Amid increased federal scrutiny, PBMs pivot strategy to further squeeze independent pharmacies
Pharmacy benefits managers (PBMs) are employing new strategies to squeeze independent pharmacies, even as the industry faces pressure from the federal government, which is looking for ways to curb healthcare's middlemen and preserve competition in medicine distribution.
Independent pharmacies have complained for years about unfair tactics used by PBMs to force them out of business, including underpaying for filled prescriptions and reimbursement clawbacks.
It has gotten the attention of Congress, and the Federal Trade Commission (FTC) is in the middle of a probe with results due this year.
FTC chair Lina Khan said in a 2022 letter to Congress that she is concerned about the impact of PBM's strategies and the market share of the three largest players now owned by some of the biggest healthcare companies in the country: United Health Group's (UNH) OptumRx, CVS's (CVS) Caremark, and Cigna's (CI) Express Scripts.
“I am also concerned that PBMs’ vertical integration and dominant market position may allow them to ... steer business to PBM-owned mail-order and specialty pharmacies, which may threaten the long-term viability of independent pharmacies in both urban and rural communities,” Khan wrote.
Meanwhile, another tactic is starting to see an anecdotal increase: terminations.
"Over the last six months, we are probably seeing more aggressive tactics by pharmacy benefits managers to either exclude independent pharmacies from their networks or terminate them than we have in the past 20 years," said Jonathan Swichar, a lawyer and co-chair of Duane Morris’s pharmacy litigation group.
Anne Cassity, senior vice president of government affairs at the National Community Pharmacists Association (NCPA), similarly confirmed the increase.
"I have heard quite a few stories about this in the last six months," she said, noting that the strategy isn't new, but the volume is. How each case is handled varies by state courts and law.
In a New Jersey Superior Court, for example, Judge Haekyoung Suh recently ordered United's OptumRx to halt the termination of a pharmacy until it completed arbitration.
"Optum is given great authority regarding termination," Suh wrote in her opinion in December, regarding the contract between the PBM and pharmacy.
The three largest healthcare companies in the country have a combined market value of more than $640 billion — all of which have their own mail-order prescription service. This has caused the misaligned incentives FTC's Khan referenced, where a PBM is looking for ways to have to pay out less to the pharmacies and direct patients to mail orders.
Swichar said the contracts are increasingly unfavorable to pharmacies. Other lawyers are also starting to see the trend.
One lawyer, who declined to be quoted in order to protect his clients in ongoing legal cases with PBMs, represents independent pharmacies for a broad array of legal issues. He shared with Yahoo Finance on background that he expects to see one or two termination notices a year. But in 2023, he saw more than half a dozen termination notices, which rose to surpass one dozen in the first quarter of 2024 alone.
The process
Pharmacies are audited by PBMs in order to ensure the pharmacy is only getting paid for drugs it actually dispenses and that it isn't overcharging the PBMs and insurers. United Health's Optum, for example, told Yahoo Finance it successfully identified $450 million in waste in 2023.
"Fraud, waste, and abuse (FWA) in the healthcare marketplace continues to trend upwards —causing huge losses to payers (private and public sector) in terms of paid claims that are fraudulent or inappropriate," the company said in a statement.
"Some of the most common schemes include: telemarketing, generic cost manipulation, submitting claims for medications not dispensed, secondary wholesalers, and drug resale marketplaces, and billing one national drug code but dispensing another," Optum said.
But the latest audits are more nuanced.
"There’s a lot of instances where there might have been a clerical error or something that a PBM is trying to miscategorize as fraud, waste, or abuse. … Sometimes it's not even a violation of their contract; are just trying to paint it as that," said Steven Bennet, an attorney and partner in Frier Levitt’s healthcare litigation practice group.
Duane Morris's Swichar and NCPA's Cassity shared similar anecdotes. In one instance, a pharmacy missed an email from the PBM, prompting the termination notice.
When a pharmacy is audited and given a termination notice, it races to thwart the PBM's efforts to shut it down within 60 to 90 days by correcting or defending against the issues cited. There is an appeal process, which usually involves an internal hearing comprised of PBM staff, followed by potential arbitration for further appeal.
Closures
But amid the rise in termination notices, those avenues for recourse are becoming less meaningful.
In a recent email viewed by Yahoo Finance, lawyers who represent independent pharmacies were notified that the internal appeal hearings at Optum are being discontinued. Instead, a panel will review the appeal documentation and simply provide a written decision.
PBMs are making matters worse by sending notices to patients that their pharmacies are out of network well before the deadline to rectify the issue — at day 45 out of the 90-day period, for example. This drives patients directly to the PBMs' mail-order services.
And there is no law requiring the PBMs to notify patients once the pharmacy resolves the issues, so pharmacies forever lose those customers, NCPA's Pivarunas explained. The damage is done.
In Suh's decision in December, she said the PBM had already pushed the pharmacy's termination date, showing that "no immediate harm will result" in continuing operations. In fact, she said, the pharmacy had demonstrated that termination "will result in serious harm through loss of customers, disrupted operations, and potential termination of partnerships with physician providers."
That's why, Swichar said, "losing network rights with any one of them will, with almost certainty, put the pharmacy out of business."
Cigna's Express Scripts has previously said that, as of 2022, 35% of its pharmacy network was independent pharmacies, while retail chains accounted for 33% and grocery chains were 32%. Independents also account for 900 million prescriptions per year, compared to 600 million from mail-order.
It also claims to be helping independents. "In rural areas, independent pharmacists are crucial to closing gaps in care created by a shortage of doctors and other medical professions paired with the closure of almost 200 hospitals in recent years," the company said.
How prevalent the problem is nationwide is hard to quantify through any court system or trade group.
"The majority of these disputes are resolved by phone, email, or arbitration. The majority of what we go through and what we're going through with independent pharmacies is a complete unknown," Swichar said.
Between low reimbursement rates and the termination notices, pharmacy closures are piling up— despite hundreds of planned retail chain location closures that could have resulted in increased business for the independents. In its annual reports, the NCPA showed that at the end of 2017, there were 21,909 independent pharmacies, and as of June 2023, there were 19,432.
The only hope left, Swichar said, is the result of the FTC's probe if its findings favor independents.
CVS declined requests for comment from Yahoo Finance, and Cigna did not respond by the time of publication.