The Pharmaceutical
Journal Vol 267 No 7176 p793-794
1 December 2001
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The Pharmaceutical
Journal Vol 267 No 7176 p793-794 |
Why I believe control of entry regulations must be maintained |
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By Kirit Patel |
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Kirit Patel says that it is time for the Government to back the entrepreneurs who are investing their own time and money in delivering health care |
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"The study will examine the market for retail pharmacy services and, in particular, whether consumers are best served by the system that regulates where pharmacies can open. This is key to the business of many chemists and drug stores in a market worth £18.7bn last year. The system will be reviewed to see how the present restrictions affect competition and consumers and whether there are alternative ways of achieving the public interest objectives behind the present arrangements," the OFT said. Why is our Government so disjointed? While one minister praises the role of pharmacists and recognises the importance of maintaining a rationally distributed pharmacy network, another ministry chooses to destroy it overnight. Patricia Hewitt showed her support by attending the annual dinner of the Royal Pharmaceutical Society's Leicestershire and Rutland branch while she was the Minister for Small Business, and yet her civil servants in the Department of Trade and Industry are about to kick us in the teeth. I strongly believe that no one in the Government understands the intricacies of how the community pharmacy sector is funded and how, in turn, these entrepreneurs and champions of community pharmacy support the NHS. Without even taking into account any goodwill value that may be attached to acquiring a pharmacy, each of these proprietors has invested on average £130,000 in NHS dispensing and self-medication. This consists of £30,000 fixtures and fittings, £15,000 tenants' improvement, £5,000 advance rent and rates, £30,000 for dispensing and medical stock holding and £5,000 for tills and computers. Furthermore, they are also NHS debtors. The average amount owed to each pharmacy is approximately £45,000. This makes pharmacy's total investment a staggering £1.6bn. This figure does not include expenditure on property refurbishment, training or marketing. The money for this investment has to be borrowed from banks, which in return seek personal guarantees and other securities. Control of entry gives banks comfort that the business will still be there for the period of the loan, which in most cases is 10 years. One does not need to be an economist to work out how banks would treat future loans if the very security they rely on is no longer deemed tangible. Furthermore, entrepreneurs who risk their money and livelihood deserve better respect. In the real economy, the higher the risk the higher the reward. In pharmacy it seems that risks are rising by the day and returns shrinking by the minute. The average NHS margin is currently well below 14 per cent. The Department of Health, which was keen to bring in Oxford Economic Research Associates to investigate the generics market, should bring it back to look at the economic viability of pharmacies and stop this rot before investment dries up, leaving the Government to pick up the tab. Major multiples, such as Moss and Lloyds, are now concentrating on acquiring pharmacies in Europe, where the return on capital is higher and the risk is lower. This should be a warning sign for the Government. It costs the Government £17 each time a patient visits a doctor, but it costs nothing for a visit to the pharmacist. Furthermore, one in four consultations with a pharmacist does not result in a sale. Pharmacists have played a major role in helping the Government save money by delivering self-medication. An average pharmacy receives £64,000 for dispensing and professional services. With margins likely to be cut from generic reimbursement, coupled with the loss of resale price maintenance, it does not take long to realise how few prescriptions an average pharmacy has to lose before it becomes unviable, bearing in mind the fixed overheads. One must not look at control of entry in isolation. There are many threats currently facing the industry. The removal of RPM was a major loss and it will be months before this will be quantified. The sales of general sale list medicines in community pharmacy have gone down following supermarkets' decision to cut prices. The reduction of NHS margins, the general state of the economy, not to mention the cost of complying with red tape, minimum wages, uniform business rates, paternity leave, health and safety costs and many other matters, have added a lot to business expenses. Nappy and toothpaste sales from pharmacies have long since gone to the supermarkets. Mail order companies, such as Pharmacy2U, are beginning to poach business. Why is it, I am asked, that pharmacies do not close? The answer is simple. Many proprietors subsidise their business by taking below-market salaries. An average proprietor works for 53 hours a week without taking account of the work he or she takes home. If one was to cost these hours out at £18.50 per hour then the professional cost of manning an independent pharmacy is nearly £50,000 per year. I wonder how many pharmacies make £50,000 profit per annum? Many pharmacy owners are simply taking all the financial risk simply to enable them to work for themselves. They would be better off selling their businesses or simply closing down and working for an hourly rate for a multiple. Furthermore, there are other barriers to exit. The liability for the lease commitments, the redundancy payments, not to mention the moral obligation to their staff, the stock write-off, negative equity, etc, play a big part. However, a day will come when the elastic band will break. The Department of Health needs to heed my warning. It needs to step in and help correct the situation. It is in its interest to maintain an infrastructure of pharmacies that serve the interests of the public and not necessarily those of shareholders. It is these vulnerable pharmacy owners who will be the biggest losers, along with the Government, if control of entry goes. Crumbs Every high-street drugstore and major supermarket will open a pharmacy. Doctors have already shown their interest in owning pharmacies through limited companies. What is to stop every single medical practice applying for a contract? My experience is that when a pharmacy opens on surgery premises nearly 90 per cent of the prescriptions dry up, leaving crumbs for neighbouring pharmacies. The very pharmacies that play an important role in providing health care will be threatened. One doctor's limited company actually owns 10 pharmacies. The Government needs to investigate developers that are already charging significant premiums and rents to pharmacy owners who have relocated into surgery premises. These were funded by cheap NHS loans through the cost rent scheme and yet the profit goes to the developers. There is currently an acute workforce shortage in the pharmacy sector. Many of the branches owned by the multiples do not have permanent managers and are simply run by a succession of locums. Some are forced to close when they cannot get locum cover. What will happen, I wonder, when control of entry is removed and everyone applies for a contract? Who will help deliver the Government's broader agenda? Who will deliver dispensing and medicines management, not to mention domiciliary and other visits and patient counselling? The Department of Health and the OFT would be well advised to conduct their own surveys to gauge the situation for themselves before scrapping control of entry. It is not in patients' interests to bring back leapfrogging and the polarisation of service that existed before 1987. One of the fundamental objectives of the NHS plan, namely, accessibility of service at a place and time of need of patients, will be compromised. The elderly and not so mobile patients will have to travel further for their health needs. How may I ask will a pharmacy dispensing 8,000 to 10,000 items in a health centre cope with patients walking off the street for self-medication and health advice when other pharmacies in the vicinity close down? My experience shows that patients from one doctor do not walk into an in-house pharmacy at another surgery for advice. The current emphasis on shifting the balance of power to primary care trusts is meant to empower them. Let these PCTs decide under the current "necessary or desirable" clause if any more contracts are needed. Let there be new contracts for out-of-town centres or where there is clearly a need for out-of-hours services. Each PCT can make its own decision based on its own local needs. There is no need for a broad-brush approach that would do long-term damage to the infrastructure that has served the community so well for years. The implementation of the NHS plan is time for investment in resources and bringing about security and stability, not the opposite. More Government and private equity is needed to help deliver the broader health agenda. Money is needed for training and workforce development. Money is needed for investment in information technology and creating consultation areas. The Government needs to act fairly and quickly if it does not want health care delivery going off the rails. It is time to back the entrepreneurs who are investing their own time and money in delivering health care. It is time for positive action. |
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©The Pharmaceutical Journal
On
3 October 2001 the Office of Fair Trading dropped a bombshell on the pharmacy
world. It questioned whether the present control of entry mechanism, which
restricts the granting of new National Health Service contracts, is in
the interest of the public.