Elements Magazine - December 2019 Vol.8 Iss.4

17

CONTENTS ON THE COVER

17 FEATURE | Inventory Management 101 How to master pharmacy inventory for a better bottom line

DEPARTMENTS

07 NEWS | Survey Says The latest national survey on pharmacy provides key insights

08 TRENDS | Drug Supply Chain Security Act What pharmacies need to know about track-and-trace right now

10 RETAIL | On a Whim

Increase basket size and profit margins with impulse buys

FEATURE | Inventory Management 101

14 SOLUTIONS | Know Your Niche How to differentiate your pharmacy from the competition

24 SPOTLIGHT | A World Without PBMs This community pharmacy does zero business with third parties

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and thrives

27 MONEY | Hot Products, Red Tape

Durable medical equipment is in demand, but is it worth the hassle?

32 OUTLOOK | Market Segmentation How to improve your marketing by targeting specific groups of patients

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

RETAIL | On a Whim

3

E

ELEMENTS

The business magazine for independent pharmacy

ON THE WEB Find more strategies, tips, and expert advice to improve your business at pbahealth.com/elements

VOLUME 8, ISSUE 4 DECEMBER 2019

Common Purchasing Mistakes That Cost Pharmacies Thousands

PUBLISHER & EDITORIAL DIRECTOR Matthew Shamet EDITOR

Pharmacies make detrimental purchasing

Greyson Honaker

mistakes all the time without realizing it. Look out for these missteps to protect your profit.

ART DIRECTOR Anna Brooks CONTRIBUTING WRITER Erin E. Rand

How to Price Retail Products at Your Independent Pharmacy Pricing your retail products is more art than

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science. These guidelines will get you the best

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balance of profit and sales.

6 Tips for Pharmacists to Memorize New Drugs Quickly Learn how to easily memorize new drugs with the top techniques and quick tricks of national memory champions.

Follow Elements magazine on Facebook and Twitter for pharmacy business tips and advice, news announcements, industry informaElements magazine is published quarterly by PBA Health.

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Neither this publication nor any part of it may be reproduced without written permission by PBA Health.

tion, and exclusive offers.

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NEWS

SURVEY SAYS

The latest national survey on pharmacy provides key insights A recent national survey of more than 12,000 pharmacy patients

such as “flu shots and vaccinations, various lifestyle programs,

reveals encouraging and useful findings about their current

smoking cessation programs, health screenings, and vision and

satisfaction with retail pharmacy. The most encouraging among

hearing tests.”

them? Even in an age when people increasingly prefer to do their shopping online, patients are happy with the brick-and-mortar

THE BIG TAKEAWAY

pharmacy store.

Of all the findings from the survey, Truex emphasized patients’

“Health consumers are very satisfied with their pharmacy experience,” said Greg Truex, managing director of health

satisfaction with pharmacies. “Overall satisfaction, advocacy, and loyalty are extremely high in this industry,” he said.

intelligence at J.D. Power, a global marketing information services

In fact, brick-and-mortar pharmacies are “exceeding health

company that conducted the survey. “J.D. Power continues to see

consumer expectations so well” that J.D. Power will be expanding

the brick-and-mortar satisfaction average increase year over year.”

its survey quarterly to get more data. “The goal is to capture the

Although the survey results show satisfaction with brick-

seasonal differences of the brick and mortar experience—cold and

and-mortar pharmacies, they also reveal opportunities to better

flu season, for example—to determine if they have a statistically

incorporate technology and online capabilities into the pharmacy

significant impact on satisfaction scores.”

experience. According to the survey, patients who correspond with

Truex spoke of the resilience of brick-and-mortar pharmacy

the pharmacist and staff through email or online chat are equally

even against the growing intrusion of online giants like Amazon.

or more satisfied than those who meet with the pharmacist in

“They will enjoy a bit of a halo-effect based on the high eCommerce

person, yet almost 90 percent of patients still continue to only meet

brand awareness,” he said. But in the end, “consumers will return

face-to-face. Pharmacists could make their patients’ lives more

to their neighborhood pharmacy.”

convenient and their business more efficient by utilizing online and electronic opportunities to interact with patients.

The transition to electronic interactions shouldn’t dilute the discussions, however. According to the survey, patients are more satisfied when interactions are thorough, covering at least four topics during the conversation.

Mobile apps are also not as prevalent in pharmacy as they could be. Only one-fourth of patients use a pharmacy mobile app, even though patients who use mobile apps are significantly more satisfied than patients who don’t use apps. Use of mobile apps didn’t increase among pharmacy patients over the past year, and Truex said this presents an opportunity for pharmacies to capitalize on. “Whichever brick-and-mortar pharmacy figures this out will have a significant competitive advantage over the rest of the industry,” he said.

“Health consumers are very satisfied with their pharmacy experience. J.D. Power continues to see the brick-and -mortar satisfaction average increase year over year.”

Another important finding relates to types of shoppers. The most lucrative pharmacy customers are those concerned about health and wellness. They are more likely to spend more on prescriptions and are most satisfied with their pharmacy. Nearly half of patients will use health and wellness services if they know about them, and Truex said this finding provides the best opportunity for pharmacies to increase business. He listed services

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

7

TRENDS

DRUG SUPPLY CHAIN SECURITY ACT What pharmacies need to know about track-and-trace right now As the Drug Supply Chain Security Act (DSCSA) continues to roll

pharmacies’ ability to efficiently return saleable product to their

out through 2023, independent pharmacies have to adjust to the

wholesale distributor,” Shankle said. “The inability to return

requirements gradually being put into effect each year. With an

saleable product to wholesale distributors in an efficient manner

implementation period of 10 years, it can be difficult to keep up on

could lead to a disruption in patient care, in addition to the

the continual changes that may affect your pharmacy business.

destruction of millions of products that should be otherwise

New requirements oblige pharmacies to incorporate stricter processes of product vetting and verification, which affects the

considered safe and effective medicine.”

Because your pharmacy’s returns could be affected by this

pharmacy’s operations, technology, and workflow. Knowing what

change, it’s important to discuss with your wholesaler how the

changes are occurring throughout the supply chain in each phase

verification processes may impact your ability to return product,

of the DSCSA will ensure you’re prepared to adjust processes and

Shankle said.

respond efficiently without hiccups to your workflow. It will also prevent any legal ramifications for noncompliance to the law.

At this time, there is one major upcoming change independent pharmacies should be aware of: the requirement for product identifiers. This requirement was instituted for manufacturers in 2018 and wholesalers in 2019, and will be instituted for pharmacies in November 2020.

2019 CHANGES FOR WHOLESALERS As of November 27 of this year, wholesalers can only accept pharmaceutical products from trading partners with a DSCSAcompliant product identifier, with a few exceptions. And they must verify with the manufacturer and repackagers the serial numbers of all returned pharmaceutical products intended for resale.

However, in response to a letter from the NCPA and requests from other industry stakeholders, the FDA has granted enforcement discretion on this requirement for 12 months.

“NCPA is hopeful that the 12-month discretion period will provide sufficient time for upstream trading partners to implement the appropriate verification systems necessary to ensure efficient returns, and ultimately the continued patient access to their needed medications,” said Kala Shankle, director of policy and

What Is a DSCSA-Compliant Product Identifier?

“A product identifier is a standardized graphic that includes the product’s standardized numerical identifier (composed of the NDC and a unique alphanumeric serial number), lot number, and expiration date, in both humanand machine-readable formats. The machinereadable format must be on a data carrier that conforms to the standards developed by a widely recognized international standards development organization. The product identifier data is specifically required … to be in a ‘2-dimensional data matrix barcode’ for packages and in a ‘linear or 2-dimensional data matrix barcode’ for homogenous cases.”

regulatory affairs at the NCPA. Why do these obligations on wholesalers matter to your pharmacy? “The smooth implementation of verification systems between wholesale distributors and manufacturers will impact

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pbahealth.com/elements

Source: “Product Identifiers Under the Drug Supply Chain Security Act Questions and Answers,” U.S. Food and Drug Administration

2020 CHANGES FOR PHARMACIES In 2020, it will be pharmacies’ turn to accept pharmaceutical products exclusively from trading partners with a DSCSA-compliant product identifier, with a few exceptions. Additionally, for products

Products Excluded From Product Identifier Requirements

under suspect investigation, pharmacies must “verify the product identifier of the suspect product of at least 3 packages or 10

The following prescription drug products are excluded from

percent of such suspect product,” Shankle explained.

the definition of a “product” under the DSCSA.

As verification requirements phase in under the law, you will have to increase your vigilance and adapt workflow. Paying attention to exemptions will be an important part of the process, Shankle said. Products don’t require an identifier if they are considered grandfathered or are subject to a waiver, exception, or exemption under the law. Pharmacies can get help identifying products with these classifications through FDA resources.

Even though the pharmacy requirement is a year away, pharmacies should start preparing now. Shankle suggested pharmacies familiarize themselves with what a DSCSA-compliant product identifier looks like and begin training staff on how to identify them. And there are always third-party companies that can assist in complying with the DSCSA. “Choosing a solutions provider that is right for your pharmacy’s specific needs is paramount,” Shankle said.

The FDA recently released a guidance with questions and answers to assist dispensers in complying to the product identifier

- Blood or blood components intended for transfusion - Certain radioactive drugs or radioactive biological products

- Imaging drugs

- Certain intravenous products - Any medical gas - Homeopathic drugs marketed in accordance with applicable guidance under the FD&C act - Drugs compounded in compliance with sections 503a or 503b of the FD&C act

requirements, which can be found on its website.

GS1 US, a not-for-profit global organization that develops supply chain standards, also published an implementation guideline providing a “simple, standardized lightweight messaging framework for asking verification questions and receiving information based on a check of the DSCSA Product Identifier and associated data—enabling the requestor to quickly determine whether to accept, reject, or quarantine the product in question,”

4 Track-and-Trace Tasks for Pharmacies

according to the guide. Shankle noted that this framework may simplify the electronic messaging that happens in the background

Pharmacies must comply with four major tasks in compliance

when a pharmacy requests product verification.

with the Drug Supply Chain Security Act. Where does your pharmacy stand?

LOOKING AHEAD In all, by 2023 pharmacies will be confirming licensure of

1.

Confirm that your wholesalers and third-party logistics

wholesalers; receiving and storing transaction data for six years;

providers have the appropriate licensure and registration

investigating suspect and illegitimate product; and only accepting

to operate within your state.

products with the proper product identifier.

As you work to adjust to the requirements, stay vocal about

2.

organizations. “NCPA is always looking for community pharmacists to speak up about the challenges they face with the ongoing

3.

and beyond.”

Investigate and quarantine suspect drugs, and use FDA- 3911 to report if the drug is illegitimate.

implementation of the DSCSA,” Shankle said. “We look to our community pharmacists to inform our efforts in front of the FDA

Receive and store the 3 Ts (transaction information, transaction history, and transaction statement) for six years.

the challenges and don’t be afraid to seek help from outside

4.

Accept only products with a proper product identifier, or those that are grandfathered or have a waiver, exception, or exemption.

RETAIL

ON A WHIM

Increase basket size and profit margins with impulse buys The margins on prescriptions are razor-thin and only getting

on the demographics of your area, some items are tried-and-

thinner. But the merchandise in your front end is a different story.

true winners.

This is especially true for a particular kind of front-end product

For example, 68 percent of people in the United States own a

called impulse buys—items patients weren’t planning to buy when

pet, mainly a cat or a dog. “If I knew that as a pharmacy owner, then

they walked into the pharmacy but put in their basket on a whim.

I would want to sell pet care items,” Stringer said.

“Impulse buys on the front end of the pharmacy should be

Practically every single pharmacy patient has a cell phone in

making 50 to 80 percent profit on each transaction,” said Mike

their pocket or purse when they come to pick up their prescriptions.

Stringer, president of Dollar Days, a wholesaler that provides front-

Accessories for phones like charging cords, earbuds, and car

end merchandise to independent pharmacies. “By upselling and

chargers all make for compelling impulse purchases. “If my phone

cross-selling customers filling prescriptions, a pharmacy has the

is dying and I need to charge because I have a meeting, I need

opportunity to double or triple their average order per customer.”

to be able to get those things conveniently while I’m filling my

The way he sees it, patients are already coming into the pharmacy to pick up their prescriptions, and pharmacists and other

prescription and not have to go to another store,” Stringer said.

Impulse buys should also be functional. “Does it solve a

team members are missing out on a prime opportunity for profit

problem? I think about those little magnetic clips people put on

if they aren’t actively encouraging front-end purchases. When a

their shirt to hold their reading glasses.” Good impulse buys often

patient comes in to spend $10 or $20 on a prescription, impulse

serve an immediate need. A patient is hungry, so they buy a snack.

buys that double the basket size give pharmacies the ability to

It’s raining, so they grab an umbrella. They forgot their mother’s

increase sales every day of the year.

birthday, so they pick up a greeting card.

“A pharmacy owner in today’s society needs to be retail-focused

Not every impulse item will sell well in every pharmacy. What

as much as they’re focused on filling prescriptions,” Stringer said.

works for an independent pharmacy in California might not work

“They need to capitalize on every one of the customers they have.”

in New York or New Jersey, Stringer explained. Those geographic and demographic variations affect not only your products but also

WHAT MAKES A GOOD IMPULSE BUY?

your prices. “You could have items priced at $100 and you’re in an

In order to convince customers to give in to their whims, you have

area that can’t support that, or maybe you’re in a high-end area and

to know what they want. While these wants can change depending

you’re trying to sell items at a dollar,” Stringer said.

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Wherever you are, you have to balance enticing prices with

the item they forgot they needed and they’ll spend even more

profitable margins. Stringer suggested that when pharmacies

dollars at your pharmacy.

purchase an item for a dollar, they should price it between two to five dollars so they make anywhere from one to four dollars

ATTENTION GRABBERS

in profit.

Where you position your impulse items can be almost as important as which items you choose to stock. Placing them at the checkout

STAY AHEAD OF THE CURVE

counter is “the number one way” to draw attention to impulse

Some impulse buys may not meet an obvious need but still sell like

items, according to Stringer.

hotcakes. They are fad items like SillyBandz, fidget spinners, and adult coloring books.

It can be difficult to know what’s going to be the next big

Setting up your aisles so patients have to walk through the entire store before they get to the pharmacy counter is another way to ensure they see all the products that might appeal to them.

trend. Stringer said he watches shows like Good Morning America

You can also draw attention to specific impulse buys by placing

and reads the newspaper to see what might be on the precipice

them on endcaps, on countertop displays, or in speed bins in the

of becoming a full-blown fad. But he also has another asset:

middle of an aisle.

his daughters.

Showing products in action increases their appeal as well. “We

“Kids are the greatest test market we have because they are

sell a lot of LED light-up dog leashes and collars,” Stringer said. “If

part of that target demographic for impulse buys,” Stringer said.

the workers at the pharmacy turn on a couple of them so they’re

Toys make for good impulse buys because kids are vocal when

blinking, that will draw customers’ attention to the items and they’ll

they see something they want, pulling at their parents’ elbows and

buy them more frequently.” If you have Bluetooth speakers for sale,

begging for them to buy it.

have them playing a tune so patients can hear the quality of the

Right now, items related to the videogame Fortnite are flying off

product for themselves.

shelves. “There are 150 million people who play this game and are paying money to have these products,” Stringer said. “My retailers came to me specifically to ask for Fortnite items, and we were able to procure and supply them.” ’TIS THE SEASON

Play to Patients’ Needs

To maximize impulse buys, pharmacies should be constantly updating their selection. At a minimum, Stringer recommends

The most tempting impulse buys satisfy a customer’s

mixing up product selection once every season.

immediate needs. Because they perceive the item as

“Most of our pharmacy customers will order one case or one

necessary, it’s easy for them to justify the purchase.

display of fifteen different items,” Stringer said. “They’re trying to

Having these types of products at patients’ fingertips

find out what sells in their area.” They reorder the merchandise

will increase their basket size.

that clicks with their clientele and mark down the rest to sell it off quickly.

Keeping seasonally relevant items in stock is another way you can meet patients’ needs and solve their problems. “If a pharmacy has umbrellas during the rainy season, they’re going to sell a lot of umbrellas,” Stringer said. “If the items were purchased correctly

Cell Phone Accessories: Charging cords, wireless chargers, wall plugs, car plugs

Pet Items: Collars, leashes, toys, brushes, treats

and marked up correctly, they’re going to make a 50 to 80 percent

Holiday Gear: Greeting cards, gift baskets,

margin on those items. It’s a win-win. It’s a win for the customer

decorations for Christmas, Valentine’s Day, and other

to have the items they need, and it’s a win for the pharmacy to

holidays

capitalize on every visit from that customer.”

During the holiday season, it’s especially important that pharmacies keep their selection relevant. At a time when everyone is buying gifts and primed to spend money, stocking the right items can make your front end a one-stop shop. A comprehensive

seasonal needs: Sunglasses, sunscreen, umbrellas, scarves, tights, fleece blankets

Hunger Pangs: Candy, snacks, drinks

selection of holiday items can make patients’ days easier by helping them check items off their holiday to-do list. You might even have

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

11

Sampling products works especially well for toys. If children have the opportunity to play with an item in the store, they will be hard-pressed to let it go, and their parents will be much more likely

Visibility Is Key

to buy it for them.

Patients can’t give in to their impulses if they don’t see a MAKE THE CASE

product. Here’s where you should place impulse buys in

Convincing patients to buy something that’s not on their list may

your pharmacy for maximum visibility.

seem like a hard sell, but it’s a necessary part of increasing your front-end sales and your pharmacy profit. Simply talking to patients

Checkout Counter: Small items at the checkout

about products can go a long way.

counter are easy for customers to throw in with their

“What comes to mind is visiting my local grocery store,” Stringer said. “They ask me every time if I want ice or stamps. I always forget

other purchases.

the ice because it’s not in the main part of the store! So it’s kind of a

end caps: A display at the end of the aisle draws extra

customer service thing.”

attention to certain products.

It also might draw attention to something the customer had not considered before but will end up making their life easier. As the

countertop displays: This is the perfect spot to

saying goes, you miss 100 percent of the shots you don’t take.

encourage patients to sample a product. Let them try

“Pharmacies are losing reimbursements every day, and to

out that lotion or doodle with different colored pens.

survive and thrive against large chains, they need to utilize any way they can to upsell and cross-sell their customers,” Stringer said.

speed bins: These bins, placed in the middle of an

“Impulse, holiday, and seasonal purchases are imperative to stay in

aisle, are a great way to blow out an item you’re not

business, to grow, and to be more profitable.”

planning on restocking.

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SOLUTIONS

KNOW YOUR NICHE How to differentiate your pharmacy from the competition In a crowded field, your pharmacy needs to find a way to stand

diabetes patients, Volheim explained, specializing in diabetes

out. “The sea of sameness that exists across the marketplace is

products and services will give new patients a reason to stop

troubling,” said Dave Wendland, vice president of strategic

into your pharmacy. “It’s identifying who you want to be your

relations at Hamacher Resource Group (HRG), a firm that focuses

next customer.”

on improving results across the retail supply chain. “Consumers are

Wendland cited Katterman’s Pharmacy, based in Seattle,

left with way too many options, and they won’t be extremely loyal

Washington, which identified a particular characteristic of its

to any one outlet.”

demographic and capitalized on it. In a large city with massive

Finding an area you can specialize in will make your pharmacy

international companies like Microsoft and Amazon, there are

into more than just a place to pick up prescriptions: it will become a

plenty of businesspeople taking trips abroad to places like Africa

destination. “That differentiation can not only improve profitability

and South America. That’s where chief pharmacist Beverly Schaefer

but also drive recommendation, and reinforce a purpose,”

saw her opportunity: travel immunizations—specifically, offering

Wendland said.

inoculations for yellow fever.

Whether it’s diabetes care, natural products, or compounding,

“Most folks who give immunizations, especially yellow fever,

having an established niche can make your pharmacy into a

require at least six weeks advance notice to get the inoculation

touchstone for your community. And it provides patients a more

in,” Wendland explained. “Katterman’s keeps it on hand so they

personalized experience they can’t get from the chains.

can take a patient without an appointment, on-demand.” Because

“Patients like the customer service aspect of independent pharmacies. They’re not going to get the personal touches or

of this, they’ve become known as the place to go for travel immunizations.

recommendations if they go to a chain pharmacy, where they’re just in the shuffle of it all,” said Colleen Volheim, category research

GO ALL IN

and analysis manager at HRG. “That’s what makes an independent

Once you decide what niche you want to serve, it’s important to go

special, makes people want to come visit you, and sets you apart

all in. “The owner of the pharmacy and the staff that work there

from other retailers.”

need to be passionate and committed to the niche,” Wendland said.

But simply stocking the right products won’t make your

“Once you’re in it, you really have to own it. That ownership means

pharmacy’s niche service an overnight success. You have to do the

that you’re constantly asking yourself what more you can do for the

research, and add in a little ingenuity, to stake your claim.

patients that are coming in for these products.”

KNOW YOUR MARKET

the shelves and expect to become a keto destination. “Get so deep

Your niche should be different than anything else that’s in your

into your niche that you provide a solution, not just a bunch of

local market, so before you commit, it’s important to scope out

products,” Wendland said. “Provide advice and resources, not just

what your competitors are providing. Wendland suggests walking

information that’s readily available.”

It’s not enough to simply stock a few ketogenic diet items on

through competitor chains to get a sense of what they have to

To do that, you have to understand those patients and what

offer. You can also look to your wholesaler or merchandise supplier

you can do to create better solutions for them, which requires

for inspiration, seeing what they have available and what group of

some legwork. “You have to be more than just empathetic to the

products you can use to cater to a specific niche.

individual that you’re trying to serve. You may want to interview

Assess the demographics of your area—there may be an opportunity hidden there. If you have a high demographic of

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them,” Wendland said. Ask them about the products and services they use and need but aren’t being offered in the community.

Read up on websites, blogs, and other social sites to find out what

it doesn’t take very long to implement it once you’ve done your

people within that niche are talking about.

research. “With a chain, it takes a boardroom discussion to decide whether or not to put an endcap in, so speed is in the favor of the

SPREAD THE WORD

independent,” Wendland said. “The closeness to their community is

When you’ve established your niche, you’ll need to spread the

right in front of them, so all pharmacists need to do is look around!”

word. Add information about your products and services to your website and any other promotional materials you produce. Within

Hamacher Resource Group (HRG) focuses on improving results

your pharmacy, carve out a separate area for your niche products

across the retail supply chain by addressing dynamic needs such as

so those customers can easily see all the products the store has to

assortment planning and placement, retail execution strategy, fixture

help them.

coordination, item database management, brand marketing, Rx track-

Marketing a niche may look a little bit different than the

and-trace, and analytics.

usual ways you market your pharmacy. Wendland remembered a pharmacist who called the local radio station to let them know about the pharmacy’s niche, which was teaching patients how to use vitamins, dietary supplements, and CBD oils in conjunction with their prescription medications. “Now this individual is on call

Find Your Niche

as an expert so when something surfaces on that topic in their community, the radio station asks them to come speak to it. That’s

An independent pharmacy with a niche service goes far

brilliant! They’re now recognized as the neighborhood expert on

beyond filling prescriptions. They have specialized services

that topic.”

that meet the needs of specific populations in their

In some cases, it makes sense to go to the places your potential patients congregate. If you are selling products for specific diets, those patients probably go to a local gym or health club. Volheim suggested, “Having a relationship with the gym or another facility would be an easy but not often thought of way to market yourself

community, making them a destination. Here’s how some pharmacies have branched out.

- Veterinary medicine

and set yourself apart.”

- Diabetes care

STAY COMPETITIVE

- Cancer care

Why should patients go to your pharmacy for your specialty nutritional supplements when they can just order them on Amazon and get them tomorrow? It’s all about the personalization.

“If you can’t put personality into the solution you’re developing, you might as well open up a storefront online and close your door entirely,” Wendland said. “You have to become connected to the individuals you’re serving, get to know them, and invite them in.”

At Katterman’s Pharmacy, where they have found a niche administering travel vaccines, they also offer a selection of travel accessories. Even though all those products are available online, Schaefer’s patients purchase them at the pharmacy because they offer a curated selection. Instead of searching for bug repellant and getting thousands of results, patients can find the exact right bug repellant on the shelf for the location they are traveling to.

- Specialty diets (ketogenic, paleo, etc.)

- Vaccines and immunizations (including travel) - Compounding - Vitamins and nutritional supplements - Hospital-to-home transitions - Health education - Lab testing

Patients are also asked to bring a bookmark back from their trip to be displayed on the pharmacy wall. “No online provider is even going to care where they’re going, let alone want to hear a story when they get back,” Wendland said.

Volheim added, “And they’ve figured out another way to get patients to come back to the store!”

And remember—as an independent pharmacy, you have the advantage of flexibility. Once you decide to commit to a niche,

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

15 13

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FEATURE

INVENTORY MANAGEMENT 101 How to master pharmacy inventory for a better bottom line

ELEMENTS | The business magazine for independent pharmacy | JUNE 2019

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Every retailer’s business depends on inventory. The better you

Then there are shortage costs, which include any loss associated

manage the flow of goods, the more money you make and the

with not having a product when a patient needs it. Although these

more cash you have on hand to grow your business.

costs aren’t as easily measured, they are significant. “If you lose

Although that’s the name of the game for all retailers, a

a customer, it’s not just that sale,” said Albert I. Wertheimer, PhD,

pharmacy’s inventory can be especially consequential, not only

professor of pharmacy economics at Nova Southeastern University

for the health of patients but also for the health of the business.

College of Pharmacy. “The typical shopper spends around $3,000 or

At any given time, a pharmacy may be carrying upwards of 1,500

$4,000 a year in the store.”

NDCs, with a single bottle of prescription medication tying up as

Mastering inventory control can help you minimize these costs,

much as $5000. That enormous financial risk requires impeccable

free up cash flow, and keep your pharmacy in the black. “It can

management to mitigate.

make the difference between profitability and loss,” Wertheimer

“I’ve never seen someone manage a pharmacy well who doesn’t

said. “To understand inventory control is absolutely critical.”

have control of their inventory,” said pharmacy owner Huy Duong, who manages around 1,300 NDCs a month at his store, Dale’s

METHODS OF INVENTORY CONTROL

Pharmacy, in Fort Lupton, Colorado. “If you’re not managing your

Although the consequences of inventory management are steep,

inventory correctly, you’re leaving a lot of money on the table.”

the goal is simple: “Have the correct amount of inventory in stock

That $5000 medication makes up only one type of inventory

and on the shelves for what’s needed and no more or no less,”

cost, called carrying costs, which are any expenses associated with

Wertheimer said. But that doesn’t mean it’s easy—far from it. “It’s

keeping products on the shelf. These include the opportunity costs

like walking on a tightrope. You can’t do it initially, you have to learn

of having cash tied up in inventory, which could otherwise be spent

from experience.”

on business improvements, investments, prompt payments, or any other endeavor that could be earning you money.

But there are other inventory costs as well, like the wages for

Various methods have been developed for determining how much product you need and when you’ll need it. In the past, pharmacists would have to physically look through shelves, take

employees who prepare and submit orders, receive and verify

notes by hand, and manually input order quantities. When they

shipments, stock the products, and monitor and maintain the

noticed a product was getting low, they’d put in an order. That

inventory. “Time is money,” Duong said. “If it costs you in time,

method has many monikers—seat-of-the-pants, just-in-time—but

then it costs you money, and eventually you don’t get back what you

it is essentially measuring on the fly, waiting until the product is

put in.”

nearly out before putting in a manual order.

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Although some still use that method, Wertheimer said

The Costs of Pharmacy Inventory

that “smarter, more progressive” pharmacies these days have perpetual inventory systems that track all the inventory in real time and automatically send orders to wholesalers according to predetermined order points. Duong says these systems are essential: “Perpetual inventory is a necessity if you really want to

Inventory decisions involve a delicate balance between three

succeed in managing inventory.”

classes of costs.

Even with a perpetual system, Wertheimer emphasized the importance of doing a physical inventory check once or twice per

1. Ordering costs:

year, which enables pharmacies to identify and account for theft

placing an order, receiving and verifying the order, and

or loss of products. “The only way you can get credit for missing

putting away the stock. These costs may take up a lot of your

bottles on your taxes at the end of the year is to indicate that

pharmacy staff’s time, which could be spent on other tasks

there’s been a shrinkage,” he said, “and that adds up to a pretty

that increase revenue or build patient loyalty.

hefty sum.”

2. Carrying costs:

Duong’s team performs daily cycle counts when the system

These are the costs associated with

These are the the costs associated with

notifies them of discrepancies, which can occur for several reasons,

keeping products on the shelf, such as fees, taxes, insurance,

such as a manufacturer error or a misplaced bottle. “When they

shrinkage, perishability, obsolescence, and employee labor

see a discrepancy as it comes along, they fix it immediately or they

for maintaining and monitoring stock. They also include the

figure out where that medication is,” Duong said. They also spot

opportunity costs of having cash tied up in inventory.

check about once every two weeks during periods of down time.

The pharmacy’s inventory count is usually spot-on, Duong said,

3. Shortage costs:

because they use automatic pill counters.

to not having the inventory on hand when you need to fill the

These are the costs of lost sales due

prescription. This cost is the hardest to quantify, but often the easiest to see. The more often you have shortages, the more

Cycle count: auditing products to verify the correct amount of inventory

you lose in sales, customers, and expedited shipping.

Perpetual systems track inventory and send orders automatically, but a person still has to determine the reorder points and quantities for the system, which are the decisions that

Inventory Turnover Rate

make or break inventory management. So the question remains: how much product should you order and how often should you order it?

Inventory turnover rate is a simple measurement that can

One strategy, often called the open-to-buy method, creates

provide a general idea of what you should keep in stock,

a monthly buying budget based on your planned sales. Unlike

especially in your front end. This rate represents the number

the just-in-time ordering method, open-to-buy is proactive and

of times you turn over your inventory in a given year—the

ensures you have enough for the entire month to meet demand.

higher the rate, the faster the turnover. To calculate the total

This budgeted approach based on financial forecasting helps you

rate, you divide the pharmacy’s annual cost of inventory by

ensure the return on investment is greater than the cost, which

your total inventory.

Wertheimer said is crucial. “Let’s say you get two percent savings

Inventory turnover rate formula:

in your bank. If you buy something and don’t get three percent on

Annual Cost of Inventory ÷ Total Inventory

that investment putting that bottle on the shelf, then the answer is you don’t need it. You shouldn’t buy it,” he said.

You can adjust this formula to calculate for specific categories and products. You may want deeper stock levels for items

Open-to-buy formula: Planned Sales + Planned Markdowns + Planned End of Month Inventory – Planned Beginning of Month Inventory

with a high turnover rate and shallower levels for those with a low turnover rate. Products with the lowest rates may need to be removed entirely.

Another strategy, often called the minimum/maximum method, determines a minimum and maximum number of products you want in your inventory at any given time. Your inventory never

ECONOMIC ORDER QUANTITY

drops below the minimum or goes above the maximum. This method focuses on keeping inventory at consistent economic

There’s a common inventory technique to help

levels. Instead of ordering a budgeted amount every month, you

determine the number of products to purchase per

continually order based on real-time stock levels so you’ll always

order. This formula, called the economic order quantity

have stock available without going overboard.

(EOQ), can help find a mathematical sweet spot based

No matter which method you use, you need to know your

on annual cost and demand data, and can be especially

pharmacy and your patients. “The biggest error is really not

useful when setting minimum/maximum thresholds in

knowing your clientele and not customizing things for change of

your perpetual inventory system.

season or aging of community and things like that,” Wertheimer said. He suggests using data from the current month a year prior.

the EOQ formula:

Decisions about inventory in December this year, for instance,

Square Root of [(2 x Annual Product Quantity x

should be guided by the sales data from December of last year.

Ordering Costs per Order) ÷ Storing Costs]

Because shortages could cost you a patient, Wertheimer recommends erring on the side of excess. It’s worse to not have a

The result of the equation is the amount of product to

product than to have too many. This is especially true for a fledgling

purchase each time you order. When using the min/

pharmacy that depends on customer growth and doesn’t yet have

max method, the difference between your maximum

enough data for optimal order quantities. “You really don’t know

and your minimum should equal the EOQ. For example,

what your typical array of sales is going to be until you get to a

if your EOQ is 25, your minimum could be 5 and your

steady state where the same people come in for the same things,”

max 30. When your inventory reaches 5, you’ll order 25

he said.

more product to fill your inventory back to 30.

Having been around since 1982, Dale’s Pharmacy has developed

Among other benefits, the EOQ number can help

a steady stream of patients that Duong can rely on. This enables

you determine whether acquiring higher numbers of

him to base his inventory almost entirely on his current clientele.

products for a discount is worth it.

Rather than planning certain quantities and timing based on general sales data and estimates, he stocks what his current

Wertheimer recalled a time when he was working at a

patients already have prescriptions for and schedules the orders

community pharmacy during his days as a student. This

based on their refill dates. These maintenance drugs from current

was the era before streaming music and mobile phones,

patients account for the majority of his stock. “If you’ve never had a

and a salesman came to the owner offering a free AM/

patient on a specific product, why would you carry it? It’s a waste of

FM radio with a bulk purchase of milk of magnesia. The

your inventory,” Duong said. “It’s more important to focus on who

owner took the bait, and “there were 144 bottles of milk

you have than to try to prepare for potential patients.” If more than

of magnesia whose cost was tied up in the basement,

one patient is using the same medication, Duong typically keeps a

and it might have taken a year or more before they

two-week supply available if it’s a generic and a one-week supply if

were sold.”

it’s a brand name—unlike generics, brands are always available and have price stability.

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In Duong’s experience, having a prescription medication out of stock when a new patient walks in doesn’t necessarily result in a lost customer. Most are willing to wait, and for those who need it

But I would also have a high return on investment because I’d have less money tied up in inventory.

“We teach in school you should strive somewhere between 12

that day, Duong recommends contacting other pharmacies for the

and 18 inventory turns a year. The higher you can get the better.”

patient and directing them there. “If a patient comes in for the first

He recommends using the NCPA Digest to compare your store to

time and needs a medication same-day, I think if you shouldered

national averages and, if possible, to stores with similar volume.

that burden, called around other pharmacies, even competitors,

“It’s always good to know where you stand to benchmark against

and you let that patient know you’ll start carrying that product for

the norms,” he said.

them, I think that patient is going to give you another shot. They’re going to be highly impressed.”

For Duong, all of these strategies are more guidelines than law.

You can also calculate the number of days it takes to turn your pharmacy’s inventory, which can help you determine lead times for reorders and get an idea of how long it may take for a product to

Managing inventory is more art than math, he said. “With more

convert to cash in the bank. Ideally, the number should be less than

than 1,300 drugs per month, I can’t go the same route for each and

37 days.

every drug we carry.”

FRONT-END DECISIONS The front end brings unique inventory challenges, including

Inventory turnover days: 365 (Days in Year) ÷ Inventory Turnover Rate

decisions about which products to buy in the first place, because of the variety of product options and changing demand. These

Although the turnover rate provides a general measurement

inventory decisions require more trial-and-error, and Wertheimer

of success, it won’t give the total financial picture on its own. The

said pharmacies should be content with that.

formula accounts for sales but not for profit. Turning items quickly

“Let’s say all of a sudden people are interested in Flintstones

doesn’t necessarily mean you’re earning profit from them. For

bandages, and you have one box in and didn’t see it coming—that’s

example, one common way to increase turnover rate is to offer

okay,” he said. “It’s better to be cautious without being out of stock.

low prices, but that lowers margins. That approach is often worth

It’s important not to make decisions based on a short period of

it, Wertheimer said, especially to generate new customers and

time, but to watch the trends carefully. If they’re not sustained, you

compete with national chains. But how do you know how low prices

need to return it to the wholesaler, buy less, and try to work down

can drop to increase turnover before sacrificing too much profit?

your inventory. If you keep your eyes open and are sensitive to trends, you’ll be okay.”

Duong shares the same sentiment of not getting too worked up

That’s where a ratio like percent-net-profit can be helpful. It tells the percent ratio of net profit to average inventory, which you calculate by dividing average inventory by net profit. (Calculate the

over front-end inventory. Compared to the pharmacy side, it just

average inventory by averaging beginning inventory and ending

isn’t worth it, he said. And Dale’s Pharmacy has the biggest front

inventory values during a specified period of time.) The lower the

end in the state, according to Duong. “For most people, their OTC

number, the lower the profit and vice versa.

isn’t going to make or break them. It’s not even going to move the needle,” he said. “OTC products as compared to Rx products, the prices are insignificant. You don’t have OTC bottles on the shelves that are a thousand dollars.”

Percent net profit: Average Inventory ÷ Net Profit

Duong’s approach to the front end is straightforward. After determining the initial order quantity, his system automatically

There isn’t a magic number, and finding the right balance

orders a new product as soon as it sells. The continuous system

requires diligence from the pharmacy in measuring data and

runs annually, and Duong hasn’t had to make many adjustments,

knowing your patients. “Like everything else, there’s a happy

even seasonally.

medium,” Wertheimer said. “There’s no one-size-fits-all. Each store has to figure it out.”

TWO MEASUREMENTS FOR A HEALTHY BUSINESS In addition to helping with stocking decisions, the inventory turnover rate can serve as a barometer for the business. “Your return on investment is in essence determined by your turnover,” Wertheimer said. “The higher the turnover rate, the less amount of capital you have tied up out of your pocket. If I could get by with one bottle of everything on the shelf, I would have a high turnover.

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The ABC Analysis A common inventory technique, the “ABC analysis” can provide

5 Simple Strategies for Better Inventory Management

more precision and better control of inventory for the front end. By breaking down products according to how well they sell, you can better allocate inventory to the most lucrative products that spend

1. Return unclaimed prescriptions to stock: Implement a

less time on the shelf.

system for responding quickly to abandoned prescriptions to keep

The A category:

your inventory accurate and prevent ordering more than you need.

The “A category” contains products you should

always have on hand. They’re your top-selling, highest-turnover

2. Perform cycle counts:

products. Generally, “A” products make up about 10 percent of

audits of inventory to account for shortages, overages, misplaced

inventory but 70 percent of sales.

or stolen product, and more.

The B category:

3. Synchronize patients: Getting all of a patient’s medications

Categories B and C contain lower-demand

products with slower turnover rates. Generally, “B” products make up 20 percent of inventory and 20 percent of sales.

The C category:

“C” items make up 70 percent of inventory and

only 10 percent of sales.

Perform routine or periodic manual

rolled into one pickup enables precise and predictable inventory stocking.

4. Set up automatic refills: Similar to synchronization, knowing exactly when a patient will pick up a refill enables you to have the product in stock exactly when they need it rather than having it take up shelf space for days or weeks.

Although the ABC analysis is used among some retail businesses to make inventory decisions, especially those that use the open-to-

5. Stay up to date on shortages: Staying diligent in tracking

buy method, Wertheimer recommends against it. What’s important

shortages will help you know when to increase your stock or order

is having everything your patients need, not the products that

alternative NDCs with minimal disruption.

make up the biggest portion of sales.

“As far as I’m concerned, if somebody comes in and they want toothpaste, to me that’s just as important as someone who needs a bottle of insulin,” he said. “For over-the-counter medicines and prescription medicines, they’re all important. You’re going to lose those potential sales because that person is not going to be coming back.”

ELEMENTS | The business magazine for independent pharmacy | SEPTEMBER 2019

23

SPOTLIGHT

A WORLD WITHOUT PBMs

This community pharmacy does zero business with third parties and thrives Imagine a world without DIR fees. No clawbacks, no audits, no

rather than a cash pharmacy. “Our service level and the prices that

worrying about whether reimbursements from PBMs will cover

we bring to the market allow us to position ourselves as the highest

your costs. That world seems like a thing of the past, doesn’t it?

value pharmacy in the community where we operate,” Wright said.

Well, Mark Wright, founder of GenScripts Pharmacy in Tulsa,

From the beginning, GenScripts worked with local physicians

Oklahoma, has created a sustainable business model reminiscent

to help introduce their new concept to patients. Physicians would

of those days when the world of pharmacy was simpler, and more

refer patients who were uninsured or underinsured and concerned

lucrative. Founded in 2006, GenScripts cut out all third parties from

about the cost of their prescriptions. But then, something funny

day one—no insurance companies and no PBMs, no matter what. In

happened. “The physicians liked the look of our prices, and they

the thirteen years since its founding, the model hasn’t changed, and

started showing up, too,” Wright said.

the pharmacy now has four locations, with some doing as much as 250 scripts per day—all paid for with cash. “The business model is

KEEPING COSTS LOW

quite profitable,” Wright said. “And it really satisfies the needs of

GenScripts runs a tight ship to keep the costs of their prescriptions

our patients and allows us to serve them.”

affordable to the people that need them most. They aggressively

Wright began his career as a pharmacist and ended it as a third-

seek the best prices, keep a low inventory, and mostly dispense

party administrator, and when he retired, he began working as a

generic medications. “It’s a real simple business model that has to

relief pharmacist in both independent and chain pharmacies. What

be managed in a very careful fashion,” Wright said. “It does take a

he experienced there dismayed him.

significant amount of marketing to make it work.”

Both the pharmacy staff and the patients were being yanked

Initially, the pharmacy mostly served uninsured patients

around by third parties with long wait times and prior authorizations,

who would have been paying out of pocket no matter what. But

he said, which is something he’d never dealt with in his early years

over the years they’ve also gained traction with patients who

practicing. “The folks that were most impacted were the people

have insurance.

who didn’t have any insurance at all,” Wright said. “They basically got stuck into that same system and got worse treatment than anybody.”

He knew that he could find a better way.

“People’s plans can be really restrictive in terms of formularies, deductibles, requirements for prior authorizations and all the hassle that goes on there,” Wright explained. “We have just grown tremendously with the insured patient. We went from thinking we

BREAKING THE MOLD

could support one pharmacy taking care of the uninsured, and now

When Wright first began contemplating opening an independent

we’re in a position to operate five pharmacies that take care of not

pharmacy, he asked himself, “Where’s the greatest need?” It was the

only the uninsured but also the people who have coverage and

early 2000s, long before the Affordable Care Act, which meant there

have to be careful with their healthcare spend.”

were scores of people with no insurance coverage and many who

One consequence of the cash-only model is that GenScripts

didn’t have access to Medicare Part D. “We said, ‘Well, let’s cut out

doesn’t always have the pricier, less-commonly prescribed drugs

all third parties. See if we can make a living and take care of these

on hand. But they do their best to accommodate patients’ needs.

people at the same time by running an efficient operation.’ And

As long as their wholesaler has the drug in stock, they can have it

that’s what we did,” Wright explained.

in the pharmacy the next day with overnight shipping. Sometimes,

Although it didn’t take much capital to open their first location

they will even contact a patient’s physician to see if they’re okay

at the heart of Tulsa, the pharmacy’s cash-only concept was met

with dispensing the medication in trade packaging to accelerate the

with confusion from wholesalers and scrutiny from regulators.

process and get it to the patient faster.

“The wholesalers didn’t know what to make of us,” Wright said.

GenScripts hasn’t found a way to incorporate specialty

And at the time, there was controversy going on in Florida over pill

medications like biologics into the cash-only model, however. “At

mills known as “cash pharmacies” that made regulators leery of the

this point, we’ve found no way to adapt our model to satisfy the

cash model. So, Wright pitched GenScripts as a high-value pharmacy

great need that exists in that marketplace,” Wright said.

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so profitable, and it’s simple to operate, so as opportunities come HIGH CONTACT

along we intend to expand pretty rapidly over the next three to four

The staff at GenScripts doesn’t have to spend a large chunk of their

years,” Wright said.

time wrangling insurance companies and PBMs, which means the

The pharmacy has also recently brought in a Chief Information

job is more fulfilling for the pharmacists and more customized for

Officer (CIO) to help them analyze their market. They’ve begun to

the patients. “We’re not all stressed out about whether we can get

develop contracts with larger employers and bring in groups of

paid by the PBM,” Wright said, which allows pharmacists to focus

patients rather than enticing them one at a time.

on what’s best for their patients.

Staff members offer personal consultations to find the most

But the overarching mission remains the same: serve patients well, with the best prices, without the interference of third parties.

affordable path for patients. They demonstrate how low the costs

Wright said, “We don’t try to be everything to everybody—we’re not

can be, which encourages adherence. They also get insured patients

a 24-hour pharmacy. But we do take care of the people who come

through the door by showing them how they can save money.

in to deal with us in a five-star fashion.”

“We have a formal program where people can schedule a noobligation, no-cost prescription cost audit with our pharmacists.

It’s printed out for them and goes with them to their physicians so they can discuss their options,” Wright explained. They propose cost-saving measures like buying in bulk or switching to an alternative therapy. Ultimately, Wright said, GenScripts focuses on the traditional triad of pharmacy: “The pharmacist working with the patient and his physician to optimize care.”

PUSH TOWARD THE FUTURE The idea of a cash-only pharmacy harkens back to Wright’s days chipping ice in his father’s pharmacy in the 1950s, but GenScripts

“The business model is quite profitable. And it really satisfies the needs of our patients and allows us toPhysician Patient serve them.”

is poised to push the business model into the 21st century. They currently operate four stores in the Tulsa area and are planning to expand into Oklahoma City and beyond. “The business model is

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

25

SPOTLIGHT

MONEY

HOT PRODUCTS, RED TAPE Durable medical equipment is in demand, but is it worth the hassle?

The market for durable medical equipment (DME) was worth

For J & D Pharmacy, CPAPs and CPAP supplies have proven

nearly $42 billion in 2016, according to a 2018 study by Grand View

to be both popular and profitable. “We belong to a re-supply

Research, and is forecasted to grow. Conditions like cancer, cardiac

program,” Fisher said. “It has helped us with our inventory costs.

disorders, and neurological disorders are on the rise, which means

We can order through them and they ship to us at a flat cost, which

the demand for DME products that aid long-term care like personal

we find to be much more profitable than having all that inventory

mobility devices and medical furniture is on the rise too.

all the time and not knowing which one’s going to go out and which

For the savvy pharmacist, this may seem like an excellent business opportunity. But is getting into the DME market worth it in the long run?

J & D Pharmacy, with locations in Warsaw and Sedalia, Missouri,

one isn’t.”

Having a traditional retail pharmacy and durable medical equipment under the same roof can have positive effects on both arms of the business. “We have a lot of overlapping patients,”

began selling DME products after the owners went to a conference

Fisher said. “They get their inhalation medicines from the pharmacy

and learned about the need for them in rural areas. “They came

and their nebulizers over here.” It makes billing more convenient,

back and took a look at our area, and found that, yes, there was no

because often in order to get inhalation medications covered, they

one around to fill any of those prescriptions,” explained Carolynn

have to know exactly when they received their nebulizer.

Fisher, J & D Pharmacy’s home medical equipment manager.

Erickson Pharmacy, located in Clintonville, Wisconsin, also saw

Erickson Pharmacy strives to make its location a one-stop shop for patients, and having both a traditional retail pharmacy and

demand for DME products in their rural area. They opened the

durable medical equipment helps achieve that. “Our customers are

DME portion of the business in 1991 and now serve five counties.

very loyal,” said Collier. “Since we serve five counties, we want to

“It’s been very much needed in the community,” said Diane Collier,

keep our name out there, that we offer lots of different services.”

owner of Erickson Pharmacy.

But despite the demand, both pharmacies have experienced regulatory hiccups that have created challenges in running their DME services.

MEETING DEMAND

By The Numbers

Patients who are recovering from a hospital stay or living with

$41.9 Billion: The value of the durable medical

long-term medical conditions often need more than just their

equipment market in 2016

medications to maintain a fulfilling and comfortable quality of life.

By offering DME equipment, pharmacies can take a more proactive

6 Percent: Estimated compound annual growth rate

role in their patients’ health.

for the DME market through 2025

Senior patients who have difficulty getting around may come to a DME service for a wheelchair, walker, or cane, while

40 Million: People aged 65 and above in the U.S., a key

diabetic patients have regular need for glucose testing supplies or

demographic for DME

compression socks.

“I sell a lot of lift chairs and aids for daily living,” said Collier.

“Say you’re having a hard time getting out of the car, there’s a

70 Percent: Increase in new cancer diagnoses through 2034, creating demand for DME

handle that hooks into the door space to assist you.” Hospital beds, wheelchairs, walkers, and oxygen are also commonly needed items

Source: Grand View Research

at Erickson Pharmacy.

ELEMENTS | The business magazine for independent pharmacy | DECEMBER 2019

27

COVERAGE HEADACHES

caught up in paperwork and red tape to ensure they are complying

Most DME products will be covered by patients’ insurance as

with the rules.

long as a doctor has written a prescription, but like medications

One sticking point is getting a certificate of medical necessity for

on the traditional retail end of pharmacy, reimbursements aren’t

each piece of equipment that’s prescribed to patients. “You have to

always satisfactory. “Reimbursements have gone down and the

know all of Medicare’s rules and guidelines,” Collier said. “There’s

administrative costs have gone up,” Collier said frankly. Medicare

a website you can look at, but you have to be a rocket scientist to

makes up about 30 percent of her business while the rest is mostly third-party commercial insurance.

On top of low reimbursements, the journey to getting equipment covered by insurance is not always smooth sailing. “Our claims don’t adjudicate in real time,” said Fisher, whose clientele is 75 percent Medicare patients. “They have two weeks to decide

Regulatory Requirements for DME Sales

whether they are going to pay us or not. If we receive a denial, we have to search out the reason and decide if we need to file a

In order to sell durable medical equipment and get

redetermination with more documentation or if we can call and do

reimbursed by Medicare, pharmacies have to meet

a reopening to change a diagnosis code or something like that.”

stringent standards.

At Erickson Pharmacy, Collier has had similar experiences.

“Sometimes it seems like all we do is sit on the phone and fight

- Accreditation from one of ten national accreditation

with the insurance company to pay the claims even though we’ve

organizations approved by the Centers for Medicare &

got the doctor’s order, we’ve got the office notes, we’ve got the

Medicaid Services (CMS)

correct codes.”

The reason for this slowdown is increased regulation. In

- Compliance with the Supplier Standards set by CMS

2008, the Medicare Improvements for Patients and Providers Act imposed new accreditation requirements for DME suppliers who want to maintain Medicare billing privileges. Collier acknowledged,

- A $50,000 surety bond for each National

Provider Identifier

“It got rid of a lot of the bad players out there, which is amazing for our industry,” but the flip side of that coin means providers are

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Source: Centers for Medicare and Medicaid Services

figure out what’s covered and what qualifies it to be covered.”

Even if the pharmacy does know Medicare’s requirements, dealing with Medicare replacement programs can often throw an additional wrench into the process. “They say they follow Medicare guidelines, which we know pretty well, and we have to have a little debate on whether they are paying us fairly based on what Medicare says,” Fisher said. “That runs into redeterminations as well. It’s a struggle, and for less money than we used to get. But we have a large Medicare population and we’re determined to provide them with the best service we possibly can.”

The tangle of requirements put pressure not only on the pharmacy but also on the doctors who prescribe the equipment.

“Nine times out of ten, a prescription is going to be inadequate, and then we have to bother the doctor’s office,” Collier said, because the insurance companies require more information before they decide to approve coverage. “They’re so bogged down with paperwork they don’t have time to be a doctor.”

TIME IS MONEY Another consequence of the regulatory maze is increased administrative costs for pharmacies. Collier acknowledged that she’s had to add staff to her roster just to deal with the everchanging demands from insurance companies. “You have to have a really good staff and make sure to keep your staff educated in order to get your claims paid,” she said. “I think that’s the biggest challenge of the whole industry.”

Erickson Pharmacy carries DME accreditation with the Accreditation Commission for Health Care (ACHC) that keeps them up to date on any new regulations, but more education is sometimes needed.

Collier recently sent two staff members to a Medicare seminar so they could find solutions to the billing problems they frequently face. She estimated that it cost around $1000, and they didn’t receive answers to their questions because the Medicare specialists didn’t have the right knowledge or resources.

When billing Medicare, pharmacies may face the same kind of disorganization. “You can have three people call Medicare with the exact same question and get three completely different answers.

Then you don’t know what’s right or wrong, and the bill gets denied, and denied again,” Collier said. “Then you get on the phone, and they realize the bill never should have been denied in the first place.”

“You have to have a really good staff and make sure to keep your staff educated.”

DIVERSIFY FOR SUCCESS To bypass the unreliable nature of Medicare and insurance reimbursements, Collier has changed her strategy to incorporate more cash sales. But even that comes with hurdles to jump over.

If a pharmacy sells a piece of durable medical equipment for cash, they have to let the patient know that Medicare might cover the item if they had a prescription.

For the patient, this means they would have to make an

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appointment, go to the doctor, and get a prescription that has all the necessary notes attached, even if all they want is a cane or a walker. Patients who decide they don’t want to go through all that and would rather pay cash have to sign a document that the pharmacy keeps on file. “If we don’t have that signed, and Medicare audits me, they can recoup my money and make me pay the customer back,” Collier said.

What Is Durable Medical Equipment?

Erickson Pharmacy also keeps in touch with their referral sources—like care management programs, emergency rooms, and

Durable medical equipment is especially needed by seniors

other specialists—to ensure a steady flow of new patients. “About

and people with chronic health conditions. These products

70 percent of the business is referrals,” Collier said.

help those people live comfortably in their own home.

QUALITY IS KEY Despite the long and winding road to getting durable medical

Mobility Aids

Respiratory Supplies

equipment covered, both Erickson Pharmacy and J & D Pharmacy

- Wheelchairs

- CPAP/BiPAP devices and supplies

focus on providing their patients with quality service.

- Walkers

- Oxygen

- Canes

- Nebulizers

Diabetes Care

Independent Living Aids

- Glucose meters

- Over-bed tables

needs. They have a 24/7 phone line, and patients are guaranteed

- Lancets

- Utensil holders

to get an actual person on the phone when they call. The pharmacy

- Test strips

- Doorknob grippers

is open on Saturdays for patients who work during the week. They

- Diabetic shoes

- Hospital beds

Fisher said that at J & D Pharmacy, “We have a large array of products, but if a patient needs something we don’t have in stock, our ordering staff will immediately go to our vendors and see if we can get it for them.”

Erickson Pharmacy has a similar attentiveness to patients’

provide support for patients in other ways, too, like making sure

- First aid kits

patients using oxygen and CPAP equipment know they have access to a respiratory therapist every day of the week.

Incontinence Products

Therapy Aids

difficulties, both pharmacies have established durable medical equipment operations that have become integral to their

- Liners and guards

- Exercise equipment

communities. Collier attributes this to “having a great staff that

- Underpads

- Reaching aids

actually cares.”

- Adult diapers

- Non-slip matting

Despite so many regulatory obstacles and time-consuming

- Crutches

- Catheters

Ostomy Products

Bath Products

- Ostomy pouches

- Shower benches

- Nutritional supplements - Toilet safety rails - Prep wipes - Wound care

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OUTLOOK income, and gender, there are almost no limitations to how you can divvy up your market.

“Segmentation variables can be literally any characteristic that makes one group different from another,” said Lonny Kocina, founder of the publicity company Media Relations Agency and author of The CEO’s Guide to Marketing. “As an extreme example, a submarket could consist of blond men between the ages of 30 and 40 who have won a spelling bee, own a red Chevy, love to eat olives, and have mothers named Kathy.”

By segmenting, you can speak more directly and specifically to people’s needs, which makes them more likely to want what you offer, said Kevin Tash, CEO of the digital marketing agency Tack Media. “This increases their ability to build a rapport and engage with your pharmacy more,” he said. “And you build more loyalty.”

It also enables you to identify your best patients so you can tailor your marketing to get more from them. “Certain groups of people make much better customers than others. When groups of people are singled out for special promotions, that’s called ‘target marketing,’ and it can be a very profitable strategy if done right,” Kocina said. “Take women for instance. In the healthcare industry, women are a much more sought-after group than men. That’s

MARKET SEGMENTATION

because when it comes to health care, women not only make decisions for themselves, they frequently make them for the men in their lives.”

HOW TO FIND SEGMENT DATA The greatest difficulty of segmentation is finding the data. How do you identify moms of young children for when you send back-to-

How to improve your marketing by targeting specific groups of patients

school postcards and emails? How can you spot bargain buyers so

Imagine you’re shopping for a pair of shoes. There’s a bargain bin

to your pharmacy, it’s most effective for dialing in on current

piled high with every type and size—baby shoes, work boots, beach

customers. Find helpful data using your point-of-sale system,

waders, high heels. You came into the store looking for a specific

loyalty rewards program, patient health files, and surveys. You

kind of shoe for a specific occasion. Would you blindly stick your

can also use customer relationship management (CRM) tools

hand into the bin and buy the first pair you happened to pull out?

to track customer information. From those sources, you should

Unfortunately, many independent pharmacies use a bargainbin approach to their marketing strategy—sending out postcards, emails, and promotions without any regard for who’s receiving

you can get them in your store with coupons?

The first step is to start with what you have. Although segmentation can help you reach prospects who have never been

gain enough information to segment based on virtually any relevant criteria.

To discover data on new prospects in your community, you’ll

them and what content would best serve, and entice, those

need to do research using public sources, local connections, and

particular people.

the internet. For demographic information, you can search the U.S.

“Without having a specific market in mind, you are targeting

Census Bureau’s American Fact Finder, the U.S. Bureau of Labor

everyone, which means you are targeting no one,” said Islin

Statistics, and the Bureau of Economic Analysis. Munisteri suggests

Munisteri, vice president of sales and marketing at Theia

using the U.S. Postal Service, IRS, Google Ads, and Facebook Ads.

Marketing. “It’s important for local businesses such as independent pharmacies to know the best part of the market that they serve.”

What you’re able to do with this general information on prospects will be limited—segments will inevitably be broader and

To find the shoe that fits your patients, so to speak, there’s a

based on location. For example, you may find that a certain zip

strategy called market segmentation, which simply means splitting

code has a large population of millennials but you won’t be able

your customers into specific target groups. Although market

to identify which addresses exactly. So your mailers will focus on

segmentation is often driven by demographic factors like age,

selling specifically to millennials in that zip code even though they

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5 Ways to Segment Your Pharmacy’s Market 1. Location: Where people live affects where they shop, especially

to dig even deeper into what drives your patients and what might

when it comes to pharmacies. “Customers who live close by are

motivate prospects to use your pharmacy.

simply more likely to take advantage of a promotional offer than customers who live farther away and may have easy access to your

Psychographic factors include:

competitors,” Kocina said. More distant prospects may need extra

- Values

motivation to make the trek to your pharmacy, which means they

- Attitudes

should receive more enticing promotions than prospects in your

- Lifestyle

zip code.

- Interests

2. Demographics: Even though each of your patients is a

- Opinions

distinct individual, they likely have similar characteristics or habits.

4. Behavior: Determining patients’ behaviors can reveal their

“Children have different needs from seniors. Women may respond

attitudes toward a product, their frequency of use of a product,

to marketing differently from men. Individuals from different ethnic

their brand loyalty, their familiarity with the brand, and more.

groups may value different patient engagement approaches,” said

Independent pharmacies need to understand their patients’

Christopher K. Lee, MPH, CPHQ, a healthcare business consultant.

behavior both as it relates to prescriptions and retail shopping.

Demographic factors include:

Behavioral factors include:

- Age

- How often patients visit

- Income

- What types of front-end products they purchase

- Gender

- What types of prescriptions they fill

- Ethnicity - Generation

5. Payers: Pharmacies can segment based on how patients pay,

- Nationality or culture

whether it’s through Medicare, Medicaid, private insurance, or cash.

- Job - Religion

“Even among Medicare Part D payers, there may be different

- Education level

programs or coverage determinations that may influence how a

- Family life cycle (single, married, kids, empty nest, etc.)

pharmacy targets those patients,” Lee said. You can even learn

3. Psychographics: Psychographics delineates people based on

which insurance plans provide the best reimbursement rates for your pharmacy and focus on marketing to those patients.

various psychological criteria. Looking at psychographics allows you

will also be received by people outside that segment. That’s okay.

relationship so that you’re top of mind when they’re ready to refill

You will still be narrowing your messaging to your primary targets

their prescription.”

and will therefore be more effective in reaching those prospects.

If you segment diabetes patients, you can focus the campaign

And you can follow up that campaign with another one focused on

on your weight loss program, your seminars on managing insulin,

the next largest segment in the same area.

or your large selection of glucose meters. For a segment of patients in lower income brackets, you can focus on coupon promotions

HOW TO USE MARKET SEGMENTATION

to get them in your store. For patients over the age of 65, you

Once you’ve segmented your patients, the next step is developing

can send postcards on your medication synchronization or home

marketing campaigns focused on the specific needs of those

medical equipment. For a segment of natural shoppers, you can

segments. “For example, you might be targeting seniors age 50

promote your high-end nutraceuticals and herbal remedies.

to 64 with a household income of greater than $60,000 a year,”

Your unique approach will depend on your unique prospects. The

Munisteri said. “You can create specific marketing materials such as

key is to fit your marketing content to their particular needs. If the

flyers or white papers for that segment of the population you serve.

shoe fits, they’ll buy it.

You can also get them on your email list and further nurture the

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