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Procedure for setting professional fee
procedure for setting
by Harry J. Knox*
here are two basic approaches to be considered. Both methods are based on the proposition that the pharmacist will want to make as much salary and profit under the professional fee basis as he has made under the markup system. The way the professional fee basis for pricing prescriptions works is very simple. After the amount of the fee is determined, it is added to the pharmacist's cost for the medication. Thus the prescription price is the cost of the medication plus the professional fee. The first approach to setting the fee may be described as the trial and error method. Here the pharmacist selects a fee which he thinks might be about right. He then goes to his prescription file and reprices at least three or four hundred prescriptions using the fee basis. These prescriptions should be selected by taking the same number of days from each calendar quarter. For instance a pharmacy which averages 25 prescriptions per day should use about seven days in each quarter starting as follows- February 10, May 10, August 10, November 10. A pharmacy which dispenses 50 :& per day should use three or four days in each quarter. As the pharmacist makes his record of the fee basis prices, he should also record the cost of medication and the markup system price or the original price to the patient. When the sample of all four quarters is completed, he should make separate totals for the original prices and the fee basis prices. These prices are then compared. If the fee basis total is significantly under or over the markup price total, an adjustment of the fee is in order. Let us assume that we have the two totals on 800 prescriptions and that we have used a professional fee of $1.25. If the two totals are reasonably close then we know that a professional fee of $1.25 will result in about the same total prescription volume and profit. If the fee basis total is $200 short of the markup basis total, the fee must be in-
T
* Presented
at the 1962 annual meeting of the Georgia Pharmaceutical Association, Inc. at Jekyll Island, Georgia.
530
creased to $1.50 to provide the same prescription volume and profit. On the other hand if the fee basis total is about $200 above the markup total, the fee should be reduced to $1. From this experiment with the trial and error approach three things should be obVIOUS-
I-80th new prescriptions and renewed prescriptions should be used. If data are not readily available on renewed prescriptions, a test computation can be made using only new prescriptions; however, renewed prescriptions should be used before a final decision is made. 2-The computations should be based on an adequate number of scripts-three or four hundred should be sufficient but one thou sand or more would be safer. 3-To have maximum competitive effect and minimum adverse repercussions, the fee should be as low as possible.
Many speakers on this subject have mentioned a professional fee of $2. This would be completely unrealistic on the high side in many areas. Similarly, it might be low in other areas. The second approach to setting the professional fee may not be as much work but it is fraught with many unknowns and a considerable amount of guesswork. Stated in its simplest terms the professional fee is equal to the sum of prescription department expenses plus prescription department profits divided by the number of prescriptions dispensed. Stated algebraically the formula is as follows:& department expenses profit Number of :& dispensed
+
=
professional fee
From a theoretical point of view this is an ideal approach. From a practical poin t of view, very few pharmacists will find that their accounting records provide figures for either prescription department expenses or profits. Hence it will be necessary to make allocations of expense. . Robert Abrams, professor of phar-
Journal of the AMERICAN PHARMACEUTICAL ASSOCIATION
Harry J. Knox, president of Medical Data Services, Inc., was born in Colorado. He attended the University of Chicago. His early experience included public accounting and life insurance actuarial work. In 1935 he joined A.C. Nielsen Company and in 1943 he became vice president. In 1950 he organized his own company which specializes in supplying marketing data to the pharmaceutical industry. His organization presently surveys prescriptions, medical journal and direct mail advertising and compiles statistical reports on the activities of medical representatives.
macy administration at the Philadelphia College of Pharmacy and Science, proposes an alternate formulaProprietor's salary
+
(~ ~~I~~t:lss:les X
)
Total expenses other than proprietor's salary Number of:&
This formula would then provide a figure indicating the cost of filling each prescription. To this is then added whatever return is desired by the pharmacist and the total represents the fee to be charged on each prescri ption.
Obviously this formula involves several assumptionsI-The proprietor spends his entire time in the prescription department. 2-The proprietor'S salary does not contain any component reflecting the profit being earned by the pharmacy. 3-Excluding the proprietor's salary, prescription department expenses have the same relationship to total expenses as prescription sales have to total sales.
If you can accept these assumptions, you are justified in using this simplified formula. If you have doubts about the validity of any of these assumptions, you must assume that a professional fee so computed might be unrealistically high or low. Perhaps the most intelligent way to proceed would be to use the Abrams (continued on bottom of next page)
by Harry J. Knox*
here are two basic approaches to be considered. Both methods are based on the proposition that the pharmacist will want to make as much salary and profit under the professional fee basis as he has made under the markup system. The way the professional fee basis for pricing prescriptions works is very simple. After the amount of the fee is determined, it is added to the pharmacist's cost for the medication. Thus the prescription price is the cost of the medication plus the professional fee. The first approach to setting the fee may be described as the trial and error method. Here the pharmacist selects a fee which he thinks might be about right. He then goes to his prescription file and reprices at least three or four hundred prescriptions using the fee basis. These prescriptions should be selected by taking the same number of days from each calendar quarter. For instance a pharmacy which averages 25 prescriptions per day should use about seven days in each quarter starting as follows- February 10, May 10, August 10, November 10. A pharmacy which dispenses 50 :& per day should use three or four days in each quarter. As the pharmacist makes his record of the fee basis prices, he should also record the cost of medication and the markup system price or the original price to the patient. When the sample of all four quarters is completed, he should make separate totals for the original prices and the fee basis prices. These prices are then compared. If the fee basis total is significantly under or over the markup price total, an adjustment of the fee is in order. Let us assume that we have the two totals on 800 prescriptions and that we have used a professional fee of $1.25. If the two totals are reasonably close then we know that a professional fee of $1.25 will result in about the same total prescription volume and profit. If the fee basis total is $200 short of the markup basis total, the fee must be in-
T
* Presented
at the 1962 annual meeting of the Georgia Pharmaceutical Association, Inc. at Jekyll Island, Georgia.
530
creased to $1.50 to provide the same prescription volume and profit. On the other hand if the fee basis total is about $200 above the markup total, the fee should be reduced to $1. From this experiment with the trial and error approach three things should be obVIOUS-
I-80th new prescriptions and renewed prescriptions should be used. If data are not readily available on renewed prescriptions, a test computation can be made using only new prescriptions; however, renewed prescriptions should be used before a final decision is made. 2-The computations should be based on an adequate number of scripts-three or four hundred should be sufficient but one thou sand or more would be safer. 3-To have maximum competitive effect and minimum adverse repercussions, the fee should be as low as possible.
Many speakers on this subject have mentioned a professional fee of $2. This would be completely unrealistic on the high side in many areas. Similarly, it might be low in other areas. The second approach to setting the professional fee may not be as much work but it is fraught with many unknowns and a considerable amount of guesswork. Stated in its simplest terms the professional fee is equal to the sum of prescription department expenses plus prescription department profits divided by the number of prescriptions dispensed. Stated algebraically the formula is as follows:& department expenses profit Number of :& dispensed
+
=
professional fee
From a theoretical point of view this is an ideal approach. From a practical poin t of view, very few pharmacists will find that their accounting records provide figures for either prescription department expenses or profits. Hence it will be necessary to make allocations of expense. . Robert Abrams, professor of phar-
Journal of the AMERICAN PHARMACEUTICAL ASSOCIATION
Harry J. Knox, president of Medical Data Services, Inc., was born in Colorado. He attended the University of Chicago. His early experience included public accounting and life insurance actuarial work. In 1935 he joined A.C. Nielsen Company and in 1943 he became vice president. In 1950 he organized his own company which specializes in supplying marketing data to the pharmaceutical industry. His organization presently surveys prescriptions, medical journal and direct mail advertising and compiles statistical reports on the activities of medical representatives.
macy administration at the Philadelphia College of Pharmacy and Science, proposes an alternate formulaProprietor's salary
+
(~ ~~I~~t:lss:les X
)
Total expenses other than proprietor's salary Number of:&
This formula would then provide a figure indicating the cost of filling each prescription. To this is then added whatever return is desired by the pharmacist and the total represents the fee to be charged on each prescri ption.
Obviously this formula involves several assumptionsI-The proprietor spends his entire time in the prescription department. 2-The proprietor'S salary does not contain any component reflecting the profit being earned by the pharmacy. 3-Excluding the proprietor's salary, prescription department expenses have the same relationship to total expenses as prescription sales have to total sales.
If you can accept these assumptions, you are justified in using this simplified formula. If you have doubts about the validity of any of these assumptions, you must assume that a professional fee so computed might be unrealistically high or low. Perhaps the most intelligent way to proceed would be to use the Abrams (continued on bottom of next page)