A drugstore on every corner: Turning points in community pharmacy
Up to that point, manufacturers established drug prices primarily on the basis of the cost of production and drug promotion.
At that time, there was no direct-to-consumer advertising, and the drug companies generally hired pharmacists to promote their products. Those pharmacists were called “detail men.” They educated the doctors about new drugs and gave them samples of their products.
The detail men encouraged retail pharmacists to open direct accounts so that their pharmacies could bypass the markup used by wholesalers.
Red Book, Blue Book
The manufacturers set yearly drug prices that were published in the RED BOOK and the BLUE BOOK. Wholesale distributers used those prices in their businesses.
Pharmacies could normally depend on the manufacturers to honor those prices.
A new pricing tactic
Until the late 1960s, the wholesalers would give a retail pharmacist a 2% discount if the bill were paid within 10 days of becoming due.
Then some small wholesalers began offering 10% discounts for their products, which were primarily generics with some brand-name drugs included. However, those drugs did not constitute a majority of their business. Those small wholesalers could demand deeper discounts from the manufacturers based on their successful sales of the products, so they could afford to offer the 10% discount on them.
In response to those small wholesalers, the large wholesalers demanded bigger discounts from the manufacturers so that they could also offer the 10% discounts. The manufacturers then had to raise their prices in order to compensate for the discounts.
A drugstore on every corner
At that time there were very few chains competing with independents for business in most of the rural areas and many larger cities.
A good many of the rural towns and cities had retail pharmacies on every corner, and pharmacists were generally successful businessmen.
Then things began to change.
Chain expansion begins
For many years Rexall and Walgreens had used franchises to further their business.
In the 1960s, Walgreens stopped franchising and bought out its members’ franchises, and Rexall went out of business.
Walgreens realized that because of its purchasing power, it could demand even greater discounts. This meant that manufacturers had to raise prices to compensate.
The professional fee and its consequences
In the mid-1960s, Medicaid came into being, and pharmacy associations and universities began to promote the idea of a professional fee.
At that time there were laws preventing retail businesses from agreeing on pricing their products. The acceptance of the professional fee in essence resulted in government price-fixing, which restricted drugstore profits.
As a result, increasing the prescription output was the only way to sustain profits.