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Drug Wars

Controversy Flares Up Again Over Local Government Regulations That Limit The Number Of Pharmacies, With Consumers Caught In The Crossfire


September 18, 2003
Copyright © 2003 CARIBBEAN BUSINESS. All Rights Reserved.

Room to grow: Local demand for prescription drugs has jumped 300% in the past 10 years while the number of pharmacies has increased a mere 1.6%. Yet a battle is waged over the opening of every new drugstore.

Battles for control of the island’s drug puntos may be violent, but the war to control the best locations for legitimate drugstores is almost as fierce.

The weapon of choice in the latter war is the local government’s requirement of a Health Department-issued Certificate of Need & Convenience (CNC) to open a new pharmacy.

To some, CNCs ensure quality control and customer satisfaction. To others, they are nothing but a government-sanctioned mechanism to protect old and inefficient mom-and-pop drugstores, stifling the competition and resulting in higher prices for consumers.

Regardless, no CNC means no new pharmacy. Walgreens, the largest nonlocally owned pharmacy chain in Puerto Rico, adamantly opposes the CNC requirement on the grounds that it artificially constrains supply, making it more difficult for the aging population to obtain prescription drugs.

"Our population is getting older. In fact, more than 40% of our population is over 40," Edwin Rodriguez, Walgreens’ marketing manager for Puerto Rico, told CARIBBEAN BUSINESS. "The older people get, the more prescription medicines they need. With the Health Reform, an additional 1.6 million people have access to private healthcare, which means they are also demanding prescriptions."

Rodriguez said the number of pharmacies in Puerto Rico hasn’t grown at the appropriate pace because of the CNC requirement, which controls the number of pharmacies that can open in a particular area. According to information from Walgreens, "while demand for medications has quadrupled, the number of pharmacies has experienced minimal growth. In 1992-93, there were 922 pharmacies. By 2003, the number had increased only 1.6% to 937."

Walgreens’ data also indicate that in 1997 there was one private pharmacy per 3,263 consumers. By 2001, the ratio had changed to one private pharmacy per 4,153 consumers.

There are those who support CNCs, mostly independent, family-owned pharmacies. They argue that even with the CNC requirement, smaller pharmacies are going bankrupt. If CNCs were eliminated, they say, larger chains would begin opening everywhere and the quality of service at pharmacies would decline.

A few years ago, pharmacy chain Eckerd scratched plans to enter the Puerto Rico market in part because of the CNC requirement (CB May 4, 2000). Independent-pharmacy owners, however, say CNCs aren’t to blame for the slow growth of drugstores on the island.

"The data show that the number of pharmacies in Puerto Rico has remained almost stable because independent pharmacies continue to go bankrupt while Walgreens opens more stores," said Jose Perez de Gracia, president of Farmacias Plaza.

Data from research firm A.C. Nielsen indicate that from 1994 to 2001, the number of independent pharmacies opening in Puerto Rico was about the same as the number of chain drugstores opening. The number of chain pharmacies went from 95 in 1994 to 117 in 2001, an increase of 22. By comparison, the number of independent pharmacies went from 802 to 829, a gain of 27.

The data also show that after dropping from 717 pharmacies in 1998 to 661 in 2000, a total 168 independent pharmacies opened between 2000 and 2001, suggesting that independent pharmacies were able to recover quickly from a temporary downturn.

However, Julie Hurtado, president of the Association of Community Pharmacies, notes that 300 independent pharmacies have closed in the past five years. And Perez de Gracia has said that every month he receives four or five offers to buy independent pharmacies that are going bankrupt all over the island.

The controversy

Debates about the need for CNCs have been waged for some time. Last week, U.S. District Court Chief Judge Hector Laffitte upheld the validity of CNCs in a challenge brought by Walgreens.

Nevertheless, the island’s largest pharmacy chain still considers some local government regulations, particularly the need for CNCs, totally unnecessary. It has said that Puerto Rico is the only jurisdiction in the U.S. requiring CNCs of pharmacies.

Moreover, it claims CNCs and other government permits required of pharmacies and other commercial establishments are seriously hurting the growth of the island’s pharmacy industry, to the point that the almost 1,000 pharmacies in Puerto Rico are hardly able to keep up with demand.

More importantly, some claim there is a double standard in granting CNCs. Statistics have shown that the rejection rate is much lower for locally owned pharmacies than for pharmacy chains from the U.S. mainland.

Community (or independently owned) pharmacies, however, say CNCs allow a better distribution of drugstores in Puerto Rico, helping to avoid overlapping services and keeping large pharmacy chains from leading independent pharmacies to bankruptcy.

Johnny Rullan, secretary of the local Health Department, in charge of granting CNCs, says that just because CNCs allegedly aren’t required of pharmacies on the U.S. mainland doesn’t mean the same should hold true in Puerto Rico. "CNCs are based on a scientific formula and serve to create a balance of health services," he told CARIBBEAN BUSINESS. "We have successfully defended their existence many times."

What is a CNC?

According to the Health Department, a CNC is a document granted by the agency’s secretary authorizing the provision of some health-related activities or services. It also certifies that the activity or service is needed in the community where it is to be provided and that it won’t cause an increase in prices or negatively affect similar services already available in the community. Besides pharmacies, CNCs are required of hospitals, hospices, rehabilitation centers, outpatient surgery centers, and other services.

Hector Reichard, a former Justice secretary and former president of the Puerto Rico Chamber of Commerce, said the U.S. government began requiring CNCs in the late 1970s. "The purpose of CNCs was to make sure the offerings of public health facilities didn’t overlap," he said. "It was an initiative of the federal government to give proper access to public healthcare facilities. Pharmacies were never included on the list of facilities needing CNCs.

"The federal government did away with CNCs in the 1980s, although some states retained the requirement for larger healthcare facilities," Reichard added.

He explained that once the public health system was privatized on the U.S. mainland, the need for CNCs was eliminated. That hasn’t been the case in Puerto Rico, even though the Health Reform established during the administration of former Gov. Pedro Rossello privatized most of the public health system.

Supporters of the regulation argue that the purpose of CNCs in Puerto Rico goes beyond making sure health services don’t overlap. Hurtado says CNCs also help to ensure the population has adequate access to health services.

Some of the factors considered in granting CNCs are the long-term development plan of the pharmacy seeking the certificate, the current and projected needs of the population to be served by the pharmacy, the percent of the population in the area that will be served by the pharmacy, the current status of health facilities in the area, and the available alternatives.

A Health Department document indicates there should be one pharmacy for every 4,000 inhabitants of a municipality, except in San Juan, Bayamon, Arecibo, Manati, Ponce, Mayaguez, and Humacao, where there should be one pharmacy per 2,500 inhabitants. The numbers can vary depending on the floating population of an area—i.e., people who go in and out of a downtown area even though they don’t live there.

Hurtado said that although CNCs currently aren’t demanded of pharmacies on the U.S. mainland, some states are considering requiring them. "For about two years, some states have been calling Puerto Rico to find out more about CNCs," she said. "I have received calls from New Jersey asking about CNCs. Over there, independent pharmacies are also dealing with the onslaught of large chains."

One problem that everyone acknowledges is the long time it takes to grant CNCs. "The process of obtaining a CNC is very slow," Michael Tovian, Walgreens’ vice president of store operations, told CARIBBEAN BUSINESS. "The average time to open a store on the mainland is 18 to 24 months; in Puerto Rico it takes an average of four-and-a-half years." Walgreens said it had to wait almost 11 years before obtaining a CNC to open on Ponce’s Las Americas Avenue.

Atilano Cordero Badillo, president of the Chamber of the Food Marketing & Distribution Industry (MIDA by its Spanish acronym), thinks the time it takes to obtain permits, not just CNCs, hurts businesses. "We haven’t discussed CNCs in depth at MIDA," he said, "but one thing we are certain of is that the government is taking too long to grant them."

Farmacias Plaza’s Perez de Gracia said it usually takes 60 days to obtain a CNC, but he knows of cases that have taken up to five years.

Do CNCs favor local pharmacies?

In the case decided by Judge Laffitte last week, Walgreens contended that the application of CNCs to pharmacies discriminates against chains from the U.S. mainland.

According to a study in 2002, the local government has denied 25% of Walgreens’ CNC applications and only 2.6% of applications by local independent or chain pharmacies.

Nevertheless, the court found no reason to conclude that CNCs discriminate against national chains. "Although Walgreens complains of the inefficient, time-consuming, and complicated procedure it must go through to receive the permit, any local economic interest seeking to obtain a CNC must also jump through the same bureaucratic hoops," said Laffitte.

Hurtado suggests Walgreens’ CNC applications might be denied so often because it seeks to open in markets already served by another pharmacy. "Walgreens wanted to establish a pharmacy right in front of Puerto Rico Drug in Old San Juan," said Rullan. "In this case, a CNC would never be granted. If they want to establish a pharmacy where there is a need for one, we won’t deny them a CNC."

Would eliminating CNCs promote health competition?

Walgreens executives say that if CNCs were eliminated, the smaller pharmacies would have to improve their service to compete, which would benefit consumers. "When a top-notch player comes, the rest strive to improve," said Rodriguez. The Walgreens marketing manager noted that independent pharmacies have extended their operating hours and enhanced their facilities when faced with competition.

"This is something every pharmacy owner should be prepared to do: compete," said Farmacias Plaza’s Perez de Gracia. He noted, however, that some independent pharmacies have been offering better service not in response to competition. At the prescription counter, for instance, consumers can seek the advice of pharmacists on alternative remedies.

Hurtado, a pharmacist, said she sees patients even when she is off-duty. "This is something you will never see a pharmacist at a large chain doing," she said.

In addition to competition from large chains, independent pharmacies in Puerto Rico worry about a shortage of pharmacists. Many independent drugstores believe that if CNCs were no longer required the chains would mushroom, making it harder for them to find qualified pharmacists to run the prescription counter. This, in turn, would seriously affect customer service.

Only 50 students graduated as pharmacists in Puerto Rico this summer. What’s more, the Association of Community Pharmacies says there is less than one pharmacist per pharmacy.

Even El Amal is feeling the pinch. "Finding quality pharmacists is a big problem in Puerto Rico and on the U.S. mainland," said President Saleh Yassin. "On the [U.S.] mainland alone there are more than 7,000 vacant positions for pharmacists."

One manager of an independent pharmacy is concerned about the large chains offering 24-hour service. "There aren’t enough pharmacists to cover [all the shifts]. A pharmacy opening 24 hours would require three pharmacists," said the manager.

That worry leads to another. "They [large chains] would have to hire pharmacists [away from] independent pharmacies. They can do this because a chain like Walgreens can obviously pay salaries that are much more attractive," added the manager.

Taking it to the judge

Walgreens’ Rodriguez is worried that Judge Laffitte’s decision against Walgreens could cause the chain to rethink its planned $400 million investment in Puerto Rico over the next four years.

"It isn’t that we won’t invest here," said Rodriguez. "But it is difficult to invest so much money when you have no certainty you will ever be able to open the business."

Rodriguez said Walgreens was pleased the court acknowledged flaws in CNCs. "We are satisfied Judge Laffitte recognized CNCs are inefficient, imperfect, and inconsistent," he said.

Independent pharmacy executives agree CNCs are inconsistent and have other flaws.

Differing opinions on proposed changes to pharmacy law

Enacted in the 1940s, the local pharmacy law hasn’t changed much. Recently, however, the House of Representatives and the Senate passed a bill seeking to update the law, but Gov. Sila Calderon hasn’t signed it.

The business community has weighed in on the subject. The debate centers on whether pharmacies should be allowed to sell alcohol and tobacco products. Another sticking point is that the bill requires prescriptions to be filled only by pharmacists at a pharmacy.

"The Association of Community Pharmacies and the College of Pharmacists have been struggling for years to convince the government to update the pharmacy law," said Julie Hurtado, president of the Community Pharmacies Association. "The proposal made it to the Legislature and was passed unanimously. When it arrived at La Fortaleza, however, the time allotted to pass it expired without a decision."

Hurtado said she favors prohibiting pharmacies from selling alcohol and tobacco products. "The government’s public policy is that the use of alcohol and tobacco shouldn’t be encouraged," she said. "In addition, pharmacies are healthcare establishments and selling such products would contradict their purpose." Some pharmacies, including El Amal, don’t sell alcohol or tobacco products even though it is legal.

Business organizations such as the Chamber of the Food Marketing & Distribution Industry (MIDA by its Spanish acronym) and the Puerto Rico Chamber of Commerce (PRCC) are against the bill.

"Consumers can find many more products besides medicine at pharmacies," said MIDA President Atilano Cordero Badillo. "At the same time, department stores and supermarkets have begun selling medicine. Why, then, should we punish pharmacies…by taking away what attracts many consumers to their establishments?"

PRCC President Hector Mayol said the organization is also against allowing only pharmacists at pharmacies to fill prescriptions. "It is precisely the possibility of having access to different suppliers that will allow consumers to reduce their costs on increasingly expensive medicines," he said.

According to Drug Store News magazine, almost 20% of drug sales on the U.S. mainland are conducted via mail order.

This Caribbean Business article appears courtesy of Casiano Communications.
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