Transcript of Conference Call on Alleged Anticompetitive Conduct by Drug Wholesalers with Pharmacy Expert Luke Slindee

Jun 01, 2023

On May 25, The Capitol Forum hosted a conference call with Luke Slindee, Senior Pharmacy Consultant at Myers and Stauffer LC, to discuss alleged anticompetitive conduct by the big three drug wholesalers, interesting state-level policy developments related to pharmacy policy, and competition issues with PBMs. The full transcript, which has been modified slightly for accuracy, can be found below.

TEDDY DOWNEY:  Good morning and thanks for joining our Health Care Conference Call today. I’m Teddy Downey, Executive Editor here at The Capitol Forum. And I’m very pleased to be joined by Luke Slindee. I’ll give him a quick introduction and then we’ll hop right into that conversation.

So he’s a Senior Pharmacy Consultant at Myers and Stauffer where he helps facilitate data collection, data analysis, rate calculation and public posting of pharmacy actual acquisition cost benchmarks, including NADAC and multiple state AACs. But for this call, he’s widely recognized for his expertise in pharmacy policy and competition issues when it comes to independent pharmacies. And so that’s what we’re going to primarily be talking about today. And if you have questions, please email them to Or if you can figure it out, you can enter questions in the chat function for GoToWebinar. And Luke, thank you so much for doing this today.

LUKE SLINDEE:  Happy to be here. Big fan of the podcast in general. I believe I’ve listened to every episode.

TEDDY DOWNEY:  Yeah. Can you give that quick disclaimer about before you hop in? I just want to make sure everyone knows you’re not actually representing Myers and Stauffer’s views here.

LUKE SLINDEE:  Right. So, yeah, I need to be very clear that anything I say in this podcast is just representative of my opinions alone. And I’m not speaking in any way for my employer.

TEDDY DOWNEY:  So, we met at that AELP anti-monopoly summit. And maybe a good place to start is just like how you ‑‑ and this I think maybe will give a little bit of perspective also on the pharmacy stuff ‑‑ maybe just how you came to be so interested in antitrust with your pharmacy background. Maybe you could just tell us a little bit about that and then we can hop into my questions about the wholesalers.

LUKE SLINDEE:  Yeah, yeah, yeah. Well, it’s been a very interesting journey for me. I am a second generation pharmacist. So my father was also a pharmacist. We went to the same pharmacy school in Minnesota. And so I grew up in a very small town in rural Minnesota, in the southern part, close to the Iowa border. And it was one of those small towns where there’s only one pharmacy in town. And so my family owned that pharmacy, and that was the environment I grew up in. And I went to pharmacy school and graduated.

And I just kind of always had this long term sense of unease in terms of it seemed like the concept of being a pharmacist and especially owning your own independent pharmacy just seemed to be getting more and more difficult with each passing year. And things just kind of seemed to be progressively deteriorating. And I really got curious as to why.

So my parents actually kind of saw the writing on the wall and they elected to actually sell their business to a small local chain in 2007. So they kind of got out of the ownership elements of pharmacy that far back. When I graduated from pharmacy school, I initially worked for Walgreens in a chain setting. And the chains were certainly not immune to any of the problems that were affecting independent pharmacies either. It’s just that the problems manifested themselves a little differently between large chain pharmacies and small independent pharmacies.

So typically, the problems for small independent pharmacies manifested as closures. Somebody would kind of arrive at the point where they decided it wasn’t viable to run their own business anymore and they would either just sell it entirely or just close it. And then the issues in the chain world were more around working conditions, just staffing. You know, every year that you worked at a chain pharmacy, like a Walgreens or a CVS, they would kind of progressively cut back on the amount of employees that you had in the pharmacy to get the work done.

And so it kind of felt like this very sinister boiling of the frog, if you will. And I just really got to a point where I felt like I needed to try to understand why? Why is this happening? And more specifically, why is it that the pricing of prescription drugs seems to make zero sense? And I would constantly see things that violated everything I learned in my microeconomics 101 classes that I really enjoyed. And I ultimately started doing a bunch of research.

And I came across, of all things, an Investopedia article about price discrimination. And I was very interested because a lot of the problems that I was noticing related to that was all around this concept of price discrimination. And on the Investopedia article, there is actually a categorical system of describing various types of terms. And I noticed that price discrimination was listed as a type of an antitrust violation. And at that point in time, I had no clue what an antitrust violation was. So I was like, well, I need to figure out what that is. And I started doing some more reading.

And then it just so happened that right around that time – I’m also a huge fan of a similar, but kind of unrelated, organization called Strong Towns. And I’m a huge fan of their podcast. And they happened to have Denise Hearn on as a guest and she was kind of promoting “The Myth of Capitalism” book that had recently come out. And both of these things all kind of converged around the same time. And so I thought that podcast was fascinating. And so I bought and read “The Myth of Capitalism” by Denise Hearn and Jonathan Tepper, and then that it was kind of like a bomb went off in my head. It was like, Oh, okay. Every single thing that I’ve experienced in my entire life related to pharmacy. Now I have some context around what’s happening in terms of market consolidation, anti-competitive business practices and things of that nature.

And so then I just kind of went on a reading spree. I read “Break ‘Em Up” by Zephyr Teachout, the Barry C. Lynn books, and then a few others, and then “Goliath” by Matt Stoller. And so then I signed up for the Big newsletter and joined the discord that they have for readers of the Big newsletter and have been very active on there. And it’s just been really an amazing journey because I spent so many years trying to understand why the pharmacy industry that I cared about so much felt like it was deteriorating. And now, I have a full understanding. And it’s because several links in the pharmacy drug supply chain are incredibly monopolized.

TEDDY DOWNEY:  I think that’s a good transition point. And I’m sure we’ll have to come back to PBMs at some point to kind of get into that part of the story. But what I really want to focus on today is the wholesalers. Because there’s been some scrutiny of the wholesalers, certainly, particularly as it relates to the opioid epidemic. And there were some good investigative pieces about that, and they certainly got caught up in that.

But ever since then, when it comes to drug prices and even independent pharmacies, there’s been a lot of focus on PBMs. I’m sure you would agree, probably rightfully, there’s been focus on that, but not quite as much focus on the wholesalers.

And so from your pharmacy perspective, I would love to hear what you came to see as the problem with how the wholesalers interact with pharmacies, independent pharmacies in particular, and how that distorts the market to your mind.

LUKE SLINDEE:  Sure. So, number one, I think it’s important to describe the extent to which the wholesaler market is an oligopoly. So there are three firms that control 95 plus percent of the drug wholesaler market in the U.S. and those would be AmerisourceBergen, Cardinal Health and McKesson. If you take a peek at the Fortune 500, you’ll notice that all three of those firms are in the top 15. And in a lot of these hearings that have happened in Washington recently, there’s been a lot of focus on the Fortune 500 positions of PBMs, and their vertically integrated organizations that they’re part of. But  really, to my knowledge, people haven’t really pointed out the fact that all of those three wholesaler firms are right there also in the Fortune 15.

And one thing that I’ve kind of learned is if you are ever interested in playing kind of a fun parlor trick style game with some of your friends, ask them to look at the Fortune 20 and just ask them to name the companies they’ve never heard of before. And usually if you do that, inevitably people will say something along the lines of “what is AmerisourceBergen”? So it’s one of those things where you really only have any awareness of this if you have some kind of connection to the pharmacy space. But I really can’t overemphasize the size of these companies. And they supply the drugs to all of the pharmacies of every type. So it’s small, independent pharmacies, the biggest chains that are out there that everyone’s familiar with, as well as hospitals, doctor’s offices and the specialty pharmacies that are owned by PBMs, as well as the mail order pharmacies that are owned by PBMs.

So there is a very direct relationship between the wholesalers and the PBMs, because the wholesalers are the source of the drugs that the PBM owned specialty and mail order pharmacies are dispensing. So I just always like to point that out that there is a direct line between all three of the big wholesalers and then all the PBMs. Because the PBMs do dispense a lot of their own medications through their owned mail or specialty pharmacies.

One area in terms of what I believe is anti-competitive business practices is you’ll notice that the pricing, and just the business contracts, for how large pharmacies, like chains or those PBM owned specialty pharmacies, how they purchase drugs from wholesalers. It looks entirely different than the way that small independent pharmacies purchase drugs from wholesalers. So there’s entirely different systems that determine prices and there’s very elaborate systems of rebates and cross subsidies that occur between purchasing prices of brand name drugs and generic drugs. And so when you look at the kind of pricing and rebate and cross subsidy schemes that are put in front of small independent pharmacies, it’s entirely different than the way that the large organization pharmacies purchase drugs. And I’m happy to dig into the details of how those ‑‑ they call them prime vender agreements.

TEDDY DOWNEY:  Yeah, I mean, it sounds like what you were talking about before, it sounds kind of like price discrimination. So, really interested to see how the contract and that interaction is different between a big pharmacy, a big chain and an independent pharmacy.

LUKE SLINDEE:  Right. Well, maybe we can start with one of the main issues around pharmacy pricing being problematic ‑‑ and it’s something that’s been covered very well by the 46 Brooklyn folks that you’ve had on a previous podcast. But it’s important to start with the understanding around list prices that are set by manufacturers. And so the main list prices that are used in the industry are AWP, which at one point stood for Average Wholesale Price. Now, given that it doesn’t really reflect any of those words anymore, I think you’re probably safer just using the acronym. And then WAC or Wholesale Acquisition Cost is another one.

And so those are the list prices that the general public usually focuses on, because that’s the only pricing that’s available publicly. But I can tell you that for a lot of medications, and in particular generic medications, those drugs that are off patent and you have multiple generic manufacturers competing with each other, the real prices ‑‑ so the actual prices that are, as part of a business transaction from the generic manufacturers selling to the wholesaler and then the wholesaler turning around and selling that same product to the pharmacy ‑‑ those real actual transaction prices bear no relationship or resemblance at all to those public list prices. And this has been something that’s been covered elsewhere. But I just always like to use that as a base. Because, especially again, for generic drugs, it seems as if the existence of the list prices themselves pretty much seem to exist solely to just kind of confuse the wider public and payers in general, because those numbers are literally gibberish for generic drugs. AWP and WAC are gibberish.

TEDDY DOWNEY:  Yeah, I want to stay on this for a second because we only look at NADAC as like a reliable or useful price, and even that isn’t perfect. I didn’t want to interrupt you though. I learned that from 46 Brooklyn as well. So that’s been a helpful shortcut for us to not get confused as we’ve been digging into these markets. But I think it makes me feel a little bit better that you do the same thing. I mean, obviously you actually are responsible for doing NADAC. So you probably think it’s helpful data there as well.


TEDDY DOWNEY:  But I want you to keep talking about the prices that don’t make sense and maybe the ones that do.

LUKE SLINDEE:  Right. And so that’s why I believe so firmly in the concept of the NADAC. And a really critical element of it is that it is fully public information. Because there is an alternate version of history where the Medicaid program‑‑ which is the reason why NADAC exists ‑‑ there’s an alternate version where the Medicaid program could have hired ‑‑ everything could have been exactly the same, and it could have been the basis for payments to pharmacies from Medicaid like it is now, but it would not be posted as public information.

So, it’s very easy to imagine that alternate history. And part of the reason why I am so proud to do what I do and to have that privilege is that all of the information that we calculate becomes public information. And one of the things that I’ve learned about monopolies and anti-competitive business practices, just in general across industries, is that anything that you can do to make real pricing information public is pro‑competitive, right? Whereas, anything that you do to obscure true pricing information or keep it secret or, you know, I’ve heard a million terms. The other day on a podcast, somebody referred to it as fog, which I thought was hilarious. But I mean, fake prices are anti-competitive. Having true pricing is pro-competitive. And so, I just really want to focus or emphasize that. Because that’s part of the reason why I’m so proud to be able to do what I do is that that public nature of the pricing is this is critical.

So back to the wholesaler relationship with the pharmacies. So you have the manufacturers posting those list prices. And on generic drugs ‑‑ again, I really can’t emphasize this enough. AWP and WAC and generic drugs are just ‑‑ it’s gibberish. It could be a billion dollars. So then a lot of the pricing that occurs between wholesalers purchasing from manufacturers and then wholesalers selling to pharmacies that is kind of shrouded in secrecy. The NADAC program is based upon voluntary surveys that are sent to pharmacies, asking nicely if the pharmacies will share that invoice, purchasing information with the NADAC program. And so pharmacies do that voluntarily. And that allows you a window into what the actual pricing, real prices of drugs, that pharmacies are paying.

Now, you made a point about how the NADAC is not perfect, and that’s certainly true. One of the things that is a limitation is that the NADAC is based off of invoices. And if you have invoices that are complemented by systems of rebates, then that can have the effect of obscuring net pricing, if you will. So, unfortunately, I’m sad to report that there are very elaborate schemes of rebates that go on between wholesalers and pharmacies, not dissimilar to the system of rebates that goes on between PBMs and manufacturers on brand name drugs. And rebates between manufacturers and PBMs, that’s something that’s had a lot of public scrutiny. Much less public scrutiny on the system of rebates between wholesalers and pharmacies.

And I want to be very clear, the system of rebates are set up in such a way that they are entirely one sided. So all of the advantage of there being this kind of confusing and unnecessarily over complicated system of rebates is to create an intentional informational asymmetry between the wholesaler, which is a Fortune 15 company, and any small independent pharmacy which these are people that are just trying to help their community. They don’t have data analysts. They can’t spend hours a day focusing on the ins and outs of all this pricing information. And so the system of rebates and pricing and anything that basically is in place to obscure true pricing to a pharmacy, I just want to be clear in that this is not like some kind of collusion type of thing where pharmacies and wholesalers mutually benefit. I believe personally that the system that creates confusion around net pricing and elaborate systems of rebates is entirely designed for the benefit of the wholesaler. And, I mean, maybe we could take a breath.

TEDDY DOWNEY:  Yeah, I would love to talk about — because this gets at, I mean, we’ve talked about this before, but how do they deal with the big chains versus the small ones? It’s not like the big chains have enough analysts to get to the bottom of this also. I mean, even they’re at an informational disadvantage. They’re certainly better off than the independents. But I’m curious, I’d love to learn more about what’s the big difference? What’s the difference between what those rebates look like and the contracts look like and those negotiations look like for an independent versus a big chain?

LUKE SLINDEE:  So, in general, the larger the chain, the less appetite they have for any rebates, period, because they know that that system is not to their advantage. So the larger the buying power, the more leverage that a pharmacy chain has, the more likely they are going to push for true net pricing at the point of sale immediately, where there are either no rebates or minimal rebates. Because the chains are smart. They know that any complicated system of rebates is not to their advantage.

And unfortunately, independents are not given that option. So independents, if I had Luke’s Pharmacy ‑‑ which maybe someday I will ‑‑ if I had Luke’s pharmacy and I wanted to go sign up with one of the big three wholesalers, I am not given that option currently to be able to purchase drugs at pure net pricing without rebates, without complicated schemes of pushing me towards certain drugs. And the term that pharmacy owners are familiar with is they call them GCRs, which stands for Generic Compliance Ratios. So if you really want to get to the bottom of this, go find your local independent pharmacy owner and get them talking about GCRs. The term compliance in this context basically just means the extent to which that pharmacy purchases almost all or all of its drug product from a single wholesaler.

So one of the main purposes of these rebate schemes is to put financial incentives in place to basically lock you in as a pharmacy owner. Pharmacy owners have all kinds of terms for this. Buying away is a common one, which just simply means buying a drug from a different wholesaler than your primary one. Sometimes people call it leakage where if you go to buy a drug from a wholesaler that isn’t your primary. And it’s this pricing dynamic that gets used to the detriment, again, of the independent pharmacies where the big wholesalers are smart. They know that once they have you locked in, that frees them to raise their prices. And most pharmacies are not going to have the time or the ability to go out and competitively shop every single drug that they’re buying. And so many pharmacy owners are kind of the mindset that whatever the price the wholesaler tells me is that’s what it is. Even though they might be able to shop around and look at a different wholesaler and that same generic drug might be available for half at another place. I’ve seen way more extreme examples of that. The pricing opacity ‑‑ I really can’t stress this enough. Like any pharmacy has no awareness of the prices that other pharmacies are paying to the wholesaler for the same drug.

So the wholesalers have created these really elaborate systems of basically like keeping each individual pharmacy in the dark with respect to pricing information. But then, of course, they have total pricing information about everything. You know, they know exactly how much they’re charging to each individual pharmacy for the same product. And so it just creates this complete informational asymmetry.

Yeah, I kind of got off board, but I do want to talk to kind of fully more ‑‑ because the main reason why I wanted to talk to you today was to explain how these GCR contracts work, because they are, you know, if you just kind of remove the morality from it, it is kind of genius, honestly, in terms of like a business strategy. So again, if I had Luke’s pharmacy ‑‑

TEDDY DOWNEY:  They’ve got a captive customer, right? They can’t go anywhere else. They have no idea what they’re paying. They have no idea what your costs were.



TEDDY DOWNEY:  Except going to NADAC sort of.

LUKE SLINDEE:  Right. And we encourage that all the time. So I constantly am telling pharmacy owners every single time you purchase something, you should be comparing it against this free public benchmark that’s out there. And so if you’re being charged more than that, you should be getting an explanation as to why. So one of the nice things about the NADAC is that it goes in both directions. It’s a sanity check for understanding PBM payments. And if you’re a patient, it’s a sanity check for okay, I know about how much my prescription should cost because I just can look at the NADAC, times the number of units that I’m buying, plus a $10 to $12 dispensing fee. It gives you a pretty good ballpark of understanding like what you as a patient or as a PBM should be paying for any given drug. But it also goes in the other direction for pharmacies purchasing from wholesalers. So, again, it’s the same thing. If you’re being charged more than that, it’s something you should look into.

But yes, the GCR. So it’s important. There’s some important background context here. So for my entire lifetime, pharmacies have always been expected to stock and carry both brand and generic drugs. And that’s just normal, right? I mean, that’s just the way it is. Everybody expects that you should have both of those. But when you really kind of get down to the details, I mean, they are fundamentally different businesses. Like, all of the pricing rules are different for brand drugs versus generic drugs. And so I’m convinced that a lot of the problems that we have in pharmacy pricing are because we essentially are taking two completely different economic models and just mashing them together.

Now, it’s also important to understand that the brand drugs are so much more expensive than the generic drugs that it creates‑‑ I’m sure you’re familiar with like the Pareto principle, the 80/20 rule or what have you. Well, in pharmacies, again, if I had Luke’s Pharmacy and I ran it like a traditional pharmacy, small, independent, it’s more like 90/10. So 10 percent of the prescriptions that you dispense at your average pharmacy these days are branded drugs, 90 percent are generic drugs. But if you look at the total amount of the dollars that are spent on your inventory for stocking the shelves, it’s flipped — 90 percent of your purchasing dollars are for brand drugs and 10 percent are for generic drugs. So it creates this very, very strange dichotomy where brands represent a very small number of the prescriptions dispensed, but they represent the vast majority of the dollars moving in and out of your pharmacy.

And so wholesalers are smart. They’re very smart. And so they know that because of the dollar significance of branded drugs, they have known that the priority for independent pharmacy owners has historically always been how do we get the absolute best brand purchasing rates that we can get? And again, that’s rational because that’s 90 percent of your purchasing volume in terms of dollars is these brand rates. So that the focus of the pharmacy owner becomes the brand purchasing rates that you’re able to get from a wholesaler.

Well on generics, alternatively, it’s only 10 percent of your spend. So you’re just a lot less sensitive to markups there. So it’s just, okay, I got overcharged by 20 percent, but it’s only $2. So who cares? So in that environment, the wholesalers basically got smart. And I’ve asked a lot of people about the historical origins of this, because a lot of this goes back before I was ever involved. And there’s not a lot of information out there about exactly what happened. But basically, at some point along the way, one of the wholesalers, invented the GCR. And so the GCR is again Generic Compliance Catio. And what it is, is it’s an explicit tying of the brand purchase rates, which the pharmacies are very focused on, to the volume of the generic purchases that the pharmacy makes from the same wholesaler.

So they have very elaborate formulas saying that the more volume of generic drugs you buy from us, the wholesaler, the bigger incremental discount on brand prices that you get. And everything is expressed in terms of percentages off of the WAC or the list price. And so if you buy an additional $10,000 of generic drug products, then we’ll give you an additional 0.5 percent discount off of your brand purchasing. So the prices of the brands that you’re purchasing become dependent upon the volume of the generics that you’re buying.

Now, I am certainly not an antitrust expert the way probably a lot of people that are listening to this are. But my understanding is that that would be an example of product tying. So, the price of one thing is dependent upon how much you buy of a separate thing. And again, it’s kind of genius. Because the priority forever, for pharmacy owners, has been to focus on getting the lowest prices on brands. And so what the wholesalers do is once they have you locked in or they’ve given you a strong incentive to buy as much generics as possible, what they do is they just systematically overcharge you on generics and then they take some of that margin and use it to actually artificially subsidize the price of brands.

And so, again, it’s kind of genius because the net result is that it locks you in because the pharmacy has to buy the generic drugs in order to meet their quotas or their volume driven incentives to get the lower purchasing price on the brands. So they’re locked in on buying the generics. The wholesalers then systematically raise their prices on the generics and get big margins on the generics. And then they take some of that margin and then they go and then use that to actually make the brands even cheaper.

So the net result of all this is a very bizarre circumstance where, to the best of my understanding, a lot of wholesalers are actually selling branded drugs at a loss. It’s not a big loss. But actually, if you just looked at solely the price that the wholesaler buys the drug from the manufacturer at and then the price that the pharmacy pays for it on the invoice, it’s less. And so the only way that makes sense is that the money has to be coming from somewhere. And the answer to that is the money is coming from the systematic overcharging on generic drugs.

And that’s why if you look at invoices, the prices of generics are very inflated compared to what they should be. And so you have this situation where this product tying that goes on simultaneously makes the brands appear less expensive than they are and makes generics look significantly more expensive than they should be. And the summation of all of that is you’ve created a system where every single incentive is to force a pharmacy to purchase all of their inventory from one wholesaler.

TEDDY DOWNEY:  And I want to talk a little bit about consolidation. And we’ve actually got a lot of questions about PBM. So we’re going to have to address that to some extent. But when it comes to these consolidations, does there only being three of these companies makes it sort of easier to lock people in? No one else is coming up with a different way to contract, a different business model to have, with the independents. So I’m interested just in terms of consolidation, facilitating this or leading to this. Or what was it like before GCR and when there were more wholesalers? Was there more shopping around, that type of thing?

LUKE SLINDEE:  Yeah, I mean, absolutely. Because before GCRs, you didn’t have any explicit incentive to buy more volume from a single wholesaler. So there was definitely more shopping around because that incentive was not there. And like any industry, as there’s more and more consolidation, there’s just more and more tacit collusion. I mean, if there’s only three firms, there’s a lot less likelihood that any one of those three firms is going to kind of deviate from the playbook than if there’s a lot more, ten or more or whatever, where there’s much more likelihood that one of the competitors might just say this system actually kind of sucks. We’re just going to go in the other direction.

And then the other way that there’s ‑‑ because I want to be clear, there are secondary wholesalers. There’s a long tail. So that that remaining 5 percent of the market, like there are lots of other wholesalers. So I don’t want to make it seem like there’s not. But you just have, it’s very similar to the PBM market in that you have a ton of small PBMs, you have a ton of small wholesalers, but in aggregate they represent a very small portion of the market share. And a lot of those secondary wholesalers do do net pricing. So they don’t play this GCR games and all that kind of stuff.

The main trap that prevents pharmacies from using those is that most secondary wholesalers can’t source brands. So if you made the elective decision to say as a pharmacy owner ‑‑ and some pharmacy owners, in my opinion, the kind of more clever ones, have already made this decision to say, you know what? Out of every 100 prescriptions I fill, only ten of them are brands. I’m just going to stop stocking brands. Like I’m going to have that conversation with my patients and just say we’re going to switch over and just become a generic pharmacy, period.

Once that occurs, all of a sudden the pharmacy’s degree of freedom in terms of purchasing just goes through the roof and they’re able to source things across lots of different secondary wholesalers where there is a true competitive marketplace. And so that that allows pricing to come down significantly on generic drugs. And there’s a perfect example of this.

In Pittsburgh, a friend of mine named Kyle McCormick runs a pharmacy called Blueberry Pharmacy. And they intentionally do not stock brands at all. And so as a result, they’re not subject to these GCRs. And so they can purchase all of their drugs competitively and source them across multiple wholesalers and always make sure they’re getting that best acquisition cost on generic drugs. And as a result, he’s able to sell generic drugs at prices that are much, much lower than you see elsewhere.

So I just want to be clear that there are other wholesalers and there is a competitive secondary market on generics. But what the big three have locked ‑‑ I don’t know exactly how they did it, but it’s basically impossible for the smaller actually competitive wholesalers to be able to purchase brand drugs from manufacturers at a price that is competitive. So there is a competitive secondary market for generic drugs, but there is not for brands. If you want to be able to dispense brand drugs, you have to go through the big three.

TEDDY DOWNEY:  And so I want to switch over to PBMs momentarily, but last question. We talked before we hopped on the call that wholesalers are almost as responsible for, in your opinion, the sort of demise of the independent pharmacy. And I just want to like tie everything up. How does it really hurt the independent pharmacy? We talked a little bit about how they’re the ones getting all these rebates. They’re the ones being kind of more punished by the complicated schemes. But I just want to get it in your language, how you tie all this together, how there’s a direct connection to the demise of the independent pharmacy because of how these wholesalers are doing business.

LUKE SLINDEE:  Yeah, I would describe it as I mean, it’s a squeeze. So if you are being reimbursed by the PBM in a model that does not include a professional dispensing fee ‑‑ which that’s one thing that sometimes people forget about the NADAC model is that the point of the NADAC is to basically make it so that the pharmacy is not earning any margin on the product itself. The goal is to try to get to as close to break-even as possible. But then in order for the pharmacy to be able to make any revenue and be able to exist as a business, they have to have a source of revenue. And under the NADAC model, that comes entirely from the dispensing fee.

So the expectation is that when you get reimbursed that net, you should also be getting a $10 to $12 dispensing fee per prescription. That actually is a complete reversal of what I would call like the default or the traditional market where dispensing fees from the major three PBMs and other PBMs as well, you might get $0.25 dispensing fee. And so I can tell you that if you’re trying to run a business and your only margin is $0.25 per prescription, every pharmacy in the country would close tomorrow. And so the implicit or sometimes what I call the “big lie” of pharmacy is that if you’re getting a $0.25 dispensing fee, the revenue has to come from somewhere else. And that somewhere else is the margin between your acquisition cost on the product and how much the PBM pays you for the ingredient cost of that same product.

So we’ve created a default system where all of the incentives are to buy the drugs as cheaply as possible, turn around and negotiate the highest possible product reimbursement rate as possible, and then accept a $0.25 dispensing fee. Or I want to be clear, in a lot of the more recent Express Scripts contracts, the dispensing fee is literally zero. Zero.

So if you’re a pharmacy, that creates a system of incentives where you provide the worst customer service possible because you’re not being paid to provide customer service. You’re just being paid to buy the drug at a low price and sell it at a higher price, which I would argue is terrible. It creates a terrible system of incentives. And I think that that is what has really destroyed my industry is this model around either minute or nonexistent dispensing fees, and then the expectation that the revenue has to come from a markup on the product, which independent, smaller pharmacies just can’t compete. I mean, if you look at that incentive structure, everything that’s occurred makes sense. The pharmacies get bigger. They create buying groups. They create PSAOs where they band together and try to collectively negotiate with PBMs on their reimbursement contract rates. The incentive structure that we’ve created is every single incentive is just to make it so you have to get bigger to increase your buying power and your negotiating power. Because pharmacies are not being paid for the actual service that they provide. And I fundamentally believe that pharmacies provide a service, not a good. The manufacturers supply the goods. The pharmacies provide a service. Sorry, I’ll come down off my soapbox for a second, but go ahead.

TEDDY DOWNEY:  Yeah. No, no. So we’re back on the PBMs a little bit. And so, we’ve talked about this before, but one of the reasons a lot of these independent pharmacies can’t just do generic is they’ll lose their customers. The customers actually come and they’re like, look. I got prescribed a brand. I need to get the brand. And if you don’t have the brand, they go somewhere else. And the minute you lose someone like that, your business is just like a much smaller patient pool.

So just to kind of make sure we cover that as kind of part of the whole dilemma that’s facing the independent pharmacy. But we’re on PBMs. We’ve got a little bit of time left. We’ve got a few questions here specific to the PBMs. And you’ve already touched on this. There’s the contracting. But what is it‑‑ maybe you can talk a little bit about sort of at a high level ‑‑ beyond those contracts, or in addition to how those contracts, maybe a little bit more color on how those contracts are negotiated, how they work, how the PBMs are – you know, clearly the wholesalers are locking them in. They’re sort of taking advantage of information asymmetries. What’s going on with the PBMs? And how are they using their power over the independent pharmacy and squeezing the pharmacies?

LUKE SLINDEE:  Sure. Well, let’s start with the fact that because of their market power, the PBMs are able to offer take it or leave it contracts to the pharmacies. So the pharmacies never have ‑‑ the smaller pharmacies ‑‑ never have the ability to amend or change anything in the provider network contract. It is either you agree to everything or you’re out of network, period. So that is the driving force behind everything that PBMs are able to do is that they do not ever change their provider network contracts for any pharmacy. And so for the pharmacy, it’s a take it or leave it contract.

In addition to being a take it or leave it contract, they are also incredibly opaque and you cannot share any details of your contract with anyone ever. So again, it creates an informational asymmetry where if I have Luke’s Pharmacy, I have no idea what the contract that’s being offered to other pharmacies in terms of that nature. Whereas the PBM, of course, knows all of it because they’re the ones that are offering the contract in the first place.

So there’s a complete informational asymmetry there. Once you get into the details of the contract itself, I mean, there’s a million stipulations that are just completely one sided. It allows the PBMs to do all kinds of what I would call just like harassment through things like predatory audits. They just write all these things into the contract that just gave them these kind of ridiculous powers that more or less just kind of turn the pharmacies into ‑‑ I’m just going to use the word enslavement. You know, like it’s economic slavery, really, where you just have to do everything that they say and you have no autonomy whatsoever.

And then the last thing is that typically on brands, the way the contracts are written, the pharmacies generally have some understanding of how much they’re going to be paid prior to actually submitting the claim to the PBM. But for generic drugs, the pricing is governed by what are called Maximum Allowable Costs or MAC lists. And those are secretive and they’re not in the contracts and they change at any point in time. So when a pharmacy signs up to fill prescriptions and be in network for Express Scripts or OptumRx or CVS Caremark for a generic drug, they have no clue what they’re going to be paid for a generic drug because that pricing is governed by a Maximum Allowable Cost, which is not disclosed to the pharmacy. It can change at any time and it’s completely controlled by the PBM.

So, I mean, it’s just kind of insane really. I mean, as soon as you sign that contract to fill prescriptions for any of the big three PBMs for generic drugs, you’re signing a contract that you’ll dispense something without knowing what you’re going to get paid. And it’s just insane. So, I mean, there are other things, but, you know.

TEDDY DOWNEY:  It’s hard to run a business that way.


TEDDY DOWNEY:  So they know the cost they’re paying, but they don’t know the cost they’re going to get paid.

LUKE SLINDEE:  On generic drugs, correct. Which is 90 percent of the volume, which I described earlier.

TEDDY DOWNEY:  Yeah. We’ve got a few questions here. What is the ability for regulators to monitor rebates and other pricing manipulations?

LUKE SLINDEE:  Well, I would just ban them personally. If anyone from DOJ or FTC is listening, I would, immediately when you’re done with the PBMs, do a 6(b) investigation into the wholesalers and just ban all off invoice rebates and force them to only do net pricing. And that would solve so many problems. Because the pharmacies would have so much better information about their actual acquisition costs that they would be able to just doing the math of knowing ahead of time how they’re going to come out on each individual prescription financially. That would be huge. Because right now, because of the way that the rebates work, it’s basically impossible to know. You don’t know what the net pricing is on your generic acquisition. And so, without that, you have no way of knowing whether on that prescription you actually made money or not.

So, I mean, from my perspective, I can’t see any possible downside of just banning any off invoice rebates in the transaction between wholesalers and pharmacies. And then that would also improve the NADAC, of course. Because the more that the invoices reflect the actual pricing, then that makes NADAC a more real number than it already is. So I would just ban them.

TEDDY DOWNEY:  And actually, the GCR, it sounds like a kind of an exclusive deal, right? And it sounds a little exclusionary. It’s sort of like the way that it locks you in, it’s like, well, you can’t shop around anywhere else. It sounds a little bit like the Open Markets is calling for a rule against that type of exclusionary conduct, those kinds of exclusive contracts. I’m not sure if that would qualify, but it sounds up that alley. And we’ve only got a few minutes left. I’ve got a few questions here. You mentioned Minnesota. There’s been a lot of legislation that just passed in Minnesota. Are there any interesting developments there in the drug and pharmacy space?

LUKE SLINDEE:  Yeah. So, I was one of the primary advocates behind what’s called a Medicaid fee for service carve out. Currently, this is a battle that’s happening across many states. It just happened in New York State. They completed successfully their fee for service carve out very recently. What this means is that under Medicaid managed care, basically the state Medicaid program will just hand over a lump sum of money to a commercial or a private insurance company, and then they subcontract with PBMs who ultimately are responsible for paying the pharmacies. And there’s just mountains of bad behavior that happens there amongst the PBMs and the MCOs, under the guise of sort of providing Medicaid coverage for patients. And so, one of the goals of a fee for service carve out is to basically just remove all of that. And it would make it so that the state Medicaid program just pays pharmacies directly in a transparent way.

So again, New York completed that. California was before them. There’s been several other states, red states as well. So it’s not just a blue state thing. And I pushed very hard in Minnesota for that. We got it through both the House and the Senate. And when they were doing the conference committee, it was killed on the one inch line by hospitals, of all things, related to a very weird drug pricing program called 340B, And that’s a whole another hour if you want to dig into 340B. But basically, we were defeated. So I’m currently regrouping and coming up with my plans for the next legislative session in Minnesota.

TEDDY DOWNEY:  And then we’ve got a couple last questions here. I’m not sure how closely you’re following this Horizon/Amgen litigation that the FTC just brought does. Curious to get your thoughts on that and just the implications from that, that you see for the pharmaceutical industry from your perspective.

LUKE SLINDEE:  Yeah. Well, so again, this is just my opinion. So take it with a grain of salt. But I would say that Horizon is really nothing more than an elaborate financial scam. That company is very, very bad. I can’t say anything good about Horizon. I would probably direct people to the recent big newsletter by Matt Stoller that covered this exact issue. I think he did it perfectly. Basically, as there continues to be more and more consolidation in the pharma space, you have these large pharmaceutical companies that are not actually doing drug development. They’re just buying smaller companies that actually are more closely related to the drug development or maybe perhaps the universities where the real actual work occurs.

And so, as we have more consolidation in the pharma space, if you’re a pharmaceutical company and you actually had no involvement in the actual development of the drug itself, and instead you just acquired other companies that actually made the drug, I think his line was perfect. You’re just another middleman. If you’re a pharmaceutical manufacturer who just buys other companies that do the real work, you’re just another middleman. So I would definitely have people read that. I thought he did it perfectly.

TEDDY DOWNEY:  Yeah. I mean, I think it’s interesting in that, like you said, it’s kind of this financial engineering aspect. To me, the case is more really about, look, if you’re buying a drug company for drugs that are sort of at the end of their life, that are like headed for the patent cliff, and the economic opportunity for you is to prolong those monopoly, keep the price high, exclude competitors with the PBMs, have a greater ability to coordinate with the PBMs, to exclude competition and therefore keep the share high and the price high for longer than you otherwise would be able to without that kind of big portfolio of drugs. That deal, the FTC now says, look, that type of deal is illegal.

Whereas, I’m not so sure, to the sort of broader point, that like if you bought something at the early stage and that that drug company doesn’t want to do the marketing, for example, and then you’re basically a glorified marketing company and you’re sort of at the earlier stage and you’re going to do all that work that maybe that other company is not going to do, I think that would be at least ‑‑ this case is not saying, hey, that type of deal is illegal. You’ve got some past history at Amgen. You’ve got the conduct at Horizon.

And then you’ve got the what could they do with this additional, you know, are they going to basically have a greater ability to sort of prevent the patent cliff to exclude competition and kind of keep your monopoly rent going. So I think, from my perspective, that’s kind of been one of my big takeaways is to the extent that this discourages M&A activity going forward, I would imagine it to be those types of transactions. And we’ll obviously see what happens in court.

All right. Last question for you. You already said, look, ban these rebates from the wholesalers. You said 6(b) investigation into the wholesalers once they’re done with the PBMs. Anything else about price discrimination, Robinson‑Patman. I mean, you brought that up. You brought up price discrimination. What else do you think would be a good tool in the FTC or DOJ toolbox to kind of get at the problem here from a standpoint of like dealing with the PBMs and the wholesalers. Or on the flip side, what’s good? What would be best for these independent pharmacies?

LUKE SLINDEE:  Let’s see. Well, in my opinion, I mean, the entire pharmacy industry, and like the vast majority of the problems in the pharmacy industry, it’s all Robinson‑Patman. That’s the whole game is just price discrimination. And the reason why independent pharmacies are at such risk is that they’re getting priced discriminated against in both directions. From the wholesalers, they’re getting worse pricing, buying the exact same drug products that bigger pharmacies do. And then on the PBM reimbursement side, they’re getting reimbursed less for filling the exact same prescription that bigger pharmacies with more leverage power do.

So my understanding of Robinson‑Patman is that you can have differential pricing based upon things like, well, they buy it in bulk or something like that. But that’s just not the case. Because all of those drugs that move around, they have to get trucked into the Walgreens the same way they get trucked into an independent pharmacy. So there’s no physical efficiencies there. It’s just purely buying power. So to me, again, I’m not an expert on this stuff, but I think pharmacy, everything is some version of a Robinson‑Patman problem.

And then just in terms of other anti‑competitive type things, forcing more details about contracts to be public, not so secretive to create these intentional informational asymmetries to just divide and conquer all these pharmacies. That would help. And then I would love nothing more than to see structural break ups. I mean, I know that’s a big thing. But, I mean, dream big, right? So in the PBM space, I think we would benefit from vertical break ups, force UnitedHealth Group to sell OptumRx or something like that.

Horizontal break ups. Is there really any reason why three PBMs get to have 85 percent of the market share? And then for wholesalers, I mean, it’s probably just horizontal break ups. You know, three companies control 95 percent of the market. We know historically that that’s bad. So I would maybe look at some of the mergers that happened over time and really, really look at the possibility of structural break ups if it’s possible. I know it’s hard. I know that’s like the hardest thing to do. But I can’t help but conclude that that would be the right thing to do.

TEDDY DOWNEY:  When we look at these other markets, there were these big mergers that really defined kind of a moment. You think Google/DoubleClick, Facebook/Instagram, Ticketmaster/Live Nation, where the market incentives just got totally distorted. You know, the insurers buying up all the PBMs. Was there anything in the wholesaler sort of acquisition history that there was one where it was like, wow. That was like the five to four or the four to three that really stood out as, all right. Well, they should really go back and look at that one?

LUKE SLINDEE:  I’ll be honest with you, I’m not nearly as familiar with the merger approvals on the wholesaler side as I am with the PBM side. So unfortunately, I can’t intelligently answer that. Sorry.

TEDDY DOWNEY:  No problem, no problem. It’s more for The Capitol Forum to research and write about. But Luke, we’re out of time. This has been a super interesting conversation. Your knowledge about pricing is incredible. I’ve learned a ton and I really can’t thank you enough for doing this. And I hope to stay in touch as all these issues kind of get more scrutiny and play out in the next couple of years here.

LUKE SLINDEE:  Yeah, it’s been my pleasure. Love the podcasts. Huge fan.

TEDDY DOWNEY:  Yeah, thank you, Luke. Thanks to everyone for joining the call. And we’re going to stay on these health care topics really closely going forward. So look forward to having you on additional calls in the future. Thanks again, Luke. And this concludes the call. Goodbye, everybody.