The Red Wedding for Rural Pharmacies

Welcome to BIG, a newsletter about the politics of monopoly. If you’d like to sign up, you can do so here. Or just read on…

First some good news. Last week, I reported on how a bad judge dismissed an important antitrust suit against Amazon. Well the state Attorney General involved, Karl Racine, just said he will be filing a motion for reconsideration, which is basically an appeal. Yay!

Ok, onward. Today I’m writing about what happens when a monopolist gets mad. In this case, it’s health giant Cigna taking revenge on rural pharmacies and patients after the Biden administration tried to slightly reduce the firm’s profits from Medicare prescription drug benefits.

I’ll also show how antitrust enforcers have stopped being polite and are starting to get real. The FTC’s Lina Khan is going after TurboTax maker Intuit for false and deceptive practices, and the Antitrust Division’s Jonathan Kanter blocked a big but obscure merger of port crane producers.

And now this ...

The most famous episode of the HBO hit series Game of Thrones was The Rains of Castamere, otherwise known as the ‘Red Wedding.’ The Red Wedding is perhaps the ugliest and most disproportionate sense of revenge ever aired on TV. In it, a regional warlord named Robb Stark attends a wedding of one of his vassals that is supposed to help patch up a minor dispute with a fellow warlord, Walder Frey. The wedding is at Frey’s castle, and Frey invites Stark, his family, and his soldiers to feast. For a time, everyone makes merry, but towards the end of the evening, Frey has his troops ambush Stark and his now-drunk band. Frey has everyone massacred, and even has one of his soldiers stab Stark’s pregnant wife in the belly to ensure he kills the unborn child.

The message from Frey to all future rivals was crystal clear. Don’t mess with me. Though fictional, Game of Thrones draws from medieval history, and such tales of vengeance are not unusual. English history, French history, and many empires of conquest pursued such a strategy of brutalizing subjects so viciously they wouldn’t consider fighting back in the future. These strategies are common because they work. For instance, Mongol empire had many cities surrender without a fight, due to fear that the Mongols would massacre everyone inside should they put up an inch of resistance.

The point of these stories isn’t just about geopolitics, but what happens when humans have too much power over other humans. Which brings me to the problem of monopolies, and what some of them do when they are even slightly challenged. A few months ago, the Biden administration put out a rule to regulate the pharmacy benefits management business, an opaque but massive part in the pharmaceutical drug supply chain. PBMs handle the drug benefit piece of insurance plans. They maintain a list of drugs for insurance companies, they negotiate drug prices, and they manage reimbursements to pharmacies.

The original idea behind PBMs is they would be able to get enough bargaining power by representing multiple insurance companies that they could negotiate to bring down drug prices. And accumulate bargaining power they did, merging until three PBMs control 80% of the insurance market. They are also vertically integrated with insurance companies and drug store chains. The top three PBMs are owned by CVS, United Health, and Cigna.

Unfortunately, because of an exemption from anti-kickback laws, PBMs don’t use their bargaining power to reduce consumer prices. Instead, they force pharmaceutical firms to compete over who will give the PBM the biggest kickback, which in the industry is known as a rebate. Take insulin. In 2013, Sanofi gave a 2-4% kickback to PBMs to prefer their product to customers. In 2018, that number went up to 56%. In other words, more than half of the price of insulin is going to a middleman who does nothing more than push around paper.

The many bad practices of PBMs are legendary. PBMs often force customers to buy more expensive drugs over their generic counterparts, likely because they get kickbacks when customers do so. This ends up making this obscure group of firms a lot money. The combined revenue of the top three firms, who comprise just a small part of the U.S. health system, is larger than the entire amount France spends on all medical care for its entire population.

It gets worse. PBMs all own mail-order pharmacies, and they are increasingly mandating that patients use those mail-order pharmacies instead of the local pharmacy around the corner. Moreover, PBMs now have so much power they are able to claw back money randomly from pharmacies months after a drug was dispensed, using something called a Direct and Indirect Remuneration fee. (DIR fees are only used for Medicare plans, but that is still 37% of the market.) For independent pharmacies, DIR fees are impossible to plan for, they are opaque, and they end up raising prices for consumers.

PBMs are particularly bad for independent pharmacies, who are a critical lifeline in many underserved parts of America. 77% of independent pharmacies serve communities with fewer than 50,000 people. In these places, the independent pharmacist often is the health care infrastructure. Seven in ten do free home delivery, a service which is virtually non-existent with chains. The amount that PBMs have been reimbursing these pharmacists has been going down for years, to the point that many are losing money depending on the medicine they are filling for customers. To put it differently, it’s the equivalent of Amazon raising fees on third party sellers, or Tyson cutting the amount they pay to cattle ranchers.

A few months ago, the Biden administration proposed eliminating most DIR fees, which would get rid of a good, but not critical, profit center for giant PBMs. It looked like a nice win for the anti-monopolists, patients, and independent pharmacies. Last week, however, a contact passed me a new contract from Express Scripts, the giant PBM owned by Cigna.

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Cigna has about a quarter of the PBM market, which means that one out of every four people who goes to a pharmacy to get drugs is using Cigna insurance. There’s regional variation, so in some places Cigna won’t have much market share, while in states like Georgia, something like 50% of the Medicare drug plans are Cigna plans. As one pharmacist put it to me, “If you don’t sign these contracts, then a third of patients won’t come to me because they won’t be able to get their services through their insurance benefits.” In other words, pharmacists can’t turn away a third of the people who come into the store, so they tend accept whatever terms Cigna offers.

And as it turns out, Cigna’s offer to pharmacists just got a lot worse. PBM pricing is insanely weird and complex, so I’ll try to explain it to you. The short story is Express Scripts is cutting revenue to partners so significantly that any independent pharmacist who accepts Express Scripts customers - which can be up to half of all customers depending on the region - will now lose money going forward on Express Scripts customers.

Here’s the contract. First, take a look at the intro page.

Express Scripts is very clear that this new contract is done entirely because of the new regulation, and the new terms are “intended to offer participating Providers the same financial value” as the old one with DIR fees. So that’s clear enough. But that’s not all. In the last paragraph, Express Scripts writes, “No action is needed to accept participation in this Network. Should you wish to decline participation, you may so so within the time allotted under your Pharmacy Provider Agreement.” For most contracts under Express Scripts, that time allotted is ten days. In other words, Cigna is sending an important new contract to its partners, and if they don’t say no in ten days, they have said yes. Contracts usually are two way agreements by both parties, so this strikes me as an abusive way of conducting business.

And the reason why is that the pricing has changed.

Pricing in this industry is weird and insane, but I’ll try to make it as simple as possible. (If you want to understand it for real, here’s an hour and a half-long podcast teaching you the language of pharma pricing.) Pharmacists buy branded drugs at a rate based on something called the Average Wholesale Price (AWP), minus roughly 20%. To make a profit selling a branded drug, a pharmacist needs to be reimbursed at a higher rate than that amount. Under the new contract, for a prescription of less than 30 days, pharmacists will now get the average wholesale price minus 26.3%, and for filling one of more than 30 days, they will get the average wholesale price minus 31.30%. In other words, every branded drug through Express Scripts means that the independent pharmacist loses money. (In case you’re wondering why pharmacists don’t just raise prices to cover the extra cost, they can’t. They have no power over prices, everything works through reimbursement amounts set by contracts with PBMs.)

As a specific example, filling one prescription of Trelegy Ellipta, which is an asthma medication, using the 2023 rates would result in one pharmacist losing $248. And that’s just on one drug. In other words, these contracts are designed to make it so that independent pharmacists can no longer accept Express Scripts customers without losing money.

Such an action is quite ugly for a monopolist, to take umbrage at a slight harm to their profit and decide to salt the earth in response. It may also be illegal, as Medicare part D plan offerers must actually have a network of pharmacies that is convenient for 90% of their Medicare customers, and kicking most rural pharmacies out of a network will likely do that. But that’s not the Red Wedding part of this situation, because there is also real physical harm, not just economic damage, occurring as a result. What CVS, Cigna, and United Health are all doing is pushing customers to order medicine from their mail-order pharmacies, which brings them higher profit margins. These mail-order pharmacies, in order to generate high margins, are often poorly run, with little customer service and frequent mistakes.

What happens to the patients? Well back in February, the Federal Trade Commission opened up a docket for public comments on this topic, and here are a few of them.

And another.

And another.

And a cancer center specialist.

There are hundreds of comments on the docket, and these are a drop in the bucket. You can check out the awful reviews for Accredo, a mail-order specialty pharmacy owned by Express Scripts, if you want more. People are being hurt, badly, and probably dying, because PBMs are directing more people to their mail order pharmacy business. (In case you’re interested in why this is legal, it’s because economists at the Federal Trade Commission argued since the 1980s that this practice is efficient.)

What Express Scripts is doing wouldn’t matter if large PBMs didn’t have market power or engage in practices to get kickbacks, because then pharmacists could negotiate on a more equal level and reject contracts that forced them to lose money, and PBMs wouldn’t have the incentive to play administrative and financial games with people’s lives. Everything would be a lot more straightforward, and pharmacists would get paid for dispensing the medication people need at a reasonable price. But Express Scripts does have market power, and pharmacists have a really tough time saying no and losing access to their customers.

For now, it seems like Express Scripts is the only large PBM taking this approach. But if the other two dominant PBMs follow along, and I expect they will, then independent pharmacies will basically no longer be able to accept Medicare prescription drug plans. And that’s a large chunk of their business. A lot of people will then be forced to get their medicine through the mail, and be on hold when those poorly run specialty pharmacists get their orders wrong. That’s not fun when you are ordering clothing. It can be deadly when it’s the medicine you need to stay alive.

Quote of the Day

What Happens When Enforcers Stop Being Polite

Both the Federal Trade Commission and the Department of Justice Antitrust Division acted boldly today. First, it’s near tax filing day. So here’s the FTC going after TurboTax filing software maker Intuit, which is a very bad actor.

Intuit has been deceiving people for years, telling them their software is free and then charging them money anyway. In 2020, for instance, only a third of tax filers were eligible to use TurboTax’s free product.

It’s not a surprise that Intuit is dirty, because TurboTax is one of those products that shouldn’t really exist. In fact, in a lot of countries, there is no filing of taxes. The national tax authority has your data, and just does your taxes for you. Not so in the U.S. Intuit, which makes TurboTax, has lobbied Congress to block the IRS from doing your taxes for you. Intuit's Turbotax, in other words, is basically a pointless software package attached to a political slush fund designed to annoy and scare Americans at tax time.

Intuit also cheats people by deceiving them about the cost of the product. Finally, the FTC is cracking down on the deception piece, though it was a 3 to 1 vote. Who dissented? As usual, it was Republican Commissioner Noah Phillips on the side of letting Intuit cheat you at tax time. He seems fun.

Meanwhile, Jonathan Kanter’s DOJ Antitrust Division just blocked a merger between Cargotec and Konecranes in an arcane but critical supply chain arena, the “manufacture and supply of four types of container handling equipment: straddle carriers, rubber-tired gantry cranes, automated stacking cranes, and rail-mounted gantry cranes. Each piece of equipment has a unique design that allows the equipment to move containers between different modes of transportation in the supply chain.” These products do not roll off the tongue, but the failure to invest in enough of them, as well as other port infrastructure, has led us to substantial delays in shipping and thus price hikes.

What I’m Reading

• https://www.forbes.com/sites/kevindowd/2022/03/28/fed-rate-hikes-could-cause-bankruptcies-to-bloom-in-private-equity-portfolios/?sh=1d701a0917aa

• People Don’t Care About Total Drug Prices, Ramblings of a Pharmacist

• I Am A Twenty Year Truck Driver, Part 2: How Truckers Are Paid, Medium

• G.O.P. Senate Hopeful Faces Scrutiny Over Handling of Teacher Pensions, New York Times

• Truist Merger: New Branch Investment Cut Out Low-income, Diverse Areas, CWA

• Walmart Kills Wages, Boondoggle

• UBS agrees to acquire Wealthfront to deliver digital wealth management offering to millennial and Gen Z affluent investors, UBS. This is a space with lots of roll-ups.

• The NFT gaming backlash reaches a fever pitch, Protocol

• Fed Rate Hikes Could Cause Bankruptcies To Bloom In Private Equity Portfolios, Forbes

Thanks for reading!

And please send me tips on weird monopolies, stories I’ve missed, or comments by clicking on the title of this newsletter. And if you liked this issue of BIG, you can sign up here for more issues, a newsletter on how to restore fair commerce, innovation and democracy. And consider becoming a paying subscriber to support this work, or if you are a paying subscriber, giving a gift subscription to a friend, colleague, or family member.

cheers,

Matt Stoller