Independent Pharmacies Feel Helpless As Unregulated Middlemen Influence Profits

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Sag Harbor Pharmacy. KYRIL BROMLEY

Southrifty Drugs in Southampton Village lost a quarter of its pharmacy clients in the last four years. Barth’s Pharmacy is losing an average of $40,000 a month in unearned profits, as of last fall. Sag Harbor Pharmacy faced a $65,000 loss from take-backs last spring — and cannot afford a similar deficit this year.

All independent pharmacies in Southampton and East Hampton towns, like other pharmacies across the state and the country, are facing financial challenges as a result of an unregulated middleman system, with pharmacies on one side and drug manufacturers and insurance companies on the other.

“Every single pharmacy is in trouble. There have been stores closing up west on the island, literally — not on a daily basis but quite often,” said Lou Cassara, the owner of Barth’s Pharmacy.

The middlemen, called pharmacy benefit managers, or PBMs, are companies that negotiate prices with drug manufacturers and pharmacies, and process insurance claims through exclusive contracts in order to provide prescription drug programs for millions of insured Americans. They claim that they work to reduce drug and pharmacy costs as a way to increase accessibility to consumers.

Because of their position, PBMs have a lot of control over what medications are covered by insurance — as well as pharmacies’ income, because they dictate reimbursement rates for drug claims and can require payment of additional fees.

Additionally, only three PBM companies make up 78 percent of the entire market: Express Scripts, CVS Caremark and OptumRx of UnitedHealth Group. Apart from the lack of competition, the latter two companies are sectors of healthcare companies that provide their own insurance and pharmacy services, thus opening the door to vertical integration.

In New York, PBMs legally do not have to disclose what they do with the revenue they collect from both sides of the distribution chain. The fees and rates that they apply to drug manufacturers and pharmacies often fluctuate arbitrarily as well, with no explanation.
Those negatively affected, like independent pharmacy owners, are left feeling like the future of their businesses are at the mercy of the middlemen.

“You’re not even allowed to inquire. It’s just, ‘This is what we’re taking, and you have to deal with it,’” said Janice D’Angelo, the owner of Sag Harbor Pharmacy.

PBMs are not new to the parties involved, but the domination by a few major healthcare corporations, coupled with the lack of oversight and transparency, has many community pharmacies struggling to survive.

They started to become a major force in the 1990s, when they took over for insurance companies directly.

Mr. Cassara of Barth’s Pharmacy said he began feeling major losses as a result of PBMs last November — roughly $40,000 a month on the entire business — although the impact has been present for as long as PBMs have been around. He owns five Barth’s locations in eastern Suffolk County, including in East Quogue and Westhampton Beach, and he said that since last fall, he has been forced to compress hours, cut expenses, reduce overtime and personally take a pay cut in order to offset the unearned revenue.

“Is it affecting me? Absolutely,” he said. “And if you have multiple stores, it hurts you times how many stores you have.”

The State Legislature passed a bill in June to regulate PBMs and require them to obtain licenses and disclose their revenue streams to health plans, pharmacies and the state, in an effort to provide accountability and prevent conflicts of interest.

Governor Andrew M. Cuomo now needs to sign the bill for it to become law, which he could do at any point before the end of the year. The law would go into effect 90 days after being signed.

“PBMs promote themselves as saving health plans and their covered members money, but, in reality, their negotiations and the discounts or rebates they get from drug companies are very secretive,” the text of the bill’s justification section stated.

It has been almost four months since the Senate and Assembly passed the legislation, and those affected are eagerly waiting for Mr. Cuomo to take action.

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Local pharmacy owners are planning to rally together outside of Southrifty Drugs at noon on October 23 to urge the governor to sign the bill — the same day that other pharmacists throughout the state are holding their own rallies.

Bob Grisnik, who owns Southrifty Drugs, is organizing the rally and said he will speak on points provided to him by the Pharmacists Society of the State of New York. He invited State Senator Kenneth P. LaValle and Assemblyman Fred W. Thiele Jr., both of whom voted in favor of the bill, to join them at the rally.

“I’m the only independent pharmacy left out of the five independents that were in town in 1995,” Mr. Grisnik noted. “And we keep tightening our belt as much as we can and give the service that we always have to our customers, and hope that they’ll continue coming to us.”

He shared how, just the other day, he was filling a prescription for a longtime customer, and when he was reimbursed, the PBM reduced the reimbursement price by $50, despite the medication costing the same as it did last month. He said the reimbursement was about $40 below his cost, causing him to lose money if he serviced the customer.

“Local pharmacies either eat the $40 loss, or you turn the prescription down and have to send them to one of the chain drug stores — because it was one of the PBMs that is owned by CVS,” he explained.

“So they took the prescription and went to CVS and had it filled there. They didn’t want to do it, but that’s the only way they could get their medicine, because I couldn’t afford to take a $40 loss on filling that prescription,” he added.

Instances like that, along with cases in which PBMs steer consumers toward affiliated pharmacies and mail-order services, have taken substantial business away from Southrifty Drugs and other community pharmacies.

For Sag Harbor Pharmacy, the oldest independent pharmacy on Long Island, the biggest problem it has experienced with PBMs has been take-backs. PBMs determine whether they overpaid a pharmacy for reimbursements from the past several months and will take the additional money back from the pharmacy.

The owner, Ms. D’Angelo, said that the PBM took about $65,000 in take-backs in one lump sum last year — a significant hit that almost caused her to go out of business. Fortunately, she runs a gift shop in the front of the store, and revenue from that allows her to pay her bills, she said.

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“I’m not going to be able to handle another take-back like that again this year,” she said. “I just barely made it through, and thank God it was right before summer, because the summer afforded me to make up for that.”

White’s Drug and Department Store in Montauk is also losing considerable revenue from low reimbursement rates and take-backs from PBMs, according to Frank Calvo, its pharmacy manager.

The pharmacy loses money from about three of its 150 claims each day, which Mr. Calvo said is “significant funds.” The business is still profitable at the end of the day, but that is mainly because of the department store items that it sells.

“To be a pharmacy by itself, meaning a standalone pharmacy just doing drugs, it’s virtually an impossibility to do something like that,” he said. “You need a front end of the store to kind of bring in some profit … it’s definitely needed to help you on the back end.”
Mr. Calvo said he is worried about the future of not only his pharmacy but all independent pharmacies as they experience similar hardships.

“This is besides all of the payroll taxes and sales taxes and things like this that are happening. Now you’re dealing with a PBM issue, where they’re taking back not hundreds but thousands of dollars,” he said. “It’s very scary as we look forward.”

Pharmacies on their own could make a profit under the current system if they purchase and sell high-volume prescription drugs, but independent pharmacies do not have such a demand and are instead losing the customers they did have, Ms. D’Angelo and Mr. Grisnik pointed out.

“You need the volume in order to counteract that. But with the insurance companies forcing you to fill your prescriptions in certain pharmacies, it’s really difficult,” Ms. D’Angelo said.
PBMs have been exposed for engaging in a practice called “spread pricing,” in which they charge pharmacies higher prices than what PBMs pay to manufacturers, and profit off the difference.

The state bill addresses spread pricing and says that “PBMs commonly pocket payments from drug manufacturers that ought to be used to lower drug prices, and they accept payments in exchange for giving preference to more expensive drugs.”

It was also discovered that PBMs conducted spread pricing with New York State insurance programs. A study that investigated PBM activity for New York Medicaid prescription claims revealed earlier this year that PBMs pocketed more than $300 million from New York taxpayers between April 2017 and March 2018, overcharging taxpayers by 24 percent during that time period.

The study, conducted by the independent consultancy 3 Axis Advisors and commissioned by the Pharmacists Society of the State of New York, also revealed that PBMs paid pharmacies “less than what it cost them to dispense the generic drugs 99 percent of the time.”

Local pharmacy owners remain optimistic that they can keep their stores alive and that the state bill will soon become law.

“If all of us independents go away, the level of service that we provide our customers and the human touch that we provide our customers is not duplicated,” Mr. Cassara said. “You’re just a customer in a chain.”

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