Two weeks ago we published an article called Make the Right Turn at the Next Crossroads .
It was based on a story written by a senior US pharmacist named Truman Lastinger and published in the US magazine, Drug Topics.
Because Truman Lastinger and I are of similar vintage I could strongly identify with the period he was writing about and the insights he was applying to contemporary pharmacy.
I hope the young US pharmacists are listening to him because he is a wise commentator and the parallels he draws with the leadership requirements of today are stark in their comparison.
He used a quotation by Winston Churchill, speaking in Britain’s House of Commons May 2, 1935, a few years before the outbreak of World War Two.
It is published again to create focus:
“When the situation was manageable it was neglected, and now that it is thoroughly out of hand we apply too late the remedies which then might have effected a cure. Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self-preservation strikes its jarring gong — these are the features which constitute the endless repetition of history.”
Truman Lastinger writes about a period that date-wise, was about 5-10 years ahead of Australia at the equivalent calendar date:
“Pharmacy practice was a predictable and profitable business for pharmacists until the late 1960s–early 1970s.
Up to that point, manufacturers established drug prices primarily on the basis of the cost of production and drug promotion.
At that time, there was no direct-to-consumer advertising, and the drug companies generally hired pharmacists to promote their products. Those pharmacists were called “detail men.” They educated the doctors about new drugs and gave them samples of their products.
The detail men encouraged retail pharmacists to open direct accounts so that their pharmacies could bypass the mark-up used by wholesalers.”
Life was fairly simple back then with the average pharmacy spending a lot of time compounding prescriptions and talking to patients.
The pharmacists involved talked about solutions with their patients, usually on a first-name basis.
Those solutions presented to patients were also compounded personally by the same pharmacist, and the completed product handed back to the patient with appropriate instructions and a friendly goodbye.
We rarely dispensed “patents” as we called them, preferring to dispense our own formulas.
These solutions were economical in cost and personalised for each of the patients. These solutions were appreciated the patients and it was the foundation for the positive ratings pharmacists still receive today.
Manufacturers had to talk hard and fast to get a product toehold on a pharmacist’s shelf because television was not introduced until 1956 in Australia.
In the US, much earlier.
Truman Lastinger comments on purchasing branded drugs:
“The manufacturers set yearly drug prices that were published in the RED BOOK and the BLUE BOOK.
Wholesale distributers used those prices in their businesses.
Pharmacies could normally depend on the manufacturers to honour those prices.”
Oh for the good old days and certainty.
Australia had its hard copy versions of the US price lists but they started to disappear with the introduction of the Trade Practices Act.
Truman Lastinger comments:
“Until the late 1960s, the wholesalers would give a retail pharmacist a 2% discount if the bill were paid within 10 days of becoming due.
Then some small wholesalers began offering 10% discounts for their products, which were primarily generics with some brand-name drugs included. However, those drugs did not constitute a majority of their business. Those small wholesalers could demand deeper discounts from the manufacturers based on their successful sales of the products, so they could afford to offer the 10% discount on them.
In response to those small wholesalers, the large wholesalers demanded bigger discounts from the manufacturers so that they could also offer the 10% discounts. The manufacturers then had to raise their prices in order to compensate for the discounts.”
The concept of fixed prices and fixed mark-ups which created stability in the retail sector, but made it correspondingly harder for a larger store, particularly chain entities because without price competition, the only other activity to compete on was service.
And in that department small community pharmacies had a field day because the larger chain entities could provide variety in a merchandise range, but failed miserably in being able to provide competitive service.
The earliest stores for Woolworths and Coles were actually called Variety Stores and advertised under those labels.
Later came the discount stores and the supermarkets with retail price relaxation finally giving larger stores the edge they needed.
Truman Lastinger continues:
“At that time there were very few chains competing with independents for business in most of the rural areas and many larger cities.
A good many of the rural towns and cities had retail pharmacies on every corner, and pharmacists were generally successful businessmen.
Then things began to change, and chain expansion began.
For many years Rexall and Walgreens had used franchises to further their business.
In the 1960s, Walgreens stopped franchising and bought out its members’ franchises, and Rexall went out of business.
Walgreens realized that because of its purchasing power, it could demand even greater discounts.
This meant that manufacturers had to raise prices to compensate.”
This pattern has existed for many years in the Australian scene but Australian pharmacists were successful in having legislated ownership rules, and later, location rules.
The chains, specifically Coles and Woolworths had pharmacy ownership ambitions around 1968, but as time went on the ownership ambitions changed to product channel domination through Trade Practice cases that eventually dismantled the “Chemist Only” contracts negotiated by the Pharmacy Guild of Australia and manufacturers, knowing that superior buying strength would provide cheaper price into Coles and Woolworths – and guess who would have to bear the higher in-store cost for the same product.
Over time, manufacturers saw pharmacy as a cheap launch pad for a new product which established a high retail price point for that product that could be later sold to the big retailers for a big discount, leaving pharmacists “holding the baby” literally.
This is why pharmacy has always been cynically labelled as being expensive by competing retailers and media releases planted by those organisations have built high priced pharmacies into an art form.
The same criticism has also been picked up by the medical profession who delightedly use cheaper pharmacies as a political football to illustrate a point or drive a hard bargain in whatever is under debate.
Truman Lastinger continues:
“The professional fee and its consequences:
In the mid-1960s, Medicaid came into being, and pharmacy associations and universities began to promote the idea of a professional fee.
At that time there were laws preventing retail businesses from agreeing on pricing their products.
The acceptance of the professional fee in essence resulted in government price-fixing, which restricted drugstore profits.
As a result, increasing the prescription output was the only way to sustain profits.”
The Pharmaceutical Benefits Scheme in Australia became exactly what is described above.
As a product it is at the end of its life cycle and has become commoditised in readiness for insertion as a supermarket.
It can no longer fit a traditional pharmacy model because it cannot sustain a long-term profit, and even as I write this article, the PBS is about to take another price hit that will again hit the pharmacy bottom line.
Truman Lastinger comments:
“More stores, more profits
Walgreens, Revco, Rite-Aid, CVS, etc. immediately realized that by increasing production they could increase their profits.
They began building stores throughout the country.
They also would move into a town and buy out the strongest independent pharmacy.
Soon there would be only one or maybe two independents left in each town.
The smaller towns would end up with no independent pharmacies left.
Most of the pharmacists who were bought out accepted high paying jobs in those chain stores.”
This is the point where Australia is that Truman Lastinger describes above.
There is a difference.
Expansion has had to occur through “dodgy” partnerships or by franchise, but with the same equivalent result as the US.
Buying power equates to lower retail price and an ability to compete.
Also high salaries for managers did not eventuate in Australia.
Some Australian pharmacy chains are even performing at a retail level better than the traditional major retailers.
This is why i2P has advocated building larger-sized pharmacies up to three or four floors high and expanding professional services markets, with appropriate space.
Collaboration with similar types of pharmacies can create independence through developing buying groups rather than buying into a franchise.
Truman Lastinger continues:
“No more detail men:
The laws barring drug manufacturers from advertising were rescinded, and those manufacturers then came up with a new way of promoting their products.
They no longer hired pharmacists to introduce and explain their new drugs, opting instead to hire young, good-looking ladies.
These young women did not call on retail stores. They only supplied doctors and their employees with lunches and branded souvenirs while promoting their drugs.”
“The coming of Direct-to-consumer (DTC) advertising:
These new salespeople were not the only way manufacturers promoted their drugs.
The drugmakers also began to use television.
Suddenly viewers were bombarded with drugs promoted over the air.
Was it any surprise that they went to their doctors and demanded to have those wonder drugs prescribed for them?”
Australia does have the attractive female detailer and we also have a version of DTC advertising on television – the endless “news” items that flood prime time news presentations that publicise the next “wonder drug”often with the manufacturer’s logo appearing somewhere in the picture.
They irritate and annoy and sometimes publicise studies that can be a decade old.
Truman Lastinger continues:
“Payers and profits:
The proliferation of insurance plans and PBMs ensured that manufacturers would make a good profit.
When the insurance companies and PBMs demanded deeper discounts, manufacturers raised their prices to protect their profits.
Upping the Average Wholesale Price (AWP):
Manufacturers were pleased to realize that they could increase prices regardless of their costs to produce drugs.
The costs of the television ads were easily covered by the increased average wholesale prices. By increasing these prices, manufacturers generated greater profits for themselves, the insurance companies, and the PBMs.
The drugstores were left out.”
And the sting in the tail for Australian pharmacists and the coming global entries into Australian pharmacy market are that they are the same players as in the US.
The same expensive predators.
By the above method, US drug companies have developed the most costly health system in the world, enriching all the players in the supply chain except for the community pharmacies.
The Patient Benefit Managers (PBM’s) and large insurance companies accompanying the global pharmacy retailers will aim to seduce the Australian government to sell out Medicare and the PBS functions to them.
As most major pharmacy chains are integrated with their own brand of PBM that in turn has its range of manufacturer shareholding, you can see how these cosy relationships develop.
End result – if the federal government sells out to the conglomerates you will see an increase in health costs for all Australians and the destruction of Australian pharmacies no matter what veneer is papered over the surface.
Some manufacturers are now increasing prices to ridiculous levels.
The insurance companies have to pay these costs, but negotiate enough discounts to offset them.
To further increase their profits, they also raise the premiums and co-pays required by their plans.
So in the long run, subscribers have to pay for higher drug costs through increased premiums as well as increased co-pays.
The way forward:
As a result of these developments, the independent pharmacists who are left are moving toward compounding, niche, and specialty practices in order to maintain profits and to stay in business.”
i2P has long known what was in store for Australian pharmacy.
Unless the economic rationalist advisers to the current coalition government are turned away, we will get the US system, warts and all.
With corruption driving the entire system it must eventually collapse and whichever flavour of government that will exist at that point in time will have the unhappy job of cleaning up the mess, including the shattered lives and misery that will accompany the breakdown.
Break-point will be sometime after the next four years and 2030 when the demographic of 64+ age group swells to its maximum level and the accompanying chronic illness causes misery beyond a reasonable level.
That is why government should not be concerned about investigations into Location Rules and ownership rules for pharmacies.
It should be about making pharmacy the face of primary health care and the triage service for some aspects of public health and emergency health systems.
To preserve a genuine need for pharmacists, innovation must drive new models.
i2P is associated with a pharmacy innovation development group.
Anyone reading this article and wants to play a genuine role in developing future pharmacy, please contact me at email@example.com