NARD, about 52 percent of prescriptions are being paid by third parties, such as Sentara, Optima and Medicaid.
A few years ago, HMOs selected only a few pharmacies to administer their programs. Most of the selected pharmacies were the large chains, leaving the independents unable to service their customers who have insurance.
Last year, the state legislature passed a bill guaranteeing equal access of HMO plans to all pharmacies willing to agree to the terms. The independents are grateful for the legislation, said Schwetz, but new problems have been created.
Druggists are reimbursed for the prescriptions they fill for customers with third-party payer plans like Optima and Sentara. Since the HMOs are able to get their drugs at lower prices, the reimbursement rates sometimes fall below the acquisition price of the drug.
``Some of these agreements are just ridiculous,'' Schwetz said.
While drugstores can make as much as $3 on each prescription under the agreements, only a small fraction is left after paying rent, payroll and the other costs. Schwetz noted that the plastic vial alone costs as much as 35 cents.
So, with all these problems, what are independent druggists doing to stay afloat?
For the larger stores, owners said that variety is the key.
Schwetz stocks specialty wines, in addition to the typical assortment of cards, snacks and beauty products that most drug stores carry. Lawrence is even taking a loss on the soda fountain in hopes of generating more traffic in the store.
Both hope that customers will pick up impulse items, while in the store waiting for prescriptions.
Lawrence plans to build a larger store this fall. As an added convenience the store will come complete with a drive-in window for customers to drop-off prescriptions.
For smaller pharmacies, variety is not the answer.
Jones and the owner of Ghent Pharmacy, Martin Friedman, depend almost completely on pharmacy sales. To compete, they try to offer services that the bigger stores and chains cannot provide.
For example, customers can fax Friedman their prescriptions. Customers still must bring in the original copy of the prescription, but the waiting time is reduced and they can pick up the prescription at their convenience.
To supplement his income, Jones has brought back one of the historical roles of the pharmacist with a technique called compounding. By using a variety of chemicals he makes medicine in the form of capsules, nose sprays and intravenous solutions to substitute for drugs, which may not be readily available. For example, some adults cannot swallow pills so by working with the manufacturers of a solid medication Jones can formulate a liquid version that is easier to swallow.
He sells the compounds to fellow pharmacists, Norfolk General Hospital, Revco and others. He even formulates medicines for area veterinarians.
``I'm trying to find little niches, where others may not have the time or the facilities to make what I can make here in my office,'' Jones said.
But even with all the extras, Schwetz said the key is finding a way to get the best prices for the drugs. And that means joining one of the many buying groups like Virginia Pharmacy Network and Epic.
``In this business you have to buy right,'' he said. ``If you don't, you're as good as dead.'' MEMO: [For a copy of a related story, see page 16 of the BUSINESS WEEKLY for
this date.]
ILLUSTRATION: [Cover]
[Color Photo]
CURING THE INDEPENDENT PHARMACIST
[Color Photos]
MARTIN SMITH-RODDEN/Staff
LAVEVIEW PHARMACY, SUFFOLK
Increasingly frustrated by the pharmacy business, Nat Jones, owner
of Lakeview Pharmacy, mixes his own drug remedies to boost the
income for his two-year-old shop. "The insurance companies and
manufacturers are squeezing the life out of us," says Jones.
MOTOYA NAKAMURA/Staff
LAWRENCE PHARMACY, CHESAPEAKE
Lawrence Pharmacy's soda fountain serves as a community meeting
place and draws customers to other parts of the drugstore.
RICHARD L. DUNSTON/Staff
ARTHUR'S PHARMACY, NORFOLK
"This stuff is not made out of gold or silver," says Boris Schwetz,
owner of Arthur's Pharmacy. "There is no reason that it should cost
this much.
INDEPENDENT PHARMACY CLOSINGS IN VIRGINIA
SOURCE: Virginia Commonwealth University School of Pharmacy
[For a copy of the chart, see microfilm for this date.]
EFFECTS OF DISRCIMINATORY PRICING
SOURCE: National Association of Retail Druggists
KEN WRIGHT/Staff
[For a copy of the chart, see microfilm for this date.]
by CNB