Who’s Killing Your Independent Pharmacy?

As millions of Americans struggle to afford their medicine, the independent pharmacies that serve them are going out of business — so where’s all the money going? Also:

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In the heart of the country’s opaque drug-pricing system, shadowy pharmacy middlemen known for jacking up consumers’ drug costs are also crushing independent pharmacies. They’re doing so by slashing reimbursement rates for small drugstores while paying exponentially higher rates to corporate pharmacies. 

These pharmacy benefit managers (PBMs) threaten the continued existence of what’s left of the country’s independent pharmacy industry — and endanger the estimated 15 million individuals nationwide who rely on independent drugstores for their medications. 

In March, federal bills curbing these companies’ power failed to make it into the federal funding package after industry lobbyists spent $15.4 million on this legislation and other matters. But states are continuing to fight for legislative reform. 

In Illinois, where documents reviewed by The Lever revealed that a PBM’s reimbursement rates to a family-owned pharmacy for certain drugs were a third of what the company was paying to a corporate chain, independent pharmacy owners are pushing legislation that would crack down on disparate reimbursement rates and other matters. 

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But advocates for the new bill are encountering mounting opposition from PBM lobbyists, health care behemoths, and even right-wing groups who’ve fought for tobacco companies. 

This corporate opposition is finding success. Earlier this month, the president of the Georgia Pharmacy Association, a lobbying group, was fired from his job after speaking out against Gov. Brian Kemp (R) for vetoing a bipartisan bill that would have required PBMs to reimburse independent pharmacies the same amount that they pay big chains.    

PBMs serve as negotiating entities between drug manufacturers and insurers to determine which medications will be covered by health plans and how much the drugs will cost. But while the arrangement began in the 1960s as an attempt to find the best drug cost for health insurance plans, drug pricing experts now say PBMs are contributing to out-of-control medication costs. That’s because PBMs are compensated based on the discount they arrange with drug manufacturers and are therefore incentivized to have insurers cover more expensive medicines. The steeper the discount, the more PBMs get paid.

Today, PBMs have “outsized power,” said Federal Trade Commission Chair Lina Kahn at a recent White House discussion on the matter. Kahn’s agency is conducting a probe into PBMs, although the companies have not fully complied with the investigation since it was launched almost two years ago.

The new bill in Illinois would usher in a sweeping package of PBM reforms, including limiting disproportionate drug reimbursement rates and banning spread pricing — the practice of PBMs charging a health plan or other payer more than they reimburse to pharmacies and keeping the difference as a profit. 

One of the provisions would require PBMs to pay drugstores a $10.49 fee to help cover the cost of dispensing medications, many of which are sold at a loss. It would also prohibit PBMs from reimbursing independent drugstores less than the average cost that pharmacies pay for prescription medications. This April, the bill was re-referred to the House Rules Committee — a key group in the Illinois legislative process. 

“PBMs are antitrust, anti-competitive, and intentionally trying to put us out of business,” said David Falk, who owns and operates a pharmacy chain with 15 locations across the state. 

Illinois isn’t the first state to try to manage PBMs. All 50 states have enacted at least one law to regulate PBM business practices. But Illinois’ current effort is particularly comprehensive: If passed, it would become one of 17 states with drug reimbursement requirements, and one of only 14 that address spread pricing, according to data collected by the National Academy for State Health Policy, a nonprofit committed to developing and advancing health policy solutions.  

The Pharmaceutical Care Management Association, the main lobbying group representing PBMs, is opposing the Illinois bill, alongside the health giants that own the three largest PBMs. Opponents also include the Council for Citizens Against Government Waste, a right-wing lobbying group that campaigned on behalf of tobacco companies.

“Despite attempts by other corporate interests to shift the blame on high drug costs away from their own industry, the function of a pharmacy benefit manager is to lower drug costs for consumers,” Greg Lopes, vice president of public affairs and communications for the Pharmaceutical Care Management Association, wrote in an email to The Lever. 

Lopes added that the Illinois bill “does nothing to reduce prescription drug costs for patients. Instead, it is a special interest-backed bill that will mandate new fees that will only boost the profits of one specific business interest while driving up medication costs for families and small businesses.” 

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Disproportionate Reimbursements

As of 2022, Illinois was home to 415 independent pharmacies that employed almost 5,000 people, filled more than 27 million prescriptions, and brought in $1.6 billion in pharmacy sales annually, according to the National Community Pharmacists Association. 

But many of these drugstores’ owners say they’re facing an existential crisis thanks to PBMs. CVS Caremark, Express Scripts, and OptumRx — the three largest PBMs, which control 80 percent of the prescription drug market — are owned by the health care giants CVS Health, Cigna, and UnitedHealth Group, respectively. These corporations also own or are affiliated with major national drugstore chains and mail-order pharmacies, and consequently, their PBMs are encouraged to reimburse their own drugstores at a higher rate than local independent operations. 

What’s more, PBMs aren’t just giving preference to their own pharmaceutical partners. Data collected across the country suggests the companies also reimburse other corporate drugstore chains more than they do independent pharmacies. This is likely because large chains sell drugs to far more patients and therefore offer a larger payoff for PBMs, said Lucas Morgan, a litigator at New York- and New Jersey-based law firm Frier Levitt, which represents a wide range of pharmacies across the country. 

From a business standpoint, losing a large retail chain because of low reimbursement rates is far more catastrophic for a PBM than losing an independent pharmacy, explained Morgan. So, although the pharmacies owned by CVS Health, Cigna, and UnitedHealth are in direct competition with one another, it makes sense these corporations’ PBMs “would look out for one another, because generally speaking, they are all benefiting,” he said.   

One owner of an independent pharmacy chain in Illinois — who asked not to be named out of fear of retaliation for his business — has experienced these disproportionate reimbursement rates. As of January 2015, his pharmacy was reimbursed $10.42 for the nerve-pain and seizure drug gabapentin, $3.31 for the high-cholesterol drug pravastatin, and $7.03 for the Parkinson’s disease drug carbidopa-levodopa from a PBM that is now owned by OptumRx, according to documents reviewed by The Lever. 

The pharmacy owner appealed these payments, and his reimbursement rates increased slightly — but they were still significantly lower than CVS’ rates at that time, which were $31.20 for gabapentin, $8.43 for pravastatin, and $20.30 for carbidopa-levodopa. Walmart received similarly high reimbursement rates. 

Neither OptumRx nor its corporate owner UnitedHealth Group responded to requests for comment. 

Such reimbursement disparities are not unique to pharmacies in Illinois. Data compiled for another proposed Georgia bill requiring a more transparent drug reimbursement system found that PBM payments to retail chains like CVS are up to 2,367 percent higher than those to local drugstores for some medicines. 

Documents provided to The Lever revealed similar practices in Arkansas, where one PBM’s reimbursement rate paid to CVS for budesonide, a steroid medication, was 283 percent higher than the fee to independent drugstores. For ipratropium and albuterol, a drug combination used by patients with lung diseases like chronic bronchitis, the PBM reimbursed CVS 353 percent more than it paid out to independent pharmacies.  

Over the years, reimbursement rates for independent pharmacies have continuously shrunk, according to pharmacy owners. 

As PBMs consolidated and mass retailers undercut the market by accepting losses on generic drugs, margins grew slimmer for independent businesses, according to The Commonwealth Fund, an organization that supports independent research on health care issues. In 2006, for example, pharmacy chains like Walmart said they would start selling a group of popular generic drugs at only $4 per prescription. Consequently, PBMs cut their reimbursements for such drugs, and independent pharmacies were forced to accept these lower rates. 

“Our reimbursement has drastically reduced over [the] past 9 years,” wrote the owner of the independent Illinois pharmacy chain in an email to The Lever. He added that his company was “on the brink of going out of business and we are filling way more prescriptions than ever before.”

Independent pharmacies are crucial for millions across the United States, particularly those in rural areas, low-income households, and adults aged 65 and older, according to a 2023 study by researchers at the University of California, San Diego. Big drugstores are also consolidating, which can reduce competition and raise drug costs. In some places, pharmacy chains are disappearing completely, creating pharmacy deserts that threaten individuals’ access to prescription medicine. 

“A Salvation For Just About Every Pharmacy”

In Illinois, some health plans are also paying PBMs increasingly large sums each year. In 2021, organizations contracted by the state to manage PBMs shelled out more than $2.6 billion for pharmacy services — up from $2.2 billion in 2020, according to a 2023 state audit of PBMs. Yet thanks to lax oversight, PBMs reimbursed pharmacies significantly less than they received, pocketing $100 million in annual profits. 

The Illinois Department of Healthcare and Family Services “does not monitor contracts between the PBMs and the pharmacies and, as such, is unaware of the rates paid to pharmacies by the PBMs,” the Office of the Auditor General wrote in their report. “The entire monitoring function of the rates paid to pharmacies by PBMs is limited and based on self-reported, unaudited encounter data.” 

This lack of regulation is why the Illinois bill is so essential, said Dave Bagot, president-elect of the Illinois Pharmacists Association, who has operated his pharmacy since 2005. 

Opponents of the bill say the proposed $10 dispensing fee is a consumer tax that would increase individuals’ prescription drug costs. Bagot and other pharmacy owners counter that this fee would come from PBMs, and that local pharmacies need the funding to keep their doors open.

“Right now, we’re not averaging anywhere near $10.49 in profit [per medication dispensed], so it would be a saving grace,” he said. 

Along with reimbursement requirements, the bill would address other PBM practices. The legislation would prohibit pharmacy middlemen from keeping a percentage of the discounts PBMs arrange with drug manufacturers that critics say are quasi-bribes, and require them to pass the total amount of these rebates onto the insurer or other payer that is paying for the drug. 

The bill would also prohibit PBMs from steering patients to PBM-owned pharmacies. Middlemen do this by telling patients if they don’t switch to the PBM’s pharmacy, they will be required to pay higher out-of-pocket costs, or their prescription will not be filled, according to the California Pharmacists Association.

This isn’t the first time Illinois pharmacists have tried to rein in PBMs’ power. In 2021, a similar bill was introduced in the Illinois Senate. But after pushback from organizations like the Pharmaceutical Care Management Association lobbying group — which argued that the legislation would “increase costs for Illinois families, small business and individuals” — the effort died in committee. 

The new attempt to better regulate PBMs “will be a salvation for just about every pharmacy in the state,” said Bagot. 

“A Thorn In Their Side” 

Bagot says PBMs and insurance companies are fighting the bill because they see it as a boon to independent drugstores and an obstacle to their plan to further consolidate the pharmacy market. 

“If we’re not here, they will flourish,” he said. “We are a thorn in their side.”

The Council for Citizens Against Government Waste, the conservative group fighting the bill, has a history of campaigning against “government-run healthcare,” arguing that such efforts will “reduce benefits and increase healthcare costs for hard-working taxpayers.” In 2023, they lobbied on other PBM reform bills, spending $4.7 million on such efforts and other matters, according to Open Secrets. 

Citizens Against Government Waste — the group’s non-lobbying arm — also received a grant from the Charles Koch Foundation, part of the billion-dollar conservative political network that bankrolls right-wing groups and political efforts targeting climate action, workers’ rights, and critical race theory, among other issues. This year, the group pushed back against the government’s decision to reinstate net neutrality rules that prevent broadband providers from throttling or blocking peoples’ internet traffic, which had been repealed during Donald Trump’s presidency.

“Any interference with the private agreements that are made to provide PBMs for employers, unions, state, and local governments increase government control over healthcare and we have consistently opposed such efforts,” Alexandra Abrams, the organization’s communications director, wrote in an email to The Lever. She also pointed to the organization’s 2022 letter to the FTC, where they noted that “government and third-party studies” have “confirmed the value of PBM tools for consumers.”

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Other detractors of the Illinois bill include the Conservatives for Lower Health Care Costs, a group with little social media presence that claims on their website that “The Left is attacking YOUR pharmacy benefits with new government mandates.” 

The bill “would add a $10.49 tax on prescriptions filled in the state,” the group wrote on their website, reasoning that it would further burden patients and make it harder for “lower-cost pharmacy options” to “grow, compete, and offer high-quality, affordable health care benefits.” 

Illinois Families for Affordable Healthcare, another opposing group, has a similarly scant internet presence other than a website and Facebook page dedicated solely to opposing the Illinois bill. 

The National Association of Benefits and Insurance Professionals, which represents health insurance and employee-benefits professionals, argues the bill “would significantly raise drug costs for all Illinois residents.” 

But this argument does not take into account that PBMs already have enough money to cover the $10 dispensing fee, so the cost would not be passed onto the patient, said Morgan at Frier Levitt Attorneys at Law. “I would suggest that there is more than enough revenue being generated and retained by the PBMs that is derived from the plan sponsor and they could simply allocate some of that revenue [to the dispensing fee.]” 

Such a fee is “crucial to account for the reasonable costs associated with dispensing medications in a safe manner,” Morgan and a colleague wrote in a memo. “Nonpayment of dispensing fees by PBMs forces the pharmacy to bear the costs associated with dispensing medications to its patients, which can jeopardize the ability of independent pharmacies to sustain their operations.” 

Independent pharmacies deserve a fair chance to stay in business, said the local drugstore owner who asked to remain anonymous. 

“We don’t care if we’re making money,” he said, “we just don’t want to lose money.’”

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