Nearly 400 independent pharmacies have closed in Minnesota since 1996. Why?

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ROCHESTER, Minn. — Over its 65 years of business, Hunt’s Silver Lake Drug & Gift has built a reputation for taking care of the Rochester community’s pharmacy needs, said Phil Hommerding, a pharmacist and the owner of Hunt’s.

“We do service a lot of long-term care facilities, group homes,” Hommerding said. “(We) do a lot of hospice business as well, take care of a lot of people in their last days, so rewarding work.”

Hunt’s is Rochester’s only independent pharmacy, a type of health care provider that is becoming increasingly rare in Minnesota. In 1996, the state had 550 community, non-chain pharmacies, according to the Minnesota Board of Pharmacy. As of 2023, that number was down to 156.

“If we were just a community pharmacy with no front end and no other sales coming in … it would be super hard to stay in business right now,” Hommerding said. “And I think that’s why we’re losing a ton of pharmacies in smaller communities.”

The financial woes impacting independent pharmacies have been in the making for decades. The core issue: inadequate reimbursements from pharmacy benefit managers, or PBMs, which manage prescription drug benefits and claims between health insurance plans and pharmacies.

Oftentimes, when a pharmacy fills a prescription, the cost of stocking that medication is higher than what the pharmacy is paid after the sale.

“We get underpaid for so many prescriptions that we sell,” Hommerding said.

“In many instances, (pharmacies are) losing $50, $75 a crack on some of these medications,” added Jason Varin, a pharmacist and assistant professor in the University of Minnesota’s College of Pharmacy.

A pharmacy’s reimbursement for a prescription under a particular health care plan is set by the PBM’s contract, which is not negotiable, Varin said.

“If the pharmacist looks at the contract and realizes that, well, I’m not going to break even on this, or I will barely break even,” Varin said, “they have two choices. They can agree to the contract anyway, or … if they don’t agree to it, they’re going to lose whatever percentage of patients that go there.”

With the three biggest PBMs now covering 80% of the U.S. health insurance market, saying no to a contract could mean a pharmacy losing a quarter of its insured clients.

It’s a financial bind that has led to the demise of many community pharmacies, especially in rural areas, Varin said.

“There’s situations where if a pharmacy in northern Minnesota goes belly up, there is a 250-mile pharmacy desert, which is not beneficial for public health,” Varin said.

At the very end of its 2024 session, the Minnesota Legislature passed a handful of changes that will help the state’s pharmacies, including allowing pharmacy technicians and pharmacy interns to continue providing vaccinations — a service that pharmacies can still reliably make money on.

Those measures are bandages to help keep pharmacies financially afloat while the larger, national issue of PBM practices persists.

“What we’re trying to do right now is to ensure that we’re able to stay solvent short-term and continue to care for our patients,” Varin said, “while, on a national level, working on PBM transformation or transparency.”

PBMs explained

Before PBMs emerged in the 1960s, Varin said, patients typically had to pay for their prescription drugs up front, then submit a reimbursement claim through their health insurance provider to cover some or all of the cost. Sometimes, the patient would learn, after buying those drugs, that their insurance doesn’t cover them.

“There was no way to provide real-time information,” Varin said.

Early PBMs stepped in to process drug claims for health insurers, creating systems where pharmacies could check “that the patient was covered, what the drug is that’s either being covered or not being covered, and what the copay would be,” Varin said.

“Pharmacy was the first health profession to actually do this real-time adjudication,” Varin said. “It was great for the pharmacies. It was, more importantly, great for the patients because the patients didn’t have to guess if they were spending $20 on a prescription that wouldn’t be covered.”

Then, PBMs began providing formulary services for health insurers — creating lists of medications that the health insurer would cover. The idea, Varin said, was to help health insurers save money.

“If you have five (medications) that are in the same category, and you have two of them that appear to be the most effective and provide the most efficacy for the general population, and one of them is significantly more expensive for the health plan than another,” Varin said, “the idea is they would include the least expensive one, that’s equally effective, on the formulary.”

Today, PBM contracts determine how much the PBM will charge the insurer for the prescription and how much the PBM will pay the pharmacy for dispensing that medication. The difference between those two figures is known as spread pricing.

Under these contracts, pharmacies lose money on some transactions because the reimbursement doesn’t cover what it costs the pharmacy to stock that medication.

PBMs also negotiate deals between drug manufacturers and insurers, including securing rebates on certain medications. The problem, Varin said, is that those cost savings aren’t forwarded down the line to insurers and pharmacies.

“They don’t keep 100% necessarily; they may give a portion back to the insurer, but they’re not providing that,” Varin said. “In most instances, they’re keeping those rebates, or a large component of them, for services rendered.”

The three biggest players in the PBM space are CVS Caremark, Express Scripts and Optum Rx (which is owned by Minnesota-based UnitedHealthcare). As of 2022, the Federal Trade Commission is investigating these PBMs and three others.

Minnesota’s legislative action

A 1,430-page omnibus bill adopted by the Minnesota Legislature on May 19 contains a few provisions that will impact pharmacies. One provision will allow pharmacy technicians and pharmacy interns — under the supervision of a pharmacist — to continue giving vaccinations, a practice that started amid the COVID-19 pandemic to aid in the nationwide vaccine administration effort.

“Before the pandemic, specially trained technicians could not provide immunizations; they had to be done by pharmacists,” Varin said. “During the emergency declaration, they said OK, we need all hands on deck, so you have pharmacy technicians which are trained to do it, they should be able to provide immunizations as well, and it was pretty successful.”

Other provisions will:

— Increase pharmacies’ dispensing reimbursement through Medical Assistance

— Guarantee that commercial health insurance will cover services provided by pharmacists, and

— Allow pharmacists to prescribe HIV prevention medication.

At the federal level, several bills have been introduced to reform PBM practices in the past year, according to Reuters. These include the Pharmacy Benefit Manager Transparency Act of 2023, which would prohibit PBMs from engaging in spread pricing, among other changes.

In 2022, the Federal Trade Commission also launched an investigation into the nation’s six largest PBMs, work that is still ongoing as of this year; in March, FTC Chair Lina Khan said at a White House roundtable on PBMs that the agency is “undertaking this work with enormous urgency and focus.”

In the meantime, though, Hommerding said, “Realistically, we’re just going to be treading water to see if we can get better contracts in the future.”

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