Serious threats, big opportunities
Retail pharmacies are in a precarious position and are struggling to generate profits: they are understaffed, losing money on prescriptions and, in the case of big drug chains, have an overall store model that appears to be in trouble. Consequently, they are cutting pharmacy hours and closing stores.
In the past, problems were the bane of independent pharmacies, many of which have disappeared. But poor PBM reimbursements and other financial challenges are now taking their toll on larger chains, particularly drugstores.
Rite Aid is in bankruptcy and CVS is closing 900 stores, representing about 10% of the chain. And last summer, Walgreens announced it would shutter 150 U.S. locations. Front ends also face challenges, with online shopping redefining convenience.
“The economic model is broken,” said Rodey Wing, partner in health and retail practices, Kearney. “That’s the biggest challenge. They’re changing hours and closing stores. There’s labor problems and the front end is struggling. There’s competition from mail order and online. They’re failing due to prevailing trends in reimbursement. How do you make retail pharmacy relevant?”
Bill Ladwig, SVP pharmacy, Lewis Drug in Sioux Falls, S.D., believes the situation is unprecedented. “The big boys have always been strong while many regionals were wiped out,” he said. “But when you see problems across the whole front, it’s apparent there’s a critical concern.”
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In an effort to remedy problems, retailers are exploring cost-plus pricing models and supporting PBM-regulating legislation. Industry experts also hope more states will expand pharmacists’ scope of practice, letting pharmacies add additional health services to offset declining prescription reimbursements.
The PBM scourge
Most problems stem from PBMs’ declining prescription reimbursements, a situation that continually worsens. Three PBMs (CVS/Caremark, OptumRx and Express Scripts) control 85% of the market, making contracts relatively unnegotiable.
“The biggest issue facing pharmacy is reimbursement,” said Drew Masey, director of pharmacy operations for Fruth Pharmacy, Point Pleasant, W.V. “Everything else is fluff. Patients and plans are charged rates that aren’t in line with drugs’ cost. PBMs make money charging the state [or insurance plan, etc.] extra. Pharmacies can receive negative reimbursements. It looks like we’re making money but we’re losing.”
Due to these financial issues, Fruth closed four stores and will shutter two more. “Pharmacies are working with less and the window to operate keeps shrinking,” added Masey. “There’s money out there but it’s being monitored inappropriately.”
Masey said pharmacy is one of the very few industries with no say in pricing. “At Wendy’s, if the price of beef goes up, they can raise prices,” he added. “But we don’t set prices or reimbursements. You can negotiate contracts to a point, but most big PBMs say ‘take it or leave it.’’’
Recently, West Virginia passed a law that makes PBM practices more transparent. And at the federal level, the Pharmacy Benefit Manager Transparency Act (S.127), introduced in January 2023, would prohibit PBMs from charging plans different amounts than they reimburse pharmacies.
Some retailers have reacted by launching their own PBMs, using a transparent model. West Des Moines, Iowa-based grocery chain Hy-Vee introduced Vivid Clear Rx in 2020. This “reimagined” subsidiary guarantees no spread pricing and uses a 100% pass through model that provides all rebates secured by Vivid Clear to the client, said Tina Potthoff, SVP communications. “It was designed with transparency in mind.” Hy-Vee also works closely with state and federal legislators on PBM reform.
Some big drug chains are implementing cost plus models, a concept initiated by Mark Cuban of pharmacy distribution company Cost Plus Drugs. Cost Plus eliminates the PBM “middleman.” Wing said cost plus considers how much the pharmacy paid for a drug along with dispensing fees for pharmacy services and other associated costs. This model better aligns costs with revenue, better positioning incentives across the value chain and potentially enabling more transparent pricing.
But creating total transparency requires a 360-degree change in business practices. “It’s a pretty significant culture shift,” added Wing.
Expanding scope of practice
Another potential revenue source would involve pharmacists being reimbursed by insurance companies and other payers in the same manner as other medical providers for non-prescription dispensing services. This could include medication and diabetes management, treating and prescribing for common illnesses and operating in-store clinics.
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This is already happening in some states. But legislators have not expanded scope of practice or passed laws requiring insurance reimbursement nationwide. “Pharmacists continue to give away services that other health care professionals charge for,” said Ilisa Bernstein, Pharm.D., J.D., FAPhA and SVP of practice, policy and partnerships, American Pharmacists Association. “Laws and policies must change so pharmacists are paid equally.”
A proposed bill, the Equitable Community Access to Pharmacies, would enable Medicare beneficiaries to be covered for testing, treatment and immunizing for certain conditions “as they were during the pandemic,” said Bernstein. Expanding scope of practice could also benefit some rural and urban communities where there are few primary care providers, she added.
Some retailers have expanded services by operating clinics. CVS acquired Minute Clinic in 2006. Staffed by nurse practitioners and physicians’ assistants, many of the 1,100 locations are inside CVS’ stores. Walgreens has 220 Village Medical clinics co-located in stores. Forty percent of these 5,000 square foot operations are in areas underserved by primary care. Walgreens also partnered with Hartford HealthCare to create six in-store clinics in Connecticut.
Gambelli Funds portfolio manager Jeff Jonas said CVS’ Minute Clinics “break even” on profits. But they drive pharmacy traffic and OTC sales. “So, they’re profitable when you include that,” he added.
Lewis Drug partners with Sanford Health System to operate 40,000-square-foot clinics next to some of its 35,000-square-foot stores. Staffed by doctors, full-service clinics emphasize convenience and collaboration. “It drives store traffic,” said Ladwig. “It improves communication between physicians, nurses and our staff. The collaborative part is the future.” The concept is being expanded.
Grocery stores have a big advantage in layering on additional services because the pharmacy can be linked to food. Through its Food as Medicine program, Hy-Vee’s dieticians and pharmacists work together to help people manage conditions like heart disease and diabetes through nutritional changes.
Recently, Hy-Vee teamed up with Soda Health to launch a Smart Benefits program that lets Medicare, Medicaid and other insurance members redeem personalized benefits for healthy food, nutritional support, medications and everyday health care items, said Potthoff.
In 2021, Hy-Vee introduced virtual dietician services. The retailer also established RedBox Rx, a low-cost telehealth provider. And it operates 28 mobile health vehicles that serve rural communities with vaccinations and health screenings.
Labor and drug shortages
There is a pharmacist shortage, with fewer pharmacy graduates and pharmacists choosing retail environments. This impedes efficiency. “Due to pharmacies’ economic situation, they’re understaffed, with pharmacy teams working hard with no breaks,” said Bernstein. “There’s a shortage of pharmacists wanting to work under current conditions. And employers need full staff to provide safe patient care.”
Front ending
About two decades ago, drugstores’ front ends were enlarged to offset declining pharmacy margins with convenience items like milk, cold beverages, grocery and household staples. Around the same time, drugstores were being erected on almost every corner. But today, e-commerce has redefined convenience, making some categories less important.
“The entire model was built around convenience and being there and everywhere,” said Matt Hamory, partner and managing director, AlixPartners. “There was a period when this made sense. But customers don’t think of convenience that way anymore. I open my phone and with two taps can get something delivered.”
Grocery is not the only troubled category. Photo processing and greeting card sections have shrunk or disappeared from many stores. In other categories, drug chains are having trouble being price competitive with mass retailers.
Despite challenges, front ends remain relatively the same. “It doesn’t feel very different than it did 10, 15 years ago,” added Hamory. “Some products are slow moving. They could make assortments more relative to customers.”
Nightengale believes front end will shrink as healthcare services and scope of practice expand. “You used to see everything from summer pool floaties to cosmetics,” he said. “Retailers are shifting front end from convenience to being a health and wellness destination, bringing in clinics and health and wellness products. We’ll see more of that.”
Brian Nightengale, executive VP and president, healthcare solutions, Inmar Intelligence, believes the shortage will end as more pharmacists fill clinical roles. “As we transform retail pharmacies into health and wellness destinations, you’ll see more interest. We’re already seeing it in places where pharmacists can practice. They’re great places to work.”
Jonas predicts that closing of 1,000-plus drug stores will free staff to work elsewhere. “Between Walgreens, Rite Aid and CVS, they’re freeing up pharmacists and technicians for remaining stores to pick up,” he said.
Pharmacies also face generic drug shortages. Ladwig cited shortages of ADHD medications. And last winter, he could not find amoxicillin. “Drug manufacturers have ‘commoditized’ generics,” he said.
Christine Walton, VP of prescription marketing at generic drug supplier Dr. Reddy’s Laboratories, said shortages occur when generic drug manufacturers lower prices to rock bottom levels to be competitive. Initially, this benefits retailers and patients. But when prices plummet below cost, suppliers exit categories and create shortages. Pharmacies must scramble to find alternate suppliers or substitute a different drug (if possible).
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“There’s potential for long-term supply issues as prices continue eroding,” said Walton. “Costs are increasing on freight, labor and active ingredients. As prices fall and costs increase, prices are no longer sustainable for manufacturers and they’re forced to discontinue the drug. This isn’t a new development. It’s continued year after year.”
Mail order and Amazon
Mail order drugs are another threat. The Commonwealth Fund said mail order represents 37%of retail prescription drug sales; drug chains command 40% while supermarkets account for 9%.
Erin Crumley, director of strategic accounts for SymphonyAI’s retail pharmacy team, believes physical pharmacies can differentiate from mail order by integrating consumers’ front end shopping data and prescription records through loyalty cards. Pharmacy teams can then counsel customers on how certain foods, supplements and other non-prescription items can improve health. They can also personalize offers for these type items “all with HIPAA and other privacy and compliance guidelines,” she added.
Amazon’s new same day, AI-driven pharmacy delivery model could also present challenges. While currently limited to several big cities, Amazon’s success in other e-commerce endeavors is hard to ignore. “Amazon is probably leaps and bounds ahead of everyone and will probably revolutionize the industry, particularly home delivery,” said Tom Bender, founding partner, Pharmacy Management Consultants LLC. He believes AI will impact other areas.
“Pharmacy schools will probably have to adapt the curriculum. In pharmacies, it could affect automation, filling robotics and operational systems. It will free up pharmacists to perform other tasks.”
Looking ahead, it is hard to predict what will happen in retail pharmacy. Some experts predict a shakeout that will dramatically change the landscape. Others see pharmacies simply enlarging and expanding their focus. Whatever happens, change is inevitable. “It’s all coming to a head,” said Ladwig.
