The United States has more independent pharmacies than it does towns. Today, these small businesses face heightened competition from retail chains and mail-order websites. Industry representatives are pushing Congress to raise regulatory barriers to ensure that the mom-and-pop outlets remain profitable. Doing so will make drugs more expensive, with little evidence that it is necessary to ensure convenient access to care.
The market for prescription drugs has boomed in recent years. Between 1990 and 2022, U.S. prescription-drug sales soared from $40 billion to $406 billion. The creation of new drugs drove the surge, with the 15 best-selling drugs of all time each being released in or after 1996.
As costly new drugs became increasingly important to patient care, they were increasingly paid for through insurance, and Congress added prescription-drug coverage to Medicare in 2006. As a result, the overall share of drug expenditures borne out-of-pocket by Americans fell from 57 percent in 1990 to 14 percent in 2022. Shifting payment responsibility from individuals to insurers transformed the industry; insurance coverage is now cited as the most common reason for patients’ choice of pharmacy (64 percent), greatly exceeding the concern for pharmacists’ knowledge and input (29 percent).
Today, insurers, employers, and Medicare rely on pharmacy benefit managers to purchase drugs, administer benefits, process claims, and contract with pharmacy networks. PBMs have increasingly integrated with pharmacies to cut costs by negotiating rebates and discounts with manufacturers. The three largest PBMs—CVS Caremark, Cigna Express Scripts, and UnitedHealthcare’s Optum—now manage 75 percent of all prescriptions.
Other pharmacies have found it hard to compete. Rite Aid, the largest drugstore chain in the late 1990s, recently filed for bankruptcy, largely because it lacked ties to a major PBM—and thus, negotiating clout with drug manufacturers. This same vulnerability means that grocery-store pharmacies have been declining as well. Similarly, the number of independent pharmacies has halved since 1980, and they accounted for only 12 percent of prescription-drug sales in 2021.
To push back, the National Community Pharmacists Association, which represents 21,000 independently owned pharmacies, has led a campaign against PBM attempts to steer patients to preferred pharmacies. It has enjoyed substantial support in Congress from members of both parties, including Senator James Lankford (R-OK), who has argued that PBMs are “killing our rural pharmacies.”
In 2019, Lankford’s home state enacted legislation to strengthen pharmacists’ bargaining position with PBMs. Oklahoma required PBMs to design networks such that 90 percent of the state’s population would be within five miles of a covered pharmacy, forced PBMs to compensate pharmacies equally rather than with individually negotiated fees, and prohibited PBMs from offering discounts to nudge patients to use preferred pharmacies.
Oklahoma is not alone. Over the past six years, the 50 states cumulatively have enacted 151 laws regulating PBMs. But states, like Maine, that have restricted PBMs’ ability to use discounts to steer patients to in-network pharmacies, saw significantly higher drug costs than states that didn’t. This effect isn’t as big as it could have been, since most employer-sponsored insurance is exempt from state regulation, and Medicare’s program rules prohibit states from passing regulations that interfere with PBMs’ drug procurement. While a December 2020 Supreme Court ruling expanded states’ ability to regulate the PBMs used by employer-sponsored plans, it’s unclear whether the ruling allows states to mandate broad pharmacy networks.
Congress is considering legislation designed to restrict similarly the ability of Medicare drug plans to steer patients to preferred pharmacies. The bipartisan Modernizing and Ensuring PBM Accountability Act recently passed the Senate Finance Committee by a vote of 26 to 1, and the House is preparing companion bills.
But the problem of inadequate pharmacy-services access, which the Senate bill is intended to mitigate, has been greatly exaggerated. Ninety-seven percent of the U.S. population lives within 10 miles of a pharmacy. As prescription-drug spending boomed from 2003 to 2021, the number of independent pharmacies actually grew by 15 percent. Whatever deficits in pharmacy access exist in rural areas are unlikely to be solved by inflating pharmacy profits across the board, as 91 percent of them are located outside rural areas.
Market competition is already reducing costs and improving access to care. Mail order accounted for 39 percent of drug sales in 2021, and Amazon has made online pharmacy a major focus of its growth efforts. Recent technological improvements have enabled automatic prescription filling, lowering costs and reducing dispensing errors. The combination of brick-and-mortar locations with remote supervision by pharmacists can also greatly improve access to care: states with fewer regulatory restrictions on the development of telepharmacy saw the share of their population living in a “pharmacy desert” significantly reduced.
Pharmacy protectionism is therefore unlikely to do much for patients, though the responsiveness of members of Congress to an interest group prominently located in every one of their districts should be no surprise.
Photo: CHIH CHIEH HSIAO/E+ via Getty Images