Small pharmacies are under financial pressure just when they’re needed most: ‘The math doesn’t work’

Richard Ost has run Philadelphia Pharmacy in the city’s Kensington neighborhood since 1983. It’s the one you can’t miss for the bright blue mural that washes over the building. In response to the coronavirus pandemic, he made some changes: He engaged more drivers to deliver prescriptions, bought masks for his employees, and hired another person to keep watch over the entryway and provide masks to customers without them.

People still need their prescriptions, and Ost is delivering them, for free, at a clip of 150 customers a day, up from 20 to 30 deliveries before. But when he looked at the books last month, amid lower drug reimbursements and fees that kicked in before the crisis, Ost and his wife wondered whether it was time to retire.

Then Ost resigned himself to the 2020 reality: His business will lose money this year.

“I’m looking at it like the next six months are a charity operation,” Ost said. "Let’s give back to the community that has provided to us over the years.”

Pharmacies are high on the list of essential business that have remained open during the pandemic. But independent pharmacists in the Philadelphia area say that, at a time when they are doing more to meet demand, they are struggling with low reimbursements and professional services fees, particularly from Pennsylvania’s Medicaid managed-care program.

Most of Ost’s customers are low-income Medicaid beneficiaries. After new contracts took effect at the start of the year, “I was, for lack of better words, beside myself," Ost said. “Because I really questioned whether we could stay open with the reimbursements.”

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The bulk of the state Medicaid program is contracted out to health plans, known as managed care organizations, or MCOs. Four such companies serve Medicaid patients in Southeastern Pennsylvania, and they hire pharmacy benefit managers, or PBMs, to run their pharmacy networks.

PBMs say they help keep health-care costs down by negotiating drug prices with pharmaceutical companies and payments to pharmacies. But their closely guarded business agreements have also raised questions about pricing transparency in some states, including Pennsylvania. And independent pharmacies say they often have no choice but to accept a PBM’s terms or risk losing a health plan’s customers.

“Our stores are offering curbside pickup, or 10 times the normal deliveries,” said Mel Brodsky, the head of a trade group that represents about 200 community pharmacies in Philadelphia. “As our expenses have increased because of COVID-19, our reimbursements are decreasing.”

Brodsky knows of at least a half-dozen independent pharmacies that are "in the process of trying to sell or being sold because they can’t support their stores anymore,” he said.

While CVS is perhaps best known to consumers for its pharmacies, the company’s PBM division, Caremark, serves two of the region’s Medicaid health plans. CVS is also the corporate parent of Aetna Better Health, one of the managed care organizations that contracts with the state.

Brodsky’s group eyes CVS warily. “They want to get rid of the competition,” he said.

“CVS Caremark continues to work to provide drug costs savings to our Managed Medicaid clients and the state of Pennsylvania," CVS said in a statement. “Ensuring Pennsylvanians can access their medications has remained a top priority for CVS Caremark throughout the COVID outbreak.”

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Greg Lopes, a spokesperson for the Pharmaceutical Care Management Association, a trade group for PBMs, said that “PBMs are working with the entire prescription-drug supply chain, including pharmacists, to help patients access needed medications during this public health emergency. That should be the focus of all stakeholders — putting patients first, not profit margins.”

The Medicaid program, Lopes said, "services the commonwealth’s vulnerable population, and should not be, especially during a pandemic, used by independent pharmacies as a place to increase revenue.”

Coronavirus struck at a sensitive time for discussions about pharmacy reimbursements in Harrisburg. A suite of measures to clamp down on benefit managers passed unanimously out of the state House last November. The legislation has support from Pennsylvania Auditor General Eugene DePasquale — who conducted his own examinations of PBM practices — and the bills had moved onto the state Senate for consideration.

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For now, however, activity on the legislation appears to be paused. "Right now we’re kind of on hold, with a hope that we’ll be able to see some opening up in May or June,” said Patricia Epple, CEO of the Pennsylvania Pharmacists Association, which represents independent pharmacies. In the meantime, she said, her members are “on the front line” and being paid less — while some are closing their doors for good.

Pharmacists are also frustrated that new requirements in the state’s contract with the managed care organizations have taken months to iron out. The MCOs are supposed to get state approval of their pharmacy payment policies, to make sure that the payments reflect the cost to acquire a drug, and a pharmacist’s professional services.

On Tuesday, the Pennsylvania Department of Human Services (DHS) said it has approved the pharmacy payment policies for three MCOs so far, all of them serving the Philadelphia region: UnitedHealthcare Community Plan, Aetna, and Keystone First. DHS continues to seek “clarification” from the other health plans. “While there is not a hard deadline, the department expects the review process should be completed in the near term,” spokesperson Erin James said. Once payment policies are approved, they will be retroactive to Jan. 1.

Keystone First said the company does not comment on its payment policies. “We continue to work with DHS and our pharmacy network to help our members access the medications they need during the COVID-19 emergency situation,” a Keystone First spokesperson said.

A UnitedHealthcare spokesperson confirmed that its pricing methodology was approved by the state.

A fourth MCO that serves Medicaid patients in Southeastern Pennsylvania — Health Partners Plans — did not respond to a request for comment.

Human Services “has received no complaints" from Medicaid patients about being able to access pharmacy services, James said.

But if community pharmacies end up closing because they can’t cover their costs, Brodsky said, "sooner or later, access will be hurt.”

Robert Frankil sold his Sellersville pharmacy in 2018 to buyers who wanted to continue to run it as an independent store, not a chain. Frankil still considers himself a strong advocate for the community pharmacy, but says the business model is tough these days.

“I saw the writing on the wall that this is not going in the right direction very quickly,” Frankil said, adding: ”PBMs have control over everything: Price, what drug is covered, what pharmacies are in the network."

Under a smaller component of state Medicaid — the “fee-for-service” program — pharmacists are paid a $10 dispensing fee on prescriptions. That program is run directly by the state, not contracted out to health plans, and serves fewer patients.

By comparison, Ost says he receives about 30 cents, on average — $1 at most, and often just 10 cents or 15 cents — as a dispensing fee to fill a prescription.

A pill vial alone costs him about 20 cents. A label costs 4 cents. Transmitting a prescription electronically costs 16 cents. Labor costs to fill one prescription run $4.50.

And out of the drug reimbursements and dispensing fees, he also must pay his employees.

As Ost put it: “The math just doesn’t work.”