In their 2023 NCPA Digest report, the National Community Pharmacists’ Association (NCPA) found that while independent pharmacies represented a $94 billion marketplace in 2022, gross profit margins fell to 21 percent—the lowest point in the NCPA Digest’s “10-year lookback window.”
While comparing gross margins across businesses and industries can be tricky, in 2022, the average gross margin in the healthcare industry was 56.3 percent.
The NCPA attributed the lower profit margins to factors including inflation (seen in drug prices), low or below-cost third-party reimbursements, and higher costs of dispensing.
We’re also talking about gross profit margins, so this is of course before operating expenses cut in even further. And while the NCPA used this report to make a call for “reforms to the broken payment model” to relieve some of the pressures on independent pharmacies, what can you do in the meantime to increase your pharmacy’s profitability?
There are, thankfully, a few levers within your control.
Add More Services
While for the average independent pharmacy, prescription sales make up 92 percent of all sales, you’d be remiss if you didn’t diversify your revenue-driving goods and services. After all, one of the key touchpoints that sets independents apart is the level of personalized care, service, and community support. For so many rural and underserved communities too, local pharmacies are the best, most accessible destination for all healthcare needs.
You may have found that adding basic vaccinations such as the annual flu vaccine and COVID vaccine are profitable services. You can carve out additional profit by adding more of these types of services as well (so it’s no wonder these represent a top trend helping independent pharmacies thrive). Some of the best options include:
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Immunizations: What other immunizations can you provide for your community? Different people require different immunizations throughout their lives, for different reasons, from travel to college to new jobs. Establish your pharmacy as an accessible, seamless source for these.
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Compounding services: Your pharmacy can provide compounding services so patients who require specialized medication don’t have to go to a specialty pharmacy but can keep coming to you for all their medication needs, making it easier on them and helping expand your customer base.
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Point-of-care testing: Point-of-care testing, including blood glucose monitoring, flu and strep tests, and cholesterol screenings, is another relatively simple service you can add to establish your pharmacy as a healthcare destination. Pharmacists can even assist with test interpretations and medication or lifestyle changes for patients following these tests.
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Chronic disease management including diabetes care: For your patients with chronic diseases, including diabetes, care requires ongoing nuance and adjustments. Your pharmacy team can be another ally in their healthcare through regular check-ups, testing, and guidance that can be provided alongside their medication fills.
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Medication adherence programs: Medication adherence has always been an issue, and it can have serious consequences. It’s responsible for more than one-third of medication-related hospitalizations, and patients who fail to adhere to their medications have nearly double the mortality rate than those who take them as prescribed. It’s also bad for your business. Starting with programs like Medication Therapy Management (MTM), your pharmacy can help your patients and keep refills and revenue flowing.
Consider providing Medication Synchronization, which has been shown to help—patients who are part of med sync programs were shown to be 5 times more likely to adhere to medications in a national NCPA study, for example. An Appointment-Based Model adherence program has also been shown to be popular with patients and highly effective, as you schedule monthly appointments for a pharmacist to consult with patients as they pick up their medication.
Reduce Inventory Costs
Inventory represents your pharmacy’s largest investment—and largest expense. Managing it is a careful balancing act, making sure you consistently have the right medications in stock, while also minimizing waste and maximizing profits.
Managed poorly, and you risk tying up money in surplus inventory that sits on your shelves too long, restricting cash flow, not turning over revenue, and in the worst-case scenario, depreciating in value. Too little inventory, and you risk your ability to provide medications to your patients when they need it, which could cause you to lose them for good.
Fortunately, inventory also represents your pharmacy’s biggest area of opportunity for time and cost optimization.
Mail and local delivery are also becoming more common as customers grow used to having regularly ordered items delivered to their doorstep. And whether you set up your website to make online ordering and refills easy or use a pharmacy app builder to offer your own app, customers appreciate the option to be able to order prescriptions online. You can even add other store goods—from tissues to over-the-counter medications to popular snacks—to your online pharmacy store.
According to PBA Health, “every 1 percent change in an average pharmacy’s costs of goods can shift profits by 20 percent.”
It’s something that, at Datarithm, we see the impact of every day.
For example, one of our clients is SincereRX, a network of independent pharmacies that are centrally owned and locally run and managed. As SincereRX started to add more stores to their network, cash flow became really important. The owner and managing partner, Peter, began to see the cash in accounts start to go down and purchases go up, but revenue stayed relatively flat.
Peter began a partnership with Datarithm, with goals to regulate cash flow, improve profit, cash flow, and liquidity, and right-size pharmacy inventory to reduce surplus (and underlying carry cost) and under-stocking, for improved customer service.
He also desired consistent, centralized management over the stores’ Rx inventory, automated order point optimization, and to shift to Perpetual Inventory (PI) management and EDI (Electronic Data Interchange) ordering—with the ability to guide and support staff through scheduled, streamlined tasks.
Following management-level training and 1-on-1 store-level training focused on task completion, the Datarithm system was implemented. Optimized re-order points were enabled and uploaded to their PMS, and EDI ordering was installed, fully transitioning SincereRx to a Perpetual Inventory management system.
Pharmacy staff began using Datarithm’s cycle counting function to assure on-hand precision of medications needed for their clients and automated inventory balancing for wholesaler returns and store-to-store transfers) to alleviate over-stocked and dead inventory. At the same time, Peter began receiving monthly and weekly automated “push” emails highlighting both performance metrics and staff task completion.
The reorder point optimization and balancing resulted in sharp, fast, and ongoing improvements in important financial metrics for SincereRx:
- Total inventories declined $696k
- Surplus inventory (over-stocked and dead) was shed through the optimized re-order points and balancing
- Turns steadily improved and widely outpaced the industry average rate of 11x-12x
"A very simple way to think about it is if you order something and it expires on your shelf. In this situation, all it takes is a for a drug to expire or be mislabeled, and you're already out the money. Datarithm® provides not only the cost savings and the cash flow improvements, but a way to prevent unnecessary costs that no one can afford."
