Catalyst: Community Pharmacy at a Crossroads
Exploring the existing dispensing business model and the growth of Pharmacy Benefit Managers (PBMs)
Story by Jon Easter | photo by Danny Alexander | Published February 27, 2024
As North Carolina’s only public pharmacy school, we are committed to impacting the health and economics of our state. An important part of this strategy involves the School working to convene, educate, and advocate for the role pharmacists play in addressing health challenges across the state.
Under the leadership of Jon Easter, Vice Chair of Practice Advancement, the School is helping educate legislators at both the state and federal levels. In our Catalyst series, Carolina Pharmacy has asked Jon to share updates on key policy and practice advancement issues. This installment focuses on the role Pharmacy Benefit Managers (PBMs) have played in shaping the current business model, and what can be done to reform PBMs to the benefit of pharmacists and patients alike.
What is the history behind the community pharmacy dispensing and services business model?
Recent reports of retail pharmacy walkouts and poor working conditions are troubling and portray pharmacy in a negative light. These stories highlight working conditions, but often fail to address the root cause: a broken business model of purchasing and dispensing medications. The existing model was established when the Omnibus Budget Reconciliation Act of 1990 (OBRA ’90) mandated that pharmacies provide counseling services as a part of dispensing fees to Medicaid patients. As is often the case, other payers adopted this model which then grew in Medicare and with commercial insurers. In 2003, the Medicare Modernization Act (MMA) provided medications to seniors for the first time through Part D. The MMA partially expanded needed medication management services through MTM programs, but fell short addressing the underlying services and dispensing business model.
By coupling medication dispensing with services, along with the failure to recognize pharmacists as Medicare providers in the Social Security Act, our profession finds itself in a challenging situation. One key challenge is pricing contracts that often result in dispensing medications at a loss. Secondly, is the need for pharmacies to identify individual payer reimbursement to deliver and scale up medication management services.
Why is the current model broken? With the high cost of medications and the complexity of the supply chain, PBMs have grown into an indispensable force to help improve access to and lower the cost of medications on behalf of employers, as well as Medicare and Medicaid patients. As PBMs have grown, so have the pharmacy contracts that significantly cut margins for dispensing medications, not only leaving community pharmacists struggling to provide needed services to vulnerable patients, but also struggling to stay in business.
What are PBMs and how do they operate?
PBMs were created in 1968 when Pharmaceutical Card System Inc (later Advance PCS) was founded to help insurance companies control medication costs. Key functions include negotiating prices with pharmaceutical companies, establishing drug formularies, creating pharmacy networks, and processing drug claims.
The ‘big 3’ PBMs are CVS Caremark (Aetna), OptumRx (United Health Group), and Express Scripts (Cigna). These organizations dominate over 80% of the marketplace, which totals over 275 million patients in the US.
Much of the discussion around PBMs is their role in negotiating drug prices with manufacturers, where the manufacturer will provide rebates to the PBM in exchange for formulary placement. Unfortunately, there is a lack of rebate transparency. According to Iqvia, gross US medication spending in 2022 was $858 billion with a net spend of $429 billion, which means approximately 50% of the total drug spend goes to rebates and discounts in the supply chain. PBMs control the vast majority of these rebate dollars. What’s more, rebate dollars have dramatically increased over the last ten years but patient out-of-pocket costs have remained the same at around $80 billion per year. This suggests that patients are not benefiting from increasing rebates.
Another PBM function and key discussion point is pharmacy contracting. Every pharmacy must contract with PBMs and there is no negotiation. If the pharmacy doesn’t accept the payment terms, then they lose all their patients who have that insurance. Specific tactics include Direct-Indirect Remuneration (DIR) fees, which were put in place by the Centers for Medicare and Medicaid Services (CMS) to control costs and improve quality in Medicare. PBMs have used DIR fees as a flat fee or percentage of ingredient cost to pull money back from pharmacy dispensing revenue, totaling $9 billion in 2019 – an increase of 107,400% between 2010-2020. A key change in 2024 is the elimination of retrospective DIR fees, which means that adjustments will be taken out at the point of sale and will not be assessed months later. The problem is that 2023 retroactive fees are still being taken while current adjustments are real-time, which creates a significant cashflow crunch for many pharmacies. Another tactic is spread pricing, where the PBM charges a payer more than they pay the pharmacy for a medication and then keeps the ‘spread’ or difference as profit.
Other pharmacy contracting tactics include below-cost reimbursement and forced brand dispensing, where the pharmacy is forced to dispense medications at a loss based on PBM rebate contracts.
As a result of these ‘take it or leave it’ PBM pharmacy network contracts, approximately 2,200 pharmacies have closed across the US between 2017-2020, which has a significant negative downstream impact like reduced hours and staff, and overall lack of patient access to their medications.
Why is PBM reform important to the profession of pharmacy in North Carolina?
The North Carolina Association of Pharmacists (NCAP) has been working with policymakers at the NC General Assembly on HB246, which passed the House unanimously last session. HB246 is a PBM reform bill that would help regulate PBMs, eliminate spread pricing, and prevent mandating mail order prescriptions, amongst other things. It is expected that the Senate will take up this bill in the upcoming short session.
On a national level, there are several PBM bills in the House and the Senate, as well as an FTC investigation into PBM practices. It is expected that congressional leaders will merge bills to advance legislative activity to regulate PBMs in 2024.
What is UNC Eshelman School of Pharmacy doing to address these challenges?
The UNC Eshelman School of Pharmacy is working to establish North Carolina as a leading example of statewide collaboration and to expand the reach and adoption of patient care services that optimize medication use in an effort to help North Carolinians live longer, healthier lives. As such, the School has sponsored a series of Catalyst events to generate ideas to evolve the community pharmacy business model, improve patient outcomes, and promote ongoing collaboration between stakeholders. Our first two events, one in 2022 and the other in 2023, took place in Chapel Hill and focused on health care payers, providers, and pharmacy to identify collaborative opportunities that advance medication optimization within population health models.
In 2024, we established regional events with local communities to highlight challenges with the current business model and successful team-based care examples. The first was held in Benson, NC in January and the second in Asheville in mid-February bringing together local health care, pharmacy leaders, and legislators, along with providers and payers with a goal of educating on community pharmacy policy changes to advance effective models across North Carolina.
What can North Carolina Pharmacists do to advocate for PBM reform?
Community pharmacy is now at a crossroads, and there are three things that we can all do to support our profession at this critical time:
- Reach out and learn more about challenges directly from your local community pharmacist. Have them share examples with you about the current environment and the difficulty they face in taking care of their patients in your community.
- If you haven’t already, join the NC Association of Pharmacists (NCAP). They are advocating, educating, and lobbying on behalf of our profession at the NC General Assembly.
- Learn more about HB246 and follow NCAP’s lead on when and how to educate the Senator from your district.
Our profession has always been there for us and, importantly, for patients. Let’s join together now so we can galvanize support – our profession and our patients need us.
Other stories from the Catalyst series:
Catalyst: CPP Expansion
Catalyst: Advocacy Day at the NC General Assembly