With falling drug reimbursement rates and competition from national chains, survival — let alone success — is a challenge for Maine's independent pharmacies
Some thought Paul and Karen Chace were crazy. In October 2006, the couple opened Old Port Pharmacy in Portland's downtown, fulfilling a lifelong dream of running their own business. A former executive at Rite Aid Corp., Paul Chace estimated there were as many as 3,000 working professionals in the area who would prefer stopping by his store during their lunch break rather than waiting in long lines at suburban chain drug stores.
Old Port Pharmacy is small for a drug store — just 1,200 sq. ft. rather than upwards of 5,000 sq. ft. for a typical chain. The small size means it can carry just a few kinds of cough syrup, for example, rather than the dozens of brands chain stores can carry. But their downtown strategy has worked so far. The Chaces say they're busiest at lunchtime, with customers from neighboring banks, law firms and retail stores dropping in to pick up prescriptions.
Still, the couple admits they're taking a big risk by opening their own drug store. Independent pharmacies are a dying breed in Maine. Since the mid-80s, their numbers have shrunk by about 40%, from 85 to 50, with 15 closing in the last four years, according to the Maine Pharmacy Association. Nationwide, the number of independent pharmacies has fallen from 24,500 to about 23,000 since 2006, according to the National Community Pharmacists Association. According to the National Association of Chain Drugstores, there are nearly 40,000 chain pharmacies in the country, almost twice as many as the indies.
Many blame the closures on competition from national chains, which rely on a smaller portion of sales to come from prescriptions, says Bob Morissette, vice president of the Maine Pharmacy Association and president of Pharmacy Group of New England, a Scarborough-based buying group for independent pharmacies. Independent stores also struggle with low cash flow because of delayed or reduced federal reimbursements for Medicaid prescriptions.
The Chaces don't have to worry as much about Medicaid reimbursements — most of their customers pay with private insurance from downtown employers — but they still fear that their relatively limited inventory and small staff won't satisfy customers. Paul Chace says he can only afford to keep two pharmacy technicians on staff, meaning he has to stretch himself thin, serving customers while also replenishing inventory and tracking reimbursements.
So far, Old Port Pharmacy is breaking even, but the couple doesn't expect to make a profit for at least another year. Even then, Paul Chace says that profit may be as slim as two percent of sales, an amount that still wouldn't cover his own salary.
But like the Chaces, a handful of entrepreneurs in Maine are trying to resurrect the independent pharmacy. In the last year, two pharmacies have opened in East Waterboro, in York County, and Marshfield, near Machias. These business owners hope to offer service they say can't be found at larger chain stores, such as home delivery or custom medications for customers, plus they can make their own decisions rather than answer to large corporations. But they also say their businesses' survival is uncertain as further cuts in federal reimbursement rates loom — including a scheduled cut that is expected to take place in January.
"These people are brave souls," Morrisette says of the Chaces and other pharmacy entrepreneurs. "They know how tough it is out there."
Cutting through red tape
To keep payments coming in from the federal government and private insurers, pharmacy owners say they have to be organized. Angela McGarrigle, who opened Good for All Pharmacy in East Waterboro in June, says she's on the phone regularly to check in on the status of payments, whether it's co-pays from customers or reimbursements from insurance companies or the government.
Reimbursements from the state government, for Medicaid prescriptions, take three to four weeks to arrive in the mail, while private reimbursement can take four to six weeks. Reimbursements for Medicare Part D can take longer, at six to eight weeks. Meanwhile, McGarrigle has to keep ordering inventory for the store. Keeping track of payments and inventory is "one of the balancing acts for pharmacies," she says. To keep track of when payments are due, McGarrigle uses software called Computer Rx, which cost $50,000 — one-tenth of her startup costs.
The average independent pharmacy books annual revenues of about $4 million, says Morrisette. That might sound like a lot, but he notes that most of the money goes toward paying for the drugs as well as fixed expenses like rent and utilities. After those costs, Morrisette says, most pharmacies end up with a profit of around one percent, or $40,000.
Running a pharmacy wasn't always so uncertain. Until January 2006, the number of independent pharmacies nationwide had been steady for years at around 24,500. About 1,120 closed that year, however, after the federal government added a prescription drug benefit to its Medicare insurance program, which, unlike Medicaid, is specifically for people who are at least 65 years old or disabled. The benefit, called Medicare Part D, was applauded as an effort to help make drugs more affordable for the more than 40 million people enrolled in Medicare. The change, however, put the squeeze on many local pharmacies.
That's because the Medicare Part D program is administered by private insurance companies and pharmacy benefit managers, which negotiate between drug companies and pharmacies. Under Medicare Part D, some pharmacies have complained that reimbursement rates have been set too low and payments have been sent out late, according to Morrisette. As a result, he says, many pharmacies nationally reduced their hours, took out loans or closed that year.
Many long-standing pharmacies in Maine suffered after Medicare Part D was introduced. Bill Hewitt, who has owned Rosemont Pharmacy in Portland for the last six years, says the 60-year-old pharmacy lost $75,000 in profit in 2006 because of Medicare Part D. As a result, Hewitt couldn't afford to give his staff raises this year. "The 18 months have been the toughest because of Medicare Part D reimbursements," he says.
State leaders acknowledge that Maine's independent pharmacies are in trouble. But there's little Maine alone can do, says Jude Walsh, special assistant in the state Office of Health Policy and Finance. "I do agree that there are challenges that pharmacies face. Certainly the [state] government is aware of the challenges, but those are mostly thrust on them by the federal government," she says.
Meanwhile, LD405, a bill introduced this spring in the state Legislature would increase the state's dispensing fee for pharmacies — a fee that pharmacies earn for selling the drugs — to close any gap between the federal reimbursement rate and what the drug actually costs to buy the drug. The bill was carried over to the next legislative session, which starts in January.
Being the boss
Not everyone thinks running a pharmacy is difficult. Chuck Roy sold Elm City Pharmacy, which he started five years ago in Waterville, to Rite Aid Corp. in July. But it wasn't because of financial pressure. He says he wanted to spend more time with his family. "It was 90% to spend more time with family, and 10% because of the reimbursement rates," says Roy, who now works at the local Rite Aid.
He does, however, miss being his own boss.
That's what persuades some pharmacists to open their own stores. Angela McGarrigle worked for Rite Aid for 10 years before opening Good for All Pharmacy in East Waterboro, inside the new Goodall Professional Park, which includes a hospital clinic. Working at Rite Aid felt impersonal, she says. "You don't want to feel like a number," says McGarrigle. "I worked a lot of hours. I said, 'If I'm going to work this hard, I might as well run my own [pharmacy].'"
Like other owners of independent pharmacies, McGarrigle hopes that good customer service and specialty product lines will set her apart from her main competition, the Hannaford grocery store that's about a mile away. She makes a point to carry only all-natural cosmetics brands like Kiss My Face, and herbal supplements, not only because they have a higher profit margin than pharmaceuticals, but also because they serve a niche market. "You have to find a niche anywhere you can," she says.
She also makes a point to be accessible to customers, chatting with them as she fills their orders, offering a drive-through window for prescription pick-up and staying open seven days a week — even staying open on Labor Day. Each time she registers a new customer into her computer, it prints out a letter of thanks addressed to the customer, bearing the line, "We want to be your pharmacists."
So far, Good for All Pharmacy has exceeded McGarrigle's expectations. She thought she'd fill about 40 prescriptions a day in September, but she's already filling about 100. But she says she'll need to fill at least 150 per day to meet her goal of earning $1.6 million in revenue this year, with a 3%-5% profit. She even plans to open a second pharmacy in Maine in the next year, and possibly more in the future.
Putting an emphasis on customer service has been a good strategy for Bill Hewitt, owner of Portland's Rosemont Pharmacy. Deliveries make up 40% of his business, with deliveries to the Casco Bay islands increasing 50% in the last couple of years, he notes. For the last three years, he's visited retirement communities like Piper Shores in Scarborough and the Woods at Canco in Portland with bags of free Band-Aids and cough drops, doing what he calls "a dog-and-pony show" so he stays in the public eye.
These efforts have helped Hewitt grow the business from roughly 3,500 prescriptions per month six years ago to 5,000 per month this year. That increased volume helps him fend off profit lost to reimbursement cuts. If he were to fill a smaller amount of prescriptions, says Hewitt, there wouldn't be enough cash flow to purchase replacement inventory for the store. "It's become a volume business," he says.
Keeping independent stores like his is particularly important in Maine, says Bob Morrisette. "They're more anchors of the community," he says. "You'll never see a Rite Aid in Eastport or Lubec because they're too small and they couldn't make enough [money]," he says. (Rite Aid does have stores in nearby Calais and Machias).
As pharmacies brace themselves for possible reimbursement cuts, those in the business in Maine stay in it because they couldn't imagine doing anything else. Paul Chace has spent his entire career in the industry, starting at age 16, when he ran the cash register at the South Portland branch of LaVerdiere's, a Maine-based chain sold to Rite Aid in 1995. At Old Port Pharmacy, he sometimes waives the co-payment for those who can't afford their Medicaid or Medicare prescriptions, losing $4-$5 per order because "we've got to take care of everybody," he says. "There are times when we put ourselves in financial jeopardy to help somebody out."
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