tion prices they conducted. The AMA surveys further indict the current distribution and marketing policies for drugs in this country. The American Pharmaceutical Association did not and does not intend to attempt to justify the findings of the AMA survey.

There are two components to the charges pharmacists make for pharmaceutical services to the public: (1) the cost of the drug prescribed and (2) the cost of their professional services. There is very little that a pharmacist can do about the amount of the first component unless the prescription order is written generically. Marketing reports indicate that somewhat less than 10 percent of the prescription orders today are written generically.

The physician chooses the exact product he wishes the pharmacist to dispense in all but 10 percent of the prescription orders written. In so doing, the physican fixes the most significant cost component of the charge to the patient. If a company establishes a cost of 17 cents, $1.70, or $17 per hundred dosage units, that is the cost the pharmacist will have to pay and that is the cost the physician selects for his patient to pay.

The pharmacist does control the cost of his professional services and this can vary from pharmacy to pharmacy. We will discuss this aspect later in more detail.

AMA has not revealed to us anything that we did not know without their survey and, had AMA or anyone else been interested, we would have provided similar information. We are not even surprised by the variations in charges for identical prescriptions of a brand-name drug.

In the existing marketing chaos where the price per hundred may vary from $1.36 to $17.88 for an identical drug produced by the same manufacturer but merely sold to different purchasers, it is naive not to expect that a few pharmacists-especially in metropolitan areasin community practice will find sources for that drug at less than the customary or usual wholesale costs. This is diversion from one artificial classification of purchasers to another which, in drug marketing circles, is both vigorously attacked as a violation of the Robinson-Patman Act and strenuously defended as permitted by the Robinson-Patman Act. One organization in pharmacy has steadfastly held the view that such diversion was a violation of the Robinson-Patman Act, and our association publicly encouraged them to test their legal theory in the courts. Several years have passed without any overt legal action.

In recent years the American Pharmaceutical Association has advocated that pharmacists discard the markup system of charging for their professional services in favor of an average "professional fee." The average professional fee is simply the average cost of providing pharmaceutical services. It includes rent, heat, light, advertising, insurance, salaries, and all the other expenses incurred in providing the professional service. Funds for taxes and return on educational and capital investments likewise must come from the dollars realized as the professional fee.1

1 "Do You Know Your Professional Fee?" William S. Apple, Journal of the American Pharmaceutical Association, vol. NS7, No. 1, p. 25, January 1967 (reprint attached).

If a pharmacist determined that his average fee was $2, this $2 fee would then be added to the acquisition cost of the drug prescribed to compute the total charge for the prescription. If the drug cost was 60 cents, the prescription charge to the patient would be $2.60; if the drug cost was $6, the prescription charge to the patient would be $8.

Economically, the pharmacist should neither gain nor lose by changing to the professional fee, and this has been the experience of many pharmacists who are using the system. Charges for pharmaceutical services do vary and will continue to vary. All that we ask of our members is that they not subsidize one category of patients at the expense of another.

There are definite advantages to the patient when pharmacists utilize the average professional fee system. Assuming a 40-percent margin-66% markup on cost-the charge to the patient for the prescriptions noted above would be $1 and $10, respectively. In the first case, the patient requiring the drug costing 60 cents would pay the pharmacist only 40 cents for the professional services rendered, whereas the patient requiring the drug costing $6 would pay the pharmacist $4 for the identical professional services. If the average professional fee the pharmacist required was $2, the first prescription would be dispensed at a $1.60 loss and the second at a $2 bonus under the markup system. While an average professional fee can be established to yield the same earnings as the percentage markup, the markup system always strikes hardest at patients who need the more expensive drugs.

We also maintain that Government should not carry the burden of subsidizing the private paying bill. We have recommended that Government agencies reimburse on the basis of an average professional fee. We suggest that a maximum be offered with the understanding that the pharmacist will charge Government up to the maximum fee or the fee charged to the general public, whichever is the lesser. If a welfare department offers a $2 professional fee and a pharmacist was charging the general public $1.75, then the maximum the Government would reimburse that pharmacist would be $1.75.

A number of State welfare drug programs currently employ the professional fee as the basis for reimbursing pharmacists for their professional services, and recently the Government Accounting Office recommended that the Department of Health, Education, and Welfare consider this a requirement for federally funded programs that include drugs.1

The use of the fee will not eliminate competition among community pharmacies. We fully expect that the fee will vary from pharmacy to pharmacy, but we recommend that the fee be uniform within each pharmacy. We believe that each prescription, whether it is paid for by the patient, by insurance, or prepayment or by the Government, should bear its fair share of the distribution cost at every level.

1"Review of Pricing Methods Used by Various States in the Purchase of Prescribed Drugs Under Federally Aided Public Assistance Programs," report to the Congress of the United States by the Comptroller General of the United States, April 1967, 30 pp., B-114836.

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It is this same principle-which we advocate for our own members and our own profession-that we advocate for the pharmaceutical industry. There ought not be any preferred customers who have to be subsidized through extra-tax and extra-legal means. Every purchaser should be able to purchase his drug inventory on the same basis as any other purchaser, and every purchaser should pay the same pro rata share of the production and distribution costs of the drug. The exemption for nonprofit institutions in the Robinson-Patman Act, as it relates to drugs, should be repealed and price differentials on drugs to any class of purchasers should be prohibited.

These are the two most important concepts that Congress could establish not only to aid the private pharmacy practitioners to compete, but also to protect patients from being gouged sometimes and being unknown recipients of charity on other occasions.

We believe that there are some leaders in the pharmaceutical industry who recognize the ultimate result if present practices are not changed. Government will become the single largest purchaser of drugs from the pharmaceutical industry, the single largest dispenser of drugs to the public, and the single largest employer of pharmacists; hospitals, physician clinics, and other preferred purchasers will run second; and the independent community pharmacy will not even be in the running. If legislative solutions are not feasible, perhaps the Federal Trade Commission could consider sponsorship of an industry trade practice conference to assist the pharmaceutical industry in straightening out what we think is a very important problem which can only grow more serious in the years ahead. We have only referred to price per se, but the discriminatory use of free goods in lieu of stated price reductions and the distribution of samples by salesmen are other practices which result in the kind of preferred treatment which needs to be discussed at a trade practice conference.

We do not see any signs that the pharmaceutical industry is seriously interested in attempting to reevaluate its historical and traditional marketing concepts. Perhaps the industry-a collection of individual firms-is legally incapable of such a large-scale reevaluation without governmental prodding and assistance.

We hope that your subcommittee can and will provide the focus and the help, if needed, for this very necessary and long overdue examination of the disaster course which our great pharmaceutical industry is following because of its archaic marketing structure.

Mr. Chairman, members of the committee, thank you for giving us the opportunity to present this testimony.

(The attachments to Dr. Apple's statement follow :)

COMPARISON OF ADVERTISED PRICES

Federal Prescription Services, Inc. has made wide distribution of its price list which carries statements: "up to 40% savings", "low, low prices", "we feature the lowest prices", "our prices will result in substantial savings to you and your family" among others.

A pharmacist can charge any fee for his services he wishes. Leaving aside the public health questions of prescription mail-order operations, the statutory prohibitions against professional solicitation, and the promotion of prescriptionlegend drugs to the public, we have compared the advertised prices of Federal Prescription Services with those advertised in various newspapers in other sections of the country. The results of that comparison are presented below.

[From the Journal of the American Pharmaceutical Association, January 1967]

DO YOU KNOW YOUR PROFESSIONAL FEE?

(By William S. Apple*)

What is the professional fee? How do I calculate my professional fee? Will the public accept the professional fee? These and similar questions are being asked daily by pharmacists who have recognized that the economics of their professional practice deserve more attention than they have given this subject in the past. The purpose of this brief article is not to defend that philosophy of the professional fee or expose the lack of logic in the recent articles apparently written to make the busy practicing pharmacist suspicious of the fee philosophy.

Stated in simplest terms, the professional fee is the difference in dollars and cents between what the patient is charged for the prescription and what the pharmacist actually paid for the drug dispensed. This is true regardless of the system or formula (fee, mark-up or combination) you use to arrive at the charge to the patient. Rent, heat, light, advertising, insurance, salaries and all the other expenses incurred in providing the professional service obviously must be paid for from the dollars realized as the professional fee. Dollars for taxes and return on educational and capital investments likewise must come from the same source. For the past decade the author has urged practicing pharmacists to keep simple records which would provide basic financial facts about their individual professional practices. The pharmacists who invested the few seconds required in properly recording the essential information have been able to analyze intelligently the primary economic facts about their professional practices and to make considered judgments in the management of their practices.

With the increased participation of third parties (including government) in the payment for pharmaceutical services, the profession collectively is being called on to justify the cost (professional fee) it claims as the essential minimum required to provide safe and timely professional service. It can be expected that initially third parties will be interested in the dollar value pharmacists are currently receiving—not what pharmacists think they deserve from the public for professional services in dispensing a prescription. Obviously the first yardstick to be examined will be the "average" professional fee nationally. The actual current "average" professional fee by geographical region or service area will then be scrutinized.

Only by accumulating actual data from the number of pharmacists required for a valid sample will the profession-at the local, state or national levels-be in a position to answer questions which are already being asked. Only with such data available will the individual practitioner be able to compare the gross economic image of his professional practice with the profile of his colleagues. You can help yourself and your profession by starting to keep the simple records required. The following forms have been designed for your convenience.

DAILY PRESCRIPTION RECORD

Record the basic factual data about each prescription at the time you determine the charge. The "B cost" is the actual cost of the drug to you regardless of whether you purchased the particular inventory of the drug dispensed directly from the manufacturer or from a wholesaler. Some pharmacists use "Blue Book" or "Red Book" listings for the smallest quantity available as their coded cost. Using a fictitious base will only result in distorted data. For example, if you charge a patient $3.50 for a prescription and the actual cost of the quantity of the drug dispensed (purchased from the manufacturer in quantities of 1,000 units) was $1.80, the actual realized professional fee is $1.70 ($3.50 less $1.80). If the "Book" cost based on quantities of 100 units is $1.85 and that figure is used as actual cost, the net result will be a fictitious professional fee of $1.65. Unless the information you collect accurately reflects what you are doing, you won't know your real professional income.

The other columns are self-explanatory. The new, renewal and B charge distribution columns when completed will provide important statistical information about your prescription practice.

*Executive Director, American Pharmaceutical Association.