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How seriously should signs of obsolescence shown by the chain drug store business model as currently constituted be taken? If one listens to recent comments by industry leaders, the question deserves careful consideration.
In response to an email from a longtime pharmacist who likened the state of the profession to a boat at sea in a hurricane, Fruth Pharmacy president Lynne Fruth said, “The boats in the storm are not all small independent pharmacies or regional chains. Some of the boats are named Walgreens, Kroger, Meijer, Albertsons, Shopko, Walmart, Rite Aid and everyone else that doesn’t operate their own PBM.”
Tim Wentworth, chief executive officer of Walgreens Boots Alliance, has also expressed concern. “We continue to face an incrementally challenging pharmacy industry,” he said during the company’s third quarter earnings call. “Recent trends such as branded mix impacts and increased regulatory and reimbursement pressures, including fluctuations in NADAC [National Average Drug Acquisition Cost] pricing, have negatively impacted pricing dynamics.
“Additionally, the script market is growing but continues to trail below prepandemic growth levels. These headwinds have affected our performance and are materially weighing on our ability to serve patients profitably. We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require that we approach the market differently. For example, we are in active discussions with our PBM and payer partners to align incentives and ensure we are paid fairly.”
By singling out pharmacy benefits managers, Wentworth and Fruth pinpointed the primary cause of the industry’s plight. For decades, PBMs and the entities they represent have exerted relentless downward pressure on margins, promising pharmacies continued access to large patient populations in exchange for lower reimbursement rates. In the hope of making up for a reduction in margins with increased prescription volume and foot traffic at the front of the store, pharmacy operators have reluctantly complied.
As a result, reimbursements have declined to a point at which pharmacies lose money when they fill some scripts. The situation is particularly acute for drug stores — both chain and independent — which derive most of their revenue from prescription medications. Upwards of 70% of chain drug sales come from that source; 90% for independents.
Drug store operators face additional challenges at the front end. Once the destination for over-the-counter drugs and beauty and personal care products, members of the trade class have seen their share in those categories eroded by fierce competition from discounters, supermarkets, dollar stores and online merchants. The convenience advantage that drug chains once enjoyed has been neutralized by the proliferation of other store formats and omnichannel shopping options.
The confluence of problems has triggered a retrenchment in the drug store sector. Independent pharmacies are closing at a rate of one or more a day; Rite Aid recently emerged from Chapter 11 after shuttering more than 500 locations; and Walgreens, which has cut hundreds of stores in recent years, is considering further elimination of underperforming outlets, a move that could impact as much as 25% of the chain.
Long seen as insulated from the vicissitudes affecting other pharmacy operators because of its ownership of Caremark — the nation’s biggest PBM — CVS Health is in the process of closing 900 stores over a three-year period. In addition, the company, which also owns health insurer Aetna, faces pressure from hedge fund Glenview Capital Management to take steps to improve its financial performance, prompting the board to begin a strategic review.
A similar process is already under way at WBA, with Wentworth laying out what’s at stake and the company’s approach: “The retail pharmacy experience will be more important to the health care industry in the years ahead, but it will evolve. With widespread demand for convenient health care solutions, including chronic diseases, and nationwide labor shortages, the pharmacy and pharmacists have never been more important. Our retail pharmacy business is uniquely positioned to expand the role we play in the lives of our patients, who have come to expect and need retail pharmacy at the center of their care.”
Drug store operators need to bring a sense of urgency to the task of highlighting the essential nature of the services they provide and convincing payers and policy makers that it is in their interest — and that of the patients they insure — to adequately fund them. With so many drug stores closing, it is increasingly difficult for people in many parts of the country to access pharmacy care, which, in many cases, will inevitably lead to unnecessary suffering and more-costly forms of treatment.
It’s in everyone’s interest to reinvigorate the drug store model to ensure the continued viability of the first line of defense in health care. Think of what life would have been like during the COVID pandemic without a neighborhood drug store to provide testing, immunizations and treatment.
