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CHAIN INDUSTRY MUST PROTECT CORE Rx DISPENSING BUSINESS AGAINST NEW GROUP OF NONTRADITIONAL COMPETITORS SUCH AS HMOs AND HOSPITALS, HARRISON TELLS NACDS

Executive Summary

Chain drug stores must shore up the core pharmacy dept. business against encroachment by a new group of non-traditional prescription dispensing competitors made up of Health Maintenance Organizations, hospitals, and ambulatory care centers, outgoing Natl. Assn. of Chain Drug Stores (NACDS) Chairman James Harrison said May 4 at the annual meeting in Maui, Hawaii. Aside from "traditional" retail competitors, such as independent pharmacies, grocery chains and deep discount stores, Harrison noted that the chain drug industry is facing a "new 'nontraditional' competition . . . that is aiming its arrows at the heart of our business -- our Rx dept." "I believe we must decide who we are and what we do best," Harrison said. Stressing pharmacy first and convenience second, he declared: "We are drug stores . . . and I believe we must do everything we can to enhance, expand and protect that franchise." Harrison cited a recent survey by the American Society of Hospital Pharmacists, which showed 19.3% of all U.S. hospitals "are involved -- or plan to be involved -- in free-standing retail pharmacies, or are actively promoting their out-patient Rx service to the public." He pointed out that the percentage of large hospitals cultivating a retail Rx dispensing business is even higher -- 31.7%. Chains Can Compete Successfully As Long As Drug Acquisition Costs Remain Equal Among All Players -- Harrison In addition, Harrison predicted that in the next five years, growth in HMO enrollment from its current 10% level nationwide "will be significant -- although probably not as high as the 50% figure touted by execs in the HMO industry." Retail pharmacy's biggest difficulty in competing with HMOs, PPOs, and dispensing hospitals, Harrison stated, is the much higher mfr. and whslr. prices that retail stores must pay for Rx drug products. "This unacceptable discrepancy in cost of product between competing entities, whether due to 'nonprofit exemption regulation abuses' or due to 'class of trade pricing policies,' is certainly one of the greatest challenges facing our industry today -- and tomorrow -- until some rectification is accomplished," Harrison declared. "If the acquisition cost of product is comparable -- if we are playing on a level playing field -- most assuredly we can compete," Harrison continued. "If, however, the competitive entity is armed with the ability to acquire product at prices 60% or more below our acquisition cost -- as they are so armed today -- we will be unable to compete." Commenting on the competitive challenge posed to the chain drug industry by the spread of ambulatory care centers, Harrison said that the recent growth in that segment is due to the current glut of doctors in the U.S., with many looking to increase their business by dispensing. "This goes hand in hand with the growth of ambulatory care centers in our country and their stated goal to dispense Rx drugs," Harrison said. "There are 3,000 ambulatory care centers in the U.S. today -- three years ago there were only 600 -- three years from now there is expected to be over 5,000." Harrison noted that mail order prescriptions will also present a challenge for the chain drug industry. "It is expanding," he noted, "some of our own members are in it and I am sure others are looking at it." Two chains that have recently announced the start-up of a mail order drug business are Walgreen and Fay's. Other hurdles facing the chain industry now, Harrison said, are a significant increase in traditional competition and disinflation in the U.S. economy. The Harco exec pointed out that competition from traditional competitors continues to intensify with the growing numbers of food/drug combos, mass merchandisers and deep discount drug stores. "There is just so much of it [business], and there are more of us," he said. Harrison noted that there is a growing number of mass merchandisers. "More and more merchandise mixes are becoming mirror images," Harrison commented. "There is, in fact, a real homogenization of the retail industry. We are all beginning to look like each other." Commenting on the deep discount store phenomenon, Harrison said he didn't know if this segment of the chain drug industry "performed any better than our industry in general." He observed: "I don't see this as a 'revolution' in our industry, but more of an 'evolution.' And I believe its net effect will be a lowering of prices and a reduction of margins in our industry." The significant decrease in the rate of general inflation during the eighties, Harrison asserted, contributed to a slow down in the chain industry's "real growth" in pre-tax profits -- from 5.4% in the late seventies to 1.9% annually during "the early part of the eighties." Harrison pointed out that this disinflation "brings new pressure to our management skills: (1) price increases don't cover up a lot of inefficiencies any more; (2) cost containment and increased productivity become a requirement to maintaining the bottom line; and (3) shedding of unwanted and unproductive assets almost becomes mandatory." He added: "I don't believe we can afford to carry the losing store or stay in the nonproductive market." Pharmacy Coalition's Success In Heading Off HHS Attempt To Modify Rx Reimbursement System Lauded By Harrison Harrison's recommendations on how to deal with the competitive environment of the eighties included: "Increased productivity and ability to control costs; the much needed improvement of our 'in' stock position -- while still maintaining inventory control; and the ability to match our merchandise mix to an individual store's customer base." He declared: "We must throw away the cookie cutter." Harrison also addressed some of his comments toward the diversion issue and what he proclaimed as pharmacy's recent victory in delaying HCFA's proposal to implement a drug reimbursement system without using average wholesale price as the basis for payment rates. "We share [House Energy & Commerce Cmte.] Chairman Dingell's concern for ensuring the legitimacy and integrity of all prescription products dispensed in our stores," he declared. "While we believe the pharmaceutical distribution system in this country is a good one and has by its performance proven itself, we find the existence of these abuses, regardless of the extent or degree, to be unacceptable and have pledged ourselves to do all in our power to help eliminate them." Regarding pharmacy's efforts to delay the HCFA proposal, Harrison touted the coalition of pharmacy associations that "were able to achieve a goal probably unattainable individually." He added: "It is my opinion that there are, and will be in the future, similar issues of such magnitude and common concern as to require the prudent consideration of such as unified approach." In addition, he reiterated NACDS' position that reimbursement should be done on the basis of the "usual and customary charge."

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