CVS Throws a Temper Tantrum

'We're taking our prescriptions and going home!'

Photo credit: Mike Mozart

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Arkansas recently adopted a first-in-the-nation law to affirmatively break up the pharmacy industry middlemen known as pharmacy benefit managers, or PBMs for short. Once enacted, it will be illegal for PBMs to simultaneously own retail pharmacies in the state.

The logic behind that prohibition is sound: It’s an obvious conflict of interest for the entity that determines how much pharmacies are reimbursed for selling particular drugs and which pharmacies are in a given insurer’s network to also own a pharmacy network itself, since it can preference those pharmacies over their competitors, and there’s simply nothing the competitors can do about it.

That conflict of interest isn’t just theoretical: PBMs regularly put independent pharmacies out of business by under-reimbursing them for the drugs they dispense, levying abusive fees, and steering patients toward PBM-affiliated pharmacies. Since Jan 2024, more than 3,100 pharmacies, most of them independent, have shuttered in the U.S.

One of the most conflicted entities in this space is the pharmacy giant CVS, which is the largest U.S. pharmacy chain by revenue and also owns Caremark, one of the three largest PBMs. CVS Caremark has faced many legal complaints and investigations over allegations that it drives patients toward CVS-owned pharmacies and that it systematically under-reimburses independent pharmacies for dispensing drugs (meaning it pays them less per prescription that it pays itself), making it impossible for them to compete with CVS-owned outlets.

Under the Arkansas law, CVS will have to either divest from Caremark or from its network of pharmacies in the state. As expected, its leadership is not happy about that prospect, and is threatening to close every CVS in the state unless the law is taken off the books, and has sued to stop the law from going into effect. The message is: “Stop trying to break us up or we’ll take all our pills and go home.”

To her credit, Arkansas Gov. Sarah Huckabee Sanders is standing firm so far, writing in a New York Times op-ed that “Arkansas isn’t scared. We won’t sacrifice our veterans, seniors or rural patients in service of P.B.M. stock prices.”

But that isn’t the end of its shenanigans. Next door, in Louisiana, state legislators were considering a similar measure to Arkansas’, with the support of Gov. Jeff Landry. CVS sent out a slew of text messages threatening to close pharmacies in the state if the bill were to pass.

The Louisiana attorney general is investigating whether some of the recipients of those text messages were chosen by illegally tapping health records to which CVS had access under a state contract. (And the tactic may have backfired: While the bill did not pass, Landry seems likely to call the state legislature back into a special session specifically focused on drug prices, where the bill will almost certainly make a comeback.)

This has become a common-place play by the leaders of dominant corporations to fend off regulations they don’t like: Threaten to leave a state or shut down a line of business entirely if they don’t get their way.

For example, Facebook threatened to shut down news-sharing to residents of several states that were contemplating making tech firms compensate journalists when they profited off their content, most prominently in California. Uber threatened to abandon Minnesota if the legislature approved a minimum pay rate for ride share drivers, and did the same in Colorado over a ride share safety bill. And several corporations recently threatened to leave Delaware if it didn’t amend its already very-corporate-friendly laws to further preference corporate insiders.

And these threats work! The governors of Minnesota and Colorado both vetoed the ride share bills in question, Delaware amended its shareholder laws, and California Gov. Gavin Newsom forced the state to cave on its journalism bill.

Of course, there’s some level of plain political cowardice at work in those decisions. After all, Huckabee Sanders hasn’t caved (yet). But these threats also rendered effective by increased corporate concentration: If the pharmacy market were less concentrated, for example, everyone could just tell CVS to pound sand and be confident that its competitors could fill the void without CVS’ massive conflicts of interest, building a healthier pharmacy ecosystem in the state. But as those competitors have vaporized thanks to CVS’ dominance, the possibility of that occurring diminishes and the ability of CVS to inflict real damage by following through on its threats increases.

(It’s also worth noting that breaking up big conglomerates can be good for investors — as the individual parts are often worth more separate than all glued together — which is why corporations break themselves up all the time.)

Still, I’m optimistic this will turn out OK for Arkansas and that CVS either won’t be missed or will have its hole in the market filled by other players. Or it could simply read the writing on the wall that PBM breakups are coming — after all, all levels of government have been working on PBM reform in recent years — and simply break itself up.

It’s critical for the long-term health of the pharmacy industry that conflicts of interest such as the one between CVS’ pharmacy and PBM arms are eliminated. To bolster the odds that its reforms are a success, Arkansas could take further steps to help independent pharmacies, such as boosting dispensing fees.

That would help ensure CVS’ temper tantrum is just that — a lot of sound and fury signifying nothing but better pharmacy access for Arkansans.

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SIMPLY STATED: Here are links to a few stories that caught my eye this week.

• Connecticut is the latest state to ban undisclosed, mandatory junk fees. Six states now have comprehensive junk fee bans on the books.

• Missouri Gov. Mike Kehoe signed a bill providing public funding to new stadiums for the Kansas City Chiefs and Royals.

• The New York legislature approved a bill that would apply warning labels to social media platforms. The warnings would note, for example, that platforms have addictive features.

• Health insurance corporations are fighting state efforts to limit prior authorization requirements.

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— Pat Garofalo