ELIZABETH FARNSWORTH: Now another in our series of reports on the changing face of medical care in this country. Tonight, the drugstore wars. Rod Minott of KCTS-Seattle reports.
ROD MINOTT: At Seattle's Queen Anne Pharmacy Chuck Paulsen is no longer filling prescriptions, just moving boxes. He recently shut down his neighborhood drugstore after eight years in business.
CHUCK PAULSEN, Pharmacist: This pharmacy was part of my life, and I thought I'd be here 40 years. And if it was my choice, I would be here for 40 years, but it wasn't my choice. The choice was taken out of my hands.
ROD MINOTT: Paulsen says he was forced to close because health insurers have been steadily decreasing reimbursements for prescriptions. He says shutting down came as a blow to many of his customers.
CHUCK PAULSEN: There was a lot of upset people, a lot of worried elderly people because we offer a huge amount of delivery.
ROD MINOTT: What happened to the Queen Anne Pharmacy is being repeated across the nation. Scores of corner drugstores are calling it quits. According to the National Community Pharmacists Association, 5,000 stores have gone out of business in the last four years. Major reasons cited include chain store expansion, alleged price discrimination by drug manufacturers, as well as the rise in mail order pharmacies and managed health care. Andy Stergachis chairs the School of Pharmacy at the University of Washington.
ANDY STERGACHIS, University of Washington, Department of Pharmacy: There's been a considerable change in how pharmaceuticals are paid for today. And particularly there's been a rise in the number of prescriptions paid for by a third party program, an insurance program, a managed care organization. And right now that percentage is somewhere around 65 percent of all prescriptions in the U.S. are paid for by a third party payer.
ROD MINOTT: The trend toward managed care is expected to keep on growing.
HOLLY WHITCOMB, Pharmacist: Those people are setting our prices for us, and the prices keep going down, down, and down.
ROD MINOTT: Corner pharmacists like Holly Whitcomb fear managed care spells disaster for her industry.
HOLLY WHITCOMB: So while the expense side of our business goes up, the income part of our business goes down. And in my pharmacy over 60 percent of my business is now controlled by the insurance industry, so it only allows me 40 percent of my business to set my own prices and respond to changes in expenses in the marketplace.
ROD MINOTT: Whitcomb says drugstores like hers need to make about $6 on every prescription to cover costs, such as rent, overhead, and salaries. She says many pharmacies are getting much less in their contracts with managed care providers. As an example, the wholesale price of a 30-day supply of the antidepressant Prozac is about $61. Typically, Whitcomb can expect insurance firms to reimburse her $64.50. That's $2.50 short of the $6.00 she needs just to break even. And it's similar for other medicines.
HOLLY WHITCOMB: I'm calling because there's a pressing problem on this prescription. It's only paying about 50 cents over my actual acquisition cost.
ROD MINOTT: Whitcomb has owned her pharmacy for 11 years. She's developed close, trusting relationships with her customers. But she says that's now threatened by managed health care.
HOLLY WHITCOMB: On a daily basis, I as a pharmacist am faced with the choice do I take a contract that I know will pay me less than it costs me to fill a prescription; that I will lose money on every single prescription I fill in that contract; or do I say no to the contract and then say goodbye to patients that I had long-term relationships with and that I care about very deeply? And so far, my choice tends to go with the contract, even though I'm losing money, and I try to find ways to be profitable in other avenues.
ROD MINOTT: Those other ways include setting aside space in her store for specialized health care services like blood tests for cholesterol levels.
HOLLY WHITCOMB: We've been working on developing some services having to do with monitoring patients that are on blood-thinning medications and monitoring patients that are on cholesterol medications. We take blood pressures in the store. And we're working on ways to charge for those services.
ROD MINOTT: Insurers say that lower reimbursements are only fair. After all, they said, they're committed to reducing health care costs and to giving their individual and business customers lower prices on premiums.
KAREN VOGEL, Blue Cross of Washington & Alaska: Prescription drugs are a very interesting topic, very volatile.
ROD MINOTT: Karen Vogel is with Blue Cross of Washington & Alaska, which recently made major cuts in the amount it pays pharmacists.
KAREN VOGEL: It's very difficult to manage. We're trying to get a better handle on it. One of the areas we felt was spiraling out of control was the pharmacy benefit program, the prescription drug program, which is now at about 14 percent of our health care expenses. A couple of years ago that was at 10 percent. And that's following the national trend. Drug costs are going up all over the country. We looked at that, and our employer groups looked at that, and they said, help.
ROD MINOTT: In an effort to cut costs even more Blue Cross and other health insurers have been promoting prescription drugs by mail. This mail order plant in New Jersey is owned by Merck Medco, one of the largest drug companies in the United States. Every week, one hundred thousand prescriptions are filled here and mailed across the country. Each order usually provides a three-months supply of medication. Merck operates 11 other mail order pharmacies like this one. Per Lofberg is president of the company.
PER LOFBERG, President, Merck-Medco: The mail order component has grown over the past decade because the elderly people, in particular, who use chronic medication, have found it an attractive option for them to use once they have stabilized their medicine, and they can send in for a long-term supply, and both save money and receive high quality delivery of their medications.
ROD MINOTT: Patients like Leslie Miller, who use mail order, phone in their prescriptions. Miller lives in Seattle, but her calls go to operators several thousand miles away in Tampa, Florida.
LESLIE MILLER: It's really like talking to an answering machine. It's a recorded voice that walks me through recorded steps and I put in the prescription number by pressing the buttons on the phone. And I don't actually get to talk to a real human being about anything.
ROD MINOTT: Miller has multiple sclerosis. She takes 14 different medications for her illness.
LESLIE MILLER: This is a medication. I have to protect my stomach, I guess, from the other medications that are upsetting it.
ROD MINOTT: For years, she bought her drugs at her local pharmacy, but she recently took her business elsewhere when her insurance plan offered mail order. Its co-payments saved her $2200 a year out of her own pocket. Even so, she would still prefer going to her neighborhood drugstore.
LESLIE MILLER: It's a big mail order place, and they have hundreds of pharmacists, so conceivably, there may be 14 pharmacists dispensing my 14 medications. And I don't feel like any of them know me at all, or no my history or know my ups and downs.
ROD MINOTT: Corner druggist Whitcomb echoes Miller's concern about mail order.
HOLLY WHITCOMB: When in the past I had a good record in my patient profile system of every medication that my patients were taking, now I'm missing a lot of their chronic medications because they're getting them elsewhere. It makes it almost impossible for me to do a good job of screening for therapeutic duplications, instances where two similar drugs are prescribed for a patient, screening for drug interactions, looking for allergy problems.
ROD MINOTT: Per Lofberg of Merck says patients are protected by safeguards in the mail order system.
PER LOFBERG: If you send in your prescription in the mail, we enter that prescription into the computer system and that computer system will identify if there's any problem with, you know, the medication you're taking in relation to all the medications that you've been receiving.
ROD MINOTT: Small pharmacists also complain about pricing deals between drug makers and their high-volume customers. Mail order firms, HMO's, and hospitals are obtaining huge discounts on medication, discounts not available to local druggists.
HOLLY WHITCOMB: They've been pressured to offer more discounts in the hospital arena and in the HMO arena, and also to mail order because those people will offer them market position. They'll say we'll carry your antibiotic and we won't carry your competitor's antibiotic that's similar. And so they can derive some market share by doing that.
ROD MINOTT: Recent figures released by the National Community Pharmacists Association underscore the pricing inequities. The group found that medicines can cost retail pharmacies 30 to 90 percent more than HMO's, mail order firms, and hospitals. Pharmacists say the higher prices mean they and their customers, including many uninsured and elderly patients, are subsidizing the discounts given to HMO's and mail order firms.
HOLLY WHITCOMB: The real loser in all of this is the consumer because often the HMO's and hospitals don't pass the pricing on directly to the consumer and so, they're the ones that are paying the highest prices. 60 to 70 percent of prescriptions are still filled in the retail pharmacy marketplace, and those people are paying the highest prices in the marketplace.
ROD MINOTT: Drug and insurance industry leaders insist such pricing policies are not unfair or discriminatory but are simply common business practices. Pharmacists have filed a series of lawsuits against drug makers, charging illegal price fixing and discrimination.
One recent class action suit resulted in a $351 million settlement with 11 drug companies. As part of the deal, these drug manufacturers agreed to make discounts available to retail pharmacies, but at least nine other big drug makers refused to go along with the settlement, and many local druggists say they remain skeptical that court action will put an end to unfair pricing practices.
Meantime, pharmacists are watching to see if a massive investigation by the Federal Trade Commission will determine if 22 major drug makers conspired to overcharge small pharmacies for medicines. Despite all that, Lofberg of Merck Medco believes extinction for many neighborhood pharmacies may be inevitable.
PER LOFBERG: I do think that, you know, this business is becoming more and more capital intensive. It requires more sophisticated information technology and more significant investment in infrastructure; therefore, it's obviously harder for individual owner/operators to survive in this environment. You know, mom and pop stores will, I think, inexorably be gradually replaced by larger, better capitalized corporations of all kinds.
ROD MINOTT: Local druggists like Holly Whitcomb hope they can prove Lofberg wrong and say they'll be searching for new business strategies to help them survive.