Abusing Drugs

AP Photo/Richard Drew

The CVS Health logo appears above a trading post on the floor of the New York Stock Exchange

When the CVS drug chain announced its proposed merger with Aetna, some health experts offered a sliver of optimism. Combining elements of the medical supply chain could increase efficiency for patients, they reasoned, and eliminate some of the middlemen that make health care so expensive.

But recent allegations about CVS trying to put independent pharmacists out of business should put an end to this happy talk. CVS’s existing combination of a pharmacy (which dispenses drugs) and a pharmacy benefits manager (which reimburses other pharmacists for dispensing drugs) is a disaster for competition and access, particularly in underserved communities. Adding a health insurer like Aetna would further concentrate market power and narrow the networks people depend upon for medical care.

As first reported by the subscription-based outlet The Capitol Forum, near the end of October, right around when CVS/Aetna negotiations were first disclosed, independent pharmacists began to notice significant cuts to reimbursement rates for prescription drugs on plans managed by CVS Caremark, the nation’s second-largest pharmacy benefit manager (PBM).

A PBM negotiates with drug companies over prices on behalf of health plans, and then pays back pharmacies when patients use their drug benefit to purchase the medications. PBMs set reimbursement prices at their discretion, through maximum allowable cost (or MAC) lists that vary from pharmacy to pharmacy. A pharmacist often doesn’t know what reimbursement they’ll receive on a particular prescription until the moment they ring up a sale. So CVS Caremark, manager of tens of millions of individual drug benefits and also a pharmacy, sets their competitors’ profit margins, while gaining access to all their sales records. In plain English, this is a conflict of interest. And since late October, the squeeze has been on.

The CVS reimbursement cuts were concentrated in Medicaid managed-care plans, according to Doug Hoey, president of the National Community Pharmacists Association. “PBMs are constantly squeezing on reimbursement, but these were at a magnitude not seen before,” Hoey explained. An example in the Capitol Forum story stated, “one pharmacy went from earning $41.63 for selling Metronidazole—an antibiotic used to treat bacterial infections—to losing $72.27 per sale of the treatment.”

Some of the most severe cuts, Hoey noted, were to generic Narcan, an emergency treatment for opioid overdoses, and generic Tamiflu, a critical treatment during one of the worst flu seasons in recent memory. “Payments for generic Tamiflu are $50 to $60 below the cost of acquisition by some accounts,” Hoey maintained.

At the same time CVS Caremark was slashing reimbursement rates, its acquisitions department sent letters to the independent pharmacists, inquiring about buying their stores. “I know what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment,” read one letter. “Mounting challenges like these make selling your store to CVS Pharmacy an attractive and practical option.”

Other pharmacy chains like Walgreens and Rite Aid periodically send letters asking independents if they want to sell out. But left unsaid in CVS’s letter is their role in the declining reimbursements. In a statement to The Capitol Forum, CVS insisted that their pharmacy acquisition program and PBM business are “completely unrelated” with “stringent firewall protections.” But the solicitations, on the heels of actions by the parent company that threaten independent pharmacists’ livelihoods, are beyond suspicious. Firewall or no, CVS is a source of the squeeze.

It’s unclear why CVS’s reimbursement cuts mostly hit Medicaid managed-care. But a disproportionate share of independent pharmacist income comes from such plans. Over 90 percent of independents’ revenue comes from prescription drug sales, unlike full-service chains that feature more consumer products for sale. And over half of all of those prescriptions are from Medicare Part D and Medicaid.

Independent pharmacies are typically located in rural and underserved communities, which have higher Medicare and Medicaid populations. So these particular reimbursement trims really threaten independent pharmacists’ ability to survive. One pharmacist reported to the independent pharmacists’ association that his gross revenue increased 22 percent last year but he still lost money, primarily because of the reimbursement cuts.

The Medicaid managed care plans are typically negotiated with states on a capitated rate, meaning that CVS agrees to manage a patient’s health needs for a set amount per month. If drug costs stay low—like through cutting reimbursement rates to pharmacies—CVS’s profit increases. And because state costs cannot rise above the per capita, they pay less attention to managed care plan maneuvering.

The squeeze and buy scheme also fits with CVS’s plan to deploy “Minute Clinics” at their pharmacies across the country. These walk-in clinics treat minor illnesses and injuries, administer vaccinations and injections, and give physicals. Matching CVS with a major insurer like Aetna can make its Minute Clinics dominant, especially if they bankrupt or take over competing pharmacies in smaller communities. Once established, CVS/Aetna can steer patients with its insurance and drug benefits to its own clinics and pharmacies. The risk is that profits for the conglomerate will take precedence over the best interest of the patient. “It locks in the patient even more,” said Doug Hoey.

This vertical integration has become epidemic across the health-care sector. Four of the largest nonprofit hospitals are launching a generic drug company. Insurer UnitedHealth, which also owns a large PBM, just bought a bunch of primary and urgent care clinics from DaVita. We’re moving to a system where your insurer will dictate your providers, your drugs, and your treatment. And with the new tax law giving health care firms ready cash for mergers and acquisitions, that reality could accelerate.

This has consequences for choice and access. One pharmacist from Brooklyn cited by Hoey reported Medicaid patients lining up outside his store every morning. The pharmacist presumed that CVS competitors like Walgreens and Rite Aid stopped filling prescriptions on CVS’s managed-care plans, because of the low reimbursement rates. Normally a line out the door is a welcome sight for a small businessman, but when each individual in line represents a net loss, it’s a nightmare. “At some point he has to tell them it’s cash, or I can’t help you because I can’t lose $50 a prescription,” Hoey said.

Independent pharmacists in several states have complained to state regulators about the squeeze and buy tactics. The Maryland Department of Insurance confirmed to me that the complaints are under investigation. This could complicate the CVS/Aetna merger in states where insurance commissioners have the jurisdiction to review the deal.

That would be completely appropriate. The squeeze and buy scheme strongly suggests anti-competitive conduct. Adding an insurer to CVS’s pharmacy/PBM roll-up would give them more ability to leverage captive patients at the expense of rivals. “People probably have no idea how much power resides within these companies,” Hoey said. “More needs to happen to rein in these guys.”

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