B2B Payments

Addressing The Symptoms Of Pharmacies’ Cash Flow Ailments

Taxes, minimum wage, global trade tariffs — there are a lot of regulatory changes weighing heavily on the minds of U.S. small business owners. Among the heaviest is healthcare, with regulatory changes impacting costs and cash flow for small businesses.

More so than the average SMB, independent pharmacies are particularly affected by the state of the healthcare market and its regulatory shifts. This kind of small business is a dying breed: recent stats from the RUPRI Center for Rural Health Policy Analysis at the University of Iowa found more than 16 percent of independent pharmacies shuttered their doors between March 2003 and March 2018, according to Washington Post reports.

While all small businesses may struggle with cash flow, certain market forces in the pharmaceuticals and healthcare space make owning a small pharmacy a challenging endeavor. Dr. Jonathan Mordis, PharmD, CPh, VP of business development at Corporate Capital Direct unit Rx Fund Assist, pointed to one of the root causes of cash flow pain for independent pharmacy owners.

“Reimbursements are compressed on a daily basis,” Mordis recently told PYMNTS. “There are times pharmacists are dispensing medications, they bill to the patient’s insurance, and they’re actually getting much less than what they think they’re getting. So they’re dispensing medications at a loss.”

The issue of below-cost reimbursements is perhaps the biggest cash flow pain point for small business owners in this industry. With prescription drugs representing 92 percent of sales revenue, according to the National community Pharmacists Association, thinning margins — and frequent losses — from this side of the business can be fatal.

It often takes 30 to 45 days for a pharmacist to actually be reimbursed by an insurance provider, Mordis noted, and the percentage at which a pharmacist will be reimbursed often changes from month to month, going down more often than not.

High-cost medications are also adding even more pressure to the cash flow crunch. While pharmacists may have a credit line with their suppliers, expensive medications that patients need can quickly eat up that line, Mordis said. These factors all made for a difficult cash flow forecasting environment for small pharmacy owners, and when cash is tight, the relationship with the vendors of these medications can sour.

Unfortunately, there are macroeconomic factors that lead to additional headaches for independent pharmacy owners. This business is highly seasonal, Mordis explained, with the busiest months coming around winter during cold and flu season. Cash flow constraints during the slow summer months make it more difficult for pharmacists to invest in ramping up capacity to get ready for the busy season, he said.

And, in addition to changing healthcare regulations, industry consolidation has threatened to squeeze out the small players.

Mordis pointed to CVS’s acquisition of pharmacy benefits manager Caremark in 2006, while just last month CVS received approval from the U.S. Department of Justice to move forward with a $69 billion acquisition of Aetna, combining its insurance operations with CVS’ pharmacy businesses.

CVS’s operation as a pharmacy benefits manager through CVS Caremark has moved to the center of industry controversy. As a pharmacy benefits manager, CVS Caremark manages the payments between insurance companies and pharmacies or drug firms. Recent allegations from independent pharmacists accuse CVS Caremark of cutting those reimbursements on medications sold to patients on Medicaid, while offering higher reimbursements to CVS pharmacies. The allegations have led to some lawmakers to pass legislation aimed at curbing this practice, according to Business Insider reports earlier this year.

Put simply, pharmaceuticals is a highly competitive industry, and independent pharmacists face the greatest exposure to both micro- and macroeconomic forces. Some business owners have worked to offset that cash flow pressure through expansion; NCPA data released last year shows 29 percent of independent pharmacy owners own two or more pharmacies. These business owners are also expanding their services, offering medication adherence programs, same-day delivery services, specialty medications and immunizations.

But these business owners need capital to expand. And while there are significant, unique cash flow challenges that independent pharmacy owners face, Mordis also acknowledged a common problem among small business owners of any vertical.

“Being an independent pharmacy owner, typically what we see is they’re great chemists, they’re great at the science. What they’re not great at is running a business,” he explained. “Running a business isn’t something they teach you in school.”

These entrepreneurs often lack the capital to hire specialty staff to manage finances. Ultimately, these business owners will either sell to a larger chain, or end up paying themselves much less in the long run than if they were to have worked at a larger pharmacy. To address some of these challenges, Corporate Capital Direct recently announced the widespread launch of Rx Fund Assist, a financing solution for independent pharmacies that provides access to capital and works with pharmacies’ vendors to promote adequate cash flow and strong business ties.

All of this begs the question: why have independent pharmacies at all, if running the business is so difficult? According to Mordis, the level and quality of care that these business owners provide can surpass those of larger chains. Three-quarters of independent pharmacies in operation today operate in ares with populations of 50,000 or fewer, NCPA data show, pointing to the importance of these businesses operating in under-serviced communities.

“In my firsthand experience, the level of care is one-to-one,” Mordis said. “They don’t have Big Brother watching over their shoulder on metrics. What they have to be able to do is manage through [cash flow crunches], and provide the best quality of care, and be relevant in their communities.”

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