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January 26, 2024

About five years ago the only pharmacy in my small town in rural Virginia closed.  A year or so later a second county drugstore failed.  Soon the owner of the last remaining drugstore in the county was unable to make a profit and had to sell.  (These last two managed to reopen at a later date.)

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I was unaware the loss of our drugstores was a nationwide trend until reading an article by Karen Kerrigan, president and CEO of the Small Business & Entrepreneurship Council.  She reported that mom-and-pop drugstores in rural areas were particularly hard hit, leaving about 630 rural communities with no pharmacy by 2018.  Kerrigan reported that the big chains closed nearly 2,000 pharmacies between 2017 and 2020 with more planned.  CNN Business reported CVS will be closing another 900 stores in 2024.  Walgreens and Rite Aid are also in the process of closing hundreds.  You know it’s serious if CNN reported it and is unable to blame Trump.

Competition and the upsurge in shoplifting in soft-on-crime big cities are not the main causes. Kerrigan placed most of the blame on third-party Pharmacy Benefit Managers (PBM).  “PBMs negotiate discounts from drugmakers [sic] on behalf of insurers.  PBMs also administer reimbursements from the system’s payers — insurers, federal and state governments, and corporations — to providers, including pharmacies and clinics.”  Kerrigan added that “PBMs have made the system increasingly complex, enabling them to extract outsized revenue from it while crowding out the small mom-and-pop drugstores.” 

There are around 60 companies competing to provide PBM services with three controlling 80% of the market.  In 2022 the global market share for PBMs was $495 billion ($315B in the U.S.) and that can buy a lot of political clout.  Originally, PBMs were paid by insurance companies to manage drug costs and receive a share of the rebates from manufacturers.  Nevertheless, mission creep apparently happened and four other primary income streams were added; pharmacy spread, PBM-owned companies, administrative fees, and direct and indirect remuneration fees. 

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PBMs have two other devious ways to generate revenue.  First by charging a copay higher than the full price of the drug and then ‘claw back’ the overcharge from the pharmacy.  Second is by inserting ‘gag clauses ’ in their contracts to prevent pharmacists from advising customers they could save money by not using insurance.  It appears many PBMs have abused their power. 

Is there legislation to curb the power of PBMs?  Thirty-three states have enacted laws to prevent ‘gag clauses.’  In addition, the Senate passed the Pharmacy Benefit Manager Transparency Act of 2022 that prohibits arbitrary ‘clawbacks’ of payments made to pharmacies and making it illegal for PBMs to engage in ‘pharmacy spread’ pricing.  

Kerrigan also reported that “…lawmakers across both parties are aware of the plight of local pharmacies and the consequences of their diminishing numbers. This resulted in three dozen bipartisan bills in 2023 that aim to curb the power of PBMs…”  However, there is no known evidence to verify if these bills slowed the closing trend. 

Additionally, one earlier bill has already backfired – Biden’s American Rescue Plan Act of 2021. The Epoch Times reported that this bill included a time-delayed rule that went into effect Jan. 1, 2024 changing Medicaid and Medicare part-D drug rebate policy. Until now, these rebates could not exceed the selling price of a drug.  Not anymore.

One unintended result is that the manufacturer GSK will now lose money on each sale of its popular Flovent inhaler for asthma and decided to stop making it. The availability of many other drugs having price increases may be similarly affected.  An analysis by AARP found that all the top 25 drugs ordered through Medicare Part-D had tripled in price since entering the market. And these 25 top sellers alone accounted for $80.9 billion in Part-D sales.

PBMs are not the only problem.  A local pharmacist placed additional blame on the Federal 340B Drug Pricing Program that began in 1990 when Congress created the Medicaid Drug Rebate Program (MDRP) to lower the cost of pharmaceuticals reimbursed by state Medicaid agencies.  Basically, the program works by mandating drug manufacturers to discount their drug prices for covered healthcare entities with a large ‘underserved’ population.  Because these discounts hurt drug makers’ bottom line, the 340B program had to limit the number of Federally Qualified Healthcare Centers (FQHC) and qualified pharmacies.