“what gets measured gets managed” the keys to maximizing margins and operating efficiency...

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“WHAT GETS MEASURED GETS MANAGED”THE KEYS TO MAXIMIZING MARGINS AND OPERATING EFFICIENCY

Presented By: Andy Oaks, President, Retail Pharmacy Management Services, Inc. All Rights Reserved

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“WHAT GETS MEASURED GETS MANAGED”

The key to success and longevity in business depends on the ability to maximize MARGINS that meet all PAYROLL EXPENSES, OPERATING EXPENSES, and TAX OBLIGATIONS on time.

WHAT IS MARGIN?SALE PRICE – COST = GROSS PROFIT DOLLARSGROSS PROFIT DOLLARS / SALE PRICE = PROFIT MARGIN

Do not confuse mark up % with profit margin. Mark up does not equal margin.


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Mark Up to Gross Profit Percent ChartMark Up % Gross Profit %5.27% ………… 5%8.70% ………… 8%9.90% ………… 9%

11.12% ………… 10%12.36% ………… 11%13.64% ………… 12%14.95% ………… 13%16.28% ………… 14%17.65% ………… 15%19.05% ………… 16%20.49% ………… 17%21.96% ………… 18%23.46% ………… 19%25.00% ………… 20%26.59% ………… 21%

Mark Up % Gross Profit %28.21% ………… 22%29.88% ………… 23%31.58% ………… 24%33.34% ………… 25%35.14% ………… 26%36.99% ………… 27%38.89% ………… 28%40.85% ………… 29%42.86% ………… 30%

43.89% ………… 30.5%44.93% ………… 31%47.06% ………… 32%49.26% ………… 33%51.52% ………… 34%53.85% ………… 35%

Mark Up % Gross Profit %56.25% ………… 36%58.73% ………… 37%61.30% ………… 38%63.94% ………… 39%66.67% ………… 40%69.50% ………… 41%72.42% ………… 42%75.44% ………… 43%78.58% ………… 44%81.82% ………… 45%85.19% ………… 46%88.68% ………… 47%92.31% ………… 48%96.08% ………… 49%99.99% (MAX)..… 50%


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Best business practice in pharmacy management requires measuring key metrics on a monthly basis to insure maximum margins are being achieved by SEGMENT OF BUSINESS.

This management discipline is necessary as different SEGMENTS OF BUSINESS produce varying amounts of profit margins with varying PERFORMANCE BENCHMARKS.


“WHAT GETS MEASURED GETS MANAGED”

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SEGMENTS OF BUSINESS in retail pharmacy fill activity:

Cash Cash Discount / Loyalty Plans Charge Accounts Champus Compounds Hospice IV’s Major Medical Medicaid Medicare Medicare Part D Over – the – Counter (OTC) Third Party Insurance Plans Vaccinations Employee Discounts Worker’s Compensation


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CONTROLLABLE ACTIONS AND KEYS TO MAXIMIZING MARGINS

1) BUY IT RIGHTNegotiating lowest buy plan from wholesaler with most favorable payment terms• BE AWARE OF PRICE MANIPULATION TACTICS AND REBATE MODELS


EXAMPLE: A PHARMACY AVERAGES $225,000 IN MONTHLY PRESCRIPTION SALES. BRAND PURCHASES ARE $180,000 (80%) AND GENERIC PURCHASES ARE $45,000 (20%).

WHICH IS THE BETTER BUY PLAN?Wholesaler Buy Plan 1Brands at WAC (Wholesale Acquisition Cost) – 3.5% Discount$ 180,000 x 3.5% = $6,300 Discount on Brand Drugs at invoice

+ Generic Rebate of 20%$45,000 x 20% = $9,000 Rebate

$15,300 TOTAL DISCOUNT AND REBATE

Wholesaler Buy Plan 2Brands at WAC (Wholesale Acquisition Cost) – 4% Discount$ 180,000 x 4% = $7,200 Discount on Brand Drugs at invoice

+ Generic Rebate of 25%$45,000 x 25% = $11,250 Rebate

$18,450 TOTAL DISCOUNT AND REBATE

7Presented By: Andy Oaks, President, Retail Pharmacy Management Services, Inc. All Rights Reserved

ANSWER: Upon due diligence and comparative analysis on line item costs Wholesaler Buy Plan 1 is the better buy plan.

Wholesaler Buy Plan 2 appears better but suppose the following:

Wholesaler Buy Plan 2 has a 30% increase on invoice cost of generic drugs (Pricing/Tier Level)

$45,000 x 130% = $58,500 Generic spend x 25% Rebate = $14,625

The net of Wholesale Buy Plan 2 = $43,875 ($58,500 - $14,625)The net of Wholesale Buy Plan 1 = $36,000 ($45,000 - $9,000)Net increase in generic purchases = $7,875Increase in generic rebate = $5,625Increase in generic purchases = $2,250Decrease in brand purchases = $900NET INCREASE IN COST OF GOODS = $1,350

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2) PRICE IT RIGHT

Best business practice requires daily updates on AVERAGE WHOLESALE PRICE (AWP) and ACTUAL ACQUISITION COST (AAC) in pharmacy dispensing system

• Failing to update costs will result in lower reimbursements and profit margins

• Spot check costs when filling prescriptions

• Take appropriate actions on “profit alerts” within dispensing system

• Know target profit margins of controllable segments of business (Cash, Cash Discount, Charge, Compounds, Employee Discounts)



3) BILL IT RIGHT

Correctly billing third party payers to insure maximum reimbursements

• Have intricate knowledge of your pharmacy computer systems pricing and billing functions

• Contact technical support when needed

• Always check prices after any dispensing system update or changes made by pharmacy staff to billing or pricing formulas

• Always adjudicate third party claims at Average Wholesale Price (AWP) basis

• Notify third party administrator of any Maximum Allowable Cost (MAC) discrepancies

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4) MARKET IT RIGHT


Marketing efforts to increase overall profit margins on prescription sales

• Increase volume in current most profitable segments of business (Cash, Cash Discount, Charge, Compounds, Hospice, IV’s, Vaccinations, Worker’s Compensation)

• Diversify fill activity into new segments of business that produce margins greater than existing overall margin

• Identify opportunities to convert patients to more advantageous Medicare Part D plans

• Create a premier healthcare provider environment with fast friendly service from knowledgeable and personable staff


5) MANAGE IT RIGHTOperating within a culture of awareness

• Pay attention to changes in key metrics including prescription volume, sales, gross profit dollars and percentages and take corrective actions when needed:

Buy It Right - Periodic reviews of buy plan to seek most favorable terms when conditions or opportunities exist.

Price It Right - Maintain profit margins on controllable segments of business when cost of goods increase.

Bill It Right - Identify any losses that are occurring or significant fluctuations in profit margins on prescriptions that are being adjudicated.

Market It Right – Measure the return on marketing efforts/spend to assess results. Are you getting the desired return on investment?


After exhausting all efforts in maximizing margins,

management’s focus must turn to OPERATING EFFICIENCY


KEYS TO OPERATING EFFICIENCY1) HAVE A PLAN (OPERATING BUDGET) Components of an OPERATING BUDGET include the following:

INCOME• PRESCRIPTION SALES - 90% + of total revenue for the independent pharmacy operation• OTHER SALES - usually less than 10% of total revenue• TOTAL SALES REVENUE - measure all payroll and operating expenses relative to this figure

COST OF SALES• PRESCRIPTION PURCHASES – largest checks that will be written having greatest impact on

CASH FLOW• OTHER PURCHASES - inventory turns is key to maximizing margins and CASH FLOW. Be

cautious of under / over stocking the shelves• FREIGHT IN - delivery charges from suppliers• SHRINKAGE - five finger discounts, undetected order shortages, and products used by the

pharmacy operation• INVENTORY WRITE DOWN - out of date items, items liquidated or sold at a loss


Components of an OPERATING BUDGET (continued)

PAYROLL

LARGEST MOST CONTROLLABLE EXPENSE IN PHARMACY - SHOULD NOT EXCEED 15% OF TOTAL SALES REVENUES FOR TYPICAL MATURE PHARMACY OPERATION.

• PHARMACIST - 6% to 8% of total sales revenue

• EMPLOYEES (NON-RPH) - 4% to 6% of total sales revenue

• CONTRACT LABOR - be aware of IRS regulations

• EMPLOYEE BENEFITS - health insurance, health savings accounts, profit-sharing, retirement accounts, continuing education

• PAYROLL TAXES - percentage of gross payroll wages paid by pharmacy

• PAYROLL SERVICES - if outsourced, any applicable fees for payroll processing

• CORPORATE OVERHEAD - management compensation usually for multiple location operations


Components of an OPERATING BUDGET (continued)

OPERATING EXPENSESSHOULD NOT EXCEED 7% OF TOTAL SALES REVENUES FOR TYPICAL MATURE PHARMACY OPERATION.

• ADVERTISING - .50% to .75% allocation ($1,500 - $2,250)• AUTO / DELIVERY - if not applicable, should be considered to best serve community• BAD DEBT - goal is $0• BANK CHARGES - account management fees and credit card processing fees• CASH OVER <SHORT> - best business practice produces zero shortages• COMPUTER SERVICES - $1,000 to $1,500 for software maintenance, support and adjudication

fees• DUES / SUBSCRIPTIONS - PSAO fees, state associations, trade journals, and industry

publications• ENTERTAINMENT / MEALS - not 100% deductible, know IRS guidelines• FRANCHISE SERVICE - varies by wholesaler and programs/services• INSURANCE PROPERTY / CASUALTY - .25% to .35% allocation ($700 - $1,000)• INTEREST - include amounts for all loan payments (auto/business/real estate)• LAUNDRY / UNIFORM - service fee for laundering and purchasing of employee uniforms

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Operating Expenses (continued)

• LICENSE / PERMITS - annual fees for operating a business• MAINTENANCE / REPAIRS - janitorial services, building and equipment upkeep• MISCELLANEOUS - use with caution, best business practice is to categorize expenses• POSTAGE / FREIGHT OUT - mail and shipping costs for products to suppliers and/or customers• PROFESSIONAL FEES - accounting, legal, consulting and/or other business services• RENT BUILDING - lease obligation for space or method of income with tax advantages to

owner• RENT EQUIPMENT - lease/rental agreements for office and/or pharmacy equipment• SECURITY - usually billed quarterly and varies by type of service• SUPPLIES - office and pharmacy supplies including paper products, inks, labels, vials, etc.• TELEPHONE - business line, cell phone, fax line, and internet charges• TRAVEL - gas, mileage, air, hotel costs to attend tradeshows, meetings, and conventions• UTILITIES - electricity, gas, water, and garbage collection


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Non-Inventory Components of an OPERATING BUDGET:

• OTHER INCOME - income generated that is not produced by a sale of a product such as public fax/copy service, vending machine commissions, and vendor rebates

• OTHER EXPENSE – expenses incurred relative to other income

PRE-TAX EARNINGS / LOSSES

Dependent upon effective management of all components (Income, Cost of Sales, Payroll, Operating Expenses, and Non-Inventory)

Best business practice is to provide accurate information for tax preparation. This process is critically important to avoid understating or overstating earnings creating additional tax obligations and possible penalties.

It is also best business practice to project earnings far in advance to most effectively manage any tax obligations.


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2) Building An Operating Budget – Monthly Budget Worksheet


2 Scenarios in building a budget:

1) Existing Business• Use historical data (numbers)

to fill in the blanks

2) Upstart / New Business • Previous Employment• Demographics• Own / Lease Real Estate• Forecasting Expertise

Income In Dollars As Percent Cost of Sales In Dollars As Percent

Sales - Rx Purchases - Rx

Sales - Other Purchases - Other

Total Sales Freight In

Shrinkage

Inv. Write Down

Total Costs

Payroll In Dollars As Percent Expenses In Dollars As Percent

Pharmacist Advertising

Employee (Non RPh) Auto/Delivery

Contract Labor Bad Debt

Employee Benefits Bank Charges

Payroll Taxes Cash Over/Short

Payroll Services Computer Services

Corporate Overhead Contributions

Dues/Subscriptions

Entertainment

NOTES: Franchise Service

Insurance P/C

Interest

Laundry/Uniform

License/Permits

Maint/Repair

Meals

Miscellaneous

Postage/Freight Out

Professional Fees

Rent Building

Rent Equipment

Security

Supplies

Telephone

Travel

Utilities

Other Income

Other Expense

Net Profit / Loss


3) MANAGING TO THE NUMBERS

Implementation of the OPERATING BUDGET and effective execution will produce best results with minimal surprises.

DO NOT FALL VICTIM TO ANY OF THE FOLLOWING:

• Operating without a plan (speculation management)

• Failing to update the plan

• Poor execution of the plan

SAFEGAURD AGAINST THESE COMMON OCCURENCES WITH THESE MOST EFFECTIVE MANAGEMENT DISCIPLINES:

• Frequent review of actual vs budgeted performance• Take corrective action(s) when identifying negative variances in performance• Let the numbers do the talking, not emotions• Create and operate within a culture of awareness• Use empowering data to make timely and informed decisions


Managing to the Numbers (continued)

• Always know these key metrics in your practice: Trends performance of volume, sales, gross profit, gross profit %

Average fee per prescription {Typical range = $12.65 - $13.80}

Average cost to dispense per prescription {Typical range $11.05 - $13.05}

Total payroll as a percent of total revenue

Total operating expenses as a percent of total revenue

Receivables balance - 90% of income is in a receivable - reconcile!

Tax obligations far in advance of due date

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“WHAT GETS MEASURED GETS MANAGED”Presented By: Andy Oaks, President, Retail Pharmacy Management Services, Inc. All Rights Reserved

The key to success and longevity in business depends on the ability to MAXIMIZE MARGINS that meet all PAYROLL EXPENSES, OPERATING EXPENSES, and TAX OBLIGATIONS on time.

While at the same time using empowering information and data to maintain OPERATING EFFICIENCY as pharmacy continues to evolve.

THE ONLY THING CONSTANT IS CHANGE!

“what gets measured gets managed” the keys to maximizing margins and operating efficiency...

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