“How do you make money?”
Everyone knows the pharmacy plays an important role in the healthcare system. Every one of us, in our lifetime, will need to see a doctor and inevitably at some point we will also need prescription medication. Today, when we need that medication, most of us simply tell the doctor to send it to the local pharmacy that serves more as a convenience store than a healthcare source.
When we speak to medical providers about our pharmacy (one that is not a convenience store and only focuses on offering the highest-quality patient care), the doctors always scratch their head and asks, “how do you guys make any money?” As much as we all interact with and rely on a pharmacy we often don’t understand its business model. “How can they make any money if last time I came in I didn’t pay anything for my prescription medication?”
It’s actually quite simple:
- Prescription comes in to the pharmacy.
- The pharmacy fills a bottle with the prescribed medication.
- The pharmacy bills the patient’s insurance for the medication.
- The difference between what the pharmacy paid for the medication and what the insurance company reimbursed for the medication is profit.
Here’s some more detail:
Even though you had a zero dollar copay your insurance typically reimbursed the pharmacy around $60 for that prescription and they made (typically) about $12 in gross profit margin. Imagine now that you are a patient that takes 3 prescriptions per month. That’s $180 in recurring monthly revenue that the pharmacy gets every time you pick up your medication.
“I thought they made all of their money on the other stuff they sell.”
Even though the actual pharmacy portion often takes up the smallest part of a retail store like a Walgreens, it typically generates two-thirds of the store’s total revenue. Those medications make a lot of money for the pharmacy. In fact, the US consumes almost $1B per day of prescription medication (12.9M daily prescriptions).
“If a pharmacy makes so much money, why is it so bad? Why is it almost universally disliked and a huge source of friction for medical providers, patients and even insurance companies?”
Well… large-chain pharmacies have realized that they don’t have to be good. This is because they have a clever way of acquiring customers which doesn’t require them to compete on quality.
“What is this clever way of acquiring customers?”
They’re on every corner! AND they sell everything we might need. Need household goods? A high-calorie snack? A cold soda? Lightbulbs?… Great! They can help us with that. As long as we go there for our convenience goods, they know that when a doctor asks, “where do I send this high-priced prescription?” patients are likely to say, send it to that convenience store right by my house where I get all of my last-minute needs taken care of (even though I really loathe dealing with their pharmacy). Where else are we going to go? Aren’t all pharmacies the same?
Food for thought:
There are roughly 120 pharmacies in the city of San Francisco. A city that only houses 800,000 people. Each pharmacy is about 6,000 square feet and is often positioned on the most high-priced and high-trafficked real estate in the city.
All pharmacies are not the same:
We believe that you only need one pharmacy to service the entire Bay Area. The medication should come to the patient (not the other way around) and that pharmacy should compete on quality of care (outcomes). We call it The Modern Pharmacy. In order to improve patient outcomes The Modern Pharmacy should work closely with doctors, insurance companies and patients to provide a frictionless healthcare experience. No need to build hundreds of storefronts or lure patients in with convenience-goods. Just focusing on being the best pharmacy allows us to work with doctors to improve patient outcomes and advance healthcare into the modern era, profitably.
Special thanks to Ian Thiel, Alisa Weiner, Mattieu Gamache-Asselin and Jamie Karraker for proof reading and fact checking.
