Split remuneration and reimbursement?

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The fundamental model by which community pharmacies are paid has not changed for a very long time, possibly since pharmacy owners became contractors to the NHS. While the balance and detail have evolved, the underlying principle has remained consistent. Community pharmacy contractors are remunerated for the services they provide and reimbursed for the medicines and appliances they supply.

Remuneration is based on piecework, with individual fees for items of work. This includes dispensing fees, and fees for NMS, DMS, the contraception service and vaccinations, among other things. There are also unpaid services provided as part of the terms of service, including disposing unwanted medicines, signposting and health promotion. The practice allowance has long since disappeared.

Reimbursement, on the other hand, returns the costs of medicines and appliances dispensed by contractors based on prices in the Drug Tariff or, for products not listed here, standard prices.

Profit principles

Gross profit from the community pharmacy ‘contract’ is a product of remuneration and the purchase profit made from obtaining products for dispensing at a lower price than that listed in the Drug Tariff.

This may not seem particularly riveting and, for some people, it may feel like common sense rather than anything new. But it is an important principle that needs to be understood.

There is a strong link between remuneration and reimbursement in the profit element contained within community pharmacy’s business model. Before the current Community Pharmacy Contractual Framework (CPCF) in England, purchase profit – the profit generated from purchasing below Drug Tariff prices – made a large contribution to overall profit.

The CPCF introduced a cap on the purchase profit that community pharmacies could obtain, managed mainly through Category M. This is a very blunt tool, and there are winners and losers.

The Government, of course, is happy with this approach. It has been successful in driving down the cost of medicines to the extent that we now see many generics costing literally pennies.

Supply impact

However, it could be argued that this approach has been too successful, and that excessive price deflation has led to many of the supply problems seen over the past few years. Lower prices lead some manufacturers to withdraw from producing lower-value products, which in turn leads to consolidation of suppliers, often outside the UK.

Any problem with supply from a manufacturer can have a large impact on availability. Lower margins also lead to smaller stockholdings to maximise profitability, which escalates the problem. It appears that we have not sought a fair return for the quality of service and supply security the NHS needs.

These supply problems mean pharmacies can lose out as prices change and concessionary prices cannot keep pace with changing costs in the marketplace. Recent confirmation that the inability to obtain a product at or below the Drug Tariff (or list) price is not a valid reason to refuse to dispense that product supports this. Along with the extra work involved in managing stock problems, this eats into purchase profit, which is part of the global sum.

Breaking point

So is it time to break the connection between reimbursement and remuneration in the profit model for community pharmacy?

Removing purchase profit from community pharmacy’s overall profit would allow dispensed products to be reimbursed at cost, avoiding the losses associated with supply problems. But this is a naïve suggestion: if it were adopted, many safeguards would need to be designed to avoid profiteering.

The DH enjoys the benefits of this situation in managing down medicine prices – and large pharmacy chains are able to generate profit through vertically integrated wholesaling operations. But this is not working effectively for many pharmacies or, indeed, for patients.

I think it is time to move away from a model that is not working for pharmacies, generic manufacturers, GPs, the NHS, or patients. Exploring naïve options is a starting point for finding a creative solution.