TORONTO - Ontario's plan to scrap pharmacy allowances for generic drugs will inflict suffering on both drug stores and consumers as the industry hemorrhages jobs and cuts services, pharmacy retailers say.

Shoppers Drug Mart (TSX:SC), where prescription sales account for about half of revenue, said Thursday it has already started to "dis-invest" in Ontario due to the plan, which the government says will cut the cost of generic drugs sold in the province in half.

President and CEO Jurgen Schreiber said his company has already reworked its business model to cut store hours and new store openings in moves that will also result in job losses.

He said the funding Shoppers received from the allowances permitted the company to offer a number of customer services at its 600 Ontario outlets, including free delivery and late-night hours. Both of those services will be cut.

"What service can you offer when you have $13 to $14 (in) cost and get paid $8 in the future?" he said.

The chain also plans to cut back on hiring and cut a summer apprenticeship program that would have hired 350 pharmacy students this summer.

"We don't need so many pharmacists anymore because we will not open so many stores anymore," he said, without indicating how many of the company's 25,000 employees in Ontario might lose their jobs.

Despite the warnings from Shoppers and some analysts, the move was welcomed by many employers and by the province's nurses.

The Canadian Vehicle Manufacturers' Association, which represents big car companies such as General Motors, Ford and Chrysler that provide health benefits to 100,000 workers, said Ontario's move would significantly reduce one of the fastest rising costs of doing business.

"The welcome news for Ontario employers seeking to enhance their competitiveness and manage rapidly rising drug costs within employer-sponsored benefit plans," association president Mark Nantais said.

"Any reduction in the cost of prescription drugs for the tens of thousands of our members' employees and their retirees would be helpful in this regard," said Nantais.

And Ontario Nurses' Association president Linda Haslam-Stroud noted that rising pharmaceutical costs have been consuming a large portion of precious health-care system dollars.

Under the plan, Ontario's public drug system, along with employer health plans and people who pay for prescriptions out-of-pocket, could see the price of generic drugs cut to 25 per cent of the cost of brand-name medications over the next three years. Currently they cost about 50 per cent of brand-name products.

The plan would prohibit generic drug makers from paying shopkeepers for shelf space. Pharmaceutical retailers in Ontario currently receive a 20 per cent rebate to put generic drugs on their shelves, something meant to help pharmacists offset prescription dispensing costs. Such deals for shelf space between suppliers and stores are fairly standard in the retail industry.

But the Ontario government has bid to end those allowances, which it says inflate prices because the allowance paid to pharmacies is reflected in the cost of the medications.

The government plans to eliminate the cost to the public plan as soon as the bill is passed and to private plans and out-of-pocket purchasers by 2014.

The province's public drug benefit plan pays for most of the cost of drugs for seniors, residents of long-term care and special care homes and people on social assistance.

Ontario's drug costs have ballooned in recent years far faster than overall health-care spending, which itself has been surging even as the government grapples with growing deficits amid the recession.

Michael Van Aelst, a vice-president and analyst at TD Newcrest, said the news means "it will be a lot less profitable to run a pharmacy in Ontario."

"Now the question becomes: to what degree do other provincial governments follow what is, in our opinion, a dangerous precedent? Quebec, for one, is likely to be first."

Industry analysts lowered their expectations of Shoppers' performance Thursday-- as its stock plunged $4.25 or 9.8 per cent to $38.92 with 14.6 million shares traded.

Jean Coutu Group (PJC.A), which operates the largest chain of pharmacies in Quebec and has some Ontario stores, also saw its shares plummet. The company's stock fell 59 cents or almost six per cent to $9.30 on the TSX. Nearly 1.4 million shares changed hands.

Patricia Baker, a retail analyst at Scotia Capital said the rule changes put forth by the government "are anything but progressive."

She added that the funding cuts would cripple profitability for Shoppers Drug Mart and other pharmacies, but would hit the "little guy" hardest.

Ben Shenouda, president of the Independent Pharmacists of Ontario, said government subsidies and patient fees account for about $7 of the $13 it costs a pharmacy to dispense a prescription, with government-regulated professional allowances helping to close that $6 gap.

The allowances went toward paying salaries, education, and patient counselling, he said.

Ontario's pharmacy industry had been negotiating with the government for nine months before the Ministry refused an industry proposal that would have saved $1 billion a year. The proposal included increasing the dispensing fee by 50 cents, and a slight reduction on the price of generic drugs, which pharmacists are required by the government to stock, Shenouda said.

About 400 to 600 of Ontario's 3200 independent pharmacies would close if the plan became law, he said. About 80 per cent of their revenue comes from prescriptions.

"To stay in business, with all the new changes imposed and passed, I have to reduce my hours of operation because I have to reduce my costs of operation," he said.

"So the patient's access to a pharmacy and a pharmacists time will be less," he said. "Everything will be less."

The Ministry of Health said it would continue to ensure pharmacists are fairly compensated for helping patients by increasing dispensing fees by at least $1 for every Ontario Drug Benefit prescription filled.

There will also be $150 million, including a new $100-million fund, to compensate pharmacy owners for the professional services they provide.

But Shenouda said the plan replaces only $1 of every $3 pharmacies will be losing under the government plan.

Dean Miller, chair of the Ontario Pharmacists' Association, said the funds are critical to helping pay for patient care not covered by dispensing fees.

"Together with other associations, we have been working tirelessly to protect the business of pharmacy while enabling the profession to do more," Miller said.

"Despite our efforts, the government was unwilling to work with us to find a mutually acceptable solution prior to its announcement yesterday. This is a very unfortunate and unacceptable outcome."