Growing up in a small town we filled our prescriptions at Emery’s Drug. It was the quintessential small-town drugstore, with a soda fountain and barstools on one side with gifts, cards, candy and sundry items on the other. The pharmacy counter was at the back of the store. Emery’s Drug closed down nearly 30 years ago, although if you travel back to my hometown the faded sign is still there. The pharmacy industry is facing headwinds and Fortunate magazine explains why.
Over the past decade about 4,550 of the nearly 61,000 U.S. pharmacies closed. Rite Aid is in bankruptcy. Large chain drugstores like Walgreens and CVS have even announced closures. Why are pharmacies closing rather than growing? Some are in small, declining towns. Others are in declining neighborhoods. Retail giant, Amazon has entered the pharmacy space. The pharmacy landscape has shifted with more of their revenue captured by pharmacy benefit managers (PBMs).
PBMs are the middlemen who leverage buying power to extract discounts from drugstores who want to be in a drug plan network and drugmakers who want their drugs in health plan formularies. When consumers enter a pharmacy to fill a prescription, the price they pay has been negotiated by a PBM. In the past few decades, the federal trade commission FTC has allowed the PBM industry to consolidate to the point that 80% of drug sales are controlled by just three large PBMs. Also, two of those are controlled by health insurance companies, who naturally want to capture as much of their members’ drug purchase revenue as possible. As a result, pharmacy profits from prescription drug sales are being syphoned off by PBMs and insurers. Drugs are what brings in the customers into the pharmacy but selling them other stuff is now what brings in the profit. The following is from Fortune:
PBMs and their representatives say, essentially, that pharmacists are crying wolf. PBMs tell Fortune that independent pharmacies do indeed have bargaining power with PBMs, since they generally belong to large pharmacy services administrative organizations that negotiate prices and reimbursements with PBMs on behalf of their members. They argue that independent pharmacists have long made PBMs a convenient scapegoat for all of their business challenges (such as the high costs for small businesses of competing with larger, better-funded chains or low-overhead mail-order alternatives). And they say that PBMs are only negotiating drug prices to save American consumers from the high costs set by Big Pharma manufacturers.
Consumers should be concerned about PBMs but not necessarily because pharmacies should earn higher profits. PBMs also control which drugs are on a drug plan formulary, and increasingly determine the mix of products that earn PBMs the biggest rebates and biggest profits. Expensive drugs pay higher rebates than cheap ones. Thus, PBMs often favor expensive drugs where cheaper ones exist. When designing drug plans benefits, requiring substantial copays for cheap generics generates profits. None of these money-making business strategies are in consumers’ best interest.
Also causing the demise of pharmacies are greedy state attorney’s general, who decided that pharmacies were partly to blame for the opioid crisis. Pharmacies filled opioid prescriptions legally presented to them by patients whose doctors wrote the prescriptions. In hindsight too many opioids were prescribed but that was hardly the pharmacy’s fault.
As state attorneys general started suing pharmacy chains over their pharmacists’ role in the national opioid crisis, Rite Aid eventually faced some 1,600 federal, state, and private suits, and had less of a financial cushion than its bigger rivals.Less than three years later, in January 2023, Donigan stepped down. By October of that year, Rite Aid couldn’t keep up with its losses and filed for Chapter 11 bankruptcy protection to “significantly reduce the company’s debt” while helping to “resolve litigation claims in an equitable manner,” the company said at the time.
Public health advocates often lament the loss of pharmacies in low-income neighborhoods because they also often sell food and groceries in areas that lack large grocers. Pharmacies in low-income areas also dispense drugs to Medicaid enrollees, who lack access to transportation.
Struggling pharmacies are a symptom of a larger problem. That problem is unchecked consolidation in the health care industry, which is primarily designed to separate consumers, taxpayers and employee health plans from their money.