Why small pharmacies can’t compete on price

In researching Wal-Mart’s impending battle with PBMs like Express Scripts and Medco, which are aggressively pushing consumers to order drugs by mail rather than at retailers like Wal-Mart, I came across some interesting data on pharmacy costs at the blog of Dr. Adam J. Fein, an economist who studies the pharmacy supply chain.

Dr. Fein referenced a study on the cost of dispensing drugs at pharmacies nationwide. Among the factoids in the study:

  • The national average cost of dispensing is $10.50 per prescription.
  • Costs vary widely from state to state, ranging from an average of $8.50 per prescription in Rhode Island to $13.08 in California.
  • Costs vary widely based on the size of the pharmacy, ranging from $9 for the busiest pharmacies to $25 for the lowest-volume pharmacies.

If you ever wondered why that small, independent pharmacy on the corner charges so much more than the big chains do, the answer is that it really has no choice. As Dr. Fein explains:

This variation is not surprising (at least to an economist). Put aside the cost of the drug (ingredient cost) for a minute and just think about the operating costs.

Pharmacies have high fixed costs relative to the incremental (marginal) costs of dispensing because certain factors are required regardless of volume — a pharmacy license, pharmacists, insurance, rent, etc. In other words, filling the first prescription is very expensive, while filling the second prescription is not.

A pharmacy that fills more prescriptions will see average cost per prescription go down, even if marginal cost remains constant. Basically, both the marginal cost of dispensing and the ingredient costs were relatively low.

In other words, it’s an issue of scale. And so small, independent retailers like Pennsylvania’s RXD Pharmacy (pictured above) will continue to close for good. Soon, they will no longer exist.

An RXD pharmacist bemoaned his business’s fate:

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Our fixed costs continue to go up, such as (business and health) insurance and salaries. General overhead has continued to rise, but the reimbursement, unfortunately, continued to decline. Don’t forget, we offer free delivery. We don’t get reimbursed for that. I don’t get reimbursed for the label that goes on the bottle, or the vial itself. We absorb the cost.

The demise of small independent pharmacies is only the first shoe to drop, however.

Next, large but inefficient drug specialty chains like Rite Aid, as well as perhaps others, will bite the dust. They can’t match Wal-Mart’s scale (or business savvy) any more than the small independents can.

And so we will be left, in the end, with Wal-Mart vs. mail order. And that will truly be a death match.

At eDrugSearch.com, we’re content to watch from the sidelines — because we know you’ll always find a better price from us on brand-name drugs than you will at Wal-Mart, Express Scripts or Medco.

Try us and see for yourself.

About Cary Byrd

eDrugSearch founder, Cary Byrd, has been called an “e-health innovator” by MarketIntellNow, interviewed by top pharmaceutical industry journalists, invited to Matthew Holt’s Health 2.0 Conference and a Consumer Report's health summit, and highlighted on numerous health blogs.

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