Edition #37d Newsletter

These days, when we hear of corporate medicine, it usually related to a public company structure, managed by people from totally unrelated fields, such as banking and petroleum. Such managers have strong management credentials and an insatiable and ruthless desire to increase shareholder returns.
They are the corporate heros of the financial world because they can demonstrate high rates of returm on invested capital.
They are noticed and favoured by governments, and because of their integration of a wide range of related services, they can have a devastating impact on sole practitioners in a given catchment area.
In the process, the human beings (patients) they are servicing, become commodities; simply markets that need to be exploited.
These corporate structures exhibit no social conscience, and the professional people contracted to them have reduced professional discretion, because of "channeling" processes that they must agree to, as well as time constraints imposed on face-to-face contact with patients.
In the services they provide, they are highly efficient, and it must be said that patients support the concept in the same way that customers have favoured supermarkets over the corner grocery store.

They like the idea of a "one stop shop" for all health services.

Whether the consumers received better service (or even a full service) or prices lower than that offered by smaller operators, is debatable.
Even with market concentration by major operators, prices eventually become ultimately what the market will bear, and form without regard to a fair markup on cost.
Inevitably, like the banks, they become very expensive for most consumers.
So is big really better - or cheaper?

This principle applies equally to supermarkets and corporate health operations.

So all this means is that when patients require something a bit more specialised, or would prefer a little more care and attention, it is not available, except from the "real" professionals, slogging it out in solo practices or small partnerships.
Already we are seeing one well-known integrated health group being accused by the Australian Medical Association of "cherry picking". This particular operator is accused of only reserving acute surgical beds for patients and turning away chronic medical patients, because they are not as profitable to service.

How caring is that?

This is definitely not the model I would propose for pharmacy.
Definitely no, not ever!

So what would constitute a good model for pharmacy?
It is not the old emotive model as represented by the Boots and Soul Pattinson models of yesteryear.

Well, first and foremost, it must always be controlled by pharmacists.
Second, it must exclude public company interest, both direct, and indirect.
Third, it must not initially disadvantage established pharmacist operators in a given catchment, as enabling legislation is generated.
Fourth, it must be populated with adequate and qualified human resources.
Fifth, it must be of a scale that could compete on all fronts, and provide a quality service to the highest standards.

A proprietory limited company is a private company which can issue a range of special purpose shares to satisfy a variety of pharmacist investors, with diverse aspirations.
An exempt proprietory company is one where, by law, it cannot have direct or indirect interest, influence or control, exerted by a public company.
Even if a registered pharmacist were to hold a directorship of a public company, he/she would be ineligible to be a concurrent director or a shareholder of an exempt pharmacy proprietory company.

Control of a proprietory company is vested in its shareholders, who in turn, elect directors to manage the company.
To ensure pharmacist control, it would be necessary to legislate that pharmacists would have to own a minimum of 51% of the capital of a company, have a majority of shareholder voting power, and have a majority of directors who are also pharmacists.
The minority shareholders need not be pharmacists.
They may be "near family", employees or maybe a venture capitalist.
Whoever they may be, there needs to be a block of shares available for incentivisation, be it for taxation purpose, to encourage employees, or to ensure an expanding future with venture capital.
There may be a number of other reasons, but provided pharmacists have a majority control, the profession would be safeguarded.
In the same way, it may be prudent to be able to appoint a director who is not a pharmacist. This could be someone with a special skill, such as a solicitor, an accountant, or a management consultant or any person deemed to bring professional or material benefit to the board , which in turn would advance the company's aims and objectives.

When the ability to incorporate becomes a reality in all the State Pharmacy Acts within Australia, care should be taken to introduce equity in the initial launch of pharmacy companies.
Incorporation is beginning to look like the pathway to liberation, because it offers the most efficient structure for amalgamation of smaller pharmacies into a larger unit offering a scale of economies.
It opens a doorway into an entirely new world, where many of the inefficiencies of existing business structures can be eliminated.
Even the shortage of skilled pharmacists can only be quickly alleviated through mergers or takeovers, and it can be done in a manner which preserves the value of each pharmacy.

Guidelines need to be prepared in advance by official pharmacy, so that an orderly process of amalgamation can occur, before any major expansion plans are initiated.
Existing operators should be given the opportunity to be part of a new pharmacy company, but they should also have the freedom to stand alone if they wish.
The beauty of a company structure is that you can acquire or merge other businesses without having to borrow. You just simply issue shares to the value of the asset being acquired,
The process begins by pharmacists in a given catchment area looking to each other to see who makes a good "fit". This could be any number of pharmacists coming together, by mutual agreement, and forming an exempt pharmacy proprietory limited company structure.
The initial company need not even have any major capital contributed in the first instance. Just a shell with one management share (A Share) being issued to each pharmacist. Shareholders then elect their board of directors (which can be all the pharmacists involved), who simply vote for themselves with their voting share, or a restricted maximum number of directors, which is determined, when the Articles of Association are drawn up.
The newly elected directors will, by pre-arranged agreement, set about acquiring the businesses of all the participants by issuing ordinary (B) shares denominated to a specified amount, equal in value to the acquired asset.

At this point, the company has a value, and the directors may recommend a further issue of ordinary shares so that participants can even up their shareholdings, or maybe the new issue will provide extra working capital for the new company.
With a new issue, all pharmacists in a given region may be offered shares or share options.
There is no reason why a locum could not be an investor, or the retired pharmacist who has capital to invest. Women pharmacists may find this an ideal medium of investment, being able to invest in a pharmacy, have a family and retain a long term interest, because it can all be done simultaneously.
Newly graduated pharmacists can begin an investment plan guaranteeing their future, overcoming the current anxiety that they will never own a pharmacy.
Well, company structure not only offers them an opportunity to do this, but anchors them more permanently in pharmacy, rather than looking elsewhere to develop a career extension in medicine, law, finance or Information Technology, which is where major leakages are occurring.
Graduates will also wish to protect their investment.
The new organisation immediately takes on a stronger framework and is more stable because of a shared risk. All shareholders will want to protect their investment, and as an added bonus, form a committed group of potential employees for the company.
Suddenly bank borrowings and wholesaler guarantees are able to be reduced and perhaps become the secondary method of financing, the primary method being the issue of shares.

The medium of shareholding offers other opportunities.
Individual shareholders may borrow personally to purchase shares.
This is not a charge on the company.
Pharmacy shares may form part of a portfolio of a private superannuation fund.
Why not use taxation planning to maximise investment in a pharmacy company?
Whatever the reason for a pharmacy company to offer shares, or even if an issue takes place at all, will always be determined by a majority vote of the shareholders.

As light follows day, it is inevitable that incorporation will trigger off masses of mergers and amalgamation.
So the next step in this process is to determine how many businesses are to be closed, and what happens to staff. It is from this pool of human resource that qualified pharmacists will be drawn, as well as other skilled staff.
Most of this planning will have taken place before the company structure was formed.
A detailed business plan should be documented and updated as the project progresses, and this process could start right now, even before Pharmacy Acts are ammended.
Even the company structure can be formed, and perhaps its first official function could be to act as a bulk buying purchasing agent on behalf of the shareholder's existing pharmacies.
This could be constructed as a "virtual warehouse" utilising Internet technology and fulfillment organisations.
These processes have to be tackled sooner or later, so if you "hit the ground running" right now, you would not miss a beat when it came to forming up the final physical retail entity when the process was legally able to be sanctioned.

The types of shares offered by a pharmacy company can also have diversity.
I have already mentioned management shares which have voting value but do not attract income.
There are ordinary shares which can be non-voting shares, or they may be deemed to represent one vote per share.
There are preference shares which offer a fixed rate of net profit or a fixed rate of interest, and the dividends must be paid before any other shares. This form of investment may suit retired pharmacists.
You can have employee shares, which must be passed in, if an employee ceases to work within the company (or they can be converted to any other form of share if it is in the company's best interests).
It is this capital flexibility that makes a company an attractive structure, and it can be combined with pharmacist control, which ensures that pharmacy professional interests are well served.

Looking again at the type of person that could be a shareholder, and we have a diverse list.
Pre-registration students, graduate pharmacists, primary care assistants, pharmacy technicians, locums, consultant pharmacists, near-family individuals or their own corporate structures (including family trusts and private superannuation trusts) and special shareholders such as venture capitalists.
All these types of shareholders need to be factored in, because they are supportive to, and have the ultimate interest at heart, of the future of pharmacy, even if it is only one particular pharmacy.
Not all in the list will be registered pharmacists and legislators should be conscious of not hampering pharmacy progress by being too restrictive.

CoAG is the coalition of state governments that is the body that will be recommending uniform legislation for all states to enact.
It has not yet published its final recommendations.
Official pharmacy needs to nudge the process to ensure that it is not too long in coming, and that the legislation contains sufficient flexibility to allow some non-pharmacist involvement, in a limited area.
While new pharmacy initiatives such as consultant pharmacy, medication reviews etc are struggling to establish themselves, the whole process would be given a major impetus just by having enough people and a well managed organisational structure in place,
A corporate pharmacy structure could well be the ideal entity to operate out of, offering security, stability, a scale of economies and professional control and direction.
Most importantly, because a corporation is not a natural person, it has an indefinite life and retains a corporate memory, because there are legally mandated meetings that have to be held and minuted.
Succession is more easily planned, and people can move in and out of a corporate structure with more ease, than say, a partnership.

And not to forget the local political process.
Incorporation may also provide the trigger to develop local Divisions of Pharmacy Practice, which could also develop and orchestrate guidelines for amalgamations and mergers, if existing official pharmacy structures did not fill the void quickly.

Developing the organisational structures and connecting all the above processes with e-commerce platforms, plus making the entire system Internet enabled, would represent an exciting project for a consultant (such as myself) to engage in.
Considering that I floated the incorporation idea more than 25 years ago, as a means of limiting the total number of pharmacies, and as an alternative to the licencing of NHS Approval Numbers, it is nice to see that the wheel has almost turned full cycle.
All that remains is enabling state legislation and the Pharmacy Guild to abandon its flawed support for the NHS approval number system.
Approval number licencing must go, never again to return.
CoAG is known to support this view.
Maybe 2002 is shaping up to be a stimulating and exciting year of real progress.

Ends
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