A strategy for maintaining your margin post Competition Commission
October 31st 2005 has arrived!
Reactions among practices to the new dispensing regulations fall into one of three types:
If I keep my head down, it may not happen to me!
Panic reduction of my medicines prices
Planned strategy to minimise the effect on profitability of my business
Those in the first group may be breaking the law and are certainly taking a significant risk with their future profitability.
Those in the second group are taking a big risk with their future profitability.
The third group can take comfort from the fact that they have a strategy to deal with a significant threat to their future profitability and can look forward with some confidence to the future.
If you are in the first two groups, are happy with your lot, can sleep at night and are due to come in to a large inheritance, you can stop reading now and go back to your favourite television programme.
If you are, or would like to be, in the third group but haven't quite figured out how to do it then read on.
A strategy for protecting your business
When planning to move your practice pricing policy to safer ground it's wise to start by figuring out where you are now. This involves taking a number of measurements to plot your current position on the map. Only when you know where you are starting out from can you hope to plot a successful route to your intended safe haven.
We therefore advise that you look at your top selling drugs. The top 20 will give you a fair idea, but the top 50 is a more reliable measurement. Any reasonable period will do, but taking 12 months' figures is safer as it allows for seasonal trends. Remember if you have changed brands during the survey period, e.g. from one ectoparasiticide to another, you will need to look at the sum of the both.
Obtain the following three measurements for each:
total income generated including any built in dispensing fees
total number of unit sales e.g. 25,000 tablets sold
total number of times that item was sold, i.e the number of times that item featured on an invoice
You will also need the unit cost of each product (preferably net of all discounts) and what mark up and dispensing or split pack surcharge is applied to each item.
You can now calculate the income from each of your main selling items, splitting out the total dispensing fees from the gross profit provided by your mark up
Drug Name
Unit Cost Price
Number Sold
Number of times sold
Mark up %
Dispense fee surcharge
Total Dispense Fee Income
Total Income
Popular Ectoparasiticide
£12.06
500
500
60%
£ 0.00
£ 0.00
£ 9,648.00
Anti-inflammatory tablet
£ 0.40
12,411
505
60%
£ 3.50
£ 1,767.50
£ 9,710.54
Anti-inflammatory Drops
£ 7.75
150
150
50%
£ 0.00
£ 0.00
£ 1,743.75
Popular Antibiotic
£ 0.18
3,000
200
60%
£ 4.00
£ 800.00
£ 1,664.00
Totals
1355
£ 2,567.50
£ 22,766.29
You can now plan 'What-if' scenarios using the above data.
For example, you currently sell 500 packs of a popular ectoparasiticide at 60% mark up with an average number of packs per sale of one. You do not apply a dispensing fee. You want to protect yourself against a potential onslaught of free prescription requests.
You choose to apply a medicinal advice fee of £3.50 to all sales and all prescriptions of this item. This is legal as long as you charge the same fee to clients who purchase from you or take a script elsewhere.
"Under the DTI Order, during the three years from 31 October 2005 a veterinary surgeon cannot charge a client a fee for providing a prescription for a relevant veterinary medicinal product (essentially a POM-V). Veterinary surgeons can, however, pass on to their clients the costs incurred in providing prescriptions, providing they do so in a manner that does not discriminate between clients to whom they give prescriptions and clients to whom they do not."
Quotation from www.rcvs.org.uk New Medicines regulations - your questions answered. 05.01.2006
As you do not want to penalise clients by increasing the overall cost of the product, you reduce your mark up to 30% to compensate.
The effect is a reduction of 18% in the retail price of the product, recovered by applying a professional fee, resulting in a marginal decrease in net income on sales of this product of £ 59.00
Drug Name
Unit Cost Price
Number Sold
Number of times sold
Mark up %
Professional Medicine Advice Fee
Total Professional Medicine Advice Fee Income
Total Income
Popular Ectoparasiticide
£ 12.06
500
500
30%
£ 3.50
£ 1,750
£ 9,589.00
Anti-inflammatory tablet
£ 0.40
12,411
505
45%
£ 5.00
£ 2,525
£ 9,723.38
Anti-inflammatory Drops
£ 7.75
150
150
35%
£ 3.00
£ 450.00
£ 2,019.38
Popular Antibiotic
£ 0.18
3,000
200
25%
£ 5.00
£ 1,000.00
£ 1,675.00
Totals
1355
£ 5,725.00
£ 23,006.76
Similar exercises applied to the other drugs in the example gives a overall reduction in retail price of 15 %, an increase in professional fees of approximately 100% and an increase in net income of around 1 %.
Of course, some allowance may have to be made for the loss of margin on items no longer dispensed by you. The object of the exercise is to minimise this by competing with other suppliers, especially in those areas most likely to be targeted, but at the same time ensuring a reasonable professional medicines advice fee is charged when issuing free prescriptions. Providing that the same fee is applied to all clients, whether receiving a prescription or buying the drugs from your pharmacy, you are being fair and non-discriminatory.
"A medicines decision fee . . would be acceptable as long as it does not discriminate against those who take prescriptions. .. a fee that was clearly itemised as a service only chargeable to those who need medicines (either purchased direct or from a third party with a prescription), could be set in a way that does not discriminate on the basis of whether a client chooses to take a prescription or not."
John Madill, Assistant Director - Competition in Markets, Dti: quotation from letter to a veterinary surgeon 15.12.2005.
However irate you may feel at the unwarranted interference with your business by the Dti, it is important not to take it out on your clients. They did not, on the whole, ask for these changes, but, like us, the changes have been imposed on them. We therefore advise that, unless there are compelling reasons to do otherwise, you should aim for a net revenue neutral result.
By monitoring future trends in sales and prescriptions issued, it will be possible to adjust margins and professional fees to retain your profitability.
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