Independent pharmacies say they’re being squeezed by shadowy middlemen tied to big health chains

For more than a decade, independent pharmacist Jay Patel has built a close and enduring relationship with his customers, who come to him for help in sickness and in health.

But now there are interlopers: Drug middlemen, companies known as pharmacy benefit managers (PBMs) that influence which medicines can be bought, where to buy them and at what cost.

Patel and other independent pharmacists say their businesses are threatened by the growing influence of these companies, tied to huge health care conglomerates. In a system that is opaque and complex, patients are steered to affiliated pharmacies, such as CVS and mail-order pharmacies, they say. Pharmacists face high fees and low reimbursement rates, so are unable to cover their costs.

That could put Patel — and other locally-owned pharmacists — out of business.

“I want to do what matters to the community. But how long can I sustain this?” said Patel, 48, who owns Savco Pharmacy in San Jose’s West San Carlos neighborhood. “We are at their mercy.”

The PBMs respond that critics base their conclusions on incomplete evidence. According to the trade organization Pharmaceutical Care Management Association, they protect consumers from high drug prices by negotiating for discounts, called rebates, from drug companies.

The disappearance of independent pharmacies could limit consumer choice and health care access — especially in low-income or rural communities.

On Oakland’s Telegraph Avenue, Selam Pharmacy owner Michael Gebru called PBMs “a big black box.” He said “They bill me whatever they want, and can reclaim it. That’s pretty scary. It’s a Wild West.”

In the coastal village of Point Reyes Station, tiny West Marin Pharmacy recently lost its contract with PBM company Express Scripts, used by insurer Cigna and others. Now residents covered by Cigna must get their prescriptions by mail or make a 20-mile drive to find another pharmacy.

“If any of us, our children and families are ill, suffering from fevers, vomiting, diarrhea or worse, we may be forced to drive an hour or more to San Rafael, Novato or Petaluma just to get a prescription filled,” worried pharmacy customer Christine Cordaro of Inverness Park.

PBMs were created in the 1960s as a way to process prescription drug claims. They are responsible for paying pharmacies on behalf of insurance companies, employers and the government. The three largest companies are run by CVS Health, Cigna and UnitedHealth Group, which oversee prescriptions for more than 200 million Americans.

In 2012, the year San Jose pharmacist Patel bought his modest shop, PBMs processed fewer than 50% of prescriptions.

A series of mergers in 2018 created the current system, where health care conglomerates are vertically integrated — owning the insurer, the PBM and pharmacy. The giant health insurer Aetna combined with drug retailer CVS. Another large insurer, Cigna, bought Express Scripts. UnitedHealth built its own PBM.  All three companies operate mail-order pharmacies.

“It’s like they’re taking the money from one pocket, and putting it into the other,” said Zsuzsanna Biran, pharmacist owner of West Marin Pharmacy.

Despite consumer opposition, the FTC approved the mergers.  But now there are concerns about PBMs’ economic leverage. The smaller, locally owned pharmacies feel muscled out of the market.

CVS calls the plight of independent pharmacies “overblown.”

“Contrary to much of the independent pharmacy lobby’s rhetoric, there is no crisis facing independent pharmacies,” CVS said in a statement.

“What the independent pharmacy lobby has long coveted is a world without managed pricing or the competitive pressure from PBM negotiations on behalf of payer clients and consumers,” CVS said.

According to Express Scripts, “If we didn’t provide significant value for our thousands of partners, we wouldn’t exist.”

The PBMs work by negotiating rebates on the “sticker price” of medicines. Some of these savings are shared with insurers and employers.  But a slice is kept by the PBMs. This is enormously profitable.

There is evidence of anticompetitive behavior that illegally distorts the market, hurting consumers and threatening the survival of independent pharmacies, according to new reports by the U.S. Federal Trade Commission and a House Committee on Oversight and Accountability investigation.

PBMs steer patients toward pricier drugs, with “formularies” of preferred medicines that discourage use of lower-priced alternatives, according to the reports, released last month. Because these high-priced drugs command a greater rebate, there’s more profit.

They also sometimes restrict patients’ access to mail-order deliveries, which they own. This cuts out the role of the local pharmacy.

Independent pharmacies say they’re saddled with unnecessary extra fees. When he started his business in 2012, Patel paid $15,000 to $20,000 in PBM fees; this year, his fees could surpass $110,000.

High fees and low reimbursement may discourage pharmacists from filling a prescription. If he loses money on a prescription, “I have two options,” said Patel. “Take the loss, or tell the patient that I cannot fill it.”

“With lower prescription reimbursements in one corner and higher back-end fees in the other, many community pharmacists are thinking about throwing in the towel,”  according to the National Community Pharmacists Association, which represents more than 19,400 independent U.S. pharmacies.

Nearly one-third of independent pharmacy owners may close their stores this year, it predicted.

But in Sacramento and other state capitals, lawmakers are taking a tougher look.

State Sen. Scott Wiener has authored legislation, Senate Bill 966, that would impose new rules on PBMs, better regulating the companies. It would require PBMs to be licensed with the California State Board of Pharmacy and to pass down drug rebates to consumers.

Meanwhile, Patel takes joy in things that don’t cost money — recognizing customers’ names and faces, making birthday phone calls and reminding them to be immunized. Once he provided a cane, for free, to a customer with a gimpy leg.

And there are rewards that are priceless, such as the gifts of fruit, chocolate and home-baked cookies from grateful customers.

“He’s the best,” said customer Rob Souza, picking up a prescription for an ailing wife. “He’s like a small-town pharmacist, always working things out.”