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The Hidden Monopolies That Raise Drug Prices

| Written by Nick Stumo-Langer | No Comments | Updated on Mar 28, 2017 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/the-hidden-monopolies-that-raise-drug-prices/

The American Prospect – March 28, 2017

By David Dayen

Rob Frankil of Sellersville, Pennsylvania, followed his father into the family business after college. “My entire life,” he said, “I’ve been involved with managing and owning independent pharmacies.” He now owns two stores, a traditional community pharmacy and another that caters to long-term care facilities.

Like any retail outlet, Frankil purchases inventory from a wholesale distributor and sells it to customers at a small markup. But unlike butchers or hardware store owners, pharmacists have no idea how much money they’ll make on a sale until the moment they sell it. That’s because the customer’s co-pay doesn’t cover the cost of the drug. Instead, a byzantine reimbursement process determines Frankil’s fee.

“I get a prescription, type in the data, click send, and I’m told I’m getting a dollar or two,” Frankil says. The system resembles the pull of a slot machine: Sometimes you win and sometimes you lose. “Pharmacies sell prescriptions at significant losses,” he adds. “So what do I do? Fill the prescription and lose money, or don’t fill it and lose customers? These decisions happen every single day.” …

Mergers Beget More Mergers

Chain stores have turned to defensive consolidation to stay in the game. In October 2015, Walgreens and Rite Aid, two of the three largest drugstore chains (CVS is the other), announced plans to merge. Walgreens has explicitly said that acquiring a handful of PBMs bundled inside Rite Aid will enable them to better compete with CVS Caremark. “It’s the same story we’ve seen in so many industries, companies justifying their marriage on the basis of another company in the market with lots of power. It’s an arms race,” says Stacy Mitchell of the Institute for Local Self-Reliance.  In the wake of the announcement, Walgreens inked lucrative new partnerships with Express Scripts and Optum, CVS Caremark’s biggest rivals. The merger deal remains under review by the FTC.

Another model would empower pharmacies. A 2016 report from the Institute for Local Self-Reliance highlights a quirk of law in North Dakota, which only allows drugstores to operate if owned by pharmacists (similar laws exist in Europe). The law prohibits chain pharmacies from entering the state. Not surprisingly, North Dakota’s independents deliver among the lowest prescription drug prices in the country, along with better health outcomes and more drugstores per capita than any other state. This flies in the face of industry claims that big chains and giant conglomerates save consumers money or improve services.

Why can’t this successful model be replicated elsewhere? “The answer is PBMs,” says Stacy Mitchell, the report’s author. “Because in North Dakota, independents are the only game in town, PBMs have to negotiate with them. In other states, they have no leverage.” Unsurprisingly, PBMs and chains want the North Dakota law overturned rather than adopted in other states.

Read the full story here.