Pharmacies excluded from preferred networks face much higher risk of closure

Key takeaways:

• Retail pharmacies excluded from Part D networks were as much as 4.5 times more likely to close in the past decade
• Growing use of preferred networks disadvantages independent pharmacies, as well as those in low-income or minority neighborhoods
• Use of preferred pharmacy networks has soared amid mergers of major PBMs and retail pharmacy chains
• PBM ownership of pharmacies has recently drawn scrutiny from federal and state officials

Retail pharmacies excluded from Medicare Part D networks maintained by drug benefits middlemen were much more likely to close over the past decade, according to new research from USC published in Health Affairs. 

Independent pharmacies and those located in low-income, Black or Latino communities were more likely to be excluded from “preferred” pharmacy networks, putting them at higher risk of closure, researchers also found. 

The study is the first to examine how substantial growth of preferred pharmacy networks in Medicare’s prescription drug benefit may have contributed to the struggles of retail pharmacies, which the researchers in an earlier study found have closed in unprecedented numbers. Pharmacy benefit managers (PBMs), which control drug benefits on behalf of employers and insurers, steer beneficiaries away from non-preferred pharmacies by imposing higher out-of-pocket costs at those locations.  

The use of preferred pharmacy networks tripled to 44% among Medicare Advantage drug plans over the past decade and grew from 70% to 98% among stand-alone Medicare drug plans, researchers found. This shift coincided with a wave of mergers involving the nation’s largest PBMs and retail pharmacy chains, which may have incentivized PBMs to nudge patients to pharmacies they are affiliated with — and away from competitors. The Federal Trade Commission in an interim report last year alleged that PBMs “routinely create narrow and preferred pharmacy networks” to favor their own pharmacies and exclude rivals, and Arkansas recently passed a first-in-the-nation law banning PBMs from owning or operating pharmacies.

“Our study demonstrates that pharmacy networks in Medicare Part D — which are designed by PBMs — are contributing to the growing problem of pharmacy closures, particularly in communities that already lack convenient access to pharmacies,” said study senior author Dima Mazen Qato, a senior scholar at the USC Schaeffer Center for Health Policy & Economics and the Hygeia Centennial Chair at the USC Mann School of Pharmacy and Pharmaceutical Sciences. 

Disparities in Network Participation
Researchers analyzed pharmacy closures between 2014 and 2023. Among their key findings:

• Pharmacies preferred by fewer than half of plans were 1.7 times more likely to close than those preferred by most plans in the past decade, after accounting for factors such as ownership and neighborhood demographics. 
• Pharmacies not participating as preferred pharmacies for any Part D plan were 3.1 times more likely to close, and pharmacies that were entirely out of network were 4.5 times more likely to close.
• While 4 in 10 pharmacies had independent ownership in 2023, just 0.8% of these were preferred by most plans. Meanwhile, 70% of chain pharmacies were preferred by most plans. 
• About 3 in 10 pharmacies in Black, Latino or low-income neighborhoods were preferred by most plans that year, compared to nearly half of pharmacies in higher-income or white neighborhoods. 
• Network participation varies considerably across the country. In a diverse group of 13 states that includes New York and North Dakota, fewer than one-third of pharmacies were preferred by most plans.

Policy Implications
“Our findings demonstrate that there is a need for federal PBM reform to expand preferred pharmacy networks,” said the study’s first author, Jenny Guadamuz, an assistant professor of health policy and management at the University of California Berkeley School of Public Health. “New legislation might prove elusive, but there may be room for regulator actions.” 

The researchers point to actions the Centers for Medicare and Medicaid Services could take, including considering provisions that ensure Part D plans meet preferred pharmacy access standards and mandating preferred status. Regulators and policymakers could also mandate increases in pharmacy reimbursement, especially for critical access pharmacies at risk for closure and if they are serving "pharmacy deserts."