On 1 September 2023 community pharmacy was hit by the first wave of negative financial impacts flowing from the introduction of 60-day dispensing for certain medications.
Historically, Australian patients have received a 30-day supply of prescription drugs, but now many medications can be prescribed and dispensed for a 60-day supply. Pharmacies are remunerated by Government each time a medication is dispensed but they are not yet being compensated for the flow-on reduction in dispensing income. This reduction left unchecked will undoubtedly lead to a condensing of broader free patient services (deliveries, blood pressure, basic health advice etc) which are currently cross-subsidised within a whole-of-service model that has evolved over the last 30 years of Guild-Government agreements. Importantly, the Pharmacy Guild and Government are currently working towards a new agreement with an expected release date of March 31, 2024 which is hoped to deliver some compensatory funding improvements. In the meantime, this article explores the impacts and opportunities of 60- day dispensing in community pharmacies, shedding light on the potential benefits and challenges associated with this change.
Impact on Patients
- Convenience: The most immediate benefit for patients is the increased convenience of 60-day dispensing as many will no longer need to visit the pharmacy every month.
- Improved Medication Adherence: Longer dispensing periods can lead to better medication adherence. When patients have a consistent supply of medication, they are less likely to skip doses or stop treatment prematurely.
- Potential Cost Savings: Patients may experience cost savings as they reduce the number of co-payments throughout the year. However, it’s crucial to note that these savings could be offset if patients take longer to reach their safety net.
- Medication changes: Patients’ medical conditions can change over time and there is an increased risk that a medication dispensed for a 60-day supply may become sub-optimal for their health status.
Impact on Pharmacies
- Financial Considerations: All pharmacies will experience financial loss due to the reduction in script volume leading to decreased dispensing fees received and a reduction in gross profit. The total loss will vary between businesses based upon doctor and patient preferences.
- Patient Relationships: Pharmacies may need to adjust their patient interaction strategies. As some patients will visit less frequently, each visit becomes an increasingly important opportunity to engage on medication counselling and health services to strengthen patient-pharmacist relationships.
- Improved Operational Efficiency: One of the most significant requirements of 60-day dispensing is the need to maintain or improve operational efficiency. By reducing the frequency of prescription refills, pharmacies will need to reallocate or reduce resources, associated with less dispensing. More on this point later.
Opportunity for Pharmacies
As Albert Einstein wisely said, “In the midst of every crisis, lies great opportunity” and that is potentially the case here. Post Covid, many pharmacy owners have been reluctant to effect necessary operational changes, fearing backlash from patients and staff. These changes vary but often include:
- Staff and trading hour adjustments.
- Pricing increases for under co-payment and private prescriptions.
- Price adjustments for over-the counter product.
- Introduction of fees for previously free services.
- Pricing modifications for packing and delivery services.
The introduction of 60-day dispensing, accompanied by media discussions, provides a compelling rationale for pharmacy owners to enact these changes and attribute them to government-mandated reforms. There exists a limited window however to deflect potential criticism for such actions before the topic loses media attention.
Operational Efficiency
When faced with an anticipated decrease in gross profit, a typical initial response involves cost-cutting measures, a trend observed during the introduction of PBS reform. The graph below illustrates that in 2013, immediately before PBS reform, operating expenses and the component comprised by wages were at an all-time high.
In response to the declining gross profit resulting from the PBS reform, pharmacies embarked on a cost cutting journey throughout the first four years of reform. Interestingly, owners managed to stabilise and slightly decrease wage costs despite prescription volume continuing to increase. Recent Pharmacist wage inflation and labour shortages means this style of response will be more difficult in coming years. However, this time, a real reduction in prescription volume will likely lead to a reduction in required Pharmacist hours for dispensing purposes.
Wage costs
Our analysis of Pitcher Partners clients shows that, on average, wages make up circa 40% of total gross profit and services income combined. Pharmacy owners will face a significant challenge in maintaining this efficient average as both prescription volume and gross profit decline.
For example, let’s consider a typical pharmacy that currently has 50% of its prescription volume eligible for 60-day dispensing. If approximately 70% of these eligible prescriptions transition to 60-day prescriptions, it results in a 17.5% decrease in prescription volume, excluding any natural growth in prescriptions. This decline is anticipated to lead to a corresponding reduction in gross profit, ranging from 10% to 15% after factoring in the indexation to dispensing fees from 1 July 2023. To sustain a 40% average ratio efficiency (which would still mean a loss of net profit), wages would need to decrease proportionally, or other income increase or a combination of both. Larger pharmacies may have more flexibility in achieving this balance as they can explore a wider array of strategies. These strategies might include adjusting operating hours, reducing the number of full-time equivalent staff (FTEs), and optimizing the mix between pharmacists and dispensing technicians. In contrast, smaller pharmacies, especially those operated by a single full-time equivalent pharmacist, may face limited options meaning a proportionally greater loss to net profit than larger pharmacies in the absence of increasing revenue.
Scope of practice
While reducing operating expenses, particularly labour-related costs, is likely to form a part of the medium term response, it would be shortsighted to view it as the sole remedy, given the expanding role of community pharmacies. With an aging population and a healthcare system already stretched to its limits, the government’s reliance on community pharmacies to alleviate the strain on general practitioners and hospitals is poised to intensify.
For smaller pharmacies lacking the flexibility to adjust labour hours, the alternative approach involves leveraging the additional time arising from reduced dispensing activities to generate more income through services like vaccinations, prescribing (when it moves to post-trial phase), and other value-added offerings. Larger pharmacies should also explore how they can optimize existing labour resources to broaden their range of services. Ultimately, pharmacies that can either maintain or enhance the 40% average ratio by increasing and maximizing their services income will be best positioned as the industry navigates through this problematic transition phase.
Summary
The introduction of 60-day dispensing in community pharmacies provides both opportunities and challenges. Patients may benefit from increased convenience and adherence, but pharmacies face difficulties to maintain historical service levels. To thrive in this evolving landscape, pharmacies must strike a balance between cost reduction and service expansion. Smaller pharmacies can harness freed-up time for value-added services, while larger pharmacies may have a greater range of available strategies. Adapting to these changes and optimizing services will be critical for long-term success. As always, Pitcher Partners are here to assist Pharmacy owners to understand the financial impact of change and implement tailored strategies that help businesses improve regardless of the challenges.
