Why your pharmacy is closing

new York
CNN
—

CVS is closing 900 stores. Rite-Aid is closing 500. Walgreens announced Tuesday that it plans to close 1,200 stores, meaning one in seven stores will disappear.

What's wrong with America's drugstores?

Walgreens and other chains overexpanded in the 1990s and 2000s to push out competitors and attract more customers. Due to changing consumer habits, competition and changes in the pharmacy industry, they are now closing.

About 25% of Walgreens' stores are not profitable, CEO Tim Wentworth said in an interview with The Wall Street Journal in June, and the chain will look to close stores that are close together or are struggling to curb theft.

Walgreens and other retailers say so have been affected by shoplifting since the pandemic and have resorted to locking up items or closing stores at high risk of theft. But shoplifting alone doesn't explain Walgreens' problems, and the company later admitted last year that it had “cried too much” over the impact of the potential scourge. Meanwhile, increasing competition and failed growth strategies, such as acquisitions of primary care providers, continue to have a noticeable impact on drugstores.

“We are at a point where the current pharmacy model is no longer sustainable,” Wentworth said in June.

CVS, the largest U.S. chain, closed 244 stores between 2018 and 2020. In 2021, it announced plans to close another 900 stores. Earlier this month, CVS said it plans to cut about 2,900 corporate jobs.

And Rite Aid filed for bankruptcy last year and closed up to 500 stores.

Drugstore chains are struggling with lower reimbursement rates for prescription drugs, according to industry analysts.

The majority of drugstore sales come from filling prescriptions. But their profits from this business have declined in recent years as prescription drug reimbursement rates fall while fees rise.

The prices that customers pay for medications and the payments that pharmacies receive are largely determined by companies known as pharmacy benefit managers (PBMs), which negotiate discounts from drug manufacturers to insurers. PBMs have been cutting reimbursement rates to boost their own profits, Evercore IRI analyst Elizabeth Anderson previously told CNN.

The pharmaceutical industry has complained that PBMs have too much control and can put pressure on pharmacies. PBMs argue that they help keep drug prices low by negotiating with drug manufacturers.

“If reimbursement rates go down and drugstores can't make up for it with other growth, that negatively impacts their profitability,” Anderson said.

At the same time, the rest of the store is struggling.

Drugstore in-store sales, which sell snacks and household staples, have become less profitable as shoppers buy those items more online at Amazon and at major chains like Walmart and Costco. Both have grown in recent years. Dollar General's growth has also hurt drugstore chains in rural areas.

“The front end is suffering like other retailers,” Anderson said.

To attract customers, Walgreens, CVS and other drugstores have moved into primary care and added doctor's offices to hundreds of stores. For example, in 2021, Walgreens invested $5.2 billion in VillageMD, a primary care network.

But VIllageMD wasn't profitable for Walgreens, and Walgreens tried to cut costs. The chain has closed VillageMD locations and said it will part ways with the company over the summer.

Walgreens' upcoming closures could have a positive impact on the company's bottom line, but are likely to impact access to healthcare.

When pharmacies close, some patients will have to travel further to get the medications they need. Researchers note that pharmacy closures lead to health risks, such as older adults not taking medications.

The loss of a retail pharmacy can leave a gap, particularly for lower-income households.

About one in eight pharmacies closed between 2009 and 2015, disproportionately affecting independent pharmacies and low-income neighborhoods, according to a study published in the Journal of the American Medical Association.

The study found that the greatest risk of closures is among pharmacies that have large public health insurance customer bases and lower reimbursement rates than private health insurance, as well as independent pharmacies.