CVS is built on a dominant chain of drug stores, but it is now trying to turn itself into a “uniquely powerful platform” for delivering health care. It uses one part of the supply chain to squeeze competitors in another part of the industry.  

Photo by Mike Mozart via Flickr [CC BY 2.0]
Very few people realize that the third leading cause of death in America is medical errors, at between 250,000 and 440,000 people a year. That’s a population the size of Reno, Nevada dying every single year. Some of these deaths are unavoidable, as mistakes are a fact of life, but the powerful monopolies in the American health care system do two things to contribute to such mistakes: First, they push too many high-margin but unnecessary pills and surgeries; second, they interfere in the relationship between medical professionals and patients.

A few days ago, Ellen Gabler at the New York Times had a great story with the gory details of one such example, the massive drug store chain CVS. The gist of her story is that CVS has imposed sweatshop-style conditions in their stores. Pharmacies are understaffed, pharmacists don’t have time to focus on patients (or sometimes even take bathroom breaks), and they are constantly being pressed to overprescribe medication.

The article has a litany of horrible errors, including a patient dying because she accidentally got dispensed harsh chemotherapy drugs, or a baby accidentally receiving steroids. As Gabler showed, “doctors complain that pharmacies bombard them with requests for refills that patients have not asked for and should not receive.”

Pharmacists themselves are frustrated. “I am a danger to the public working for CVS,” wrote one pharmacist the Texas State Board of Pharmacy in April. A different one told authorities in Pennsylvania that because of these practices, “Mistakes are going to be made and the patients are going to be the ones suffering.”

The Tyranny of Metrics

Gabler’s article is terrific, showing how corporatized health care can be destructive. Pharmacists are not robots, and they do personalized service because medical advice has to be given based on the individual’s needs. And yet, CVS corporate uses automated systems and terror to attempt to remove the human element from the process.

“Pharmacy staff members are expected to call dozens of patients each day, based on a computer-generated list,” Gabler wrote, and pharmacists are evaluated based on whether the patients do what they want. Pharmacists complained these practices were harsh and unsafe, and that they were retaliated against if they complained. CVS responded with the argument that metrics were meant to help patients.

Photo by Random Retail via Flickr [CC BY 2.0]

CVS: Drug Store Chain or Tech Platform?

America has traditionally had a decentralized pharmacy industry. In my book Goliath, I show how independent pharmacists were a key part of Wright Patman’s populist coalition; they were quite powerful as a lobby until the 1970s. But today, CVS is everywhere, touching the lives of nearly 100 million Americans and businesses through its various subsidiaries.

How did CVS acquire such power over American health care?

Like most giant corporations today, CVS is the result of a series of mergers. Starting in 1972, with the purchase of the 84-store chain Clinton Drug and Discount, CVS began buying other chains and health care corporations. It became a billion-dollar corporation in 1981, but its real acquisition spree started in 1990. Here’s a brief list:

  • 1977, CVS buys 36-store-chain Mack Drug
  • 1990, CVS buys 490-store-chain People Drug Stores in the mid-Atlantic
  • 1997, CVS buys 2600-store-chain Revco D.S. across the midwest for $3.7 billion
  • 1998, CVS buys 200-store-chain in Michigan for $1.5 billion
  • 1999, CVS buys online drug store
  • 2002, CVS buys bought assets from bankrupt discount drug store chain Phar-Mor
  • 2004, CVS buys 1260-store-chain Eckerd stores, plus Eckerd Health Services mail order and $1 billion mail order pharmacy benefits management business, plus three distribution centers from J.C. Penney
  • 2006, CVS buys 700-stand-alone Sav-On and Osco drugstores from Albertson’s
  • 2007, CVS buys Caremark RX pharmacy benefits manager for $26.5 billion
  • 2008, CVS buys 521-store-chain Long Drug Stores for $2.9 billion, including Rx America, a PBM with more than 8 million members
  • 2015, CVS buys Target corporation’s pharmacy business
  • 2018, CVS buys Aetna health insurance for $69 billion

CVS is built on a dominant chain of drug stores, but it is now trying to turn itself into what it describes as a “uniquely powerful platform” for delivering health care. It has 9,900 pharmacies, which is 26 percent of the drug store market nationally, and as their 2018 annual report puts it, they “engage with one in three Americans as part of their everyday activities.” Drug store markets are local, so this understates the market power of their stores.

While stores are the foundational piece, CVS also has 1,100 walk-in clinics and is moving into telemedicine. It runs Medicare plans for drugs, it manages health services for corporations, and it now insures 22 million Americans directly through Aetna. It also owns the nation’s largest pharmaceutical benefits manager (PBM)Caremarkwhere it managed or filled 1.9 billion prescriptions annually on behalf of 92 million customers.

Key to CVS’s power is its PBM, an odd yet critical business in American health care. PBMs solve a specific problem for health insurers and drug stores. A health insurer often doesn’t have the expertise to manage the complex undertaking of managing the flow of drugs to patients and money to pay for them among insurers and drug stores. There is an enormous number of drugs available for all sorts of medical conditions, many of which do similar things, with different safety implications, and these drugs don’t have list prices.

It’s not just the drug companies that have prices, pharmacies that fulfill these prescriptions need to get reimbursed for what they sell to customers.

PBMs manage this whole process, maintaining the list of drugs for the health insurer, negotiating prices with drug companies and pharmacies, and processing prescriptions. It’s a business where size matters; PBMs sign up multiple health insurers and represent them all at once, and so have bargaining power with drug companies.

PBMs are a very concentrated industry, with just three companiesincluding CVS’s Caremarkcontrolling 70 percent of the market. While PBMs are an odd industry that exists largely because American health care markets are immensely screwed up and our drugs don’t have credible public prices, the real problem is what happens when you combine a powerful PBM with a drug store chain.

Squeeze and Buy

In 2018, the Capitol Forum reported how CVS leverages its various lines of business to roll up power. Five weeks before CVS announced it was buying Aetna, its Caremark PBM subsidiary began telling independent pharmacies that their reimbursement rates for key medicines were going to go down.

As an example, “one pharmacy went from earning $41.63 for selling Metronidazole—an antibiotic used to treat bacterial infections—to losing $72.27 per sale of the treatment.” Immediately after announcing price cuts, CVS began sending out letters offering to buy independent pharmacies who had just had their revenue slashed.

In one solicitation letter, CVS’s head of acquisitions wrote that as a pharmacist himself he knew “what independents are experiencing right now: declining reimbursements, increasing costs, a more complex regulatory environment.”

When confronted with it by independent pharmacists in front of Maryland state regulators, CVS lobbyists said the reimbursement cuts were simply the result of a “computer glitch.” This was known as “squeeze and buy,” or the use of one part of the supply chain to squeeze competitors in another part of the industry, with the end result being a buy-out for a reduced price.

It’s not that these problems weren’t known. In the 1990s, the FTC forced a bunch of breakups in the health care industry, forcing PBMs. The Bush administration allowed a re-consolidation, including CVS’s purchase of Caremark. Then the Obama administration investigated PBMs and did its usual expression of useless concern. It closed its investigation in 2012 without action. PBMs are a hot topic in DC these days. Senators recently noted that PBMs have increased fees to pharmacies by “extraordinary 45,000 percent increase” from 2010-2017. Weirdly, the Trump administration is somewhat hostile to PBMs, while Nancy Pelosi’s main health care advisor is quite friendly with the industry.

Moving Forward

CVS is seeking to become the Amazon of health care. Wall Street analysts noted that when it purchased Aetna, it was a clear move to parry or mimic Amazon. And like Amazon, CVS’s strategy is more than just growing stores, but using levers across its lines of business to reinforce one another, or as the corporation put it, “tighter integration of pharmacy and medical benefits.” What’s particularly interesting is how the corporation discusses its “open platform model”:

“In-store pharmacists have already started providing adherence outreach and counseling to Aetna members identified to be at high risk for an adverse health event. We’ve also launched a specialized program to help support Aetna members being treated for cardiovascular disease. We expect to make these offerings available to our health care partners as well as through an open platform model.”

CVS is trying to become a sort of underlying infrastructure for all health activities, much as Amazon is the underlying infrastructure for online retail. Amazon’s strategy is to build a service for itselflike fulfillment servicesand then push third parties into buying that service directly. It seems like CVS is trying to copy this model, building itself into a gatekeeper for customers other parties in the health care systempharmaceutical companies, hospitals, or doctorswill have to use.

There is a fierce debate in health care right now, largely over how to address rising health care costs. These costs are a result of market power from hospitals, drug companies, PBMs, and health insurers. CVS has made the case that its heavily integrated system will reduce such costs because it will be able to cut waste and elevate bargaining power against all the other agents in the system.

And yet, the data doesn’t bear this out. Local independent pharmacies, in rural areas underserved by the big chains, often offer free screenings, plus wellness checks, immunizations, and medical supplies. And on price? There’s no comparison.

“Consumer Reports found independents won on price, too, by a country mile. ‘The price differences were remarkable,’ the magazine reported. How remarkable? For a basket of five commonly prescribed drugs, independents had an average retail price of $107 for a month’s supply. Walgreens sold that same basket for $752, Rite Aid for $866, and CVS for $928.”

So it seems like CVS’s growth is more about power than anything else. And that’s how its pharmacists seem to feel about its new integrated model of pill-pushing.

Mistakes in Health Care

All of which brings me back to medical errors, and how many people suffer and die as a result. Now, mistakes are inherent to everything we do, and in health care, mistakes kill. That’s just life. But the American health care system is a nightmare. Price signals tell our system to over-treat, and more surgeries, pills, etc., means more errors. And our monopolies interfere in all sorts of ways with medical professionals and their ability to actually give care.

The politics of health care are changing, and it’s clear that Americans are becoming increasingly frustrated and angry with cost and quality. A fully nationalized nonprofit system can work, and does in many places all over the world. So can a much more decentralized system that operates through tightly-regulated markets. But in America, we have the worst of all worlds, private medical monopolies that centralize power in order to generate cash rather than give care.

The result of that isn’t just pharmacists being mistreated, but independent businesses ruined and lives lost.

Editor’s note: A previous version of this article appeared in BIG, Matt Stoller’s newsletter on the politics of monopoly. You can subscribe here. Matt Stoller is the author of Goliath: The Hundred Year War Between Monopoly Power and Democracy and a fellow at the Open Markets Institute.

The ProMarket blog is dedicated to discussing how competition tends to be subverted by special interests. The posts represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty. For more information, please visit ProMarket Blog Policy.