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Costs cut to ease hit on dispensing profits

Profits from dispensing are falling, reports Paul Kendall.

Three or four years ago my advice to young doctors who were looking for a practice to join was to opt for a dispensing practice in a provincial town. The lower list size of these practices often resulted in a lower-than-average work rate, while the dispensary could result in a higher-than- average level of earnings.

Given the changes that have affected dispensing since then, and those which have yet to take effect, the dispensing practice may not, any longer, be the best option to choose.

Changes in drug VAT
Over the past three years dispensers have been hit with the reclassification of category M drugs (effectively reducing the reimbursements on those drugs), the withdrawal of the VAT allowance and a reduction in the number of discounts being offered by drug wholesalers.

The withdrawal of the VAT allowance forced many dispensing practices to register for VAT purposes and complete tax returns in order to reclaim the VAT on their drug purchases.

Practices which did register were saddled with an administrative nightmare in identifying the non self-administered drugs on which they could claim back VAT and the administration procedures increased their expenses. Those practices that did not register had to pay VAT on the drugs they dispensed.

Issues affecting profit
These factors have affected gross profits being generated by dispensing practices over the past year (see box). Income has dropped due to the loss of the VAT allowance and the reclassification of category M drugs, while costs have risen due to the lower drug discounts, and the VAT cost for the non-VAT registered practices.

Likewise, the level of net profits achieved by dispensing practices has fallen in 2008 (see box). The table shows a drop in profits of only £5,489 per partner in 2008 which, given the drop in the gross profit from drugs of £13,001, is less than the reduction that would have been expected. Most practices have achieved this position by reducing practice expenses, the main one being staff costs.

Given that the major expense in practice is the staff costs, only marginal further savings could be made on other expenses. Therefore, looking ahead, inflationary pressures on staff and other expenses will only further reduce profits in dispensing practices.

White Paper impact
If all this wasn't bad enough, further possible changes may have a serious impact on dispensing, the first being the Pharmacy White Paper, which includes a change in the rules around the distance patients live from the nearest pharmacy. They use the practice's distance from the nearest pharmacy as the new criteria, a change which could significantly reduce the number of practices eligible to dispense.

The proposals include references to some services currently being provided by doctors being transferred to and provided by pharmacists. This may include some enhanced services. The threat of this loss of income has forced a number of dispensing practices to make defensive applications for their own pharmacy licences.

MPIG replacement
The second issue that will have an effect on dispensing practices is the withdrawal of the MPIG (or, more accurately the cut in correction factors).

This proposal will have a major impact on dispensing practices, as many are reliant upon the correction factor, which represents a significant part of their income.

The proposals to replace it with further quality monies or enhanced services may not provide the more rural dispensers with the income to make up for the loss.

Practices under threat
While it is true that there are a number of very high earning dispensing practices, there are an equally large number of relatively low earning dispensing practices providing a vital service in rural areas. These smaller practices will not be viable without their dispensing income and correction factor monies, and are seriously under threat.

A five-partner rural practice with whom I recently spoke would have its net profit reduced to less than £200,000 if both these proposals come to fruition, resulting in the loss of two or possibly three partners.

Doctors' leaders need to stress to ministers the need for rural practice allowances or we face the extinction of the country doctor.

  • Paul Kendall is a partner at Dodd & Co Specialist Medical Accountants.
  • Contact Sarah Wild at sarah.wild@haymarket.com or tel (020) 8267 4532.

 

Dispensing profits and expenditure
Dispensing Practice Gross Profit Per Partner

20072008
£           
£

Drugs income

124,626

 114,422

Drugs expenditure78,67781,474
45,94932,948
Gross profit percentage37%29%
Net Profit Per Partner
  2007           
2008
£               
£
Practice income370,032357,256
Practice expenditure219,466 212,179
150,566145,077
Net profit percentage41%41%
Staff Costs Per Partner
20072008
££
Staff costs80,12876,481
The statistics provided above are from a sample of dispensing doctors with 31 March year ends in England and Wales. Figures from our Scottish survey are not yet available, but we would expect them to show the same percentage reductions as suffered by the English and Welsh.

 

The DDAThe DDA is the only organisation that ensures the views of dispensing practices are heard by the government and key negotiating bodies. We also provide telephone advice to members and essential updated information via our website, and email alerts. To find out more call Jeff Lee on (01751) 430835 or visit www.dispensingdoctor.org
The DDA does not necessarily support or endorse the opinions or information contained on this page.

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