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Column: Pharmacy middlemen claim to keep prescription prices low. In fact, they've cost consumers billions

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Column: Pharmacy middlemen claim to keep prescription prices low. In fact, they've cost consumers billions

In 2022, an executive of a big pharmacy middleman firm acknowledged the noxious reality of its business model:

It was designed to massively overcharge customers by steering them to its affiliated or “preferred” pharmacies or its home delivery subsidiary.

Referring to a generic version of Gleevec, a leukemia drug taken by nearly 200,000 patients, the executive noted in an internal memo that “you can get the drug at a non-preferred pharmacy (Costco) for $97, at Walgreens (preferred) for $9000, and at preferred home delivery for $19,200…. We’ve created plan designs to aggressively steer customers to home delivery where the drug cost is ~200 times higher.”

PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.

— Federal Trade Commission

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The executive concluded, “The optics are not good and must be addressed.”

What that memo described, according to a new report from the Federal Trade Commission, is standard operating procedure among the nation’s largest pharmacy benefit managers, or PBMs.

Originally devised in the 1960s as intermediaries helping health insurers process claims, steering doctors and hospitals to the cheapest drug alternatives and giving insurers greater leverage in negotiations with drug manufacturers, they soon became just another special interest in America’s fragmented healthcare system.

Thanks to a wave of consolidation and growth of healthcare conglomerates, the FTC says, the three largest PBMs manage nearly 80% of all prescriptions filled in the U.S. They have accumulated enough power to profit “by inflating drug costs and squeezing Main Street pharmacies,” driving the independents out of business.

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Once posed as an answer to high drug costs, they’re today at the hub of a system that drives up drug prices for consumers.

Starting in the 1990s, some of the biggest PBMs were acquired by drug companies, creating conflicts of interest that led to federal orders for divestment.

Then came a wave of mergers and acquisitions within the PBM universe, followed by acquisitions by insurers and pharmacy companies — CVS acquired Caremark, then the biggest PBM, in 2007 and UnitedHealth merged CatamaranRx, then the fourth-largest PBM, into OptumRx in 2015.

Between 2000 and 2021, 39 individual healthcare companies — drugstore chains, health insurers, managed care firms and PBMs — all coalesced into three healthcare behemoths, Cigna, CVS and UnitedHealth.

CVS Health Corp. owns not only the Caremark PBM, which controls 34% of the prescription market, but the insurance company Aetna and about 9,000 retail drugstores.

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Cigna Group, which has a prescription market share of 23%, owns the mail-order PBM Express Scripts and the Cigna insurance company. UnitedHealth Group is the largest U.S. health insurer and owns 1,000 walk-in health clinics as well as physician groups; through its OptumRx PBM, its prescription market share is 22%.

Between 2000 and 2021, mergers and acquisitions combined these 39 independent healthcare companies into three huge conglomerates.

(Federal Trade Commission)

Along with Humana, the fourth-ranked PBM with a market share of 7%, those conglomerates produced combined revenue of $456 billion in 2016, 14% of national health spending. Today, they collect more than $1 trillion in revenue, or 22% of U.S. healthcare spending.

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Despite the predictably anticompetitive effects of these mergers and acquisitions, not a single one was challenged by antitrust enforcement agencies, says the FTC — one of the antitrust regulators asleep at the switch.

Among the stratagems employed by PBMs to boost profits, the FTC says, is steering health plans and patients to their own affiliated pharmacy chains.

Some patients have discovered that their drugs won’t be covered by their insurers unless they buy them at specified pharmacies, the result of deals the PBMs have made with insurers, including those with which they share a parent. But the customers may have to pay more out of pocket at the affiliated pharmacies than they would at an independent.

The FTC staff found that for “specialty prescriptions” — a designation the PBMs place on certain drugs, often without explanation — 55% were filled at affiliated pharmacies. The same ratio didn’t occur with prescriptions under Medicare’s Part D prescription coverage, because federal law requires that those prescriptions can be filled at almost any licensed pharmacy. Only 22% of Part D prescriptions were filled at PBM-affiliated pharmacies. That suggests that PBMs may be steering patients to their pharmacies where that’s not forbidden by law.

The statistics were drawn from submissions by two of the three top PBMs, which are unidentified. The third didn’t submit the necessary data.

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The FTC also touches on a relatively new wrinkle in drug pricing — rebates by drugmakers to PBMs in order to gain preferential positions in drug formularies.

The agency says its review of contracts between manufacturers and PBMs shows that some drug companies promise PBMs higher rebates if the latter exclude competing drugs from their formularies — including generic versions that are chemically identical to the brand-name products — or require prior authorization before covering the rival drugs.

Predictably, the big PBMs and their lobbyists find much to dislike in the FTC report, which the agency describes as an interim staff report, part of an investigation launched in 2022.

A spokesperson for Cigna’s Express Scripts criticized the report for “blatant inaccuracies” (but didn’t offer specifics in an email to me). A spokesman for CVS blamed drugmakers for high prescription prices, stating that an FTC effort to “limit the use of PBM negotiating tools would instead reward the pharmaceutical industry.” Optum didn’t reply to my request for comment.

J.C. Scott, president of the Pharmaceutical Care Management Assn., the PBM lobbying arm, accused the FTC of advancing “pre-determined conclusions … irrespective of the facts or the data.”

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Drawing from more than 1,200 comments submitted by stakeholders in healthcare and by other members of the public, the agency outlined a host of methods PBMs are accused of using to benefit their affiliated services, block patient access to inexpensive generics and pocket discounts that should properly go to customers.

The FTC also mined lawsuits, including a 2023 case the state of Ohio filed against Express Scripts, charging that the PBM exploits its knowledge that “Ohioans in need of medication, particularly life-saving medication, will pay the asking price. The choice is binary — pay or suffer.”

Drug manufacturers capitulate to the PBMs’ rebate demands, the lawsuit says, to avoid being dropped from the PBMs’ formularies, the rosters of drugs that they’ll cover. “Patients pay more, manufacturers get less, and the PBMs profit. Handsomely.”

PBMs have been the targets of drug industry participants for years — sometimes fingered by drugmakers or insurers to deflect accusations that they’re responsible for prescription drug inflation.

It may be true that all those entities share the blame for high prices. Over the last couple of decades, however, all have become tentacles of the same octopus. The consolidation of drug chains, physician groups, insurers and PBMs into conglomerates has made it much harder to identify responsibility for drug inflation.

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Contracts between PBMs and unaffiliated pharmacies, the FTC says, are “opaque, complex, and conditional, making it challenging to understand what pharmacies will ultimately be paid for any given drug.” The result is that smaller, nonchain pharmacies may get pushed out of the market, “leading to higher costs and lower quality services for people around the country.”

The FTC report offers two case studies involving generic cancer drugs in which the agency says PBMs reimbursed their affiliated pharmacies more for prescriptions than unaffiliated pharmacies, yielding nearly $1.6 billion in gross profits from 2020 through mid-2022 for those affiliated pharmacies over the national average of those drug costs.

The drugs are a generic version of Zytiga, a treatment for prostate cancer, and a generic for Gleevec, a drug for leukemia. The high reimbursement rates for druggists dispensing those drugs may “translate into high out-of-pocket costs for patients,” the FTC says. In other words, “PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.”

Magnify the gains on those two drugs by the potential profits the PBMs may be extracting from the entire spectrum of prescription pharmaceuticals, and the toll becomes breathtaking.

reimbursement rates

Prices that PBMs paid affiliated pharmacies for the generic version of prostate cancer drug Zytiga were much higher than they paid independent pharmacies, and much higher than the national average cost. As a result, patients may have been charged much higher co-pays at the affiliates — but may not have had any other option.

(FTC)

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“It appears that PBMs are having the commercial health plans and Medicare Part D prescription drug plans they manage pay their affiliated pharmacies rates that are grossly in excess” of national average prices or prices paid to unaffiliated pharmacies.

No one escapes the consequences of this sort of market manipulation. The internal transactions, largely hidden from the public and regulators, may distort the statistics that health plans submit to the government to show they meet the coverage standards required by the Affordable Care Act, allowing the conglomerates to “game” the rules, the FTC says.

They may drive up healthcare costs for self-insured clients such as large companies, which may pare back health coverage for their employees as a result.

They can raise co-pays for patients, lead to cutbacks in the availability of coverage for some drugs, or prompt patients to ration their prescriptions, risking their health to save money. To the extent they affect Part D, they may drive up government spending.

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To quote the Ohio lawsuit, PBMs were created as a counterweight to perceived profiteering by Big Pharma. But once they “grew powerful enough to themselves extract exorbitant fees … the solution became the problem.”

The FTC says it issued its interim report because several PBMs haven’t provided the agency with the information they’re required to submit, hindering its ability to complete its investigation.

At the very top of the report, the FTC warns that the firms better come across “promptly,” or they’ll be taken to court. The FTC should start suing now, because the PBMs’ apparent code of silence raises a familiar question: What must they be hiding?

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In-N-Out Burger outlets in Southern California hit by counterfeit bill scam

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In-N-Out Burger outlets in Southern California hit by counterfeit bill scam

Two people allegedly used $100 counterfeit bills at dozens of In-N-Out Burger restaurants in Southern California in a wide-reaching scam.

Glendale Police officials said in a statement Friday that 26-year-old Tatiyanna Foster of Long Beach was taken into custody last month. Another suspect, 24-year-old Auriona Lewis, also of Long Beach, was arrested in October.

Police released images of $100 bills used to purchase a $2.53 order of fries and a $5.93 order of a Flying Dutchman.

The Los Angeles County District Attorney’s Office charged Lewis with felony counterfeiting and grand theft in November.

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Elizabeth Megan Lashley-Haynes, Lewis’s public defender, didn’t immediately respond to a request for comment.

Glendale police said that Lewis was arrested in Palmdale in an operation involving the U.S. Marshals Task Force. Foster is expected in court later this month, officials said.

”Lewis was found to be in possession of counterfeit bills matching those used in the Glendale incident, along with numerous gift cards and transaction receipts believed to be connected to similar fraudulent activity,” according to a police statement.

A representative for In-N-Out Burger told KTLA-TV that restaurants in Riverside, San Bernardino and San Diego counties were also targeted by the alleged scam.

“Their dedication and expertise resulted in the identification and apprehension of the suspects, helping to protect our business and our communities,” In-N-Out’s Chief Operations Officer Denny Warnick said. “We greatly value the support of law enforcement and appreciate the vital role they play in making our communities stronger and safer places to live.”

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The company, opened in 1948 in Baldwin Park, has restaurants in nine states.

An Oakland location closed in 2024, with the owner blaming crime and slow police response times.

Company chief executive Lynsi Snyder announced last year that she planned to relocate her family to Tennessee, although the burger chain’s headquarters will remain in California.

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Newsom’s budget includes $200 million to make up for Trump’s canceled EV rebates, among other climate items

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Newsom’s budget includes 0 million to make up for Trump’s canceled EV rebates, among other climate items

Gov. Gavin Newsom on Friday doubled down on California’s commitment to electric vehicles with proposed rebates intended to backfill federal tax credits canceled by the Trump administration.

The plan would allocate $200 million in one-time special funds for a new point-of-sale incentive program for light-duty zero-emissions vehicles. It was part of a sweeping $348.9-billion state budget proposal released Friday, which also included items to address air pollution and worsening wildfires, amid a projected $3-billion state deficit.

EVs have become a flashpoint in California’s battle against the Trump administration, which moved last year to repeal the state’s long-held authority to set strict tailpipe emission standards and eventually ban the sale of new gas powered cars.

Last year, Trump ended federal tax credits of up to $7,500 for EV customers that were part of President Biden’s 2022 Inflation Reduction Act. In September, his administration also let lapse federal authorization for California’s Clean Air Vehicle decal program, which allowed solo EV drivers to use carpool lanes.

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“Despite federal interference, the governor maintains his commitment to protecting public health and achieving California’s world leading climate agenda,” Lindsay Buckley, spokesperson for the California Air Resources Board, said in an email. “This incentive program will help continue the state’s ZEV momentum, especially with the federal administration eliminating the federal EV tax credit and carpool lane access.”

Newsom had previously flip-flopped on this idea, first vowing to restore a state program that provided up to $7,500 to buy clean cars and then walking it back in September. That same month, a group of five automakers including Honda, Rivian, Hyundai, Volkswagen and Audi wrote a letter urging Newsom and state legislators to establish a $5,000 EV tax rebate to replace the lost federal incentives, Politico reported.

During his State of the State speech Thursday — one year after the devastating Palisades and Eaton fires in Los Angeles — Newsom said California “refuse[s] to be bystanders” while China and other nations take the lead on electric vehicles and the clean energy transition. He touted the state’s investments in solar, hydrogen, wind and nuclear power, as well as its recent move away from the use of any coal-fired power.

“We must continue our prudent fiscal management, funding our reserves, and continuing the investments Californians rely on, from education to public safety, all while preparing for Trump’s volatility outside our control,” the governor said in a statement. “This is what responsible governance looks like.”

Several environmental groups had been urging Newsom to invest more in clean air and clean vehicle programs, which they say are critical to the state’s ambitious goals for human health and the environment. Transportation is the largest source of climate and air pollution in California and is responsible for more than a third of global warming emissions, said Daniel Barad, Western states policy manager with the nonprofit Union of Concerned Scientists.

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“As federal attacks threaten California’s authority to protect public health, incentives are more essential than ever to scale up clean cars and trucks,” Barad said. “The governor and legislative leaders must act now to fully fund zero-emission transportation and pursue new revenue to grow and sustain climate investments.”

Katelyn Roedner Sutter, California senior director with the nonprofit Environmental Defense Fund, called it “an essential step to save money for Californians, cut harmful pollution, spur innovation, and support the global competitiveness of our auto industry.”

While the budget proposal does not include significant new spending proposals, it contains other line items relating to climate and the environment. Among them are plans to continue implementing Proposition 4, the $10-billion climate bond approved by voters in 2024 for programs geared toward wildfire resilience, safe drinking water, flood management, extreme heat mitigation and other similar efforts.

Among $2.1 billion in climate bond investments proposed this year are $58 million for wildfire prevention and hazardous fuels reduction projects in vulnerable communities, and nearly $20 million to assist homeowners with defensible space to prevent fire. Water-related investments include $232 million for flood control projects and nearly $70 million to support repairs to existing or new water conveyance projects.

The proposal also lays out how to spend money from California’s signature cap-and-trade program, which sets limits on greenhouse gas emissions and allows large polluters to buy and sell unused emission allowances at quarterly auctions. State lawmakers last year voted to extend the program through 2045 and rename it cap-and-invest.

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The spending plan includes a new tiered structure for cap-and-invest that first funds statutory obligations such as manufacturing tax exemptions, followed by $1 billion for the high speed rail project, $750 million to support the California Department of Forestry and Fire Protection, and finally secondary program funding such as affordable housing and low-carbon transit options.

But while some groups applauded the budget’s broad handling of climate issues, others criticized it for leaning too heavily on volatile funding sources for environmental priorities, such as special funds and one-time allocations.

The Sierra Club called the EV incentive program a crucial investment but said too many other items were left with “patchwork strategies that make long-term planning harder.”

“Just yesterday, the Governor acknowledged in his State of the State address that the climate risk is a financial risk. That is exactly why California needs climate investments that are stable and ongoing,” said Sierra Club director Miguel Miguel.

California Environmental Voters, meanwhile, stressed that the state should continue to work toward legislation that would hold oil and gas companies liable for damages caused by their emissions — a plan known as “Make Polluters Pay” that stalled last year amid fierce lobbying and industry pressure.

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“Instead of asking families to absorb the costs, the Legislature must look seriously at holding polluters accountable for the harm they’ve caused,” said Shannon Olivieri Hovis, California Environmental Voters’ chief strategy officer.

Sarah Swig, Newsom’s senior advisor for climate, noted that the state’s budget plan came just days after Trump withdrew the United States from the United Nations Framework Convention on Climate Change, a major global treaty signed by nearly 200 countries with the aim of addressing global warming through coordinated international action.

“California is not slowing down on climate at a time when we continue to see attack after attack from the federal government, including as recently as this week with the Trump administration’s withdrawal from the UNFCCC,” Swig told reporters Friday. “California’s leadership has never mattered more.”

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Abandoned shops and missing customers: Fire-scarred businesses are still stuck in the aftermath

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Abandoned shops and missing customers: Fire-scarred businesses are still stuck in the aftermath

The charred remains of the historic Pacific Palisades Business Block cast a shadow over a once-bustling shopping district along West Sunset Boulevard.

Empty lots littered with debris and ash line the street where houses and small businesses once stood. A year since the Palisades fire roared through the neighborhood, only a handful of businesses have reopened.

The Starbucks, Bank of America, and other businesses that used to operate in the century-old Business Block are gone. All that remains of the Spanish Colonial Revival building are some arches surrounding what used to be a busy retail space. The burned-out, rusty remnants of a walk-in vault squat in the center of the structure.

Nearby, the Shade Store, the Free-est clothing store, Skin Local spa, a Hastens mattress store, Sweet Laurel Bakery and the Hydration Room are among the many stores still shuttered. Local barbershop Gornik & Drucker doesn’t know if it can reopen.

“We have been going back and forth on what it would take to survive,” co-owner Leslie Gornik said. “If we open, we have to start over from scratch.”

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Hundreds gathered around Business Block on the anniversary of he fire on Wednesday to witness a military-style white-glove ceremony to pay respects to the families who lost loved ones. Photos of those killed from the neighborhood were placed at the Palisades Village Green next door.

The Palisades fire burned for 24 days, destroying more than 6,800 structures, damaging countless others and forcing most of the neighborhood’s residents to move elsewhere. About 30 miles northeast, the Eaton fire burned more than 9,400 structures. Combined, the fires killed 31 people.

Remnants of the the Pacific Palisades Business Block, which was completed in 1924 and burned in the Palisades fire.

The few businesses that are back in Palisades serve as a beacon of hope for the community, but owners and managers say business is down and customers haven’t returned.

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Ruby Nails & Spa, located near the Business Block, was closed for eight months before reopening in September. Now business is only half of what it was before the fires, owner Ruby Hong-Tran said.

“People come back to support but they live far away now,” she said. “All my clients, their houses burned.”

Ruby Hong-Tran, owner of Ruby Nails & Spa in Pacific Palisades, says her business is half of what it was since reopening.

Ruby Hong-Tran, owner of Ruby Nails & Spa in Pacific Palisades, says her business is half of what it was since reopening.

It took months to clean all the smoke damage from her shop. The front is still being fixed to cover up burn damage.

The firestorms destroyed swaths of other neighborhoods, including Malibu, Topanga, Sierra Madre and Altadena, where businesses and homeowners also are struggling to build back.

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Some are figuring out whether it is worth rebuilding. Some have given up.

The Los Angeles Economic Development Corporation estimated last year that more than 1,800 small businesses were in the burn zones in Pacific Palisades, Malibu and Altadena, impacting more than 11,000 jobs.

Businesses say they often have been on their own. The Federal Emergency Management Agency tasked the U.S. Army Corps of Engineers to clean up debris at private residences, some public buildings and places of worship — but not commercial properties.

Business owners had to clean up the charred debris and toxic waste on their properties. Many had to navigate complicated insurance claims and apply for emergency loans to stay afloat.

Rosie Maravilla, general manager of Anawalt’s Palisades Hardware, said damage to her store was limited, and insurance covered the cleaning, so she was able to open quickly. The store reopened just one month after the fire.

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Rosie Maravilla, general manager of Anawalt Palisades Hardware, in front of of the store in Pacific Palisades.

Rosie Maravilla, general manager of Anawalt Palisades Hardware, in front of of the store in Pacific Palisades.

Still, sales are 35% lower than what they used to be.

“In the early days, it was bad. We weren’t making anything,” Maravilla said. “We’re lucky the company kept us employed.”

The customer base has changed. Instead of homeowners working on personal projects, the store is serving contractors working on rebuilding in the area.

An archival image of the area in Pacific Palisades hangs over the aisles in Anawalt Palisades Hardware.

An archival image of the area in Pacific Palisades hangs over the aisles in Anawalt Palisades Hardware, where business is down despite a customer base of contractors who are rebuilding.

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Across the street from the Business Block, the Palisades Village mall was spared the flames and looks pristine, but is still closed. Shop windows are covered with tarps. Low metal gates block entry to the high-end outlets. The mall is still replacing its drywall to eliminate airborne contaminants that the fire could have spread.

All of its posh shops still are shut: Erewhon, Lululemon ,Bay Theater, Blue Ribbon Sushi, athletic apparel store Alo, Buck Mason men’s and Veronica Beard women’s boutiques.

Mall owner and developer Rick Caruso said he is spending $60 million to reopen in August.

The need to bring back businesses impacted by the fires is urgent, Caruso said, and not just to support returning residents.

“It’s critical to bring jobs back and also for the city to start creating some tax revenue to support city services,” he said. ”Leaders need to do more to speed up the rebuilding process, such as speeding up the approval of building permits and stationing building inspectors closer to burn areas.”

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Pedestrians walk past the Erewhon market in Palisades Village that plans to reopen this year.

Pedestrians walk past the Erewhon market in Palisades Village that plans to reopen this year.

(Genaro Molina/Los Angeles Times)

Wednesday, on the anniversary of the fire, Caruso sent three light beams into the sky over the mall, which met in one stream to honor the impacted communities of Pacific Palisades, Altadena and Malibu.

The nighttime display will continue through Jan. 31.

Business Block’s history dates to 1924, when it served as a home for the community’s first ventures. In the 1980s, plans to tear it down and build a mall sparked a local uprising to save the historic symbol of the neighborhood’s vibrancy. It was designated a Los Angeles Historic-Cultural Monument in 1984.

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Tiana Noble, a Starbucks spokesperson, said the landlord terminated the company’s lease when the building burned down. Bank of America said it secured a new lease to rebuild nearby.

Business Block’s fate is still unclear. Some people want to preserve its shell and turn it into a memorial.

This week, it was ringed by a fence emblazoned with the words “Empowering fresh starts together.”

Caruso said the ruins should be torn down.

“It needs to be demolished and cleaned up,” he said. “It’s an eyesore right now and a hazard. I would put grass on it and make it attractive to the community.”

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Twisted and scorched remnants of the the Pacific Palisades Business Block still are there a year after the fire.

Twisted and scorched remnants of the the Pacific Palisades Business Block still are there a year after the fire.

A short walk from the Business Block and near a burned-down Ralphs grocery store is the Palisades Garden Cafe, one of the few places in the neighborhood to get food and drink. The small, vibrant cafe was closed for two months after the fire, during which the employees went without pay.

Manager Lita Rodriguez said business is improving, but misses the regulars.

“We used to get tons of students and teachers who live and work here,” she said. “Our customers are mostly contractors now.”

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