Before diving into specific components, I felt it would be best to discuss a high-level overview of the retail pharmacy business. In the introduction to this series, I talked about some of the components involved in running a successful pharmacy business. Most people in the pharmacy industry will tell you that there are two measures that are by far the most important: managing inventory costs and controlling payroll expenses.
Later in the series, I will discuss those two components in detail. For now, I just want to make the point that inventory and payroll costs will always play an integral role in determining how the rest of the pharmacy business is run.
In the simplest form, the retail pharmacy business can be described as follows. A customer has a need for a product, generally a medication, and the pharmacy provides this product. The pharmacy profit is derived from the difference between the price at which the pharmacy purchased the drug and the amount the patient was charged. This is often referred to as the gross margin or gross profit. Operating expenses are then subtracted from the gross profit, and you are left with net profit.
This illustrates how critical inventory costs and payroll expenses are to a pharmacy’s profitability. For most businesses in general, payroll expenses are typically the largest expense on the balance sheet. In the retail pharmacy world, inventory costs are oftentimes significantly higher than payroll expenses, especially in niche areas such as specialty pharmacy.
Before healthcare insurance and pharmacy benefit managers (PBMs), pharmacy was more or less this simple; at least from a pure business perspective. However, the state of the retail pharmacy industry is significantly different now. Some experts in the industry point to PBMs as the primary driver of the changes occurring the retail pharmacy space.
Additionally, the role of the community pharmacist has expanded significantly over the past 20 years, and it continues to expand at a rapid pace. This has brought new revenue streams to the marketplace including immunizations, medication therapy management, point of care testing, and many, many more. Retail pharmacy was traditionally a product-driven business model, but with the advancement of the profession, more and more fee for service components are being added. Consequently, the business model has become much more complex. Even traditional reimbursement for products (medications) is beginning to be tied to patient outcomes. This means that the amount paid by patient - price paid for drug = profit equation is no longer the only factor to consider.
There are now many factors that complicate the retail pharmacy industry. Pharmacy managers, owners, leaders, and corporations have to strive to understand as much as possible about this rapidly changing industry. They must be innovative, resourceful and determined if they want to be successful and profitable in the current landscape.
Please let me know your thoughts and opinions in the comments and feel free to ask any questions you may have.
In the next part of the series, I will discuss the general principles of inventory management.