Ontario recently overhauled its generic drug policy. In part 1 of this series, I outlined how the previous policy, a key element of which was a massive, mandated subsidy of retail pharmacies by generic drug manufacturers, came to be. This instalment investigates the validity of the claim that these subsidies were essential to the viability of retail pharmacy.

Pharmacies – even the independents – are corporations, and when you are the owner of an incorporated business (as I am), some creative accounting is at your disposal. Say my company’s revenues exceed its expenditures by $100,000 in 2010. If I decide that the company I own should pay me $100,000 in salary for 2010, my company’s earnings will be zero and will be reported as such. Conversely, if I defer my personal income and take no salary, my company’s earnings will be $100,000 and will be reported as such. In the former case, my company looks like a profitless enterprise; in the latter, it appears to be nicely viable. The important point is that if you don’t know both my personal income and my company’s income, you don’t know anything about the viability of my business.

I could find no data that report both pharmacy (corporate) incomes and the incomes of the shareholders (some of whom are owner-operators). The Statistics Canada pharmacy income survey contains only the (self-reported) business bottom line; and if you’re with me so far, you know that’s only part of the story. So we are left to deduce by other means whether or not Ontario drugstores were ever at risk of going under en masse (as opposed to occasional failures due to market saturation, inept business practices, inhospitable location etc.).

Put most simply, businesses get into trouble because their revenues are too low or their costs are too high (or both). Let’s focus on a key cost of doing business: staff salaries. If after doing everything it can to increase sales the retail pharmacy sector still finds itself in a precarious state, the focus must shift to cutting costs. This should create downward pressure on hourly wages. Retail pharmacists’ wages should be somewhat higher than those of health professionals with similar levels of education and job complexity if profits are robust and somewhat lower if the sector is struggling.

Retail pharmacists in Ontario make around $50 an hour on average (Ontario Pharmacists’ Association 2007), and more if they are franchisers or otherwise share in the profits of the store. Compare this with what similarly educated nursing colleagues earn. The top hourly rate for a staff registered nurse in Ontario is about $42 (O’Malley 2009), and the average is several dollars less. (Nursing managers get a pittance extra.) I think nurses have harder jobs than retail pharmacists. Armed with a computer hooked up to the Web, I think I could fake being a pharmacist and avoid doing damage a lot easier than I could fake being a nurse in a hospital (maybe I could fake being a public health nurse more easily). My strategy would be to do nothing but dispense the medications ordered by doctors and Google the answers to questions posed by customers. If Google failed me (or I failed Google), I would redirect the customers back to their doctors for enlightenment. The pharmacy technician would do the actual counting and labelling. In my limited observation, what I would do is not unlike what a lot of these knowledgeable professionals do most of the time. My conclusion is that retail pharmacists are overpaid relative to registered nurses.

Before you burst a vessel, I’m not saying that all retail pharmacists are just pill-counting automatons whose professionalism is subordinate to the mega-chain non-pharmaceutical uber-mission (“We gotta move these refrigerators; we gotta move these colour TVs”). I’m just saying that if you look at it dispassionately, a retail pharmacist’s job complexity, risks and levels of responsibility are less challenging than those of a nurse looking after very sick people in a hospital. If your pharmacy is in a dodgy neighbourhood and your clients are cognitively challenged, it’s not stress free. But relatively speaking, it’s a pretty sweet gig for $100,000 plus per annum.

Which brings us back to the economics of retail pharmacy and the woe-is-us-without-the-rebates argument. A major reason – perhaps the only reason – pharmacists make more money than nurses is because their pay scales are driven by the retail market. If retail pharmacies had been on the brink of financial unsustainability, there’s no way they would have bid up pharmacists’ wages. Marginally profitable enterprises pay less, not more – ask the people working in daycare centres, private nursing homes and home healthcare agencies.

All along, many more pharmacies were opening than closing, students were clamouring to get into pharmacy programs and drug sales kept rising. I don’t doubt that some non-chain stores in small towns or remote areas had a tough go of it. But to concede that the whole sector would have been unviable without these massive rebates is to concede too much. And it is a virtual certainty that the profit windfalls generated by the escalating rebates drove up pharmacists’ wages. For once, trickle-down economics seems to have worked.

So, if the case for rebates of this magnitude seems flimsy, why was there no outcry? There is a certain logic to even the most bizarre developments. Generic “pharma” (like brand-name pharma) incurs high fixed costs and low marginal costs. It costs next to nothing to produce an extra pill, so it makes sense that entrepreneurial companies would offer discounts to expand market share. Who can be surprised that the retail pharmacy sector would portray the wallet-fattening rebates as subsistence payments essential to keeping the lights on? (Otherwise they would have been expected to pass on at least some of the discount to their customers.) Having dropped the ball on price regulation in the first place, the government could play Solomon and decree the redistribution of wealth from manufacturers to pharmacies, secure in the knowledge that the former would grin and bear it and the other would just grin. Yes, it could have allowed dispensing fees to rise, but that would show up at the cash register and many people might be upset. So it was a cozy arrangement that caused no political stir.

The inconvenient truth that scuppered the scheme was that its viability depended on unjustifiable retail prices in the first place. It became impossible to ignore the fact that Ontarians (like other Canadians) were paying much more for generic drugs than people in other Organisation for Economic Co-operation and Development (OECD) countries – even the United States, which usually enshrines profiteering in public policy. A house of cards doesn’t stand forever, and generic manufacturers do not have an adoring public fan base. One hopes it is not too optimistic to impute good motives to the government: it recognized a flawed system and moved to fix it. Learning late is better than never learning.

Next in the series: retail pharmacy – profession or conduit?

This essay is from a four part series. Please see the links below for Parts 1, 3, and 4.

Steven Lewis: the Generic Drug Wars:

Part 1: How It All Began
Part 3: The Soul of the Pharmacy Profession
Part 4: Lessons for Medicare

Comments

Brent Berry wrote:

Posted 2010/09/14 at 08:26 PM EDT

E K wrote:

Posted 2011/05/27 at 01:14 AM EDT