Image: Dared Price purchased Graves Drug in 2010, which now has seven locations throughout South Central Kansas. Source: Dared Price.

Since Dared Price founded his independent community pharmacies in 2010, haggling with large consolidated healthcare companies for fair reimbursements has become less of a negotiation and more of a take-or-leave-it agreement

An owner of seven local pharmacies throughout Kansas, Price got into the industry to make healthcare and prescription drugs affordable to members of his community. However, Price and other independent pharmacies feel the squeeze from unfair payments they get from large insurers while retail chain pharmacies–like CVS Pharmacy and Walgreens–are pushing them out of the market. 

The number of independent pharmacies has declined by nearly 50% since 1980, according to a report by the consulting firm McKinsey & Company. In contrast, the number of retail chains has increased through consolidation, outnumbering local pharmacies by almost several thousand. 

The decline in independent pharmacies is only one sign of an alarming consolidation of the healthcare industry that has resulted in insurers generating a significant market power in various industries through vertical integrations and a rise in health costs, which has attracted the attention of regulators. Thus, the federal and state governments are taking steps to reassess whether these mergers and acquisitions are safeguarding fair competition and serving the best interests of their patients.

“There is evidence that there’s been a fair amount of consolidation in the healthcare sector,” said Martin Gaynor, an economics and health policy professor at Carnegie Mellon University and a former director at the Federal Trade Commission. “A number of these mergers have led to either very substantial price increases in some cases to decline in quality of care.”

When Anthem, which switched its name to Elevance Health, tried to purchase Cigna Group in 2015, federal regulators blocked the deal because it would lead to higher prices for healthcare. A proposed merger of the healthcare giants, Cigna and Humana, was called off because the companies couldn’t agree on financial terms, a likely challenge from regulators played a role as well.

“The federal government is aware that there have been more vertical integrations among companies than there were 10 years ago,” said Gaynor.

In the last decade, vertical integrations weren’t seen as a threat to competition, so there wasn’t much federal oversight, because regulators were solely keen on companies buying like entities. Now, insurers have market power in different parts of the health system because they have purchased ancillary businesses over time. For example, UnitedHealth Group has created a continuum of care that houses its own PMBs, physician groups, and home health care–all three subsidiaries are dominant players in those markets.

Vertical consolidations allow companies to capture a greater share of healthcare spending by managing their patients’ touchpoints and directing them to their services, thereby increasing their revenues. Optum, a subsidiary of UnitedHealth that manages the company’s PBMs and primary care services, has seen its margins grow every year since it began in 2011 and almost made as much profit as its insurance business in 2022.   

“They are well aware that the more market share they have, the more they can leverage that to extract stockholder value,” said Greg Reybold, director of healthcare policy at American Pharmacy Cooperative. As consolidated companies grow in size and profits, healthcare costs have increased added Reybold.

For example, pharmacy benefit managers (PBMs), whose job is to get the best drug deals on behalf of insurers, play a critical role in determining and reducing drug prices for patients. There are about 66 PBMs in the country, but three of them–UnitedHealth, CVS, and Cigna–control about 80% of the market share. The consolidation of PBMs in the last decade has raised concerns among regulators because instead of lowering prices–which companies often say when announcing a merger–drug costs have increased exponentially.

The top 25 popular drugs that Medicare spends on the most have, on average, more than tripled since these medications went on the market, according to a report by the AARP, an advocacy group for people over 50. Lantus, for example, an insulin that treats diabetes, has increased its price by 739% since entering the market in 2000.  

“A lot of drug costs go up as insurers grew through consolidation and integrated with pharmacy benefit managers,” said Reybold. “We're at a point where any further integration is going to receive significant scrutiny.”

Vertical integrations have indeed caught federal agencies’ attention as the FTC and the DOJ released draft merger guidelines in July that address beyond horizontal consolidations. The new set of guidelines would provide extra scrutiny over mergers and acquisitions that go unnoticed, particularly a consolidation strategy called “roll ups” that has allowed companies to evade antitrust review in past years by buying up a series of small-size entities that don’t require involved parties to notify the FTC. 

“That is how they built these big monopolies…they'll buy a lot of little companies that won't even get any kind of scrutiny,” said Eileen Appelbaum, a co-director and economist at the Center for Economic and Policy Research. “But there are new proposed rules that will change all that.”

Roll ups have even gotten the attention of the White House, which published a press release last week regarding the extra steps it would take to identify mergers that use this anti-competitive practice.

State governments are also heightening scrutiny of healthcare mergers to rein in rising costs. Earlier this year, New York passed a law requiring health companies to give 30 days' notice before closing any deal and Maine revoked a law that exempted certain healthcare companies from antitrust laws.

When CVS, Cigna, and UnitedHealth made PBM consolidations in 2018, all three giant insurers made statements about how the mergers would improve the health of their patients while lowering costs. Indeed people are living longer but the price they have to pay to stay alive has only gone up since then.

Meanwhile, Price claims he struggles every year to receive a fair pharmacy contract from large consolidated insurers. If he doesn’t accept their terms, they will send all of his patients to their own mail-order facility or find another retail chain.

However, Price wonders, if independent pharmacies aren’t receiving equitable payments from large healthcare companies and if common insured Americans are paying more for their medications every year, “Where’s the money?”