How Generic Drugs Can Cost Small Pharmacies Big Bucks

Oct 22, 2015
Originally published on October 26, 2015 7:20 pm

Pharmacist Narender Dhallan winces as he looks at a computer screen in his drugstore on a recent morning. For the second time in two hours, he has to decide whether to fill a prescription and lose money or send his customer away.

This time it's for a generic antifungal cream that cost him $180 wholesale. The customer's insurance, however, will pay Dhallan only $60 to fill it.

"This used to be something that would happen once in a rare, rare while," Dhallan says. "Now it's becoming routine."

If the losses keep coming, Dhallan says his store, RiverRx in Bethesda, Md., won't be in business two years from now.

The scenario at RiverRx is repeating itself at independent drugstores across the country, says Doug Hoey, president of the National Community Pharmacists Association.

Nearly 9 in 10 prescriptions filled in the U.S. are for generic drugs. And while generic drugs are typically cheaper than brand-name medicines, the prices for generics have been on a tear.

The problem for RiverRx and other independent pharmacies is that reimbursements haven't been keeping up with the pace of price hikes. As a result, the pharmacies are losing money simply by filling prescriptions.

Hoey flips through a 3-inch stack of spreadsheets from his members detailing losses on generic drugs. "Here's a generic Prozac, loss of $26," Hoey says. "A generic used for rheumatoid arthritis, $83 loss. This one store lost $4,800 in one month."

Hoey, Dhallan and other pharmacists say the problem lies with pharmacy benefit managers. The PBMs are middlemen in the medical world who influence what drugs you get, where you can get them and at what price. The biggest are Express Scripts and CVS Caremark.

PBMs negotiate deals with employers to run the part of their insurance plans that covers prescription drugs. The managers extract discounts from drugmakers on medications and also contract with pharmacies like RiverRx to fill prescriptions for the people served by PBMs. If Dhallan wants to be included in a PBM's network, he has to sign on to its terms.

In the past, PBMs reimbursed drugstores pretty much in line with market prices. However, in the past two years, generic drug prices have risen on average 40 percent. When they spike like that, Hoey says, PBM reimbursements often don't keep up.

"When those prices go up, our cost to buy the drug can go up 100, 500, 1,000 percent overnight," Hoey says. "While we're paying 1,000 percent more than we had paid the day before, our reimbursement — the payment to the pharmacy — often stays the same for an average of three months."

Chain pharmacies like CVS and Walgreens also sometimes lose money filling generic prescriptions. However, they have more revenue and profit than the independents as well as other business lines to cushion the blow.

It's hard for small pharmacies like RiverRx to demand more money from the PBMs because they hold the trump cards. CVS and Express Scripts dominate the industry. CVS Caremark is the 10th-largest company in the U.S. by revenue and it manages prescriptions for 70 million people. It also owns nearly 10,000 retail stores and the Caremark mail-order pharmacy. Express Scripts has a huge mail-order pharmacy of its own.

The PBMs aren't just setting reimbursement for River RX, they're also competing for its customers.

"We feel that's a conflict of interest," says Hoey.

A CVS Caremark spokeswoman said in an email that the pharmacy benefit manager deals "at arm's length" with the retail side of the company.

"Our pricing with CVS/pharmacy is very competitive to similarly situated providers," she said.

Benefit managers like CVS and Express Scripts say they save money for their clients and keep drug prices low overall. A 2011 study by the PBM's trade group estimates it will save its clients and Medicare $2 trillion over 10 years.

"We save about 35 percent over what businesses would pay if we weren't in the picture, and they were doing all of this themselves," says Mark Merritt, president of the Pharmaceutical Care Management Association, which represents CVS Caremark and Express Scripts. "It's billions if not trillions of dollars."

Not everyone is so sure.

Analyst Richard Evans, who heads up the health practice at Sovereign and Sector Research LLC, says pharmacy benefit managers do extract discounts from drug companies for their clients. But as an industry, the PBMs haven't managed to take all the air out of inflating drug prices.

He agrees that independent pharmacies are in trouble, in part because PBMs, in an effort to cut costs even more, have been narrowing their lists of approved pharmacies.

Laura Ard, a regular customer at RiverRx, has seen that firsthand. She takes a medication for a chronic condition and has been able to get the prescription for it filled with a modest copay at Dhallan's store. Then her drug plan changed. Now she has to go to CVS or pay entirely out of pocket.

"It's irritating because they're telling me where I have to go, and where I have to shop, and at what price I have to get things," she said on a recent day standing at the cash register at RiverRx.

On principle, she's continued to pay out of pocket for the past six months — a total of more than $800. "This is my own personal private picket, at my expense," she said with a laugh.

But Dhallan can't count on many people doing what Ard does. He says he's lost about 20 percent of his customers in the past year.

"Last year was the first year that we had a decrease in profit, even though we had an increase in the number of prescriptions," Dhallan said. "I don't know how long we can continue."

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If I ask you what your closest drugstore is, what name would you come up with? Walgreens? CVS? Rite Aid? Or, a neighborhood shop owned by a pharmacist? That type of store is at risk. The reason is that independent drugstores actually lose money on many of the prescriptions they fill, especially generics. NPR's Alison Kodjak reports.

ALISON KODJAK, BYLINE: Pharmacist Jennifer Demeno loves her job at RiverRX, a tiny independent drugstore in Bethesda, Md.

JENNIFER DEMENO: What was the last name again, please?

KODJAK: The thing she loves most is to get out from behind the counter and talk to customers.

DEMENO: You could also try some of the topical, like the pain-relieving gels.

UNIDENTIFIED WOMAN #1: I'm trying these ones...

KODJAK: Demeno finished her six years of pharmacy training last year. Then she went to work at a big chain store. It was long hours and almost no contact with clients. It's not what she had in mind when she chose to go into pharmacy after working at her small hometown drugstore.

DEMENO: When people would come in, the pharmacists would know them by name, you know? They'd greet them - oh, hey Mr. so and so, how are you today?

KODJAK: But that kind of pharmacy may not be around much longer. That's because independent drugstores like RiverRX are struggling.

DEMENO: Now with the way that these insurance companies are reimbursing, I'm just lucky to be here for as long as I can.

KODJAK: Her boss is also worried.

NARENDER DHALLAN: Do you need a little bag for this?

KODJAK: Narender Dhallan bought this shop eight years ago, and for the first time, his profits are down. This recent morning, Dhallan follows his usual routine. He pours pills through a counting machine and checks prescription forms. Two money-losing orders have just come through. One is an antifungal cream that cost him $120 more than the customer's insurance will pay.

DHALLAN: This used to be something that would happen once in a rare, rare while. Now it's like a routine thing, and this is just two medications I've seen in the last two hours.

KODJAK: The customer pays the usual co-pay no matter what. Dhallan can either take the loss or send his client away. He says the problem lies with the so-called pharmacy benefit managers, or PBM. The biggest are Express Scripts and CVS Caremark. PBMs manage prescription insurance for employers. They're middlemen who bargain hard to get the best deals for their clients. Sometimes that means PBMs play drugstores below cost for a prescription.

DOUG HOEY: Here's a generic Prozac - loss of $26. A drug used for rheumatoid arthritis - $83 loss.

KODJAK: Doug Hoey is president of the National Community Pharmacists Association.

HOEY: Loss of $21.

KODJAK: He flipped through stacks of spreadsheets from his members detailing losses on generic drugs.

HOEY: This one store lost $4,800 in one month.

KODJAK: Generic drug prices have been rising for the last two years, but Hoey says the pharmacy benefit managers' payments to drugstores often don't keep pace.

HOEY: When those prices go up, our cost to buy the drug can go up a hundred percent, 500 percent, a thousand percent overnight. While we're paying a thousand percent more than what we have paid the day before, our reimbursement, the payment to the pharmacy, often stays the same for an average of three months, according to our surveys.

KODJAK: Big chain pharmacies can potentially eat the cost of these price increases, but Hoey says that the losses are rough for independents.

HOEY: I'm hearing more cries of pain than I ever have heard, and from people that are some of the most savvy businessmen and women that I know.

MARK MERRITT: The point is what's best for consumers.

KODJAK: Mark Merritt leads the trade group that represents the CVS Caremark and other benefit managers. He says PBMs drive down drug prices so that more people can have access to new breakthrough medications. He says the companies have cut drug costs for their clients by trillions of dollars.

MERRITT: The reality is consumers want lower drug prices, and independent drugstores, like any other business, would like to charge as much as they want, but that's just not the reality nowadays.

KODJAK: Industry analyst Richard Evans says this new reality does put independents at risk. He believes many won't survive in part because of the power of the PBMs. Express Script and CVS Caremark now dominate the industry. CVS Caremark alone manages prescriptions for 70 million people. And the final blow for some small drugstores, Evans says, could be that PBMs are knocking some of them off their lists of approved pharmacies.

RICHARD EVANS: Up until about a year ago, drug benefits tended to allow beneficiaries to go to any pharmacy and basically pay the same amount at any pharmacy they went to.

UNIDENTIFIED MAN: There you go.

KODJAK: Laura Ard is a customer at RiverRX. She's on a long-term medication, and for a while paid the usual $15 co-pay. Then she learned she couldn't get it covered at RiverRX and would have to go to CVS or pay entirely out-of-pocket. Now she's mad.

LAURA ARD: It's irritating because they're telling me, really, where I have to go and where I have to shop and at what price I have to get things.

KODJAK: On principle, Ard now pays more than a hundred dollars every month for her meds.

ARD: This is my own personal, private picket (laughter) at my expense.

KODJAK: But Ard is the exception. Owner Narender Dhallan says he's lost about 20 percent of his customers in the last year. He does what many independent pharmacists do to hold, he offers personal service.

DHALLAN: Gave you the easy-off cap so be careful they don't spill.

KODJAK: He walks the aisles. He even delivers.

UNIDENTIFIED WOMAN #2: We'll get those delivered later on today.

KODJAK: But even he says that probably won't be enough. Alison Kodjak, NPR News. Transcript provided by NPR, Copyright NPR.