Vertical integration is admirable when it results in efficiencies of production that in the end benefit the consumer. But the federal government has set up an opaque healthcare system with unintended perverse incentives for health insurance firms to vertically integrate–where the firms own pharmacies, pharmacy benefit managers (P.B.M.s), hospitals, and doctors practices. Reimbursement rates for drugs are set by P.B.M.s. So the insurance company’s in-house P.B.M. reimburses its in-house pharmacy generously, but reimburses outside independent pharmacies stingily–often so stingily that the outside independent pharmacies go bankrupt, increasing the customer flow to the insurance company’s in-house pharmacy. Consumers do not benefit.
I mainly blame the government. But I do not praise the insurance firms. Libertarian philosopher Robert Nozick in Anarchy, State, and Utopia argued that profit maximization was ethical and served the common good, as long as it was done subject to ethical side-constraints. The three big health insurance firms, and especially United Health, have NOT set a conspicuous example of following Nozick’s advice.
What a pitiful, frustrating, inefficient, unfair mess.
(p. D3) The small-town drugstore closed for the last time on a clear and chilly afternoon in February. Jon Jacobs, who owned Yough Valley Pharmacy, hugged his employees goodbye. He cleared the shelves and packed pill bottles into plastic bins.
Mr. Jacobs, a 70-year-old pharmacist, had spent more than half his life building his drugstore into a bedrock of Confluence, Pa., a rural community of roughly 1,000 people. Now the town was losing its only health care provider.
Obscure but powerful health care middlemen — companies known as pharmacy benefit managers, or P.B.M.s — had destroyed his business.
This has been happening all over the country, a New York Times investigation found. P.B.M.s, which employers and government programs hire to oversee prescription drug benefits, have been systematically underpaying small pharmacies, helping to drive hundreds out of business.
The pattern is benefiting the largest P.B.M.s, whose parent companies run their own competing pharmacies. When local drugstores fold, the benefit managers often scoop up their customers, according to dozens of patients and pharmacists.
The benefit managers’ power comes from two main sources. First, the three biggest players — CVS Caremark, Express Scripts and Optum Rx — collectively process roughly 80 percent of prescriptions in the United States. Second, they determine how much drugstores are reimbursed for medications that they provide to patients.
Pharmacies buy those drugs from wholesalers, in the hope that P.B.M.s will reimburse them at a profit when the medications are provided to patients. But the largest benefit managers have strong incentives to set those rates as low as possible. A key reason: They make money in part by charging employers more for certain drugs than what the P.B.M.s pay pharmacies for them.
P.B.M.s frequently pay the pharmacies at rates that do not cover the costs of the drugs, according to more than 100 pharmacists around the country and dozens of examples of insurance paperwork and legal documents.
To take just one example: For a month’s supply of the blood thinner Eliquis, several pharmacists in different states said, the big three P.B.M.s routinely paid them as much as $100 less than what it cost the pharmacies to buy the medication from a wholesaler.
By contrast, the P.B.M.s sometimes pay their own pharmacies more than what they pay local drugstores for the same medications.
Independent pharmacies are powerless to fight back. As the unprofitable transactions pile up, some are unable to stay afloat.
. . .
(p. 26) The evidence that P.B.M.s pay their own pharmacies more than independent drugstores for the same medications is not just anecdotal. One study, paid for by a pharmacy association, found that the markup that P.B.M.s were charging on brand-name drugs was 35 times higher when the drugs were sold through their own mail-order pharmacies than when the drugs were sold by independent drugstores.
Government studies have identified a similar phenomenon.
Those extra costs are borne by taxpayers or employers and can be passed on to patients in the form of higher premiums — at odds with the benefit managers’ mandate of lowering drug costs.
. . .
(p. 27) In Mississippi, . . ., the state board that regulates pharmacies said this month that Optum Rx paid independent pharmacies less than it paid itself to dispense generic drugs. On a single day in 2022, Optum Rx paid itself 22 times what it paid six independent drugstores to fill generic Prilosec, a heartburn medication. Optum Rx declined to comment on the audit.
For the full story see:
(Note: ellipses, and bracketed date, added.)
(Note: the online version of the story has the date Oct. 19, 2024, and has the title “The Powerful Companies Driving Local Drugstores Out of Business.” Where the wording of the two versions differs (sometimes considerably), the quotes above follow the online version.)
The academic article co-authored by Evans is: