Pricing a New Service Under Fixed Reimbursement
A community pharmacy is considering adding a medication review service. The owner estimates 12 reviews per week, each taking 40 minutes of pharmacist time. The pharmacist is paid TT$180 per hour including on-costs. The service needs a private counselling room, which currently exists but is used for storage; fitting it out costs TT$24,000, depreciated over 4 years. Consumables are TT$15 per review. The pharmacy must also fund 6 hours per week of additional technician time at TT$70 per hour to cover the pharmacist's absence from the counter. The proposed payer reimbursement is a flat TT$120 per completed review. The owner wants to know whether the service breaks even and what volume is needed if it does not.
1. Calculate the contribution per review and the weekly and annual position at the projected volume.
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Pharmacist time cost per review = 40/60 x TT$180 = TT$120. Consumables = TT$15. Technician cover: 6 hours x TT$70 = TT$420 per week, spread over 12 reviews = TT$35 per review. Room depreciation: TT$24,000 over 4 years = TT$6,000 per year, or about TT$115.38 per week, spread over 12 reviews = about TT$9.62 per review. Total variable-plus-allocated cost per review = 120 + 15 + 35 + 9.62 = TT$179.62. Reimbursement is TT$120, so the contribution is negative: TT$120 - TT$179.62 = -TT$59.62 per review. At 12 reviews per week the loss is about TT$715 per week, or about TT$37,200 per year. The service does not break even at the proposed price and volume. Note that the pharmacist time alone (TT$120) equals the reimbursement, so every other cost is uncovered.
2. What volume would be needed to break even at TT$120 per review, and is that realistic? What assumptions drive the answer?
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Fixed costs per week: technician cover TT$420 plus room depreciation TT$115.38 = TT$535.38. Contribution per review before fixed costs = TT$120 - (TT$120 pharmacist + TT$15 consumables) = -TT$15. Because contribution is already negative before fixed costs, no volume breaks even: each additional review increases the loss. The service cannot break even at TT$120 unless the cost structure changes. If the pharmacist time were treated as a fixed salaried cost rather than a variable one, contribution would be TT$120 - TT$15 = TT$105, and break-even volume would be TT$535.38 / TT$105 = about 5.1 reviews per week, which is achievable. The answer therefore depends critically on whether the pharmacist's time is genuinely incremental (extra hours paid) or absorbed within existing salary. The owner must be clear which it is before deciding.
3. What options should the owner consider, and what non-financial factors matter?
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Options: negotiate a higher reimbursement or a per-hour rate rather than a flat fee; reduce pharmacist time per review (a structured 25-minute review with a technician doing preparation could cut the TT$120 to about TT$75); batch reviews to reduce technician cover; share the room cost or use existing space without fit-out; start at a smaller scale to test demand. Non-financial factors: the service may increase dispensing volume and customer loyalty, improve clinical outcomes and patient safety, and position the pharmacy for future payer contracts, so a loss leader may be justified if the strategic case is explicit. Staff workload and the risk of counter errors while the pharmacist is away must be managed. The owner should pilot for three months with recorded time, completion rates, and any downstream revenue, then re-price. The decision should be documented with the assumptions so it can be reviewed.