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La Conner Drug Store is not the first small-town, family-owned drug store to go out of business in recent years. Rite Aid, hopefully the new home of former employees from La Conner Drug and Island Drug, is itself in bankruptcy.

The conservative advocacy group Association of Mature American Citizens reports that 2,000 U.S. pharmacies closed between 2017 and 2020. Forbes wrote last September, "CVS, Walgreens and Rite Aid were closing nearly 1,500 stores. Between 1980 and 2022 the number of independent pharmacies decreased by nearly 50%."

Most of a drugstore's revenue comes from prescriptions. "The combined effects of insurance (companies) preventing customers from filling prescriptions locally while reducing reimbursements (to them) is not sustainable," said Aaron Syring, owner of Island Drug in Oak Harbor and La Conner Drug Store. He closed both this week.

Additionally, drug stores face stiff competition for beauty products, toiletries, snacks and household supplies from Amazon, Ebay and big-box stores.

While drugstores benefited during the pandemic from COVID-19 vaccines, fewer consumers returned to these same stores to shop. Why not? Why didn't vaccinated customers return to show their appreciation and support their local businesses?

Pharmacy benefit managers are middlemen hired by insurance companies to manage prescription spending, originally intended to get lower-cost drugs from manufacturers, though they claim it is the manufacturers who set prices.

There are three major PBMs: CVS Caremark, Express Scripts and OptumRx and they control a whopping 80 percent of the prescription drug market.

PBMs negotiate discounts with drug manufacturers – like Pfizer or Johnson & Johnson on behalf of insurers, like Blue Cross or Medicare. In exchange, the drugmaker's products are included in the PBM's formulary, a list of generic and brand-name prescription medications covered by your health insurance plan. Not only do PBMs designate which drugs make their formulary list, but they raise costs by almost 30% due to the rebates they get back from the manufacturers.

In 2019 PBM rebates totaled $143 billion according to the National Community Pharmacists Association, adding 30 cents per dollar to your prescription drug bill. Many PBMs own their own mail-order pharmacies and mandate or steer their clients to them.

There are even more ways to get your money. The biggest PBMs are vertically integrated with drugstore chains and their mail-delivery services as well as the largest insurance companies.

Within the healthcare system, vertical integration allows PBMs to call the shots from the manufacturers to the wholesalers to the drug store, your healthcare plan and your doctor. Vertical integration can create more profits for the PBMs and also create opportunity for self-dealing – quite possibly an illegal act.

In addition, PBMs administer reimbursements from the payers to the providers, from the insurers to pharmacies. PBMs are raking it in from every angle.

According to Syring, many insurance plans charge customers more to fill locally but make it cheap or free through mail order, often owned by the PBM.

Without any legal obligations to prevent this, PBMs can favor affiliated pharmacies, including their own stores and mail order pharmacies owned by themselves, leaving mom-and-pop independent drug stores out. By requiring patients to refill prescriptions at an affiliated pharmacy, they limit where patients can get their medicines. If patients choose their neighborhood store instead, they will pay a higher price. That pushes many customers, often elderly, to participate with a PBM pharmacy.

Another source of revenue for PBMs is claw backs. Under the guise of quality-control, PBMs perform audits on independent pharmacies and mandate that funds by the stores be returned to them. During the pandemic, PBMs benefitted financially because of persnickety audits made to independent pharmacies, with whom they competed.

Additionally, there is the "spread," when a PBM pays pharmacies less for a medication than they charged payers like Medicare, they pocket the difference: a spread.

The price you pay is set by the PBM – not the pharmacy and not the drugmaker.

Next week: Congress and the Federal Trade Commission on PBMs.