By B. Douglas Hoey
Rite Aid, the beleaguered pharmacy chain, filed for bankruptcy for the second time in two years. The company hopes that Chapter 11 will make it easier to find a buyer. Its 1,250 stores and other assets will be picked over by potential investors, and patients will be left to follow their prescription records to another pharmacy or find a new one.
Some of Rite Aid’s wounds are self-inflicted. Once the country’s largest pharmacy chain, it began crumbling in the 1990s under massively high debt deals and an accounting scandal that sent its CEO to federal prison. Subsequent leadership piled up even more debt, and the company has been limping along ever since. Now it’s in hospice.
Finding a buyer won’t be easy. These days, the pharmacy sector is challenging even for companies whose balance sheets are healthier. Rite Aid’s largest competitors, CVS and Walgreens, have closed hundreds of their own stores in recent months. Independent pharmacies, which outnumber the big chains, are disappearing too, but they don’t get the same attention from Wall Street investors or the financial press.
What’s driving all this? After all, America is aging, and more people than ever suffer from chronic illnesses. The demand for pharmacy services is certainly robust. If you really want an answer, talk to your local, independent pharmacist. They will tell you the main challenge to their survival is the vertical integration of pharmacy benefit managers (PBMs) and insurance companies.
Big insurance companies’ acquisition of the three largest PBMs has enabled them to control the fate of 80 percent of all prescriptions, and they use their market dominance to control patients and providers. In some geographic areas, just one big insurance-owned PBM controls more than 90 percent of the market. OptumRx (owned by UnitedHealthcare), CVS Caremark (CVS Health which also owns Aetna), and Express Scripts (Cigna) decide which pharmacies patients must use, which medicines they can take, how much patients will pay at the pharmacy counter, and how much pharmacies will be reimbursed for filling prescriptions.
And, oh, by the way, all of them own their own competing pharmacies.
With all that power, abuse is rampant. Last year, the House Oversight Committee issued a blistering report which found that “PBMs share patient information and data across their many integrated companies for the specific and anticompetitive purpose of steering patients to pharmacies a PBM owns. Furthermore, the Committee found that PBMs have sought to use their position to artificially reduce reimbursement rates for competing pharmacies.” The report also noted “numerous instances where the federal government, states, and private payers have found PBMs to have utilized opaque pricing and utilization schemes to overcharge plans and payers by hundreds of millions of dollars.” The Federal Trade Commission, which has been investigating PBMs for years, issued similar findings in January. It found that pharmacies owned by the Big 3 PBMs “generated over $7.3 billion of dispensing revenue in excess of their estimated acquisition cost.” Also: “In the aggregate, the Big 3 PBMs also separately generated an estimated $1.4 billion of income from spread pricing — i.e., billing their plan sponsor clients more than they reimburse pharmacies for drugs.”
These and other anticompetitive practices are decimating retail pharmacy and increasing prescription drug prices for consumers. Hundreds of independent pharmacists from around the country recently traveled to Washington, D.C., to warn their congressional representatives that unless they take action soon, there will be many more losses.
Bipartisan legislation to reform PBMs came close to passing last year, but it was stripped out of the year-end spending deal along with almost everything else. Congress has another chance this year. We would urge President Trump give it the push it needs. PBM reform is an important element of an executive order he issued in April. That’s highly encouraging, but he should want to make it permanent with legislation that could save consumers billions of dollars and preserve pharmacy access for the millions of Americans who rely on them.
