Why are pharmacies getting worse?

Bennett Tomlin describes how the pharmacy duopoly of CVS and Walgreens has led to consistently worse experiences for customers, and how their anti-competitive behavior can be curtailed.

Read more: Why are pharmacies getting worse?

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00:00:00:08 - 00:00:27:02
Unknown
Have you gone to the pharmacy recently? Was it an enjoyable experience? Did you feel like they had adequate staff for the tasks they needed to complete? Were you served quickly, professionally and painlessly? Or have you had to wait an incredibly long lines? Deal with endless insurance issues and just generally have an incredibly frustrating experience? For me, it's the latter.

00:00:27:29 - 00:00:50:16
Unknown
Now, first things first. It's not the fault the pharmacy technicians and pharmacists at your local store. As a former pharmacy tech myself, I can tell you they are trying to serve all of you. There is just not enough of them. You may even be tempted to cite staffing issues or COVID19 as the reason that these pharmacies are having troubles.

00:00:51:04 - 00:01:16:11
Unknown
To the first point, I'll say. People work for money. If you need more people to work for you, then give them more money or otherwise make the job more desirable. To the second point, I'll say you are correct that COVID19 has added tons of new job responsibilities and to these already overworked individuals, including managing the COVID 19 tests and the vaccinations.

00:01:16:27 - 00:01:39:07
Unknown
But COVID 19 has also been cited in both Walgreens and CVS, earning calls as a source of new revenue for them. And now they're having to warn investors that their profits will slow because people are not getting enough COVID vaccines anymore. The people you want to blame for this awful experience are not the pharmacists and are not the pharmacy techs.

00:01:39:16 - 00:02:14:20
Unknown
They're these people. Also these people. Honestly, these people, too. Also, all these people. Health care in the United States is a multifaceted failure, and there are few places that really hammer that home, like the pharmacy. So let's go over how all of these people are to blame for your experience. CVS and Walgreens together control a massive portion of the U.S. retail pharmacy market, especially with Walgreens purchasing Rite Aid several years ago and CVS purchasing target pharmacies several years ago.

00:02:14:29 - 00:02:49:04
Unknown
They have continued to grow and to control more and more of the industry. But CVS and Walgreens are not just pharmacies. Of course not. Both CVS and Walgreens also have pharmacy benefit managers or PBMs. PBMs are the entities that manage the pharmacy benefit program. Normally for corporations, unions manage health care programs. If you look closely at your medical insurance card, you'll probably even see another logo, perhaps next to the BIN or RxPCN number that will indicate who your PBM actually is.

00:02:50:00 - 00:03:11:05
Unknown
Not that you get any real choice, and even your employer who is picking the plan likely struggles to get any real visibility into how the plan is performing. Now, I should pause for a second here and give you full disclosure that I used to work as the lead data scientist and developer for a consulting firm who created algorithms and systems to detect and audit fraud for PBMs.

00:03:11:17 - 00:03:43:28
Unknown
I'm not sharing any privileged information or insights from former clients, but did want to let you all know that this is what I used to do. So how did PBMs work and why did they exist? PBM started in the 1960s to help insurance companies manage pharmacy benefit programs as those started becoming a thing. Since then, they've started to grow more and more important role in deciding what pharmacies you can use by contracting with pharmacy networks, running their own pharmacies, and even trying to decide what drugs you should be able to get.

00:03:44:19 - 00:04:12:00
Unknown
Have you ever had a drug you desperately needed that went through several rounds of prior approval or kept getting denied? Well, you can thank your PBMs, valiant efforts to keep health care costs contained. Yeah, the clear evidence is that y'all are killing that. And yes, they do have their own pharmacies. Many PBMs now run their own mail order pharmacies where they try to direct as many of their drugs as possible.

00:04:12:01 - 00:04:44:18
Unknown
Some also run their own specialty pharmacies so they can keep those really high ticket prescriptions. I mean, of course, they're not steering patients that would be anti-competitive. What I mean is that they can provide the most competitive prices possible to patients. Yeah, sure. So how do PBMs make their money? Well, there's broadly two different models. The traditional model is one where there is a spread between what the PBM gives the pharmacy to fill the drug and what they charge the plan, whoever contracted with them for the fill.

00:04:45:01 - 00:05:12:13
Unknown
So if they give the pharmacy $5 to fill the drug because of the rebates or whatever they've negotiated and they give and they charge the plan, $10 they make that gap between those two numbers. The other model is called pass through with the discounts that they're able to negotiate are entirely passed along to patients in the plan, and they charge a fee for the plan to use their services generally on a per claim basis.

00:05:13:19 - 00:05:41:26
Unknown
That, of course, is not the full story. There's a couple of other smaller models, but the real trick is that many of the pass through providers will also have traditional accounts and may allow pharmacies to charge a higher fee schedule for pass through claims than for traditional claims. This is because when the PBM contracts with the pharmacy, that contract will often require a certain average cost for a drug.

00:05:42:04 - 00:06:02:24
Unknown
When looking at the year in total. So if on your traditional claims you have a really low amount the pharmacy can charge and then on your pass through claims you have a really high amount the pharmacy can charge on average. That's going to come out to the number you need to. And on the traditional one, you're making that spread right.

00:06:02:24 - 00:06:22:11
Unknown
And so you want that to be as low as possible. And on the pass through, you get the claim admin fee no matter what it costs. And so it doesn't really matter for you. The fun part of this is that if you structured these fee schedules well, which again are very often confidential, you can end up passing along basically none of the savings to the people you're supposed to.

00:06:22:19 - 00:06:48:14
Unknown
This also creates a perverse incentive for PBMs to not deal with fraud. If they're a traditional PBM and they still get to collect the spread on that fraudulent claim, and if you're a pass through PBM, then you still get to charge the claim admin fee to the plan. The only entities who can pressure PBMs on fraud are really plan purchasers, and PBMs often make it challenging for them to get more insight into how to understand that or what that means.

00:06:48:25 - 00:07:23:03
Unknown
According to pharmacy benefit managers, brand name drug prices and patient cost sharing from the Annals of Internal Medicine. As of 2018 three PBMs express Scripts owned by Cigna, CVS Caremark and Optumrx owned by UnitedHealthcare Control 80% of the pbm market. Walgreens not to be left out also owns AllianceRx Prime Walgreens a corporate mishmash of the Prime Therapeutics PBM and the AllianceRx Walgreens mail order and specialty pharmacies that works mostly with Blue Cross and Blue Shield.

00:07:24:02 - 00:07:45:21
Unknown
CVS also recently purchased Aetna, the insurance company, because they were worried there were some parts of your body they may have left currently and monetized and could not stand that thought. Walgreens, of course, is going out and purchasing health care providers like VillageMD and partnering with City MD because they also want to control the doctor in the prescribing relationship.

00:07:46:10 - 00:08:14:12
Unknown
Both Walgreens and CVS are also making aggressive expansion into home health care, and CVS is now looking to purchase Signify Health, a nationwide clinician network with about 10,000 providers. CVS and Walgreens want to own your health and and and that's why pharmacies keep getting worse. They each have continued to grow, consuming everything in front of them until they have entered effectively unassailable market positions.

00:08:15:04 - 00:08:37:19
Unknown
There are literally investors who argue that the reason you should invest in CVS and Walgreens is because they are an effective duopoly. And so their moat gives them an advantage over new entrants into this market. They now no longer need to provide quality service to you, the patient, because you, the patient are much more like a unit moving through their value manufacturing pipeline.

00:08:37:19 - 00:09:01:09
Unknown
Then you are a customer of them. Think about it. You probably did not choose your pharmacy. You figured out which one was in network for your PBM and told your physician to send the prescriptions there. The customers for pharmacy chains are not really the patients. It's the PBMs and insurance companies. They're contracting with. Now, perhaps you're seeing how problematic it becomes when pharmacies buy PBMs.

00:09:01:16 - 00:09:24:08
Unknown
And when PBMs buy pharmacies, they are incentivized to steer patients to themselves to maximize their profits. So now that they have bought up, most of their competitors, purchased the PBMs, purchased the doctors, purchased the insurers. They can let the wait times get longer and longer and close more and more stores and leave more and more pharmacy islands. Because what the fuck are you going to do?

00:09:24:17 - 00:09:43:07
Unknown
Not get your medicine. You need it. So you're going to suck it up and deal with it because you don't get a choice. Now you may be listening and going. Bennett It sure sounds like if these companies are that insulated from market forces and they should be broken up into you convenient person. I just made up who is providing me with a segue.

00:09:43:12 - 00:10:05:11
Unknown
I would like to say, Oh my God, you think the government brings up monopolies now? That is hilarious. You may remember that I said this is partially the fault of these people. Well, these people are the federal Trade Commission or FTC or the US regulatory body in charge of dealing with monopolies and anti-competitive practices. And they're effectively worthless.

00:10:06:06 - 00:10:28:12
Unknown
Ever since the Chicago School of Economics became more and more influential in political circles, especially starting in 1970s, we have seen antitrust enforcement continue to fall. We have lost the political will to handle these types of behaviors. And as a byproduct, we have allowed these massive corporations to continue to gradually corrupt more and more of our political process.

00:10:29:10 - 00:10:54:01
Unknown
34 of Walgreens, 43 lobbyists have previously held government jobs. CVS is an even more active lobbier, and 29 out of 44 of their lobbyists have previously held government jobs. CVS is also a big fan of dark money donations, including $5 million to the innocuous sounding Partnership for America's Health Care Future, which is a group that really wants to stop Medicare for All.

00:10:54:24 - 00:11:16:27
Unknown
The refrain from the government has consistently been that breaking up corporations is a very extreme tactic, with many arguing. Breaking them up would be like unscrambling eggs and pointing to how badly they had fucked up the AT&T and Standard Oil breakups as proof they should not be trusted. Luckily, there are those who recognize that this is not a very compelling argument.

00:11:17:15 - 00:11:44:01
Unknown
Rory Van Loo at Boston University wrote in Cornell Law Review an article entitled In Defense of Breakups Administering a Radical Remedy, in which they argue that the earlier studies that led to that conclusion we methodological disaster. And they point out that unlike behavior remedies you forbid anti-competitive behavior, that structural interventions like breakups have always been favored in theory. The reality is that they were just not often used.

00:11:44:18 - 00:12:13:26
Unknown
Eventually they end with an analogy that I think is central to understanding this issue. Perhaps a better analogy for antitrust than unscrambling eggs is that controlled burns helped reinvigorate forests, allowing ecosystems to regenerate and emerge more resilient than before. Thankfully, Rory isn't the only one. John Kwoka and Thomas Valletti argued in unscrambling the eggs, breaking up, consummated mergers in dominant firms in 2021 in industrial and corporate change.

00:12:14:09 - 00:12:40:19
Unknown
They argued that these firms that have undergone many mergers to grow to this size will often retain certain natural organizational break lines that make them relatively easy to break up. Consider an example Aetna was purchased by CVS, but it still largely operates independently inside the corporate structure of CVS. And so you could conceivably break them up and spin it out without fundamentally destroying either firm.

00:12:40:29 - 00:13:06:09
Unknown
And that spinning them out like this promotes competition. So why is this not happening? Broadly, we lack the political will to undertake this type of action, pursuing antitrust actions, going after these large corporations as a politician does not just threaten your campaign funding, but also allows your opponent to paint you as someone who is anti-business or who wants to punish success.

00:13:06:24 - 00:13:33:27
Unknown
Combine that broad the increasingly apathetic regulators looking for jobs after they're done regulating, and you end up with a revolving door that prevents real change from occurring. That's not to say there is no hope. Lina Khan, the current chairwoman for the FTC, has taken a much more aggressive stance reviewing mergers and threatening breakups, even specifically citing the CVS purchase of Signify Health as a merger that might be anti-competitive.

00:13:34:21 - 00:14:01:03
Unknown
But broadly, regulators and lawmakers are reactive and respond to the pressures put on them. If we want to start seeing a world where these companies are forced to actually respond to competitive pressures, then we need to pressure the people with power to reshape the market. So that's possible. We need to refuse to accept the excuses of lawmakers and regulators who act as though they are impotent, despite being imbued with the ability to take this type of action.

00:14:01:14 - 00:14:16:19
Unknown
We need to demand that they take actions that represent our interests, and that means finding ways to disconnect politicians from the money piles that come from the corporations that support them. Things can be better, but everyone needs to demand better.

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