A harsh funding regime which hasn't adapted to changing macroeconomic realities means the viability of large parts of the pharmacy sector is at risk unless the model changes. Very simply, at a sector-wide level, revenue has remained fixed while costs have increased significantly. No business model is sustainable under such circumstances.
The sector landscape
Many pharmacies are struggling due to years of NHS underfunding, increasing costs, staff shortages, and medicine supply issues. More than 1,500 community pharmacies have closed since 2015 with 700 of these since 2021. Multi-site operators have seen the biggest decline in pharmacy numbers. For example, Lloyds Pharmacy went into liquidation in January 2024, following a year-long divestment campaign of over 1,000 high street and community pharmacies. Boots is in the process of reducing its pharmacies by 300 branches and Rowlands Pharmacy has sold over a fifth of its branches in the last three years.
The majority of the sector now consists of regional multiples (some of whom, like the nationals, have their own wholesaling operations) and independent contractors. Smaller businesses operating between one and five pharmacies account for almost 50% of the sector. And these contractors don't attract the same sort of headlines as the larger, nationwide operators.
A legacy of significant underfunding
Despite rising inflation and business costs, the NHS pharmacy funding model has remained fixed. Over the period of the current Community Pharmacy Contractual Framework (CPCF) - 2019-2024 - pharmacies have experienced a 30% real terms reduction in core funding. Analysis by the CCA shows that this equates to an annual shortfall of over £750 million, equivalent to £67,000 per pharmacy in England.
Around 30% of pharmacies NHS funding derives from the retained margin (or Category M funding) – the margin they're allowed to make on medicines purchases. This is currently set at £800 million and hasn't changed since 2014 despite a dramatic increase in the average number of prescriptions per pharmacy. Many pharmacies consistently dispense medicines at a loss.
Any margin that's claimable by pharmacies via purchasing medicines at reduced prices is often paid months after the transaction, and due to a complicated averaging system, pharmacists are often not clear how much they'll receive. Not only does this exacerbate cash flow, pharmacists are having to make spending decisions without knowing how much money they have.
Operational challenges
Regular polling by Community Pharmacy England (CPE) shows that instability in the medicines market, in terms of both availability and price, is ranked as one of the most severe pressures facing pharmacies.
In 2023 there were 1,634 alerts relating to drugs shortages compared with 648 in 2020, a 152% increase. While many supply problems are global, Brexit has weakened the UK’s ability to respond as the UK isn't part of European supply chains and authorisations. The difficulties and costs related with drug sourcing creates significant extra work for pharmacists and intensifies wider financial pressures.
There's also an increasing shortage of community pharmacists themselves. Many have left the sector under the Additional Roles Reimbursement Scheme, a scheme introduced in 2019 which reimburses GPs the salaries and costs of employing clinical pharmacists. As of September 2023, almost 5,300 pharmacists had been recruited into GP surgeries. As a result of this shortage, the average hourly locum rate for pharmacists in England rose 85% from £20.02 in 2020 to £37.14 in July 2023.
The rise in the national minimum wage (NMW) has further impacted pharmacies' staffing costs. The NMW has increased nearly 40% since the start of the current contractual framework, with the latest rise implemented in April 2024, adding an additional cost of between £150-195 million to the community pharmacy sector.
Uncertain funding environment
The current CPCF is due to end in 2024, but there's still no arrangement in place for future funding. Negotiations have started between CPE, the Department of Health and Social Care and NHS England, but discussions are currently only due to cover funding arrangements for pharmacies in 2024/25.
This limbo is compounded by the fact that current government budgets, including for the NHS, are set to expire in April 2025.
This instability not only leads to delayed and inefficient spending decisions, it also hampers the ability of the sector to plan and attract much needed investment. The sector awaits much needed clarity from the new Government.
Pharmacy First
Against this backdrop of inadequate funding and operational pressures, pharmacists are being asked to provide more front-line services than ever. Pharmacy First was launched on 31 January 2024, with the aim of giving patients quick and accessible care for seven common conditions and ease pressure on GPs. A report by the Company Chemists’ Association (CCA) showed there had been strong patient demand for the service, with CCA members alone delivering over 90,000 consultations in the first two months.
However, it has placed significant additional pressure on pharmacies, who have had to train pharmacists and reconfigure stores to provide consultation rooms. The Government provided £645 million funding for Pharmacy First but research by the Association of Independent Multiple Pharmacies has shown that 70% of pharmacy owners don't think this is sufficient remuneration for the time and clinical decision making involved.
Hub and Spoke: the future of pharmacy?
In May 2024, the Department of Health and Social Care’s (DHSC’s) response to the consultation on hub and spoke dispensing confirmed long-proposed changes to allow dispensing across different legal entities from 2025.* While the exact model and details are still to be confirmed, this opens a range of possibilities both larger and smaller contractors.
For larger operators, there's an opportunity to improve utilisation at the hub by providing dispensing and logistics solutions to smaller contractors and even competitors. For smaller operators, there's an opportunity to outsource certain functions which can release working capital and potentially provide a better service to customers.
Adapting for the future – how can we help?
There are four key areas where we support pharmacy operators to help be future-fit:
Implementing the best financing structures
Pharmacies have many different financing options and getting the right mix can optimise cash flow. We help contractors explore all these options and implement the best structure. These options include:
- Raising finance from the mainstream bank sector – there's appetite to support contractors because the NHS is a low-risk customer, although demonstrating cost control will also be relevant
- Contractors should consider how to unlock capital and cashflow from existing property portfolios, or raise development finance for distribution, warehousing, and hub centres
- Asset-based lending (ABL) facilities may be appropriate on drug inventory, particularly in wholesaling businesses, and asset finance can be used to support the installation of automated dispensing robots, whether in-store of in distribution (hub) centres
Whole business forecasting
With operators working under significant financial pressure and with multiple unknowns, accurate and granular forecasting is essential, both for business-as-usual and for seeking external financing.
We help operators design best-in-class forecasting, flexed to the size of your business, including dashboard reporting incorporating programmes, such as Power BI. This helps areas of strength and concern be identified quickly while longer-term forecasting assist with investment decisions.
Operational excellence – hub and spoke
Pharmacy operators should consider whether implementing a hub and spoke model or a similar distribution centre model would be beneficial for their business.
This could be the contractor building their own hub and spoke capabilities or making the decision to outsource elements of dispensing.
We have advised major UK and European pharmacy and retail groups on the implementation and subsequent optimisation of hub and spoke facilities. Integration across IT systems, in store and centrally, are often key – as are the cultural considerations of operating in a different way.
Indirect tax recovery from HMRC
VAT treatment of the single activity fee (SAF) has long been uncertain, but HMRC appears to have (finally) decided the SAF should be zero-rated.
To the extent that pharmacies have historically declared output VAT and restricted input VAT recovery in relation to SAF income, there's now an opportunity to go back and make VAT reclaims. As with all retrospective UK VAT claims, this is capped by a rolling four-year window.
We would recommend considering this promptly in order to 'stop the clock' on the earliest periods in the four-year window and minimise any value falling out of time. We can help you with your claims in order to generate much needed additional cash into your business.
* Update: In September 2024, the Department of Health and Social Care said they are not in a position to implement the hub and spoke dispensing between different pharmacy owners by 1 January 2025. There is currently no further clarity on time scales.
For more information or advice, contact Christopher McLean or Dan Smith.
