Assess and Manage Your Pharmacy’s Profitability

Published - Written by Keith Loria

To be successful, independent pharmacists must identify the most essential financial key performance indicators (KPIs) for their businesses. For pharmacy owners, having a simple awareness of their pharmacy’s specific KPIs is crucial, according to Christopher Cella, RPh, national vice president for RxOwnership at McKesson, a no-fee resource for independent pharmacies seeking financial and ownership transaction guidance. 

“Some owners need help identifying what measures are important and what needs to be monitored from a financial standpoint,” he said. “Once that is established, how do their results match up against other owners in similar market areas, demographics, and services? After you know what your financial results are, you need to understand how to interpret these results as well as understand what levers can be or need to be adjusted to change your results.”

Matthew Johnson, PharmD, chief pharmacy officer for FDS, a Fort Worth, Texas-based pharmacy solutions company, said pharmacists must identify critical actions that drive volume and profitability—and then determine which ones are most advantageous. “In an environment with high unit costs and low margins, profit takes precedence over revenue,” he said. “Utilize shorter feedback loops. Use KPIs that can be measured on daily and weekly cadences. A quarterly view is helpful, but it is far too long to wait before correcting the course.”

All pharmacists should ask themselves certain questions. For instance, do you manage your expenses? Or do you consider your store to be operating efficiently if at the end of the month there is money leftover in your account after paying expenses?

Pay Attention to Controllable Costs

When it comes to helping pharmacists discover KPIs to help inform them on areas of profitability, Cella said independent pharmacy owners must identify their controllable costs. These are expenses one can alter that will directly affect financial results.

“The 3 that come to mind, and the easiest to control, are inventory, payroll, and utilities,” he said. “Any change—positive or negative—in either inventory, payroll, or utilities will directly affect your bottom line. Typically, your payroll and inventory are also your largest numbers on the expense line of your profit-and-loss statement.” Even if things are looking bleak financially, any pharmacist can control these 3 expenses by being diligent.

When it comes to inventory, Cella suggested using a replenishment system and a medication synchronization process. “Inventory should not be ordered immediately after a medication is dispensed,” he said. “It should be ordered just in time for the next prescription fill.” It is important to consider factors such as expiration dates and turnover rates for different products to avoid overstocking and potential profit loss from unused medications.

As for payroll, pharmacists should determine whether they are getting the most out of their employees and have the correct number of individuals on payroll assigned to legitimate tasks. Consider whether you are paying your employees according to market averages. “For utilities, are you monitoring your thermostat and keeping it in the right range?” Cella asked. “Do you have your lights and air conditioning on timers? Being aware of your controllable expenses and making meaningful changes can help the bottom line.”

On Demand: Use the Right Analytics to Unlock Value Beyond Prescription Reimbursements

Identify Areas to Improve Profits

Scott McDougall, MPharm, director and registered manager of The Independent Online Pharmacy, said sourcing the right medicines at the appropriate times in the correct quantities can a! ect profi tability of independent pharmacies. “Some products are evergreen and will always be in demand, such as migraine medicine, while other products are seasonal, such as acne in colder months,” he said. “Your supplier should be able to provide enough stock to cater to these peaks and troughs in demand from consumers, and you should have an accurate planning schedule of how you stock seasonally relevant medicines and in what quantities.”

Another good way to improve profitability is to focus on medicines with the highest profit margins and build KPIs around those opportunities, according to Johnson. “High-level financial reports are often a great starting point,” he said. “Reporting allows pharmacists to dig deeper into brand versus generic sales, reimbursements by plan, and high-cost prescriptions.”

Once these areas of opportunity are pinpointed, Johnson explained, diagnostic tools can reveal the root causes of profitability changes. Often these opportunities can be categorized at the claim, patient, drug, or payer level. “For example, sometimes decreased profitability is not due to a [National Drug Code (NDC)] but rather a change in payer composition of patients prescribed those NDCs,” he said. “Uncovering these blind spots can inform the best KPIs to rally your team around.”

Late refills are prioritized by profitability. Johnson noted that in some cases pharmacies can recover significant profit up to hundreds of thousands of dollars in annual yield just on the KPIs related to late refills. Some KPIs used around this area of focus are the number of calls per week, total call time per week, and total recovered profit per week.

Johnson also suggested leveraging sta! incentive programs to drive results. “Pharmacists drive the most significant results by using incentive programs that tie staff actions and outcomes to a reward,” he said. “It’s helpful to have a tech platform that automatically tracks staff contributions.”

Additionally, he recommended supercharging the prioritization of worklists. “Pharmacists can leverage technology recommendation tools to place a higher priority on adherence tasks when those patients are also tied to performance measures that have a higher impact on [direct and indirect remuneration] fees,” he said.

Optimize Financial Reporting

Independent pharmacists should also pay attention to their financial worksheets, such as the monthly profit-andloss statement, the balance sheet, and year-end statements. “As the owner, they should be receiving or producing a monthly profit-and-loss statement at the very least,” Cella said. “This will allow them to review revenue, gross profi t, expenses, and net profit immediately after they occurred in the previous month. Pharmacy owners can see previous months’ results as well as month-over-month trends."

This monthly report allows owners to make changes quicker and adjust as needed. Yearly reports do not show a picture of each month and it is very difficult to make changes at the end of the year if you do not know when an issue occurred.

Technology solutions that automate calculations are highly beneficial, making it easier to identify and track the most meaningful KPIs. Removing this manual process gives the pharmacy staff more time to focus on execution. Pharmacists can tap into resources such as RxOwnership, National Community Pharmacists Association Digest, or an accountant to help guide them in placing their businesses in better situations.

Final Thoughts

It is critical for pharmacists to make data-driven decisions as close to real time as possible. “Managing the financial performance of a pharmacy is distinctly challenging,” Johnson said. “It is one of the few businesses where identical inventory can sell at wildly different prices depending on the payer. Furthermore, cash flow projections become painstakingly complex from the retroactive DIR fees and stretched payment cycles.”

The COVID-19 pandemic showcased to the public how quickly pharmacies can reinvent and reinvest themselves in their communities. A new era of pharmacy is dawning, in which profit from pharmacy services will eventually eclipse profit from prescriptions. As pharmacies prepare to take these leaps, it is more important than ever to maximize profit and efficiency

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