Viewpoints

Generics Could Lower Bar for Retail Pharmacy

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Generic drugs have become a godsend for consumers, especially in times of economic stress.

Ever since Wal-Mart introduced the $4, 30-day generic program in 2006, these discounted drugs have become pervasive throughout all retail channels. Today discount generics are used as a strategy to combat the fall-off in prescriptions (click on “Rx for Survival” for the story). Some programs — specifically antibiotics and prenatal vitamins — are free.

When Wegmans announced its free generic antibiotics earlier this year, company spokeswoman Jo Natale said in a statement: “The great thing about being a family-owned company, a private company, is we can make decisions that are right for our customers and employees without concern about the short-term impact on profitability.” Wegmans and others have received a lot of positive press and goodwill with such programs. Some say that is as good as profitability.

There is no question that generic drugs have helped lower health care costs for consumers, but at what cost to retail pharmacy? At one time, selling generic drugs was profitable because of the low cost. However, these discount programs cut those margins to nearly zero and have raised questions about predatory pricing.

According to those who follow the numbers, generic promotions result in a 2%-4% drop in the average gross profit margin of a pharmacy even though the number of scripts dispensed and traffic in stores do increase. Essentially, generic programs have become a marketshare strategy to pull in and retain more customers. Retail pharmacy is being used as a loss-leader department at a time when expenses are rising. The pharmacist is a highly paid manager for a supermarket at an average salary of $120,000.

Then there is the value perception these programs have on the overall retail pharmacy and pharmacists in providing reimbursed professional health care services, including disease-state management services that can possibly keep patients from using more drugs than necessary.

The danger is that generic discounts box in retail pharmacy in a way that devalues its future service offerings, possibly making it difficult to get reasonable reimbursement for future services. Generic discounts also impact retailers' contracted rates with third-party payers. Retailers are forced to get reimbursed at the “usual and customary” rates rather than the higher contracted rates, which means at the unprofitable $4 generic rate. Drug chains have figured out a way around this by issuing membership cards for discount generics.

Consultant Bruce Kneeland, president, Pharmacy Connections in Valley Forge, Pa., says generic discounts are bad for the pharmacy profession. “Of the issues that leaders believe are the future of pharmacy — pharmaceutical care, counseling, professional services and reimbursement — this effort destroys all that. It clearly makes price the paramount issue,” he told me.

While generics are good for consumers, they place the most trusted professional in America, the pharmacist, in the precarious position of peddling low-cost drugs rather than helping customers stay healthy.

Contributors

Julie Gallagher

Julie Gallagher’s delicious foray into coverage of the food industry was purely accidental. With a background in technology, she joined Supermarket News as associate editor of its Technology...

Mark Hamstra

Mark Hamstra is the editor of the Retail/Financial section of Supermarket News covering mergers and acquisitions, quarterly earnings reports, executive changes and other significant events and trends...
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