Drug Downturn.

MANAGED CARE FORCES SHERMAN OAKS PHARMACY TO ADAPT

It is 9 a.m. on a recent Wednesday morning and Ellis Herz is shuffling through a stack of computer printouts.

One printout notifies him that a customer is not covered by insurance. Another says that an insurer won't pay for a prescription refill. Others indicate that one particular brand of drug isn't covered but a different one is, and still others provide various instructions about co-payments required.

Herz, owner of Maxsons Drugs in Sherman Oaks, one of a dying breed of independent pharmacists, must begin the day not by filling prescriptions, but by calling health insurance carriers, doctors and patients to clear up the problems delineated on those printouts.

For his trouble, which can take hours of phone time, Herz will earn between $1.75 and $3 per prescription, a dispensing fee paid by the insurance company. "It's a very service-oriented business, but you can't charge for the service," said Herz.

With insurance companies exercising greater control over the prescription drug business, independent pharmacies like Maxsons find it harder to stay afloat. Scores of such operations have closed since the early part of the decade. Those that do survive are branching out into other businesses to cover the cost of running the pharmacy operation.

"How do you stay in business? You have to sell a lot of greeting cards or Beanie Babies," said Carlo Michelotti, chief executive at the California Pharmacists Association, a trade group in Sacramento.

Michelotti and others say that the problems have been building since the early part of the decade, when insurance companies became more involved in prescription medications.

As these companies seek to control rising drug costs, they have turned to the use of so called "prescription cards." A patient with insurance coverage for medications brings the card to the pharmacy and is charged a co-payment, usually $10 to $20, regardless of the cost of the medication. The pharmacist bills the insurance company, which reimburses the average wholesale cost of the medication, plus a professional fee that is supposed to cover the dispensing costs, less the co-payment.

The use of prescription cards has doubled in the last decade and now represents about 80 percent of all prescription transactions in California, according to the California Pharmacists Association. At the same time, professional or dispensing fees paid to pharmacies have been declining, from $4 per prescription to as low as $1.75 today.

As a result of managed care, gross margins at independent pharmacies nationwide have fallen to 26 percent from 35 percent, according to the National Community Pharmacists Association, another industry trade group. On insurance transactions, margins average 16 percent.

"The contracts are calling for lower and lower reimbursement to the stores with very little profit left in dispensing medicines," said Todd Dankmyer, a spokesman for the NCPA.

Larger chains can often make up the difference because they buy in larger volumes, paying less for medications than the average wholesale costs allowed by insurance companies. For independents, however, the wholesale cost may be at or above the insurance company formula, making the dispensing fee their only source of gross profit.

"The local pharmacy is twice oppressed," said Michelotti. 'They have no ability to negotiate (their contract with the insurance carriers), and once the rates are thrown at them, those rates are less than their cost for the product. What happens is, pharmacies close."

Independent pharmacies in California have closed at a rate of about 350 a year since the early part of the decade, Michelotti said, meaning about 2,500 statewide.

To survive, Herz has turned over a large portion of his 3,500-square-foot store to cosmetics and other personal care products, and gift items like ceramic serving pieces and toys. The store also offers a post office outpost and a film developing service.

"I've gone to other niches," said Herz. "I rent wheelchairs and breast pumps, so I've gotten to where I make money in other areas."

Herz gauges success by the ability to pay his bills, collect his salary and take what he says is a substantial amount of time off "to do what I want to do.

"I can spend hours and days trying to figure out numbers, but I found out it didn't do me any good," Herz said. "All I can do is keep the customers coming in."