Pharmacy shutdowns: Independent businesses being swallowed up by falling reimbursements

HONOKAA — For 72 years, the Hamakua Family Pharmacy served this town, filling 3,000 prescriptions a month.

“Pharmacy used to be enough just (to) standalone,” said registered pharmacist Eileen Cheng. “So we didn’t have to do anything else.”

But as time went on, she said, tighter margins made it harder and harder to run an independent pharmacy.

Today, Cheng runs Hamakua Naturals, a natural food and supplement store. The pharmacy, which was the primary business beforehand, shut its doors at the end of February.

The Honokaa pharmacy is one of a number of small independent pharmacies to close down recently. Oshima Drug, located within Kainaliu’s Oshima Store, ended pharmacy operations in August.

Malama Compounding Pharmacy in Captain Cook, meanwhile, remains open but now only fills compounded prescriptions.

Pharmacists at all three locations said the decision to cease traditional retail pharmacy came as a direct result of falling reimbursement rates from insurers.

“The bottom line is the insurance reimbursements that we get for filling the medications,” said Tara Manwarring, office manager and pharmacy technician at Malama Compounding Pharmacy. “A lot of times, we don’t get paid enough just to buy the drug to fill that medication.

“We won’t even get paid enough from the insurance companies.”

Manwarring said small, independent pharmacies don’t have the buying power of large chains.

“We cannot buy bulk or we can’t buy it as cheap as they do,” she said.

She said when the pharmacy files a claim with insurance companies, insurers will often kick that claim back, pointing out that other pharmacies are able to fill the prescription for cheaper.

Shortfall in reimbursements, dispensing fees

Pharmacy reimbursements are calculated in one of two ways: either a set rate, referred to as the “maximum allowable cost,” or through a formula, which usually consists of the average wholesale price of the drug minus a certain percentage plus a “dispensing fee.”

The dispensing fee is the fee charged for the act of filling the prescription, essentially covering the pharmacy’s overhead costs.

That fee, however, doesn’t necessarily reflect the actual cost pharmacies bear from filling prescriptions.

In 2015, the Coalition for Community Pharmacy Action surveyed more than 25,000 pharmacies nationwide, accounting for more than 1.9 billion prescriptions filled.

Overall, the study determined an overall average dispensing cost of $10.55 per prescription. An average dispensing cost for Hawaii was unavailable.

That accounted for the pharmacies’ salaries and benefits, facilities costs and other costs for the prescription department and store, such as office supplies, licenses and transaction fees.

However, the reimbursement pharmacies get back from insurers doesn’t come close to that average.

The state’s dispensing fee from Medicaid, for instance, is only $5.

Cheng said about 50 percent of Hamakua Family Pharmacy’s clients were Medicaid.

When she first took over the pharmacy in March 2005, she said, reimbursements were at least better than they are now.

“At the time, we made enough to cover the overhead,” she said.

She said she could reasonably expect about a $7 dispensing fee, plus some to help cover the cost of buying the drugs.

Cheng added that total reimbursements have fallen dramatically — in some cases by as much as 10 times — in the past five years.

“The total amount that we can actually get back for a particular drug at the end of last year is more like up to around $1 to $2 per prescription,” she said. That includes some of the most commonly used generic medication.

“We’re just killing ourselves.”

She also referred to one particular prescription drug, a painkiller, which would cause the pharmacy to lose $100 every time they dispensed it.

Given that environment, she said, it’s not feasible to reopen the pharmacy.

“Not if current trends continue,” she said. “That’s just like suicide.”

A conflict with the middleman

One state lawmaker said part of the issue stems from what he sees as a conflict of interest involving what’s called pharmacy benefit managers.

Pharmacy benefit managers act as the middleman between pharmacies and insurance companies.

Their responsibilities include developing and maintaining a reimbursement formula, contracting with pharmacies, negotiating with manufacturers and paying drug claims, according to the American Pharmacists Association.

In January 2013, HMSA, which according to its website covers “more than half of Hawaii’s population,” named CVS Caremark as its pharmacy benefit manager.

That decision authorized CVS Caremark to process prescription drug claims for people with HMSA drug coverage.

Elisa Yadao, senior vice president of consumer experience for HMSA, said CVS also determines the dispensing and administration fees.

CVS Caremark is a subsidiary of CVS Health, which also owns CVS Pharmacy, the retail division that includes CVS Pharmacy stores and Longs Drugs. The company also offers mail service pharmacy.

Rep. Mark Nakashima, who represents the area including Honokaa, said he believed there was a conflict of interest when one company owns both a pharmacy benefit manager and a chain of pharmacies.

Nakashima said he was alerted to the issue of pharmacy shutdowns when he met with a pharmacist in his district to learn more about the issue.

He said in their conversation, he learned of a client who needed a particular drug, but the cost price was higher than the pharmacist could get reimbursed for dispensing it. As a result, Nakashima said, the pharmacist called the pharmacy benefit manager.

“And they directed her to just send them to Longs Drugs,” he said.

The closest Longs Drugs to that pharmacy was about 16 miles away.

“What was of greater concern was the fact that the PBM was a subsidiary of CVS, which also owns Longs Drugs,” he said. “I thought it was a conflict of interest that a subsidiary of CVS basically told the pharmacist that they were gonna pay her price and just send them to Longs Drugs, which is another CVS subsidiary.”

“So yeah, that caused a lot of concern to begin with,” he said.

Responding to that concern, Yadao said that HMSA ensures members have choices when it comes to picking a pharmacy.

“As a PBM, CVS Caremark works together with all of the local pharmacies in our network,” she said. “Both HMSA and CVS Caremark agree it’s not advantageous to our members for us to encourage customers to use one network pharmacy over another.”

Mike DeAngelis, senior director of corporate communications for CVS Health said the company has a “firewall” between the PBM and retail wings of the company “to prevent the dissemination of certain competitively sensitive information.”

DeAngelis said CVS Caremark reimburses pharmacies in its network “at competitive rates” to balance the needs of pharmacies while keeping plans cost-effective.

Yadao said for HMSA, “members are our first priority,” when it comes to cost considerations.

“We have to carefully balance their need to have access to a wide network of pharmacies with their need to be able to afford prescription drugs,” Yadao said. “Any increase in dispensing fees is an increase that is passed along to our members through higher premiums.”

Yadao also pointed out how pharmacy benefit managers help keep costs down for people filling their prescription.

“The cost of prescription drugs continues to rise so quickly that without the right partner for HMSA, many medications would be unaffordable for our members,” she said.

Pointing to the recent increase in the cost of the EpiPen, a prescription medication used to treat asthma attacks and allergic reactions, Yadao indicated how CVS helps HMSA negotiate prices to keep drugs accessible to members.

Chain reaction

Cheng said after Hamakua Family Pharmacy closed down, all of the store’s prescriptions moved to the Waimea Longs Drugs.

Manwarring said CVS also took over records and inventory from Malama Pharmacy.

The same happened at Oshima Drug. The store’s staff pharmacist Debby Mattioli said prior to its closure, the store transferred all their prescriptions to Longs Drugs in Keauhou.

Cheng declined to speculate about any intent by larger companies, but said the result is the same regardless: independent pharmacies are shutting their doors.

“I don’t know what the undercurrent movement is, but that’s the result,” she said. “We don’t have to guess what the intent is.”

During the last legislative session, state lawmakers considered legislation that would help some pharmacies that opt to run out of a pharmacy benefit manager’s network.

That network consists of pharmacies that have contracted with the PBM.

The PBM, then, manages the retail pharmacy network on behalf of the insurer.

Going “out-of-network” to a pharmacy that hasn’t contracted with the PBM can result in higher costs for filling a prescription.

To help out rural Hawaii residents, the House and Senate considered legislation that would bar PBMs from imposing any fee or extra co-pay on people who fill a prescription at an out-of-network pharmacy.

That proposal would only apply if the client lived at least 10 miles away from the nearest “in-network” pharmacy.

It would also set a minimum dispensing fee to reimburse the out-of-network pharmacy for filling those prescriptions.

The Senate version would have set a $12.50 dispensing fee, while the House version included a $15 dispensing fee to be billed to the client’s insurance company.

Nakashima said independent pharmacies were being offered dispensing fees closer to 25 cents.

That might be workable for larger stores, he said, who can offset the cost of running a pharmacy with other services such as retail sales.

“But if you’re just a country pharmacy and all you’re doing is drugs and maybe aspirins and things of that sort, then you just don’t have the business to compete with that,” he said.

Rebuttal

Yadao, however, said HMSA’s dispensing fees aren’t unreasonably low.

Although she couldn’t say exactly how much HMSA’s dispensing fees are, saying it’s confidential, she said CVS Caremark confirmed with them that the dispensing fees are higher than what the PBM pays to mainland pharmacies.

She said when CVS Caremark negotiates with pharmacists, the PBM considers issues like the cost of doing business, higher shipping costs and the cost of moving prescription drugs between islands.

Health care stakeholders came out against the proposed legislation.

“None of the pharmaceutical companies liked the idea,” Nakashima said.

CVS Health submitted testimony opposing the bill when legislators were considering the proposals, saying it could increase costs and deter the use of already-existing cost saving measures.

If the bill were to pass, wrote CVS Health senior director of government affairs Eric P. Douglas, “we are unsure how it would serve as a convenience to patients.”

State law already allows any retail pharmacy in Hawaii to join a pharmacy benefit manager’s network, meaning those who haven’t joined the network “made a business decision not to do so.”

In fact, Douglas wrote, CVS Caremark’s network encompasses more than 92 percent of all the pharmacies in the state.

As a result, CVS argued, the bill hurts pharmacies that decided to join the network and “has the potential to negate all of the cost-savings measures and health benefits … such networks ensure along with it,” wrote Douglas.

Without being in the network or having any sort of contract, he said, pharmacies can’t bill a prescription claim or access patient history.

HMSA was also among those who opposed the legislation, saying network-based plans “are essential for an efficient health care system.”

Jennifer Diesman, vice president of government relations for HMSA, said the bill could harm quality management for HMSA, requiring more scrutiny and raising costs for the system.

Nakashima, however, was skeptical of how much the bill could actually increase costs.

“There are so few independent pharmacies that I can’t see how providing them with a differential over and above what they pay the larger pharmacies, how that would cause increases in the cost of health care insurance,” he said.

But one of the main reasons he believes the proposal didn’t make it, he said, is that it just came too late.

“By the time that I found out about the concern and introduced the bill, we were already a year too late,” he said.

By the time the bill made it to conference in April, he said, the pharmacy he was communicating with had shut its doors.

The fallout?

As large chain stores come in and some clients turn to mail-order pharmacy, there’s a personal touch that’s lost, said local pharmacists.

“I felt like we’ve always had really good customer service and that’s why people kept coming back,” said Manwarring of Malama Compounding Pharmacy.

Aside from simply filling prescriptions, Manwarring said the pharmacy’s staff took the time to sit and talk story with customers.

“We know about them personally and we get to know each and every one of them,” she said.

Manwarring added that customers who relied on the store for certain medications were “very upset.”

“Especially the ones that have been coming to us for years since day one,” she said.

“They’re lost. They’re like, ‘Where are we gonna get our medicine now?’”

While the pharmacy is able to direct clients to Longs Drugs in Keauhou, she said, there are still several clients that lack good or reliable transportation.

Cheng also said she was concerned about her customers who aren’t able to drive or aren’t comfortable driving to Waimea for prescriptions.

Manwarring and Cheng said they’re finding ways to help the community through services outside of traditional retail medicine.

Manwarring pointed out that Malama Compounding Pharmacy started out in 2003 doing compounded prescriptions, which the store is doing 100 percent these days.

The store is able to create customized medications in order to fill a prescription.

For instance, if a client is allergic to certain dyes or fillers, the store can make the medicine without that specific ingredient.

“If we make our own medications, we know exactly what we’re putting into it,” she said.

Manwarring said the store cannot exactly reproduce medications that are already commercially available.

She cautioned that a lot of insurance companies won’t pay for compounded medicine.

In Honokaa meanwhile, Cheng said her store offers special services to help rural residents retain access to health care.

To accommodate former customers who can’t drive to Waimea to get prescriptions filled, she said her store offers free prescription pick-up through its “Errand Angels” program.

Cheng said clients who accept the co-pay offered by Longs Drugs and sign a permission form can give that co-pay to Hamakua Naturals staff.

Then, an employee takes the co-pay to Waimea, picks up the prescription on the client’s behalf and returns it to the Honokaa store, where the client can pick it up at no additional cost.