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Compendium March 2010 (Vol 32, No 3)

In Practice: The Decreasing Role of the Pharmacy in Veterinary Practice: Detrimental to Practice Income

by Ronald E. Whitford, DVM

    In my 30-year career as a professional speaker at regional veterinary continuing education meetings, I have addressed the issue of the future of the veterinary pharmacy many times. Overwhelmingly, the attitudes I encounter regarding this subject are as follows:

    • My clients are different and will buy from me whatever the cost! The truth is that even higher-end earners now shop online stores and discount houses to save money.
    • People will pay me more for the "service" I provide. The reality is that veterinarians provide no better service in relation to drugs than do pharmacists. In fact, owners often get more technical information from pharmacists than they do from us, and they get it in written form!
    • Pharmacy sales are not a large part of my business. Based on my experience as an on-site management consultant, as well as published national statistics, I estimate that up to 25% of clinic income comes from the sale of prescription and nonprescription products.
    • Very few clients question my prices. This may be true, but pet owners today are bombarded by several forms of media telling them that buying veterinary medicines from veterinarians is inconvenient and expensive. Statistics show that very few people who are dissatisfied actually complain.
    • I'm going to milk that cow until every last drop is gone! Unfortunately, changing strategy at that time is too late. The effects of a failure to act will be devastating.

    Most veterinary practice owners do not understand that the biggest concern is not the loss of income from the sale of products, but the overall fee perception for all services we provide. Most people judge the unknown by the known. When our fees are too high for products they can purchase elsewhere, their perception becomes that everything we provide and sell is overpriced. Perception is reality when it comes to service. Could this be part of the reason many practices are seeing less compliance with recommendations? You betcha!

    A Prediction

    I have been associated with this profession now for 50 years and have seen many management strategies come full circle more than once. I have made many predictions—often to be cussed, discussed, and dismissed by others‚Äîand seen most of them come true. When Internet veterinary pharmacies first appeared, about 10 years ago, I included a slide in my presentations stating that these pharmacies (a) certainly were not going to benefit us, (b) would become serious competition, and (c) were merely a forerunner of what would come within 5 to 7 years. I said then that we had a chance to change our ways and prepare to deal with the new competition. As it has turned out, our real competition is not the Internet, but rather the local discount pharmacies. Even big-box retail stores are starting to tap into the generic drug market, with at least one supermarket chain now providing free generic prescription medications for human and veterinary patients. It's a great marketing strategy: get new customers through the door for free prescriptions that only cost the retailer $1 or $2, and pick up an easy profit on the other products the customers buy while in the store. In reality, this is far better and cheaper advertising than billboards and media ads touting any other advantage they may have.

    One prediction I made 3 years ago has yet to come true:

    This profession will, for all practical purposes, be out of the dispensing business by 2015, or at least well on the way to it.

    My reasons for making this prediction are as follows:

    • Cash flow is becoming a far bigger problem in veterinary medicine. As new medications arrive on the scene, wholesale costs will rise dramatically. Is this really the best way to use your money, especially if drugs must be paid for before they are sold? Also, many practitioners have fallen into the trap of delayed billing, which haunts them with a vengeance when it comes time to pay the IRS. Practices on the accrual system also have additional costs in the form of taxes for inventory on hand.
    • The markups necessary to continue to dispense products in bulk will be so low that the profit is not worth the bookkeeping, breakage, and hassle it requires. Any time you cannot dispense with at least a 30% markup, you lose! Even then, the dispensing business is not worth the time and effort. The true cost of a product includes staff time for ordering, unpacking, stocking, etc.
    • It can be difficult to get staff buy-in on marketing products to clients. In fact, staff members themselves may buy products cheaper elsewhere, meaning that they will not market as aggressively to your clients. I have heard a staff member tell a client to buy a product elsewhere because it was cheaper.
    • Unfortunately, I have also encountered the issue of theft in more than one practice. Although it is not a pleasant subject, staff theft does occur, especially when it comes to flea control products, heartworm preventatives, and NSAIDs. In some cases, the thief is taking enough to supply his or her family and friends, or even selling the products on the Internet or to a local pet store!
    • The more successful Internet and media advertising becomes, the more non-veterinary dispensaries will adopt the message that veterinarians have ripped off pet owners for years.

    What Can We Do About It?

    • Know your competition: local stores, mail order services, and Internet retailers. Know what they sell and what prices they charge.
    • Compete where you can. Currently, prescription diets do not have the retail competition that other products face. Therefore, the typical practice markup of 45% on prescription diets—combined with good inventory control—remains modestly profitable, although the relatively low volume sold of these products means that they are not a large revenue generator. On the other hand, the typical 100% practice markup on heartworm preventives and external parasite control products is not competitive with the most advertised Internet pharmacy prices. Unfortunately, if a pet owner is savvy enough to search the Internet, he or she can find many of these products being sold at less than we pay for them. Once a pet owner buys from these sources and receives the delivered product, your practice has lost his or her business for good.
    • When it comes to other prescription drugs (e.g., amoxicillin, cephalexin, thyroxine, prednisone, dexamethasone, meloxicam), the good news is that, right now, although Internet pharmacies are the major sellers, their gross margin profit is being eaten up by their media campaigns. However, this is only a short-term reprieve because, again, once an owner buys from these sources, they are likely to continue doing so. Eventually, these campaigns will generate huge profits. The more immediate threat is from retail stores offering cheap prescriptions for these common generics, especially once they start creating their own campaigns to attract pet owners.
    • When you can't compete, write a prescription. I've heard many practitioners say that they are going to stick to prescribing and dispensing veterinary-labeled products, but a determined client can obtain almost any product from a non-veterinary source (ethically or not). The day may come when veterinary practices provide starter packs of long-term medications and then let clients shop for the best price for refills, but if a product can be obtained in 24 to 48 hours from another source, clients may feel that they do not need a starter pack from the clinic either.
    • Remain ethical. For a practice to stop prescribing effective generics just to sell a product that, theoretically, pet owners cannot get elsewhere is ethically questionable. We owe it to the pets of the world to help owners provide the best medical care they can afford. Surely we can make our living without resorting to hoping that we can pull the wool over the eyes of our clients. Years ago, some veterinarians would put a cc of B12 in a bottle of penicillin so that they could mark it up more without the client asking about purchasing it at the local farmers' co-op. Let's hope that we have moved beyond such practices.
    • Invest in quality staff. Hiring, training, and retaining staff is getting harder and harder to do. I believe it makes more sense for veterinary practices to attract staff members capable of providing and marketing additional services and maintaining good public relations than to use staff time for inventory management. Percentwise, good client relations and service have a far higher gross margin profit.
    • Limit your stock. Even with good inventory control, many products reach their expiration date and are wasted. Products you need to keep on hand for immediate use in your practice must be marked up far more than the 2.6 times cost (recommended in the past by many consultants, myself included) to remain profitable. Therefore, you should limit these products to items that are not stocked in a local pharmacy.

    Looking Ahead

    After all that doom and gloom, here are my predictions and recommendations for the future.

    • I'll reiterate: veterinarians will be out of the pharmacy business by 2015. Because the markup on pharmacy items is typically so high (100%), the effect of this will be a significant loss of income, both gross and net. Practices that have not yet seen a decline in income from these products may not realize that their sales are already down because they are looking at the revenue generated instead of the number of units sold. Fewer units sold at a higher price because of yearly price increases on the wholesale cost generate more money per unit sold, but the key is that fewer units are being sold. Eventually, a point will be reached at which the price cannot be marked up enough to compensate for the lack of sales.
    • We must learn to sell the professional services of our brains and hands rather than "stuff." I foresee that veterinary practices that survive the next 10 years will do so by being competitive on all fees for "shopped" services (i.e., those that clients shop for by calling several practices looking for the best price) and increasing markups for every other service. Because we will no longer have income from product sales, my vision is that our fees for office visits and consultations must at least double within 10 years. We must also charge significantly more for sophisticated services. Unfortunately, this may put high-end sophisticated veterinary care out of reach for most pet owners. We will become even more a tiered profession, with some practices providing only basic services and others (serving the rich or at least upper middle class) offering advanced care.
    • Pet insurance is the best possibility at this time to help us generate the fees we need to survive. The reason for the limited success of pet insurance to date is that the average pet owner does not spend even an amount equal to the fees of a veterinary practice to provide appropriate wellness exams, laboratory procedures, heartworm preventatives, and external parasite control for their pets. Can we realistically expect to see pet insurance grow substantially? Only if we can support the concept and convince our clients that it will help them give their pets the best care.

    Dr. Whitford discloses that he has received financial benefits from Impromed.

    NEXT: Metacarpal and Metatarsal Fractures in Dogs [CE]

    didyouknow

    Did you know... Managing the inventory of a larger practice can be a full-time job, and even in small practices, many hours are needed to do the job well. Designate an inventory manager to help ensure that best practices are consistently followed. Read More

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