Even before the pandemic, pharmacies were struggling. Now, the pressures are even greater as demand shifts, digital disruption escalates and the need for health equity is in the spotlight. Access to health care is critical for Americans, and 90% of Americans live within five miles of a pharmacy. While there are some components of health care that can be performed virtually, there are many more that require in-person access. Health equity emerged as a major issue in 2020 as we witnessed the barriers to access that exist more in some communities than others. Access issues that we can remedy we must remedy.
The PBM/insurer segment dominates specialty drug markets, making retail pharmacy highly dependent on generic dispensing for driving profitability even as generic drug pricing has been deflating for years. At the same time, the consumer share of prescription spending is rising, as evidenced by the growth of high-deductible plans and the expansion of discount card programs. The three largest PBMs control more than 70% of the market, giving them much greater power than pharmacies in negotiating reimbursement contracts, including vaccination administration reimbursement. Brand Effective Rate (BER) and Generic Effective Rate (GER) contracting have both become the latest tactics for taking reimbursement dollars from pharmacies. Medicare Part D has put additional financial pressure on pharmacies with DIR (direct and indirect remuneration) fees now averaging 2.6% of total sales.
These market conditions are making it increasingly difficult to make money in the business of retail pharmacy and have resulted in myriad mergers, acquisitions and pharmacy closures.
A number of smaller retail pharmacy chains and independents have been sold to the larger players, and an increasing number of hospitals are teaming with large pharmacy chains to manage their outpatient pharmacy services.
When the pandemic hit, there was a short-term boom as patients rushed to get early refills. Then volume and mix became more significant issues as new diagnoses and acute care prescriptions fell. These became material profitability issues, with independents being the hardest hit. Chain drug stores suffered a double blow as sales of beauty items declined as well. Supermarket pharmacies fared the best, as the grocery business soared and consumers wanted to make fewer trips and move to e-commerce. Brick-and-mortar pharmacies emerged as heroes with COVID-19 testing.
The pandemic changed the digital landscape and the role of community pharmacies
Grocery e-commerce took off during the pandemic. According to eMarketer, e-commerce grocery sales were up 54% in 2020 (versus 2019), making up 7.4% of total grocery sales. Share of total grocery sales for e-commerce is expected to grow to 11.2% by 2023.
And in pharmacy, the digital disrupters emerged — led, not surprisingly, by Amazon. While Amazon has talked about pharmacy over the last few years, and purchased PillPack, it doubled down in 2020 with the launch of Amazon Pharmacy. While Amazon is self-funding its efforts, other new digital pharmacy models are being fueled by investor capital.
As payers attempted to grow their mail order businesses (another name for e-commerce), they lowered 90-day reimbursement rates for retailers to discourage pharmacies from going after that same business segment. Amazon Pharmacy does not currently offer 90-day fills, nor does it automatically refill prescriptions. Inmar Intelligence data shows that 90-day fills now represent approximately 20% of all prescriptions filled, which means fewer patient visits to the store. 90-day Brand Effective Rates (BER) declined 0.93%; Generic Effective Rates (GER) declined 0.39% between 2019 and 2020.
Digital-only pharmacies have operating cost advantages over traditional brick-and-mortar pharmacies — such as real estate costs for convenient locations, supply chain costs for distribution over the last mile and staffing costs for coverage during retail hours, among others. According to a recent study, Accenture found that since the onset of COVID-19, 60% of patients want to use technology more for their health care. And nine out of 10 patients said the quality of online care was “as good or better” than before the start of the pandemic. Digital health has a definite place in pharmacy business strategy but, for brick-and-mortar pharmacies, it must dovetail with in-store care, consultation and services.
How vaccinations will be a pivot point
In December, Pfizer introduced the first COVID-19 vaccine — and the first one to use mRNA; Moderna quickly followed suit and released its own vaccine using mRNA. In March, Johnson & Johnson gained approval for its traditional, single-dose vaccine.
Scheduling vaccine appointments in pharmacies has seen concert-like activity, with situations where 100,000 appointments (for one week) are “sold out” in 12 minutes. This is stretching pharmacies in new ways. Do they have the systems, service and trained staff to manage all these vaccines? Do they have the administrative infrastructure to ensure they get paid appropriately for vaccine administration? Are they building the capabilities to manage reimbursement for COVID-19 vaccines post-pandemic and post-government funding? Most importantly, are they engaging with patients in a way that will secure their future growth in the retail health care business?
What if we didn’t have convenient access to pharmacies for these vaccines? What if there were one-third fewer physical retail pharmacy locations because e-commerce pharmacies will take more share? Will this create greater health equity or less? There are opportunities to make this a positive pivot. But there are risks that it could be a negative pivot and drive further contraction within brick-and-mortar retail pharmacy.
Opportunities to create a catalyst for growth
There is a need for retail pharmacies — and the convenience they provide — in the U.S. health care system. COVID-19 will pass, but what will happen next? Will it be another 100 years before we have another pandemic? Or could it be next year? No one knows. What we do know is that the COVID-19 pandemic could have been much worse than it was without the critical role played by retail pharmacies.
Now is the time for brick-and-mortar pharmacies to reinvent themselves. We need to band together as an industry to secure infrastructure vital to our growth and success. How? Well to start, retail pharmacies need to take control of their own destiny and build around in-person services that can’t be performed online. If pharmacies continue to operate stores with rows and rows of health and convenience items just as easily purchased on Amazon or another e-commerce site, then they may perish. With prescription reimbursement rates remaining low, and the share of government-funded health care likely to grow, this approach is untenable. Start with the personal health and wellness in-person services that won’t go away:
• Point-of-care testing.
• Vaccinations of all kinds, not just COVID-19.
• Consumer drug take-back.
• Genomic testing that informs prescribing.
• Test and learn in the store with O-T-C and beauty solutions.
• Biometric screenings.
• Visits from mobile health care units.
• Dietitians and weight loss programs.
• Medication therapy management (MTM).
• Chiropractic partnerships.
• Vision and hearing services.
• Mental health services.
Sophisticated what-if modeling on the prescription business will also be critical for a positive future. How will growing government insurance coverage impact reimbursements? What if the cash-paying customer segment grows? What if the volume of prescription to O-T-C conversion grows? How many patients and scripts are needed to maintain the overhead of a physical retail pharmacy? How does the payer and drug mix impact this equation?
Regulatory intervention is also needed. Legislators need to be better educated regarding the business restraints that exist for our first line of health care defense. COVID-19 vaccinations represent an excellent example. While the government paid for the vaccine, pharmacies are billing PBMs and insurers for the administration of the vaccine, which has been too complex with high audit rates. There are many examples where government rules did not consider the downstream impact. In one instance, a state’s rules related to administering to certain patient categories resulted in wasted vaccine doses. In 2020, Inmar Intelligence published a white paper titled “The Business of Pharmacy’’ with industry data illustrating the financial challenges that pharmacies face. (It’s available for download at inmar.com). How can you empower the industry associations and your vendor partners with data to influence legislation?
Employer intervention must happen to ensure businesses do their part to help employees find accessible and economical health care. This includes understanding the economic dynamics between their PBMs and retail pharmacies as well as gaining clear insight into mail order pharmacies from a true cost/benefit perspective.
And, as was stated before, digital must be a significant component of pharmacy’s future strategy. It must be truly omnichannel — not just offering shoppers an app but, rather, providing a genuinely connected experience in-store and virtually. In-store signage, e-commerce experiences and social media messaging all influence how the consumer feels about their retail pharmacy. Partnering with your trading partners to share data is essential, as this will empower CPG brands to amplify your messaging and enhance your approach.
Let’s have these conversations at the NACDS Annual Meeting this year.
Lari Harding is vice president of client development at Inmar Intelligence. She can be contacted at lari.harding@inmar.