How Insurer and Benefit Manager Mergers Squeeze Out Smaller Pharmacies

By | March 12, 2018

Over 20 years, Brian Komoto built a thriving pharmacy in California’s Central Valley. Each day, his nurses would travel the vast agricultural region’s roads to help hepatitis C patients take a grueling regimen of shots.

Then, in 2016, 20 percent of Komoto’s business vanished, practically overnight. The insurer Centene Corp. purchased the health plan that covered his patients — many of them Hispanic farm workers who had developed a level of trust with Komoto’s traveling nurses. Centene had its own mail-order pharmacy, and it told the patients to go there instead, he said.

Using tactics that have drawn the attention of federal regulators and attracted lawsuits, drug plans and insurers have boxed out their smaller partners so they can take the business for themselves, independent pharmacies say.

“There was nothing we could do,” Komoto said of Centene steering his patients away. “It’s not like there were hoops we didn’t meet or criteria we didn’t meet. It appears they just wanted the business.” Other health plans put similar pressure on Komoto, and he froze hiring to cut down on headcount.

What happened to Komoto’s business shows the growing pressure on small operators in the health-care industry, who are seeing their profits squeezed by a tightly interwoven web of distributors, retailers and health-plan administrators. As patient demand lower costs, bigger players such as Centene can use their size and connections to box out independents.

Squeezed Out

The drug supply chain is being drawn even more taut, and the power of the big players even greater. Last week, insurer Cigna Corp. said it would buy Express Scripts Holding Co., the U.S.’s biggest stand-alone pharmacy benefit manager, or PBM. In December, drugstore chain and PBM giant CVS Health Corp. said it would buy insurer Aetna Inc.

Health plans and benefit managers say their centralized pharmacies save money and do a better job at keeping patients on complex drug regimens. For example, both CVS and Express Scripts have pharmacists that specialize in specific diseases.

Centene confirmed that it asked Komoto’s patients to switch, though said it was flexible with the transition so as not to impact their care.

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The interest by insurers and PBMs in the pharmacy business has risen in parallel with the growth of high-cost “specialty” medicines that need delicate handling or careful counseling of patients. Handling those drugs can be a profitable sideline.

At CVS’s drug benefit unit, 60 percent of specialty prescriptions are filled through CVS’s own specialty pharmacy, CVS Chief Operating Officer Jonathan Roberts said in a Feb. 8 conference call. It’s “the highest and fastest growing part of the pharmacy benefit,” he said.

More Pressure

Komoto said that he also lost business to CVS. And a benefit manager now owned by UnitedHealth Group Inc. told him that to stay in its network, he would need a broad-reaching accreditation that would have cost hundreds of thousands of dollars.

“Gradually we have been excluded from more and more PBM networks for specialty–and for no reason other than they wanted that market share,” Komoto said.

It wasn’t always this way. The specialty pharmacy business began to take off in the 1990s. In 1996, a Pittsburgh-area pharmacy landed an exclusive contract with Merck & Co. to distribute a breakthrough HIV drug then in short supply.

The pharmacy took a 37 percent markup, according to news reports at the time. Soon, specialty pharmacies were popping up everywhere, and big drug benefit managers gobbled up some of the most successful ones.

The markups are in the single digits now, Komoto said, but specialty pharmacies still get a spread on costly drugs, and may also get fees for their services or for selling data.

Market Concentration

The three largest pharmacy benefit managers — CVS, Express Scripts and UnitedHealth — control more than 70 percent of the PBM market, according to data from Drug Channels Institute, an industry research firm. They now also control more than half the $138 billion market for specialty drug prescriptions, according to the institute.

“It’s hard to imagine that the market could be less competitive than it is today,” said TJ Parker, founder of the online pharmacy startup PillPack, referring to the home delivery and mail-order services that are how most patients get specialty drugs.

Drug benefit managers also say that it’s their employer and insurance company clients that choose the exclusive arrangements, and they always have the option to include more pharmacies if they want.

Express Scripts’ two-story mail order pharmacy in an office park 20 miles north of Pittsburgh specializes in infused drugs for pulmonary hypertension and other rare diseases. It stocks almost $300 million of inventory, much of it inside a 100-foot-long walk-in refrigerator. The drugs inside can cost $125,000 per vial.

On the ground floor one recent February morning, dozens of technicians in short-sleeve shirts and khaki pants gathered infused drugs, syringes, tubes, drug pumps, and other supplies on rolling metal carts. Pharmacists checked the orders and packers wrapped them in gel packs and insulated boxes and send them on a conveyor belt to UPS trucks headed for the airport.

In the more serene call center upstairs, dozens of patient representatives were on phone dealing verifying insurance coverage, coordinating authorizations, and arranging financial aid.

“We try to avoid scripted types of calls. We want patients to be comfortable,” says Mickey Law, a 25-year-industry-veteran who runs the facility.

Fewer Options

But when problems arise, patients locked into a single pharmacy find they have nowhere to go.

Jodi Ruehling, a school librarian in Massillon, Ohio, said her 6th-grade daughter suffered worsening hearing damage from a rare autoimmune disorder in 2016 after CVS’s specialty pharmacy was a week late in shipping a crucial anti-inflammatory medicine. Ruehling says she started calling CVS a month ahead of time to insure that all the authorizations were in place, but it didn’t help.

“It was always a runaround,” she said. “They kept telling me it was the doctor’s fault and the doctor hadn’t sent the prescription in.”

CVS’s takes “incredibly seriously” the importance of getting patients their medicines on schedule every time, said Alan Lotvin, CVS executive vice president for specialty pharmacy. When a problem occurs, “we do everything possible to make it right” and make sure it doesn’t happen again, he said.

In Ruehling’s case, CVS in late 2016 appointed a single point person to handle her calls and the service improved, she said.

Lawsuits

Some pharmacists have sued to get better access to the PBM networks.

In Arkansas, UnitedHealth’s PBM refused for 16 months to allow AllCare Specialty Pharmacy into the specialty pharmacy network it operated for a local insurer, according to a lawsuit AllCare filed against the PBM in 2016 accusing it of “deceptive and unconscionable” tactics.

Even though AllCare was already accredited, the PBM made AllCare get a second certification, which took nine months, the company said in the lawsuit. Then came new demands: it had to develop a program to monitor hepatitis C patients. AllCare submitted documents proving it had such a program, but was still turned down until it hired a lawyer to press its claim.

The lawsuit is on hold while the parties negotiate a settlement, according to court filings. Through its lawyer, AllCare declined to comment. UnitedHealth declined to comment.

The U.S. government has begun to look into whether PBMs and health plans were blocking access to some pharmacies.

In November, the Centers for Medicare and Medicaid Services said it was concerned that health plans were manipulating the rules “in a way that inappropriately limits dispensing of specialty drugs to certain pharmacies.” It proposed rules to stop some of the practices in Medicare.

The Pharmaceutical Care Management Association, which represents PBMs, said in a in a January letter that the CMS proposal would undermine a “competitive and well-functioning” system and make it harder to keep drug costs down.

Patients with serious diseases should have a choice, says Jerry Flanagan, a lawyer at Consumer Watchdog. He has filed a lawsuit against CVS on behalf of HIV patients who claim the PBM’s requirements violate their privacy and access to trusted pharmacists. CVS said the the suit is without merit.

“If mail-order specialty pharmacies provide such great advantages, why not let patients choose for themselves?” Flanagan said.

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