Antitrust – the independent pharmacist’s role in the fight for open markets, transparency, and strong small businesses
In July, I was invited to give some thoughts for a meeting of the Louisiana Independent Pharmacy Association. I would like to share those thoughts here.
Hello everyone, my name is Benjamin Jolley. I am a third generation pharmacist from Salt Lake City, Utah. My family’s business was started by my grandfather in 1954. I’ve worked in the pharmacy since 2004. In the past few years, I’ve started to work with pharmacies across the country to use their pharmacy software more effectively – in particular to configure their software to estimate DIR fees and other adjustments before a claim goes out the door. I feel extremely honored to be here today to speak to you.
“A generation ago, there was a revolution. It was not a left-wing or a right-wing revolution. It was a revolution of ideas. That revolution was so powerful and dominant that it stole from us not just our liberties but even the words that helped us describe our world.”
-Matt Stoller, Goliath (page xix)
As pharmacists, we spend a lot of time talking about the abuses of PBMs. We talk about the self-dealing of CVS and its Caremark subsidiary. We talk about spread pricing. We talk about steering to mail order. We complain about DIR fees. About financial middlemen who add no value but extract plenty. We complain about declining reimbursements.
At the same time, we see our neighbors complain about rising drug prices, and the rising cost of health insurance:
Restaurateurs complain a lot about GrubHub and their seller fees, their menu stealing, and their ghost kitchens.
Chicken farmers complain about the control that Tyson Foods exerts over their “small business.”
Small business manufacturers who make a “better mousetrap” or better folding chair complain endlessly about Amazon. Amazon charges them on average a fee of 30% of their sales to sell their products on Amazon (in the form of Fulfillment by Amazon fees, “advertising,” and other seller fees). They then see their small business go from a successful one selling millions to nothing when Amazon robs the design of their best selling item and duplicates it as “Amazon Basics.”
Phone app developers complain about Apple charging them fees totaling 30% of their sales to list their app in the app store.
Newspapers and journalists complain of Facebook and Google stealing their ad revenue, putting them out of business.
Parents of cheerleaders are shocked at the cost of uniforms and cheer tournaments, and the excessive power the Varsity Brands holds over the fate of their children’s passion.
All of these industries have one thing in common: a dominant middleman extracting a tax from the buyer and the seller.
And all of it has one root cause: a deliberate misinterpretation of our laws prohibiting unfair conduct in business relationships, based on the ideology that these laws are REALLY about the welfare of the consumer (as expressed in prices, mainly), not about establishing a fair playing field for competition.
We refer to these laws as “antitrust.” Beginning about 40 years ago under Ronald Reagan, anti-trust has been turned on its head from being about being against trusts to being about complex models of price and theoretical constructs that mean that mergers are actually GOOD for consumers, and therefore perfectly compatible with the Sherman Act. This is utterly ridiculous on its face, but we don’t realize that because societally, we’ve forgotten what a “trust” is – we know what the term literally means – a legal structure to protect assets, but John Sherman wasn’t opposed to the trust you use to protect your home. He was opposed to the “Trust Movement.” The Trust Movement was a movement by the wealthy and connected to organize entire industries into a single entity, which was legally structured as a “Trust Holding Company.” The railroads were organized into massive regional monopolies like the New Haven, the oil industry was organized into “Standard Oil,” steel manufacturing consolidated into US Steel, aluminum was dominated by the Aluminum Corporation of America, known as “Alcoa.”
If this sounds familiar, that’s precisely the point of my remarks today. Because of the “Consumer Welfare Standard” proposed by Robert Bork in his 1978 fanfiction about antitrust law entitled The Antitrust Paradox: A Policy at War with Itself, the Federal Trade Commission and Department of Justice’s antitrust division basically stopped bringing cases to block mergers, on the assumption that on the whole, mergers would be good for consumers. It’s fairly easy for us small business pharmacists to see how mergers in our industry are harmful to consumers. We see how CVS forces members of drug plans operated by its Caremark division to fill at CVS, despite the fact that the total price of their prescriptions is frequently HIGHER at CVS. This is at odds with the entire principle of Consumer Welfare Standard, but at the time of the CVS and Caremark merger, the Obama FTC and DOJ believed that the merger would be good for consumers because CVS hired a fancy economist to “prove” it by using the fancy economic models that the Consumer Welfare Standard values over common sense.
More than a century ago, our ancestors saw the same problems with concentrated corporate power as we see today. They passed laws which largely went unenforced for a generation. Then came the Great Depression. They put their faith in FDR, who believed in Big Government to nationalize industries and set prices and dictate outputs. When that didn’t work, FDR pivoted hard towards enforcing antitrust law. His antitrust division at the DOJ broke up and restructured entire industries in favor of small businesses and robust competition. What followed was the greatest period of economic expansion in our history, and it wasn’t just an expansion in stock prices or the wealth of Andrew Mellon or Andrew Carnegie or John Rockefeller or Jeff Bezos – it was a broad-based expansion that saw huge gains in the wealth of the plain people – entire regions of the country got electricity for the first time, car ownership exploded. “In 1940, 35% of americans did not have flush toilets, including over 80% of residents in Mississippi and more than 70% of people in North Dakota. By 1970, nearly all Americans did. Less than half of households had washing machines or refrigerators in 1940. By 1970, more than 90% did” (Goliath by Matt Stoller page 190).
Small business pharmacists played an essential role in this fight to control monopolies and break them up. NCPA operated a journal called the “National Association of Retail Druggists Journal” which published multiple editorials against monopoly and chain store power. Here are a few quotes:
“The selfishness of those who would control the money power of the nation, if their greed is allowed to develop unchecked . . . [would leave] masses of Americans wholly at the mercy of the despotic power of a monopolistic class” – NARD Journal, 1936
In 1937, the NARD and the NWDA spearheaded a successful campaign for fair trade laws. Fair trade in my experience is a largely forgotten concept, as the laws protecting it have gone unenforced for a generation. The way it worked was that in order to ensure that manufacturers of high quality products could have a sustainable business, retailers like pharmacies would agree not to discount the price below a certain point. The manufacturer would in exchange not give sweetheart pricing to the dominant retailers. The death of Fair Trade led directly to the rise of Walmart and discriminatory pricing based on the size of the company purchasing. ( https://books.google.com/books?id=w8lBDwAAQBAJ&pg=PA300&lpg=PA300&dq=nard+fair+trade+manual&source=bl&ots=_qVTYarMSA&sig=ACfU3U3OLEtqLH5LAE4UPtssFX3NMfr_fA&hl=en&sa=X&ved=2ahUKEwj83qa0-d7xAhVLWs0KHbP6D2oQ6AEwCXoECCQQAw#v=onepage&q=nard%20fair%20trade%20manual&f=false accessed 7-12-2021)
Estes Kefauver, whom we all know as one of the major sponsors of the Kefauver Harris Amendment to the FDCA was a tireless advocate for antitrust. For example, he said “I want to talk to you about something that affects not only everybody’s pocketbook, but, to an increasing degree, the strength of the Free World. Today, there are few countries in the world with the system of free enterprise as we know it in the United States. In the communist world, private ownership of industry is out of the question. Even in the non-communist world, there are many countries where industry, by-and-large is subjected to direct governmental control. Why, then, has the United States managed to remain an island of free enterprise in this sea of collectivism? The answer, I think, lies in our uniquely American institution, the antitrust laws.” (https://thebhc.org/sites/default/files/scroop.pdf)
It is apparent from the last few quotes that the last antitrust movement was led in some measure by our forerunners at the NARD and the independent pharmacy owners of that era. I believe that our profession can once again act as leaders in the fight against large corporate power. If you get nothing else out of my speech today, I would like you to stop complaining about the particulars of pharmacy as a uniquely horrible situation when you talk to your legislators, but rather to contextualize how our industry is just one of the farthest along in the path toward middleman monopoly power. While no other industry has “MAC price” abuses and “formularies” and “GER” and “DIR fees,” or GCRs or GPRs, the methods behind these terms are incredibly common across multiple industries.
Let’s take, for example, Tyson Foods. Let me read a chicken farmer’s description of the “tournament system” in chicken farming and you tell me if it reminds you of anything in pharmacy. “Under the tournament system, the company determines when to pick up the chicks. Everyone that delivers chicks in a week is entered into the tournament, and then the company ranks you against all the others that delivered that week. There is a baseline, and depending on the ranking, you get paid either above or below that baseline. I have multiple houses delivering in the same week, so we can show that if the same person delivers the same thing the same week, they can have very different payments.”
Now let me read a description of how the Amazon Buy Box works, and you tell me if it reminds you of something in pharmacy. “An Amazon spokesperson had this to say about the phantom buy boxes: “Sellers set their own product prices in our store. If a product is not priced competitively by a seller, we reserve the right to not feature that offer. Customers can still find all offers on the offer listings page.” https://www.bigcommerce.com/blog/win-amazon-buy-box/#the-changing-buy-box
“While there are many variables that influence your chances of winning the Buy Box and getting favored by Amazon’s algorithms, there are four that have the highest Buy Box impact:
Using Fulfillment By Amazon.
Seller-Fulfilled Prime.
Landed Price.
Shipping Time.”
“Only sellers who have purchased a Professional Seller account (in Europe called a Pro-Merchant account) are eligible.”
“There is no one trick to beating the Buy Box, but rather a complex web of metrics to be monitored and improved upon.”
For me, these descriptions of the buy box remind me of
1) formulary rebates for preferred brand items.
2) U&C pricing mandates in contracts
3) PBM credentialing requirements like the need for a URAC accreditation to join a specialty network or to join a PBM’s compounding network.
4) DIR fee performance metrics
I love the writings of Cory Doctorow about antitrust. I’d like to read a few excerpts from his recent blog posts.
“Fixing industry… requires action from the public sector. We can't make monopolies better by acting as "consumers" – we have to act as citizens.
“Consumer welfare's boosters understood its consequences: by focusing solely on what monopolies did to us as "consumers," we'd remove from consideration how monopoles acted on us as citizens.”
“Boycotts or other purchase decisions are not going to solve the monopoly problem. You're not a consumer, an ambulatory wallet who votes by buying or not buying. You're a citizen, who can and must demand action from your state on your behalf.”
https://pluralistic.net/2021/07/12/monopolist-solidarity/
Related to this issue of so called “antitrust” is the “right to Repair” movement – a diverse coalition of farmers, computer nerds, and motorheads who want to be able to fix their own devices. Let me demonstrate how important this movement is to our profession – how many of you own some kind of automation? How many of you are allowed under your software agreement with the automation maker, to fix your own device when it breaks, or to hire an independent repair shop to fix it? Our pharmacy owns an piece of automation – Last year, we got an email from the automation company saying that we had two choices – 1) we could pay them $10,000 to upgrade the guts of it to allow Windows 10, or 2) we could basically throw it away. It doesn’t cost $10,000 to upgrade the guts of a device to allow Windows 10, it costs MAYBE $2000, but due to the software agreement, the company acts as though they continue to own our device. (author’s note 2/2022, we threw it away).
How many of you own an iPhone? When it breaks, how do you fix it? Can you open it up and replace the broken parts? Can you hire your neighbor to do that for you? Or do you go to the apple store where they tell you to buy a new phone? And if you do try to fix it yourself, you quickly discover that the phone is deliberately designed to break worse if you try to fix it. These two examples are why the Right to Repair movement should matter to you.
Farmers experience the same kind of “fake ownership” with their John Deere tractors – John Deere claims to own the data generated by the tractor, data about soil conditions, moisture levels, etc. They’ll sell that data to the farmer for a fee. If the tractor breaks, John Deere demands that the farmer not fix it himself, but that he hire a John Deere authorized repair person, or else the software license is void, and they’ll stop servicing it.
A few weeks ago, President Biden signed an executive order around antitrust, instructing all agencies in the government to source their supplies from smaller companies, and to enforce the right to repair. While signing the order, the president said, “Forty years ago we chose the wrong path… following the misguided philosophy of people like Robert Bork, we pulled back on enforcing laws to promote competition. We are now forty years into the experiment of letting giant corporations accumulate more and more power.”
“What have we gotten from it?” Biden asked. “Less growth, weakened investment, fewer small businesses. Too many Americans who felt left behind, too many people who are poorer than our parents. I believe the experiment failed.”
Following the Executive Order, Cory Doctorow wrote,
“The Biden admin is refusing to treat agricultural repair as somehow different from automotive, electronic or appliance repair. More importantly, it's refusing to treat tech monopolies as separate from all monopolies.
This is crucial, because the same kind of diverse coalition that kept R2R alive is potentially a massive force for driving an antimonopoly agenda in general, because monopolies have destroyed lives and value in sectors from athletic shoes to finance, eyeglasses to beer.
The potential coalition is massive, but it needs a name. It's not enough to be antimonopoly. It has to stand for something.
As James Boyle has written, the term "ecology" changed the balance of power in environmental causes.
Prior to "ecology," there was no obvious connection between the fight for owl survival and the fight against ozone depletion. It's not obvious that my concern for charismatic nocturnal birds connects to your concern for the gaseous composition of the upper atmosphere.
"Ecology" turned 1,000 issues into a single movement with 1,000 constituencies all working in coalition. The antimonopoly movement is on the brink of a similar phase-change, but it needs to stand for something.
That something can't be "competition." Competition on its own is perfectly capable of being terrible. Think of ad-tech companies who say privacy measures are "anticompetitive." We don't want competition for the most efficient human rights abuses.”
“A far better goal is "self-determination" – the right for individuals and communities to make up their own minds about how they work and live, based on democratic principles rather than corporate fiat.”
https://pluralistic.net/2021/07/10/unnixing-the-fix/
Now that I’ve given a vision of how the issues we face in our industry are not unique, let’s talk a little about specific abuses in our industry, and what we can do as small business owners.
First, let’s talk about Effective Rates. You are all, I hope, familiar with the term, but for the benefit of the non-pharmacists in attendance today, let’s dive into how pharmacy pricing used to work and how it works under Effective Rates, and what kind of behaviors both systems incentivized by PBMs, insurers, manufacturers and pharmacies.
Ever since I started in pharmacy back in 2004, reimbursement to pharmacies has been driven by the same pricing algorithm: a payor will pay the pharmacy the lowest of a) the pharmacy’s submitted charge, b) the pharmacy’s “Usual and Customary” c) a contractual discount off of a benchmark price called “AWP” or d) a proprietary price list developed and maintained by the PBM called a “MAC” plus a nominal amount that theoretically represents the cost of preparing the prescription, called a “dispense fee.”
Under this pricing system, PBMs were able to insert themselves in the middle of the market between a pharmacy and the end payer. Through their market dominant position, they are able to squeeze ever lower prices from the pharmacy – show of hands, how many of you have seen a contract amendment where the dispense fee or AWP discount went in your favor? Precisely – the structure of these contracts was such that over time, the maximum price payable – the AWP discount, would decline over time. So would the dispense fee. In contracts that I review, the AWP discount typically increases by 0.25% every year, while the dispense fee declines by $0.05 every year. Today, one of the major PBMs literally offers no dispense fee at all in their standard template contract.
Now the MAC price is theoretically a market-based price, but in my experience it is arbitrarily set at the sole discretion of the PBM regardless of actual market conditions and invoice prices paid. This means that the livelihood of each of the small business owners in this room is largely tied to the caprice of a fortune 500 company. There is strong evidence from the wonderful folks at 3Axis Advisors that one PBM, CVS/Caremark, cut their MAC price simultaneously across the country across the entire price list by nearly 30% on one fine day in 2018. A few weeks later, pharmacy owners who had seen their reimbursements crater capriciously found that CVS/Pharmacy had sent them letters offering to purchase their pharmacy due to the “hard reality of declining reimbursements.”
So what then is an “effective rate” – in essence, an effective rate kills the MAC pricing game and replaces it with a fixed discount off AWP across all products. This is attractive to a PBM, because they don’t have to mess with MAC prices anymore, really, in order to meet their performance guarantees with their clients. It’s attractive to PSAOs because it gives a floor to reimbursement. For pharmacies that understand how it works and how to exploit it (basically dispense higher AWP products, always), it can be attractive. So what’s not to like?
1) for pharmacies that DON’T understand how it works, it can cause some serious financial pain – if you dispense a lot of a new first ANDA generic, which typically has a wholesale cost of ~AWP minus 25-50%, a true reimbursement of AWP minus 80-90% could be hundreds or even thousands of dollars lost on a single prescription, and dispensing a lot of it could add up quickly.
2) In scenarios like that, the pharmacy now has a vested interest in dispensing the BRAND product (which has a true reimbursement that might be just a smidge above cost). This increases the total cost to the plan sponsor.
3) GERs are the second coming of “spread pricing.” Spread pricing is a PBM remuneration scheme under which instead of paying a per claim fee or a per member per month fee for the PBM’s services in claims adjudication and formulary management, the PBM instead marks up the claims – they’ll pay the pharmacy $100 and charge the plan sponsor $150. Now a lot of plan sponsors don’t like this arrangement (to be clear – some do!) and so they require the PBM to “pass through the point of sale reimbursement to the plan” – basically they’ll prohibit spread pricing in their PBM contract. But a GER contract allows the PBM to circumvent that provision – they pass through the point of sale reimbursement to the plan, dollar for dollar, but then they claw back from the PSAO the difference between the point of sale reimbursement and the PSAO’s GER, pocketing THAT spread as margin for themselves.
GER is also advantageous to the PBM because many client facing contracts will contain a provision that the PBM must achieve a certain discount off AWP or else they have to pay back the difference to the plan – the PLAN has a GER with the PBM. So from the PBM’s perspective, establishing a GER with the pharmacies makes reaching that performance guarantee a simple matter – they just have to set the client facing GER at a lower discount than the pharmacy facing GER, and they are guaranteed to meet the guarantee, plus they can pocket the difference between the two as I described above.
So what is to be done about this scheme?
1) I believe that the national scale PSAO model has outlived its usefulness. The reason that PSAOs were originally established was to facilitate easier contracting between a PBM and small pharmacies, so that PBMs wouldn’t exclude small pharmacies from their networks simply due to the difficulty of contract management. Today, however, the PBMs are excluding PSAOs from a number of networks anyway, simply to gain bargaining leverage with the other PSAOs. So the network access function of a PSAO is no longer working. Additionally, PSAOs have no leverage at the table, because to have leverage, you have to have something the other guy wants, and to be able to say no, and mean it. But the PBMs have discovered that they can simply boot a PSAO from their network and all of the participant pharmacies will join their network anyway, one by one. We’ve seen this with Humana and with ESI. This means that the PSAOs will accept the take it or leave it contract, with minimal modifications from the PBMs. The PSAOs don’t have the solidarity of their members, first because they don’t really ask for it and second because most pharmacies will likely ask themselves what the point is of that solidarity, and third because they are not empowered to really do so legally – the antitrust laws against “strike action” by businesses have still been enforced.
I have found that there are advantages to be gained for an individual pharmacy by “going it alone” and contracting with PBMs on your own. I do have less access to some networks compared to being a part of a PSAO. However, my performance measurements in Part D are based on my pharmacy alone, rather than based upon the collective performance of several thousand pharmacies who I don’t control and who don’t have the same focus as me. Grouping pharmacies COULD be a good thing for performance measurement, but it requires that all of the pharmacies are aligned on the goals and not simply passively part of the network.
I see four alternatives to the incumbent PSAO model – one is the route we have gone – single pharmacy to PBM contracts – short term this makes sense, long term it feels like it continues to allow the PBMs to control the industry. A second is a PSAO bound by a state’s boundaries – you would form a PSAO that is confined to only Louisiana pharmacies for example. This PSAO could gain substantial bargaining leverage – you know the members of your state association and you’re willing to stand with each other to collectively say no to a bad contract, you probably don’t know the folks in New York. This state PSAO could gain substantial command of rural pharmacy access within a given state – PBMs need rural pharmacies, they don’t need urban pharmacies, because they have the chains for the urban areas. The most attractive part of the “state PSAO” model to me is that your agent-negotiators at the state level would be familiar with the quirks of your state’s laws, and would insist on contracts that adhere to your state laws, rather than agreeing to a contract that is identical across multiple states. If a PBM violates those provisions or isn’t willing to negotiate, this PSAO could refer the contract dispute to the state insurance commissioner and other state regulators like the attorney general.
The third and fourth models attempt to circumvent PBM contracting entirely. I call these routes “direct pharmaceutical care.” Under DRxC, you can go one of two ways – 1) you offer a membership to people in your area, and then sell them their medicines at cost, funding your operations out of the membership fees. This has the beauty of having no middleman between you and your patient. The second route is to find employers near you and charge the membership fee to them, and then sell generics to their employees at cost. An attractive part of this is that you can build in more services than simple dispensing – you can throw in packaging, med sync, clinical reviews of therapy, etc. These additional services are oftentimes a hard sell for an individual, but are attractive to an employer’s health plan. This route is extremely difficult in the short term, but in essence, you would simply offer terms to the employers and other plan sponsors near you for a bundled contract for a variety of services that are not included in typical PBM contracts, and throw in the dispensing of a formulary of generics at no additional cost. This requires substantial network development, very few employers will consider signing such a contract with a single pharmacy. But if you contract on an up front capitated rate plus a fee for value basis, you don’t need to bill individual prescription claims to the plan. I think that many of us are so attached to the status quo model of “bill single rx, get paid for single rx” that the concept of a capitation model without item level detail seems foreign. To me though, it seems rather silly that we involve complex billing systems in the billing and reimbursement of items that cost less than $4 wholesale for a year’s supply.
Today, I’ve offered some thoughts on how we can fix our profession’s reimbursement model to better favor the purchasers of our services and to be fairer to the pharmacists providing those services, by pushing back on the incumbent financial middlemen and their uniform, national-level contracting models.
The moneyed interests in our country – Bezos, the Waltons, CVS, Cigna, United and the big banks like to pretend that America is a homogenous mixture of people with identical laws and identical desires. They push laws and contracts that pretend that individuals and their local and state governments don’t really have power, and that if you just believe, you can ignore the nuances in our patchwork of democracy.
I’ve also offered my thoughts on how similar our plight is to that of our brothers and sisters in farming, in software development, in restaurant ownership, and across the economy. I firmly believe that it is the duty of small business owner pharmacists to lead in the new movement to reawaken the powers of our governments to protect the small operators against the predations of the financial elites who create middleman after middleman to extract value from every industry.
I want to challenge each of you in attendance to do three things:
1) read a book in the “new antitrust canon” – a group of about a dozen or so books about the history of antitrust, the context of monopolism today, and what we can do about it.
2) Reach out to other small business owners near you and ask them what kinds of abuses they receive from the PBM-equivalents in their industry.
3) Start a local “self determination” club with those other small businesses to talk about these problems and how to organize with them to solve these problems, through legislation and through direct deals that cut out these middlemen.
As a society, we are at a crossroads between monopoly power and economic malaise and the rebirth of self-determination and economic vitality. If we can show our neighbors how the PBM problem is just like their tractor problem and their GrubHub problem, I think that small business pharmacy has a bright future, full of potential. I hope that you’ll join me. Thank you.
Excellent speech Benjamin.
A significant differentiator of the prescription drug supply chain is the stakes involved -- we're talking about Americans' health. PBM behavior can directly cause death (not so with Tyson, Amazon, Apple).
Another difference is that the person receiving the goods (the patient receiving the medications) is often not the same entity paying for the goods. The payor is often an employer or taxpayers, for Medicare, or Medicaid.
Thank you for your helping to educate the public on this topic!
Very informative and well written. Years ago I was sued by one of the major PBM's on a project for a national union group doing an analysis of their contractual agreement( or lack of). These public entities thrive on the fact that corporate America is not willing to think out of the box to bring costs down. They have the marketing power. They also have the major/national employee benefit consulting firms working on their behalf.