Inside This Issue - Opinion
Drug chains find themselves in a difficult spot
June 7th, 2010
As recent developments in several countries attest, traditional drug stores confront an array of challenges that have the potential to weaken their competitive position vis-à-vis other community pharmacy operators and threaten their financial viability.
Pharmacies in Ontario are awaiting final word on the provincial government’s plan to slash reimbursements for prescription drugs. Outlined in draft form by Deb Matthews, Ontario’s minister of health and long-term care, in April, the cuts would cost each pharmacy in the province an estimated $300,000 a year (dollar figures are in Canadian currency), or a total of some $500 million.
Reaction to the announcement from pharmacy operators, particularly drug chains, was swift and intense, causing the government to move back its timetable for implementation from the original target date of May 15. Industry advocates are hopeful the delay signals that Matthews will soften the policy before it takes effect.
In the meantime, the mere prospect of the change in provincial policy has altered the playing field for pharmacies. While drug store retailers, including Shoppers Drug Mart and the Katz Group, have raised the possibility that the cuts may necessitate a reduction in service and operating hours, Loblaw Cos., Canada’s top supermarketer, is intensifying its commitment to health care.
"We see it as a big opportunity for us to drive our drug store business," Allan Leighton, the retailer’s president and deputy chairman, said during a conference call with financial analysts at the beginning of May. "There’s a huge number of consumers out there who are going to be looking for an improving service."
Less than a month after Leighton made those remarks, the retailer extended the hours the pharmacy department is open at select stores in Ontario. With less than 10% of its total revenue stemming from pharmacy, Loblaws is able to enhance service levels even in the face of the pending shift in provincial government policy. The company is banking on the fact that, once in the store, pharmacy patients new to the chain will buy enough food and other grocery products to offset the lower reimbursements for prescriptions. That leaves drug chains, which in Canada derive close to 50% or more of their sales from pharmacy, hard-pressed to respond.
The same dynamic is currently playing out in a different way in the United Kingdom, where Asda, the food and general merchandise division of Walmart, has pledged to sell privately prescribed cancer medications at "not for profit" prices. The initiative, which was quickly matched by Tesco PLC and J. Sainsbury PLC, takes the profit out of a significant portion of what, for those retailers, is not a primary part of their business. Like Loblaws, they expect increased customer traffic to make the program workable. For Britain’s drug chains that’s a much more difficult, if not impossible, step to take.
Drug chains in the United States have already had to deal with a situation similar to that in the U.K. After Walmart rolled out its highly successful $4 generics program several years ago, pharmacy operators in all trade classes were compelled to pay more attention to price, addressing the issue through either discount initiatives of their own or patient loyalty plans.
The battle in Ontario echoes fights in this country over Medicaid reimbursements and could be a preview of new clashes as the government assumes a greater role in health care and pharmacy care vies with other priorities, both inside and outside the health care system, for scarce resources.
If price is allowed to become the primary criterion on which pharmacies are judged, drug chains will find themselves very hard-pressed. Competing with retailers that don’t have to rely on prescription drugs to be profitable would leave the trade class in an untenable position.
Drug chains’ best defense is to foster the evolution of the pharmacy business model. If governments and payers in the private sector can be convinced that, as several recent studies indicate, greater involvement by pharmacists in patient care improves outcomes and reduces total health care costs, the basis for remuneration will shift from products dispensed to services rendered. Only then will the growing commoditization in community pharmacy cease to be a serious threat to drug store operators.