Implications of 60-day dispensing for pharmacies

As we know from the Federal Budget 2023, significant changes are proposed for Australia’s pharmaceutical landscape, commencing September 1, 2023.

Eligible patients with chronic conditions will have the option to purchase two months’ (60-days) worth of commonly prescribed medicines (PBS listed) for the price of a single prescription. While the Government’s change brings perceived consumer benefits in reduced prescription fees, it brings with it a range of concerns for pharmacists, their businesses and the community.

There continues to be considerable lobbying from various pharmacy industry groups to reduce the implications to the retail pharmacy sector and our sincere hope is that the Federal Government will acknowledge these and act to mitigate the financial impact to pharmacies. The government has (on numerous occasions) praised the pivotal role of the pharmacy sector in delivering positive health outcomes. It has also conveyed messages of continued support for the industry. However, it has not yet acknowledged (at least publicly) the financial implications of the proposed changes. This may require evidence of the actual impact post 1 September to achieve a change in the government‘s position.

As a result, it would not be wise to wait and hope for a change to government policy. Rather, it is important for owners and business managers to consider and assess the various options available.

The full impact of 60-day dispensing will be staged over a 12 month period. This is likely to result in an evolution of your business model over this period. Drastic action may not be needed on 1 September 2023 – but you cannot afford to be ’asleep at the wheel’.

We encourage clients to invest time in ensuring they understand their business model and the various business drivers, to test what available actions may have a positive impact on the business.

A word of encouragement and reflection

The introduction of 60-day dispensing presents a series of challenges for pharmacies that we are all too aware of. However, pharmacies have always adapted and evolved to capture new opportunities and revenue streams in the face of government policy changes. We have no doubt that the industry will do so again. Finding innovative ways to offset the potential negative impacts, implementing new systems and processes, and knowing your numbers will be vital for the future sustainability of your business. We are here to ensure you are prepared.

Being better prepared than your direct competitors will assist you in securing the long term viability of your business. No harm will come from investing this time. On the other hand, not investing the time could be very damaging.

As pharmacy advisors, we have been working with clients to highlight, assess and prepare for what’s ahead. Knowing your numbers is the key. Here are our top tips to prepare your pharmacy for these challenges.

1. Understand your revenue streams

One of the immediate challenges pharmacies will face with 60-day dispensing is a reduction in revenues from dispensing fees. But let’s start on a positive note, as many pharmacies introduced new services to support their community during covid and these have continued in the new environment. It’s time to drill into your data to understand how your other revenue streams contribute to your business. Consider reviewing your pricing and charging for services currently provided. Many pharmacies currently provide free deliveries, free or heavily subsidised dose administration aids and free health checks. Do you understand how much these cost and the net benefit to your business?

This is essential to understand before considering changes to the way you operate in the future.

2. Analyse dispensing fees and prepare forecasts based on the new paradigm

We recognise that the extent of the likely take-up of the 60 day dispensing opportunity is uncertain. There is conjecture on how severe the impact will be.

Many have obtained their reports from StrongRoom AI and Nostra Data which suggest a wide range of revenue impacts. Our observation is that they suggest a reduction in dispensing fees (once fully implemented) in the range of 17% to 25% of the current level.

If you have not done so, we encourage you to obtain copies of the reports available and review the assumptions in those reports to ensure they appear reasonable.

It is apparent that each pharmacy will be impacted differently depending on customer demographic, location, and current pricing policy. This will also be the case for medical centre pharmacies and those with a significant aged care component.

Therefore, individualising your model will be necessary to consider these varying factors.

Under all scenarios, the impact on your profitability is likely to be severe. The question is what levers do you have to ‘pull’ to mitigate this impact?

Not surprisingly, labour costs are likely to be an initial focus. However, there may be services you provide (and considered in your review of revenue streams) which should command a (higher) fee. There may also be other costs you incur which are historical and no longer provide any meaningful benefit.

Retail Pharmacies are often charged more rent per square metre than most other outlets. Ultimately, this will need to change.

NB:  The Govt has not yet confirmed the amount of the indexation of the AHI dispensing fee which is supposed to be CPI and take effect from 1 July 2023.

3. Adjust retail and companion purchase estimates

Pharmacists play a crucial role in patient care by providing valuable information, advice, and monitoring regarding medications. However, with the reduced frequency of visits due to 60-day dispensing, there is concern that pharmacists will have fewer opportunities to engage with patients and ask important questions about their health care.

This decreased interaction could potentially lead to missed opportunities for medication optimisation, counselling, and the identification of potential drug interactions or adverse effects. Another consideration is that this reduced foot traffic will impact the companion purchases a customer may have made, who is now visiting your store less frequently. Customers who have multiple medications may still need to visit the pharmacy monthly if one of their medications is not in the 60 Day Dispensing list.

Nevertheless, you are likely to experience a decline in sales of companion products such as over-the-counter medications, health and beauty products, and other items typically purchased alongside prescription medication.

Undertaking this analysis will assist in your forecast of future revenues. It’s a good idea to be able to ‘toggle’ these estimates so that, when the changes are introduced and you have real data available, you can assess against your estimates and adjust to understand the real impact.

While you’re addressing this concern, you could consider opportunities too. How can you improve your retail sales skills and processes to optimise in store purchases overall? For those customers now on 60-day scripts, what checklist may you introduce to ensure that you can still support them with in store services and purchases?

4. Drawing the short straw

Another concern that arises with the implementation of 60-day dispensing is the potential for supply stock shortages. Pharmacists fear that longer prescription intervals could put additional strain on the supply chain, making it challenging to maintain consistent stock levels. In cases where prescribed medications are temporarily out of stock, pharmacists may face difficulties in finding suitable alternative medications promptly. Turnaround time in sourcing alternatives becomes critical, as patients rely on a continuous supply of their prescribed medicines to manage their chronic conditions effectively. You may also need to house a larger quantity of eligible medications. This is something you should prepare for in your reordering processes, stock management and storage.

You are likely to need to have more stock of the impacted stock items in the transition phase. It would be wise to prepare for this well beforehand to ensure no sales (and customers) are lost. These changes may result in a covid-style ‘toilet paper effect‘, if shortages do become an issue. Consider if an overdraft facility / extension of supplier payment terms is required to help facilitate this. We anticipate the higher stock holding requirements will be temporary.

This loss of revenue could have a significant impact on the financial viability of your pharmacy if no ’counter measures’ are taken. Take this policy change as an opportunity to review your wages and overhead costs. When assessing wage costs, it is important you consider the potential impact on the level of customer service and the workload of pharmacists / support staff. None-the-less, it may necessitate staff cuts, reduced (or re-priced) services, or even shortened opening hours. Establishing a forecasting model to enable you to assess the impacts of varying these items is imperative to preparing for the 60-day dispensing challenges.

5. Assess your financing

Clearly, a critical factor will be the impact of these changes on bank lending policies.

We have been in contact with representatives of major banks and they have unanimously indicated their continued support to the industry. Communication with your bank representative will be very important during this period of change.

It is likely that they may seek some reassurance from you regarding actions that you propose.

6. Other things to consider

• Varying down quarterly tax instalments (commencing October 2023)
• Look to vary debt reduction programme (additional overdraft to deal with extra stock)
• Adjust staff rosters to minimise overtime
• Consider impact of less dispensing activity – what it means from a staffing requirement.
• Review financial impact (Sales and labour costs) of varying your opening hours
• Consider service fee rates, including home delivery charges
• Communicate with landlords
• Review overhead and operating costs. Consider costs of ‘doing business’.

Again, we are here to ensure you are prepared.