COVID Consolidation Could Kill Independent Pharmacies
The coronavirus crisis is likely to spur even more consolidation, meaning more CVS and fewer small drugstores.
The same day in March he declared coronavirus a national emergency, President Trump assembled the CEOs of CVS and Walgreens—as well as those of Target, Walmart, and several medical technology firms—in the Rose Garden to announce the imminent rollout of nationwide drive-thru testing centers. For a moment, it seemed like America’s big box retailers were going to be key players in an ambitious national testing regime.
“This innovative approach centered fully on unleashing the power of the private sector,” said Trump, would provide “convenient testing to hundreds of thousands of Americans within short turnaround times.” He went on: “We have many, many locations behind us, by the way. […] We cover very, very strongly our country. Stores in virtually every location.”
That testing capacity has been slow to materialize. Only a small percentage of stores are operating as testing sites, even now in June. But the president overpromising and underdelivering is less important than the fact that his administration’s instinct was to outsource the nation’s domestic coronavirus response though America’s large chain businesses. Part of their failure to deliver on that promise was surely inadequate federal support, but the Rose Garden event also put a fine point on decades of corporate consolidation and the free market orthodoxy supporting it. Important consumer-facing sectors like retail, pharmacy, and grocery have constricted and concentrated greatly over that time. The promise that always accompanied this, from economists, lawmakers, and Wall Street alike, was that bigger and bigger operations will bring increased efficiencies, lower prices, and one might think, the ability to rapidly respond to the needs of their customers and the public at large.
Surviving While Small
The world of retail pharmacy has been instructive to watch throughout the pandemic. Its fate might even signal the direction of American Main Streets in a post-COVID economy. Recent industry history matches the story for so many other kinds of American storefronts—once neighborhood staples, and often family-owned, independent pharmacy has endured the ascent of large national chains like Walgreens and CVS over the last 30 years, distinguishing themselves with superior service, and often better prices. But that period was coupled with the rise of Big Pharma as we know it, blockbuster drugs, and steady growth of chronic disease diagnoses. While prescription sales grow reliably every year, reimbursement to the pharmacies advising patients and dispensing the drugs shrinks. That lost revenue causes pharmacies to close, hundreds every year—one in eight shuttered between 2009 and 2015, and independents in rural areas have been among the hardest hit.
As a business, retail pharmacy rises and falls with the overall healthcare sector. In the initial months of the pandemic and quarantine, the fear that the health system would be overloaded with COVID cases meant that elective procedures, and most routine visits and diagnoses were delayed or cancelled. That put a sizable dent in reimbursements. “The elective surgeries are way, way down,” said Douglas Hoey, CEO of the National Community Pharmacists Association, representing the independent sector. “And there’s some indication that people aren’t getting their refills. That because of economic conditions—some people aren’t able to. They’ve lost their job and they’re not able to afford the medication that they’ve been taking. Those three coming together are making business slower.”
Like others in retail, many independents suffered from decreased foot traffic. Patients stocked up on 90 day supplies of medications, or just made do without. Pharmacists have had to get creative with their services. Most are ramping up delivery and curbside, and some are even offering free or flexible prescriptions for those who have lost their jobs due to COVID. Others are advising patients on the health risks. “We do provide a lot of education—whether it’s masks, or talking to people and just sort of allaying their fears on what they need to do to be safe,” said Peter Kreckel, a pharmacist in Altoona, PA. Social distancing has minimized the direct contact and consultation with patients many practitioners are used to. “It is definitely a challenge. I hate drive-thrus. But ours has been a godsend, I’m not going to lie. I’ve tolerated it the past three and a half months because I know the minimal patient contact is going to be best for them,” Kreckel said. Thompson Pharmacy, where he works, has been serving the community since 1966, and the building in which Thompson’s main branch is located has been a pharmacy for the area since the late nineteenth century. “People just don’t get the level of care in a chain pharmacy as they do in a small independent.”
Independents like Kreckel’s are eager to begin testing for the virus. In April, HHS announced that licensed pharmacists could administer tests, but regulatory complexity related to state-federal preemption, and shortage of tests, has limited the large scale adoption of that testing. “As far as independents being able to do the tests, right now it comes down to the availability of the materials and the equipment,” said Hannah Fish, a pharmacist and NCPA’s Associate Director for Strategic Initiatives. She’s been helping to facilitate and communicate the regulatory approval and reimbursement pharmacists will need to administer tests. “There are so many intricacies we’ve found with this. It’s made it really noisy for our members to understand exactly what they can and can’t do, what’s available and what’s not.”
It isn’t for lack of interest. Fish said a recent survey of independents indicated a majority want to offer testing in their communities. Hugh Chancy runs a small group of independent pharmacies in Georgia affiliated with the Health Mart consortium. His store in Hahira, GA was selected as part of an HHS pilot program to administer COVID-19 tests in rural areas. “It really is a great service to our community to have access to get tested,” Chancy said. “Early on there was a great deal of fear, and this was a way for us to help ease some of that fear in our patients and in our community.” Chancy’s pharmacies, like many others, compounded gallons of hand sanitizer for use in hospitals in early days of the pandemic, and is continuing to serve patients through curbside and drive-thru pickup. “As community pharmacies, we’re some of the most accessible healthcare professionals out there. We’re already in many rural areas with no hospital, sometimes no doctor at all. But we’re willing to step up and take action in a crisis like this.”
Pharmacies have had good luck with the Paycheck Protection Program. A survey from NCPA showed 96% of respondents applied, and 99% of those had received the funding. The program has been a lifeline to many, especially in operations with bigger staffs and heavier payrolls. It’s nice to have the federal government cover payroll for a few months, what would be even better is for regulators and legislators to step in and address the fundamental unfairness that’s caused so many pharmacies to close before the virus arrived.
Still Battling Pharmacy Benefit Managers
Part of the strain community pharmacies have been feeling over the past months comes from fighting a battle on multiple fronts. In addition to a global pandemic, pharmacy is dealing with a middleman problem. Pharmacy Benefit Managers are administrative businesses that negotiate between insurers, manufacturers, and pharmacies to determine reimbursements, drugs covered, and prices. Just three PBMs, CVS Caremark, Express Scripts, and OptumRX, control three fourths of the market. Those top three are themselves owned by giants of healthcare—CVS Health (which now owns Aetna), Cigna, and UnitedHealth, respectively. They have enormous market power in the pharmacy business, and own a significant stretch the prescription pipeline from insurer, to PBM, down to retail delivery. Wedded to healthcare behemoths, PBMs can dictate where a patient can or can’t fill a prescription, steering business toward their own preferred pharmacies or mail order operations, and slashing reimbursements for independents. “Everywhere else in the world we’d call this restraint of trade, in America it’s called ‘managed care,’” said Altoona’s Kreckel.
There’s good reason to believe that PBMs contribute to high prices for consumers, and even Secretary of Health (and former Lilly lobbyist) Alex Azar has called PBMs “a startling and perverse system.” It’s not an exaggeration to say the combined power of large chains and PBMs now seriously threatens the traditional Main Street pharmacy model.
There have been multiple state-level activities limiting the PBMs and seeking greater transparency, especially when it’s come to light that PBMs are skimming away money made through prescription reimbursements from state-run managed care programs like Medicaid. In March, Kentucky’s state legislature and Governor passed bipartisan PBM reform. A 2018 report found that the PBMs had made $123.5 million dollars that year in Kentucky from their “spread pricing” model—charging the state’s managed care organization a certain amount for a 30-day supply of drugs, and reimbursing the dispensing pharmacy for a lower amount, pocketing the difference.
Independents are also being pummeled by DIR (direct and indirect remuneration) fees. Originally designed as rebates for Medicare Part D patients, DIR has morphed into any number of fees charged by PBMs to pharmacies. According to NCPA’s Hoey, DIR is “The single biggest issue for independent pharmacies today.” The fees have become a huge profit center for PBMs, and a major additional expense for independent pharmacies. DIR made PBMs $9.1 billion dollars last year, and have jumped by 1600% in the last five, according to one count. In many cases DIR means pharmacies will lose money dispensing a drug to a patient, and not even know it until much later as the fees aren’t accessed at point of service. “I don’t know of any economic system anywhere on this planet that would allow that—except for the world of pharmacy,” said Kreckel. Among independent pharmacists, it’s widely believed that PBMs play the tune, and the rest of the industry has to dance. “Because they have the money, they control the rules,” Kreckel says.
The Future for Independents
With the prospect of mass small business closures following the coronavirus crisis, small pharmacies could be left with little choice but to sell their operations. When a neighborhood pharmacy closes, it doesn’t just disappear. Remaining patients’ files are sold to a new operation. The path to dominance for the big chains over previous decades was paved with these sorts of acquisitions. Pharmacists are worried the person-to-person interaction and health expertise that they provide will also be lost to the direct-to-consumer, mail order model—part of the broader, investor-driven contractor and gig economy taking hold in other industries. It isn’t just the chains and PBMs on pharmacists’ minds, it’s the status of their very profession.
Pharmacists are asking legislators to ensure not only their survival as small businesses, but to enlist them as frontline healthcare response centers. State legislators can act to require transparency on PBMs’ spread pricing, and follow Kentucky, Ohio, and West Virginia’s leads to stop letting PBMs juice state managed care programs by finding alternative management structures. Authorities can also designate pharmacies with healthcare provider status, allowing them to play a bigger role in mass public health responses in the future. At the highest levels, the FTC has the authority to break up or spin off PBMs from their associated insurers and pharmacy owners. Insurers and companies like CVS wouldn’t be able to control the drug pipeline from end to end, picking winners and losers along the way. Congress’ oversight of the agency ought to encourage this.
At its best, pharmacy is still a practice that can manage to balance modest commercial interests with the public interest, medicine with finance, the personal health of Americans with the wellbeing of their communities. Pharmacists and their employees have put themselves at special risk to continue to care for their patients, and deserve credit along with many other essential workers who have made life bearable in unbearable times. They have an even bigger role to play in the healthcare sphere in the future.
Charlie Thaxton is a researcher and writer in Philadelphia. He was previously a Research Associate with the Institute for Local Self-Reliance.
This article was supported by the Ewing Marion Kauffman Foundation. The contents of this publication are solely the responsibility of the authors.