Independent pharmacies in Kentucky have been closing by the bunch in recent years. It’s not for lack of people needing prescriptions or choosing to get their medicine at chain stores, though.
Instead, the small business owners say their financial woes are out of their control – and in the hands of pharmacy benefit managers, one of the many kinds of middlemen in the medicinal world.
A new bill before the Kentucky Senate aims to give pharmacies more transparency and agency when it comes to doing commercial prescription business with pharmacy benefit managers or PBMs.
When a locally owned pharmacy fills a prescription, how much the business gets from insurance companies and what fees will be paid to fill it are tabulated and decided by an unpredictable and complicated mix of entities, including PBMs.
PBMs are the go-betweens for pharmacies and insurance and drug companies. The fees PBMs collect, in addition to Direct and Indirect Remuneration (DIR) fees (often referred to as clawbacks) are often unpredictable for pharmacies, usually levied months after a prescription is filled and aren’t broken down by prescription. DIR fees are governed by the Centers for Medicare and Medicaid Services and are the result of a loophole in Medicare regulations.
To make matters worse, PBMs are often vertically integrated with larger medical businesses like CVS Caremark, ExpressScripts and OptumRX. This allows some of independent pharmacies’ biggest competitors to dictate terms in the market, leading to smaller profits, more fees and a bigger risk of going out of business.
Senate Bill 188 – introduced by Republican Sen. Max Wise of Campbellsville late last week – would help give Kentuckians better access to prescription medication and aid struggling hometown pharmacies across the state.
Wise wants to look “at best practices that are fair, and [make] the PBMs play by the rules.” This includes calling for minimum dispensing fees for prescription medications purchased commercially, fair pricing of drugs and services for pharmacies not affiliated with PBMs and defining several industry terms previously not statutorily defined, among other changes that he feels will make the industry more competitive and consumer-friendly.
The GOP lawmaker led the charge with a similar effort in 2020 that cut the corporate middlemen out of prescription drug business for Kentucky’s Medicaid program. The Cabinet for Health and Family Services reported in September that that bill had already helped save the state nearly $283 million.
Now, he’s hoping this bill – which he said is based on similar legislation in Tennessee and West Virginia – will find success, too. Wise also wants to stop PBMs – which he likened to “a slippery snake” – from capitalizing on policy gaps for economic gain.
“If we had $282 million in Medicaid savings over those two years – that's what we did with Senate Bill 50 – I feel very confident we can find similar types of savings,” Wise said. “This bill will continue to try to block any loophole the PBMs are trying to fight to get through. Eventually, you know, they just find the way to get through and, ultimately, it's affecting the small businesses and it's affecting the patients out there.”
Doing business 'underwater'
The legislation comes too late for some of the state’s pharmacies. According to data furnished by the Kentucky Independent Pharmacy Alliance (KIPA), more than 60 independent pharmacies have closed in recent years.
Rosemary Smith co-founded KIPA – which represents more than 600 locally or regionally owned pharmacy businesses in the state – alongside her husband, Luther. Together, the pair have been in the pharmaceutical industry for more than 50 years and run six pharmacies spread across eastern Kentucky.
She said the pharmacy business has experienced “sharp” changes in the past decade.
“[In] the pharmacy business, we're based on the cost of our drugs. We have to buy the drugs from our wholesalers and then we’re reimbursed a professional dispensing fee. And so together, that was the amount of money that we would get for a prescription,” Smith said. “That figure has dwindled and dwindled because the PBMs are controlling what we're getting reimbursed. Often we're filling prescriptions ‘underwater’ is what we call it, or under what the cost of doing business is.”
Smith said the “clawing back” of DIR fees can be crippling for independent pharmacies, which she said filled more than half of all prescriptions statewide before the closures and operated in all but one of the state’s 120 counties.
“Three, four, maybe six months later, when we get paid back for different prescriptions, at the bottom of our remittance will be something called a DIR fee and it's a negative figure and there's no way to tie that back to the prescription,” she said. “We don't know which prescription it's tied to and it's huge amounts of money. We have no idea when that's going to come out. How do you manage a business like that?”
The pharmacy co-owner said Jordan Drug – the independent pharmacy group owned by Smith and her husband – paid around $807,000 in DIR fees in 2021, but that that figure had increased to over $1.5 million in 2023.
For 2023 prescriptions, Smith estimates that more than $203 million in DIR fees will be levied against the state’s independent pharmacies.
She said clawbacks from the previous six months have combined with a Jan. 1 change that resulted in DIR fees being collected up front to create a “perfect storm” for independent pharmacies.
“They're trying to force us out of business, independent pharmacies, and it's working,” Smith said.
Marshall Davis has been running Davis Drugs in western Kentucky for more than 40 years, a business that has expanded over time to include four stores. He said operating a pharmacy business in Kentucky now is like trying to pay household bills without knowing how much a job was going to pay. Davis supports legislation that would give transparency to “abstract and nebulous” DIR fees.
“There's so much vertical integration now where insurance companies own PBMs, which own pharmacies, which own mail-order houses, and so the economics of their organization potentially can get distorted,” Davis said. “From my experience, the trend is for them to maximize their profit for their stockholders … which is the capitalist way, but at the same time there needs to be some safeguards there to protect patients and protect other entities.”
Davis said PBMs helped “camouflaged what was going on” in the financial ledgers of pharmacies across the state, and directly led to many independent pharmacies going out of business.
“It hasn't made me panic yet, but I know a lot of stores have. They saw what was coming and they just decided it wasn't worth fighting anymore. We haven't had much help from anyone,” he said. “I guess we blindly signed a lot of these contracts, when maybe we shouldn't have. We thought there was more margin and a lot of these prescriptions and there actually was.”
Jonathan Powers co-owns Maiden Drug Company in southeastern Kentucky with his brother. He said in a letter supplied by KIPA that this shift in the industry has had “devastating effects” on their business, which has operated in the Williamsburg community for more than 75 years.
“We follow in the footsteps of several great pharmacists and families who have guided this pharmacy to where it is today. Many of them have passed but I know they would want this drugstore to continue,” he wrote. “I would consider myself a failure if this icon was forced to close under our ownership. Unless serious changes occur with PBM practices this could be a possibility.”
Powers is not alone in his worries. Dozens of independent pharmacists have shared their stories with Smith and KIPA. Many of those owners – as reported by the Lexington Herald-Leader – are being forced into tough choices between dipping into personal savings, cutting costs or folding the business.
Smith warned in a November letter to Centers for Medicare and Medicaid Services Administrator Chiquita Brooks-LaSure that, without intervention on their part, patients who “depend on independent pharmacies across the country in rural and underserved areas” could lose vital access to care.
Wise hopes he can help ease some of those concerns.
“Ultimately, I'm for the Commonwealth of Kentucky, I'm for the patient and I'm also for the small business owner,” he said. “[I want] to make sure that we're not going to continue to see closures of pharmacies across the Commonwealth.”
SB188 was sent to the Kentucky Senate’s Banking & Insurance Committee on Feb. 12.
