Why Your Pharmacy May Be Disappearing

Imagine walking to your local pharmacy — the one your family has trusted for years — only to find it shuttered. This is unfortunate for many Americans as pharmacies nationwide close their doors permanently.

While multiple factors can contribute to a business closing, the additional costs Pharmacy Benefit Managers (PBMs) impose on pharmacies contribute to the problem. Even when PBMs are not directly shutting down pharmacies, their tactics drive up costs for patients who can’t get generic medicines as easily. Legislators have put off shining a light on the PBM industry for too long.

Of the tactics PBMs use, preferential formulary placement of expensive drugs whose manufacturers offer price rebates has garnered widespread attention. This results in brand-name drugs receiving favorable placement over their generic counterparts. PBMs then choose not to pass the rebates to patients or pharmacies, instead pocketing the difference — a practice known as spread pricing.

PBMs use a tier system to determine copays and reimbursements for pharmacies. This is intended to give patients more access to less expensive generic drugs. Frequently, generics are listed on the brand-name tier while providing many brand-name drugs preferential prescription status of the supposedly generic tier. This artificially affects drug prices.

In 2024, more than half of all generic drugs were not listed on their formularies’ generic tiers. A survey found that 72 percent of Medicare Part D formularies placed at least one brand-name drug in a tier with lower cost-sharing than its generic equivalent. These practices inflate drug prices for Medicare beneficiaries and privately insured patients by limiting generic competition and sometimes preventing generics from being prescribed.

This practice creates significant financial challenges for pharmacies. Brand-name medicines are more expensive for pharmacies to purchase, yet they do not benefit from the PBM rebate. At the same time, PBMs reimburse pharmacies at lower rates for generics due to their placement on non-preferred formulary tiers. With PBMs retaining savings from brand-name drug rebates and offering minimal reimbursement for generics, pharmacies often lose money dispensing medications.

PBMs also steer patients away from independent pharmacies. Restrictions within PBM pharmacy networks limit which pharmacies patients can use, often excluding smaller, independent pharmacies. Oklahoma legislators attempted to address this issue with new regulations, but the law is being challenged in court.

Another harmful PBM tactic involves Direct and Indirect Remuneration fees. While some service and processing fees may be reasonable, clawback fees, performance-based fees, and audit fees often make it impossible for pharmacies to turn a profit. For example, if the copay for a drug is $15 but the drug is only $10 for the pharmacy to buy, the PBM will bill a pharmacy for the $5 profit to claw back the difference.

DIR fees are assessed long after the transaction, leaving pharmacies unaware of their actual financial losses. In 2020, audit fees cost pharmacies an average of $24,000. While the Centers for Medicare and Medicaid Services attempted to eliminate DIR fees in Medicare Part D, experts predict these fees will be shifted to the point of sale, and the change only applies to Medicare, not private insurance plans.

These tactics push independent pharmacies out of business, reducing patient access to medication and limiting consumer choice, particularly in rural areas and minority communities.

PBMs get away with these tactics because insurers, pharmacies, and drug manufacturers lack transparency regarding PBM fees and practices. Without knowing the actual costs and rebates ahead of time, these stakeholders cannot effectively negotiate or shop for better terms. This lack of competition allows PBMs to impose arbitrary and excessive fees and requirements without consequence.

However, Congress has the power to act. By implementing basic reporting requirements, PBMs could be forced to disclose their fees, rebates, formularies, and reimbursement structures. Increased transparency would enable insurers, pharmacies, and manufacturers to negotiate, ultimately reducing drug prices and protecting independent pharmacies from predatory PBM practices. 

Now is the time to shine a light on PBMs and demand reform before even more local pharmacies disappear for good.

Justin Leventhal is a senior policy analyst for the American Consumer Institute. He wrote this for InsideSources.com.

Reprinted with permission from The DC Journal – By Justin Leventhal

The opinions expressed by columnists are their own and do not necessarily represent the views of AMAC or AMAC Action.