This is the second article in a series about how pharmacy benefit managers distort the health care system at the expense of patients, employers and taxpayers.
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.
The companies "chopped us off at the knees," Mr. Jacobs said.
In every state, The Times identified at least one example since 2022 in which an independent drugstore closed and the pharmacist blamed P.B.M.s. In some states, like Pennsylvania, such closings have become routine. They have disproportionately affected rural and low-income communities, creating so-called pharmacy deserts that make it harder for residents to get prescriptions and medical advice.
P.B.M. executives deny that they are underpaying small pharmacies. And they say they are not to blame for drugstore closings, which they attribute to other factors like changing consumer habits and high labor costs.
To some extent, the P.B.M.s are simply doing their jobs, the most important of which is to reduce drug costs for their clients. It is those clients' money that P.B.M.s use to pay pharmacies. In theory, the less P.B.M.s pay small drugstores, the more they save for employers and governments. That, in turn, can lower insurance premiums for workers and people covered by government programs like Medicare.
"There is an inherent tension between the interests of retail pharmacies and the employers, unions and other entities that offer prescription drug benefits," said Justine Sessions, a spokeswoman for Express Scripts.
David Joyner, the president of Caremark who this past week was promoted to be chief executive of CVS, said the benefit manager's priority was to save money for employers, not to keep independent drugstores afloat by paying them more than necessary.
"I think today you would argue that there are more pharmacies than we probably need," he said.
But that apparent frugality often benefits the P.B.M.s in ways that have nothing to do with their clients' interests.
The benefit managers have a variety of methods to extract profits, such as charging fees to clients. But there are quieter ways, too. At the same time that P.B.M.s are reimbursing pharmacies at rates below their costs, the benefit managers are often charging employers much higher prices and pocketing the difference, according to insurance paperwork reviewed by The Times.
Another source of profits is the P.B.M.s' own pharmacies. Caremark's owner, CVS, operates the country's largest chain of retail drugstores. And the parent companies of all three big P.B.M.s -- Express Scripts is part of Cigna, and Optum Rx is a subsidiary of UnitedHealth Group -- also own warehouse-based pharmacies that send prescriptions to patients through the mail.
The P.B.M.s have been poaching customers from rival pharmacies. For example, they push and in some cases require patients to stop filling certain prescriptions at local drugstores and to instead fill them via the benefit managers' mail-order pharmacies. That tactic has hastened the demise of some local drugstores, according to pharmacy owners.
In Confluence, Pam Miller, 68, gets her insurance through Medicare and has Express Scripts as her P.B.M. Since Mr. Jacobs's pharmacy closed, she has started using Express Scripts' mail-order service to fill her seven regular prescriptions.
For each of those medications, Express Scripts has been paying itself more than it was paying Yough Valley Pharmacy, according to her insurance paperwork. In the case of one drug, nortriptyline, Express Scripts had been paying Yough Valley Pharmacy about $9 for a three-month supply. When Ms. Miller switched to Express Scripts' mail-order pharmacy, the P.B.M. paid itself more than $26.
Ms. Sessions said Express Scripts sets its payment rates based on several factors, including changes in how much it costs pharmacies to buy drugs.
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.B.M. officials said that the studies were based on cherry-picked examples and that they often paid independent pharmacies more than they paid themselves.
"Independent pharmacies gain public sympathy when they spotlight instances when a specific drug is dispensed without much profit, while concealing other instances when a different drug is dispensed with a substantial profit," said David Whitrap, a spokesman for CVS Caremark. He said that filling prescriptions at independent drugstores instead of at CVS inflates costs for employers.
The Times previously reported that the top three P.B.M.s steer patients toward more expensive drugs and collect billions of dollars in hidden fees.
Federal and state lawmakers, regulators and attorneys general have been looking into whether P.B.M.s use their own pharmacies and disadvantage rivals in ways that distort competition. Vice President Kamala Harris has promised that as president she would crack down on "abusive practices by pharmaceutical middlemen who squeeze small pharmacies' profits."
A recent Federal Trade Commission report quoted from an internal document that investigators obtained from one of the P.B.M. conglomerates. In the document, an executive at the company, which the F.T.C. report did not name, wrote to colleagues that "we've created plan designs to aggressively steer customers to home delivery where the drug cost is ~200 times higher." Separately, the F.T.C. recently sued the largest P.B.M.s, accusing them of improperly inflating insulin prices. (The P.B.M.s denied wrongdoing.)
Mr. Jacobs said he was at a disadvantage in a system in which P.B.M.s both decided how much he was paid and competed with him. "It's a stacked deck," he said. "They're calling all the shots. They're making all the rules."
Unfavorable Contracts
P.B.M.s are far from the only force endangering independent drugstores.
Profit margins have long been thin. Rents are increasing. So are labor costs. People have grown more comfortable getting everything from laundry detergent to medications delivered through the mail, sapping pharmacies of long-running revenue streams. And independent drugstores don't enjoy the economies of scale that allow larger chains to save money on things like software systems and drugs. (Even CVS, Walgreens and Rite Aid have been closing hundreds of stores.)
In some cases, P.B.M. officials said, they pay rural pharmacies higher rates than they pay those in more densely populated areas. "We have been working to ensure pharmacies are paid fairly," said Elizabeth Hoff, a spokeswoman for Optum Rx.
Yet the top P.B.M.s -- which have come to dominate the prescription drug market only over the past decade -- are in many cases dealing decisive blows.
The benefit managers decide which pharmacies are available to patients through their insurance. To be included, a pharmacy must agree to a contract with the P.B.M. that details the formula for how much the pharmacy will be reimbursed for drugs.
Pharmacists say they have no choice but to agree to the contracts, even when the terms are unfavorable. Because the top P.B.M.s collectively control the overwhelming majority of prescriptions, pharmacies that forfeit their business could not survive.
But agreeing to those contracts can also spell trouble, according to pharmacists nationwide. Sometimes the contracts provide for small profits or losses on particular drugs. But the more expensive the drug, the bigger the losses tend to be.
To survive, pharmacies need to cover their losses by making money from other sources, such as vaccinations or beauty products. Those that can't, fold.
Within a few months of when Mr. Jacobs closed his store in Confluence, Michael Ohashi shut his pharmacy in Sanger, Calif., largely because of benefit managers' low reimbursements. So did Joe Craft in Ohio and John Brittin in New Jersey and Louis Spitale in Louisiana and Katie Bell in Georgia and Becky Morgan in South Carolina.
In Delaware, Percy Dhamodiwala poured $120,000 of his savings into his three drugstores before closing them in 2022. Around the same time, in Bismarck, N.D., Sherry Furcht closed her pharmacy after going deep into debt to try to stay open.
In Huntington Beach, Calif., Erika Hoffman said P.B.M.s had left her no choice but to close Champion Rx in September. "If they had just reimbursed us like they reimburse themselves, we would still be in business," she said.
Regulators are paying more attention to these disparities.
In Mississippi, for example, 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.
Waiting in Pain
P.B.M. executives often point to data that suggests the number of pharmacies in the United States has held steady in recent years.
Yet hundreds of communities no longer have any drugstores.
Nearly 800 ZIP codes that had at least one pharmacy in mid-2015 now have none, according to an analysis of pharmacy data by Luke Slindee, a consultant who has been tracking pharmacy closings around the country. (Some 14,500 ZIP codes -- less than half of those in the United States -- currently have at least one pharmacy.)
Mr. Slindee, a second-generation pharmacist, grew up in one of the communities on his list: Harmony, Minn., where his parents once owned the only pharmacy in town. They sold it in 2007 before it closed in 2022.
When small drugstores close, communities can be harmed in ways that are hard to measure.
Getting your flu shot becomes less convenient. As residents grow accustomed to traveling long distances for their medications, they do more of their other shopping far away from home, draining revenue from local businesses. Relying on mail-order pharmacies deprives customers of an easy way to get advice from a trusted local pharmacist.
Research has found that after pharmacies close, their older customers are less likely to consistently fill their prescriptions and end up missing doses.
Along the Jersey Shore, hospice nurses relied on an independent drugstore, Village Pharmacy in Marmora, which reliably stocked medications used to ease pain, agitation and shortness of breath at the end of patients' lives. In January, the pharmacy closed, with its owner blaming the P.B.M.s. Employees at local hospices said nurses now sometimes had to drive 50 miles to get the medications, and that dying patients could go without relief for hours.
In Darrington, Wash., a mountain town, the nearest pharmacy is 28 miles away after the community's only drugstore closed last year largely because of P.B.M.s. The town's one doctor said he had seen more complications like sepsis or pneumonia because of delays in filling antibiotic prescriptions by patients who didn't want to make the long drive.
Even when a small pharmacy stays in business, low reimbursement from P.B.M.s can make it harder for its customers to get their medications. Many small drugstores sidestep their contracts with P.B.M.s and decline to dispense certain medications -- especially high-cost brand-name products for conditions like diabetes and obesity -- because they lose money on them. Customers must go elsewhere.
Cigarettes Replace Pills
Confluence is nestled at the junction of two rivers and a creek on the southwestern edge of Pennsylvania. There are few jobs in town. Many residents are older and poor. The last doctor departed in 2006, and there are no longer any nurses or dentists.
Yough Valley Pharmacy, which was inside a grocery store, served as "the go-to medical facility," said Shelley Ralston, the pharmacist whom Mr. Jacobs hired to oversee the drugstore. "There are no doctors in town, so they asked me."
But the pharmacy's finances were becoming untenable, Mr. Jacobs said, because P.B.M.s were routinely paying him less than he spent to buy drugs.
On a one-month supply of the diabetes drug Trulicity, Mr. Jacobs's costs at times exceeded his reimbursement by $83. He would lose $59 when he filled a prescription for another diabetes medication, Jardiance. And $53 on Eliquis, the blood thinner.
The payments from P.B.M.s had been getting smaller for years. To cover his losses, Mr. Jacobs dipped deeper into a $150,000 line of credit from his bank. He also borrowed $85,000 from his life insurance policy.
Mr. Jacobs's wife, Aimee, realized in January that the store was losing $5,000 a week. She searched for a buyer, but none emerged.
June Rugg, 92, had come to rely on the Confluence drugstore. She lives on the outskirts of town on a desolate road with few neighbors. She often called Ms. Ralston with questions. Every three months, an employee would meet Ms. Rugg, who uses a walker, in the parking lot and load her medications into her car so she wouldn't have to go inside. When she learned the pharmacy was closing, she cried. She now gets her medications delivered.
The nearest pharmacy is now 14 miles away in Farmington, Pa. The pharmacist there estimated that 20 to 30 patients had skipped their medications for at least a week by the time they came to him after Yough Valley Pharmacy closed.
Compared with some other communities, Confluence has been lucky. Mainline Pharmacy, another independent drugstore about 25 miles away, is delivering prescriptions to many people's homes. But Mainline, too, is struggling with low P.B.M. reimbursements, and it closed nine of its 11 stores in March.
The Confluence grocery store has repurposed the space that Mr. Jacobs's pharmacy once occupied. Now there is a row of casino-style machines. The shelves that held pill bottles contain packs of cigarettes.
Susan C. Beachy contributed research.