Owning your own pharmacy can be an extremely rewarding and fulfilling venture. However, there are many risks and pitfalls that can adversely affect the viability of a pharmacy. This article will outline some of the main risks inherent in community pharmacy and some actions that can be taken to mitigate these risks.
A risk to a community pharmacy can be considered as anything that threatens to have a negative impact on the pharmacy. Some risks may be avoided or reduced through pre-emptive action. In order to identify risk in your pharmacy and develop a plan to mitigate them, the following questions need to be addressed in each aspect of the pharmacy business; What can go wrong? How big is the risk? How can it be prevented? What actions must be taken if it happens? Answering these questions will assist in documenting potential risks, assessing the level of seriousness of each, the costs associated with mitigating them and who is responsible for implementing the solution.
The first type of risk category this article will consider are ‘insurable risks’. All pharmacies are exposed to risk on a daily basis and insurance is an integral part of mitigating some of these risks in conjunction with store policies and procedures that identify, assess and monitor them. The key areas of insurable risk to which community pharmacies are exposed include:
- Workplace Health and Safety (WHS)
- Dispensing errors and defamation/privacy breaches
- Risk to assets including cash, stock and premises
- Public liability
It is the responsibility of pharmacy owners to create a safe work environment for the public and staff and measures must be taken to ensure that the health and safety of employees and the public are protected. Workplace Health and Safety (WHS) incidents can be reduced by developing a store policy that demonstrates to staff and management a commitment to WHS, and should include regular checks of the premises to identify any potential hazards and a reporting system for incidents or any potential incidents. Each pharmacy should have a written safety checklist outlining potential hazards and complete a self-audit at least every three months. The checklist should ensure the following are identified and assessed:
- Any potential obstructions and trip hazards
- Unstable fixtures or fittings
- Any sharp surfaces/objects
- Poorly lit areas inside or outside the pharmacy
- Uneven or slippery flooring
- Unclean or unhygienic areas
- Overloaded power points
The pharmacy should ensure that an adequate first aid kit is on hand, emergency contacts are clearly displayed, emergency exits are clear and serviced fire extinguishers are present. As no two pharmacies are identical, each pharmacy must develop their own risk assessment check list specific to their premises.
A poorly designed work space can lead to unnecessary fatigue, increasing the risk of professional errors and injuries in the workplace. It can also be a cause of decreased productivity. During the design phase of a pharmacy, the ergonomics of the work space should be considered to reduce the fatigue and injury, particularly in relation to dispensing, which involves a large number of repetitive movements. Stock placement, lighting levels, work station heights and work spaces are some ergonomic factors that should be addressed.
Pharmacies commonly receive deliveries of heavy or bulky boxes of stock, so it is important that the risk of manual handling injuries are reduced. Implementing a safe lifting procedure that details safe lifting technique such as outlined in T17E of the QCPP standards can help to minimise this type of injury.
Becoming familiar with Workplace Health and Safety (WHS) laws can reduce the unnecessary costs and damage to the business. Help in complying with WHS requirements can be obtained from State or Territory WHS agencies. Employers must maintain current workers’ compensation insurance, through an approved insurer, to protect against financial hardship as a result of a workplace accident.
Pharmacists are also exposed to claims of professional negligence or breach of duty when providing professional services or advice. Dispensing medications involves professional judgement based upon information provided by patients and prescribers. Therefore, there is always potential for errors that cannot be completely overcome. Implementing procedures to reduce the likelihood and severity of professional errors is essential, such as the PDL ‘Guide to Good Dispensing’. This guide outlines a number of routine checks and procedures to minimise errors that should be observed each time a pharmacist dispenses a prescription. P2A of the Quality Care Pharmacy Program also provides a detailed process for the dispensing of prescriptions. Barcode scanners can also be used in the dispensing process to provide an additional level of checking. The pharmacy should have a set of procedures to follow in the event of a dispensing error, as outlined in ‘Guidelines to follow in Case of a Dispensing Error’ as provided by PDL.
The costs of claims and litigation in relation to professional negligence can be extremely high and could have the potential to bankrupt a business. Professional indemnity insurance can mitigate the risks associated with the provision of advice or services to the pharmacy’s customers. It protects the business against legal costs and claims by third parties arising from acts, omissions or breaches of professional duty in the course of business as covered by the policy.
Social media is an increasingly used platform for businesses to communicate with the public, and vice versa. Information posted on social media platforms, such as Facebook and Twitter can potentially damage the reputation of the business and attract claims for defamation or unprofessional conduct. Potential negative impacts can include; allegations that the pharmacy has damaged someone’s reputation, breaching a patient’s privacy, staff posting material that portrays the pharmacy in an unprofessional light, and customers or rival businesses expressing negative comments about the pharmacy. Social media can bring many benefits to a business but can pose serious risks if not monitored closely and routinely. Care should be taken to ensure that any information posted on a social media site is accurate and factual. Before anything is posted online, the ramifications of how it may be perceived by all sectors of the public should be considered. Once something is posted online, it can be extremely difficult to have it removed. A social media policy for the pharmacy and staff should ensure that privacy of customers is not breached and a professional standard of behaviour is adhered to at all times. It should also provide guidelines for staff to follow when posting comments about pharmacy from their personal social media accounts. Steps must also be taken to maintain the security of computers and login details.
It is unfortunate that pharmacies are often the victims of theft, break ins and even armed hold ups. In addition, shoplifting accounts for between 3-5% of inventory loss in Australian pharmacy. The design and layout of a pharmacy can be optimised to make it difficult for would-be shoplifters to conceal theft. Surveillance cameras, electronic stock tagging and bag checks can also be employed to discourage shoplifting. Further, the pharmacy should document procedures for identifying and apprehending potential shoplifters. It is not only customers who pose a risk of theft to pharmacy but also staff. Checking employment history, reference checks and employment contracts which state clearly the consequences for acts of this nature assist in reducing the risk of staff theft. A clear written policy regarding staff purchases should explicitly state what is a legitimate staff purchase and what constitutes theft or fraud.
Random cash reconciliations performed through the day help to expose any discrepancies and ensure that no staff member is responsible for a large sum of cash at one time. Measures to reduce theft of cash include anchoring cash registers and ensuring cash is cleared to the safe often. Cash takings should be banked daily and the banking routine should vary so that there is not a predictable banking pattern.
External security measures to reduce the risk of break and enters should be employed including deadlocks on all entry points, external and internal cameras and lighting, bollards to prevent ram-raids, security systems including alarms and glass break sensors, security grilles and security patrols.
A security checklist tailored to the pharmacy can help assess the level of security in the pharmacy and identify areas where these risks can be minimised. The list should assess the effectiveness of:
- The physical security of the building e.g. locks, grilles etc.
- Alarm systems and video surveillance
- Cash handling and safes
- Merchandise security e.g. locked cabinets for perfumes, electronic tagging etc.
As a pharmacy owner, you may become liable for injury/damage caused to a person in the pharmacy. Public liability insurance products are available to protect you and the pharmacy against the financial risks of claims for negligence. Negligence is defined as causing reasonably foreseeable harm. In order to avoid liability for negligence, you must meet your duty of care and be proactive in the pharmacy to reduce risks to the public. The checklists described above will assist in identifying potential problems within your pharmacy and assess the level of risk and actions to be taken to minimise likelihood and impact. Additional business insurance can also be obtained to mitigate other risks. Some examples include losses incurred due to fire, break in or theft, damage to stock in the event of a power failure, accidental damage to property and loss of income following an interruption to the business. Each insurance policy is different and it is important that you study your policy to ensure you are adequately covered. Many insurance providers now offer policies specific to the pharmacy industry, so there is a range of pharmacy insurance solutions from which to choose. Insurance brokers can assist in arranging appropriate cover and in handling claims.
The second set of risks this article considers are ‘market and legislative risks’ which also need to be identified, assessed and managed. One of the major issues currently at the forefront of many pharmacists’ concerns is risk associated with the Pharmaceutical Benefits Scheme (PBS) and how it is administered. For example, in April 2012, the medicines listed on the PBS underwent the first round of price reductions as result of price disclosure calculations. The Pharmacy Guild of Australia estimated this to impact community pharmacies profitability on average in the amount of $90,000 in 2014/15. Another example of this type of risk occurred with the recently signed Sixth Community Pharmacy Agreement (6CPA), which saw the implementation of an optional discount of $1 off the co-payment amount on PBS prescriptions. This also has the ability to drastically impact the profitability of community pharmacies.
While the Pharmacy Guild negotiates with the Government on behalf of pharmacy owners, it is fair to say that pharmacy owners had little influence over these decisions which fundamentally affect the profitability of their businesses. In order to survive and maintain profitability, it is essential that pharmacists quickly grasp the extent to which these changes will affect their business and then build and maintain a business plan to counteract the negative effects. This will involve identifying and monitoring Key Performance Indicators (KPIs). Target KPIs would need to be set and include improving sales, prescription numbers, customer numbers, retail sales growth, average basket size, claiming of professional services payment and monitoring major costs such as wages and rent. To have the best chance of achieving these goals, the targets set must be specific, measurable, achievable, relevant and be time-bound, with clearly defined strategies on how to meet each goal.
In most instances, it is no longer viable for a pharmacy to just depend upon the revenue generated from dispensing prescription medications. Pharmacies must adapt their business model so that current revenue streams are enhanced and additional revenue streams are generated.
The 6CPA has gone some way in assisting pharmacies to generate new revenue streams with $1.26 billion in funding budgeted for the provision of professional services. For the pharmacy to benefit from the professional services funding, pharmacies may need to invest time and money in pharmacist and staff training. There may also be a requirement to invest in equipment or a fit out and extra staff hours to ensure a professional environment is provided. A cost to benefit analysis should be considered when planning to provide additional professional services. There is also a risk that the increase in provision of professional services, in areas traditionally offered by doctors (e.g. vaccinations) could possibly cause tension between the professions. Medical centre pharmacies will need to be particularly mindful of this and it would be prudent to communicate clearly and openly with nearby doctors so a good working relationship can be maintained.
Community pharmacies should also explore ways of reducing costs in order to maintain profitability. There is a risk of breaching covenants with the bank if profitability drops. Usually financiers will insist on an interest cover ratio and a loan to value ratio (LVR). Typically, the profit generated needs to be twice the interest payment. Pharmacies, like most other businesses are usually valued at a return on investment. If there is a drop in profit, but the loan remains unchanged, then LVR and interest cover is adversely affected. If these two key ratios drop below the covenants documented in the loan, the pharmacy may be in breach of the loan conditions and at risk of the bank taking action. A business plan outlining steps that will be taken to address these issues will greatly assist in any negotiations with the bank.
Another example of risk relating to the administration of the PBS occurred in 2012 when changes were made to the pharmacy location rules. The changes included provision for the establishment of a new pharmacy in small and large shopping centres, large medical centres, private hospitals and one pharmacy towns. In practice, this can lead to the establishment of a new pharmacy that could compete for business with existing pharmacies. Owners of existing businesses need to be ever vigilant and be ready to employ defensive strategies should a new competitor arrive. At the same time the long distance relocation rule was abolished. This basically removed the ability of struggling pharmacy to sell the Pharmacy Approval Number (PAN) to a third party under the long distance relocation rule (or indeed perform the relocation themselves). The flow on effect is that a PAN no longer has a value where the price paid reflects the opportunity to relocate and hence the ‘scrap value’ of the business is diminished.
The 6CPA serves to provide stability to the industry through a transparent remuneration mechanism and a commitment to maintain location rules until 2020. However, the main elements of the agreement are subject to review after two years. This makes it difficult for pharmacy owners and financiers alike to plan for the future.
In addition to the risk of increased competition through new pharmacies opening in direct opposition, competition can also arise in the relocation or rebranding of an existing pharmacy. Other retailers, such as supermarkets are also constantly striving to increase their market share.
Of concern is the fact that medications that were previously ‘pharmacy only’ lines, are increasing available as open sellers in competing retail outlets such as convenience stores, supermarkets and petrol stations.
The proliferation of pharmacy discounters and online retailing has applied pressure to margins in both the dispensary and front of shop. Increased numbers of discount oriented pharmacies in the suburbs are in direct competition with traditional pharmacies and provide price sensitive customers a convenient discount offer. Even when a discount model is not located in a pharmacy’s catchment area, pressure on margins is still applied through extensive price promotion of products in all forms of media including internet, television, catalogues, radio, newspaper etc. This effectively educates the public on the price point of products resulting in very price conscious customers who often expect the pharmacy to match an advertised price.
To remain viable in this competitive environment, a pharmacy should be proactive in identifying their competitors and assess the competing offers including price positioning relative to them. From this a competitive analysis of the business Strengths, Weaknesses, Opportunities and Threats (SWOT) can be performed with a focus on promoting the pharmacy’s Unique Selling Point (USP) and tailoring the pharmacy offer to the target market. The business plan developed should reflect these findings and contain specific goals and KPI targets that can be measured on a weekly basis.
A common solution for many pharmacies in addressing these competitive risks is to join a brand that aligns closely with their ideal USP and appeals to their target customer. Joining a brand should give the pharmacy a clear position in the retail space. The economies of scale achieved as a group can increase profitability through better buying power with suppliers of goods and services and cost effective marketing that would be prohibitively expensive to produce for a single store. A brand can offer retail support and resources to drive performance in each pharmacy category.
Any business plan put into action must take into account the future cash flow requirements of the pharmacy. There is a risk that profitability of the business can be increased however, if there is not enough cash available to meet fixed costs, wages and creditors, the business is not sustainable and may fail, even though it is profitable. The largest impact on cash flow in community pharmacies is stock levels. Excess stock ties up cash until it is sold. Stock levels must be monitored by category to ensure that cash is being invested in stock lines that meet rate of sale targets that ideally allow for sale stock before it is paid for. An accountant can assist in developing a cash flow forecast to ensure funds are available pay suppliers on time (and maximise settlement discounts) and leave enough working capital to meet all other obligations. If a pharmacy fails to have adequate funds in the cash flow cycle, the pharmacy will likely need a capital injection from owners or utilise an overdraft facility (incurring interest) to meet financial obligations.
Arguably, the largest risk facing community pharmacies is complacency. Failure to be proactive in identifying, assessing and responding to the above risks in the day to day operations of a pharmacy will severely impact the viability of the business. Documented policies, procedures and business plans are essential to optimise financial performance and minimise exposure to risk.
In conclusion, the journey of owning a community pharmacy is undoubtedly a rewarding one, but it’s important to recognize the multifaceted risks that come with this venture. Ultimately, the ability to adapt to these challenges and proactively manage risks will determine the long-term success and sustainability of community pharmacies and protect you and your business for any unforeseen issue that may arise.
Written by Stuart Ellis, QLD State Manager – AP Group
AP Group are the leading pharmacy experts in Australia, helping hundreds of pharmacists into ownership every year – our team can help with sourcing finance for your purchase, as well as providing the right legal advice to help you navigate the process.
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About the Author:
Stuart brings over 20 years of pharmacy and business expertise to the AP Group table, a journey that’s been as diverse as a pharmacy’s offerings. He’s not just a pharmacist – he’s a seasoned entrepreneur who’s owned and operated successful pharmacies across the country and was pivotal in starting two respected national pharmacy retail brands Good Price Pharmacy Warehouse’ and ‘Chemist King’.
Stuart’s trajectory led him through Sigma Healthcare for more than a decade, where he played pivotal roles such as Head of Brand for ‘Chemist King’ and ‘Pharmasave.’ With this rich background, he’s a vital asset for both those seeking to buy and sell pharmacies, armed with a wealth of incredibly valuable knowledge and insights.
Away from the world of pharmacy, you’ll find Stuart indulging his need for speed as a car enthusiast. Whether he’s piloting his Porsche GT3 RS through Queensland tracks or occasionally venturing to races beyond state borders, his love for racing matches his passion for pharmacy. But when it’s time to step off the gas, Stuart enjoys quality moments with his wife and their young daughter.