Why I Sold my Independent Pharmacies

Prior to my current status as the upper Midwest representative for Integrity Pharmacy Consultants, I was a multi-store pharmacy owner in northern California. With Integrity's help, I sold my pharmacies in early 2021. At the time, I wrote an op-ed piece for the local newspaper, which my wife convinced me not to submit because emotions were very raw at the time...not only for myself, but for my employees and the community-at-large. The piece served as a sort of cathartic therapy for me...it felt good to finally put my thoughts and emotions into writing, even though it was only my wife who read it. There were many things in the op-ed that even she did not know about, as I had taken it upon myself to bear those crosses alone over the years.

Having recently traveled through western Pennsylvania and meeting with pharmacy owners, I was reminded of the op-ed that still resided somewhere on my laptop, since many of the conversations I had with said owners harkened back to many of the same worries and concerns I had when I was an owner. I publish it here for other pharmacy owners to read. Perhaps many of you can't relate, as your passion and commitment to the profession still burn strongly. I admire people like you, truly. But I suspect that there are many here who can indeed relate all-too-well to my thoughts and words in this op-ed. It is for you I hope to help. Sooner or later, every pharmacy owner gets to "that point" in their careers. I am hoping you will allow me to help you when "that point" comes.

Without further adieu, here is the op-ed article I originally composed in February 2021, written the day I told my employees that I was selling the pharmacies:

The Demise of an Independent Pharmacy

My name is John Backus, and I’m the CEO and co-owner of Cloney’s Pharmacy, Inc.?I am announcing that Cloney’s is merging our retail business with CVS.?All patient insurance and prescription history will be transferred to the CVS system prior to the closure of the three Cloney’s retail locations.?All CVS stores will have access to Cloney’s patient prescription files, and patients may pick up their prescriptions at whatever CVS location is most convenient for them.?The last day of business for Cloney’s Red Cross Pharmacy will be Tuesday February 23rd.?For Cloney’s McKinleyville Pharmacy, it will be Wednesday February 24th, and for Cloney’s Prescription Pharmacy, the last day will be Monday March 1st.?Much of our staff will be staying with CVS, and they look forward to seeing you there.

Cloney’s Long Term Care Pharmacy will continue operations and servicing the medication needs of patients in skilled nursing facilities, assisted living facilities, board and cares, correctional facilities, rehab centers, Semper Virens, and psychiatric injection clinics now and for many years to come.

If you’re reading this, perhaps you’re looking for some answers as to why one of the largest and busiest independently-owned retail pharmacy businesses between San Francisco and Portland closed its’ doors.?The reasons are numerous, and somewhat complicated, but hopefully I can help explain the issues which lead to the decision to close a business that had been servicing the retail pharmacy needs of Humboldt County since 1902.

We must first start with the issue of how a pharmacy gets reimbursed for the products and services it provides for its’ patients.?Years ago, healthcare was purely a cash-transaction type business.?You went to the doctor, paid them for their services, took the prescription they provided to you to the pharmacy, and paid for the price of the prescription.?There was probably a great disparity in drug prices from location to location.?Along came insurance companies to “level the playing field”, and offer patients a standardized way of paying for health and prescription coverage.?No longer would patients have to shop various pharmacies to get the best price on drugs.?Their insurance coverage guaranteed their out of pocket expenses would be a certain dollar amount.?On the pharmacy side of things, insurance companies grew to be enormous in size, to the point where today there are only a few behemoths representing hundreds of millions of Americans, and processing hundreds of billions of dollars-worth of prescriptions every year.?The large pharmacy benefit management (PBM) companies offer take-it-or-leave-it contracts to pharmacies across the nation, including small independent pharmacies.?Not signing their contracts means not participating in the insurance networks patients belong to, which ultimately means patients won’t fill their prescriptions at your pharmacy if they can’t use their insurance to pay for their drugs.

The problem is that reimbursements from said insurance companies have been shrinking severely year over year, particularly for those patients who rely on state-sponsored prescription coverage such as MediCal and Partnership Health.?As an example, I witnessed a patient’s medication was reimbursed for $2, when in the previous month we had been reimbursed $14 for the same prescription.?This was for a relatively cheap generic drug.?There are some brand name drugs where insurance companies reimburse hundreds of dollars below our actual acquisition cost.?And you can’t tell the patient that you can’t fill it “because you’re insurance company isn’t paying us enough”.?Oh no!?We signed the contract, therefore we agreed to its’ terms.?(Never mind that contract was a take-it-or-leave-it scenario).?Those terms include accepting Direct and Indirect Remuneration (DIR) fees, which have grown over 16,000% over the past decade.?They were originally included in the 2004 Medicare Part D law, and were supposed to offset member costs in prescription plans.?However, they have become the bane of independent pharmacies across the nation.?Imagine a restaurant that had to pay its’ food supplier an arbitrary fee six months after the purchase of goods.?As I have stated in past op-ed pieces, the insanity of such a business model cannot be overstated.?Last year, Cloney’s Pharmacies paid over $570,000 in DIR fees alone.?And that was actually less than DIR fees in previous years!?These all represent monies that should have stayed within the business.?If you were a business owner, what would you do with an extra $570,000??As the years have gone on, we’ve had to rely more and more on rebates from our wholesaler to make up the difference between our acquisition cost and what we were reimbursed for the prescriptions we dispensed, especially considering DIR fees were going to be a nefarious unknown hit to the bottom line months after transactions took place.

Which brings me to the next problem.?Most independent pharmacies purchase their drugs through buying groups which negotiate rebates with the wholesalers we deal with.?By belonging to a buying group, an independent pharmacy can “purchase like a chain”, or so we’re told.?However, our buying group made some major concessions to the wholesaler over the past year and a half, and as a result, our rebates were cut to the tune of hundreds of thousands of dollars.?I tried shopping around for other buying groups, but to my dismay, found that their rebate structures were worse than what we already had.?So while the wholesaler reports billions of dollars in profit to Wall St, and the CEO makes north of $10 million per year, the local independent pharmacies they service struggle to make up for the loss in rebate dollars that helped maintain profitability.

Profit.?It seems to be a dirty word nobody likes to talk about, especially in regards to healthcare.?The idea that healthcare professionals could profit off of a patients’ health (or lack thereof) is an unpalatable thought to the average person.?However, profit allows companies to stay in business and to grow, and to offer more services which fulfill the needs of more people.?Profit allows for the recruitment of the best minds and talent, as well as the retention of said talent.?Gone are the days of the wealthy doctor who bought a new Cadillac every year, lived in a mansion, wore 3-piece suits to work, and golfed at the exclusive country club every weekend.?As onerous insurance requirements have grown over the years, more money has been funneled towards administration, paperwork has increased, and doctors and pharmacies have been forced to see more patients per day, and to fill more prescriptions, to make less money today than what they were making 10 years ago.?Here on the North Coast, the market rate for a pharmacist is over $70/hr, and for a pharmacy technician it is over $20/hr, all due to the shortage of pharmacists and technicians in Humboldt County (much like the shortage of nurses and doctors).?But insurance reimbursement rates and DIR fees made it difficult for our pharmacies to support these salaries.?Cuts had to be made to our health insurance plan over the past few years in order to be able to raise our wages and make them market competitive.?Now that those benefits had been cut to the bone, there remained few if any more cuts to be made in order to maintain profitability.?We were backed into a corner.?Was there anyone who could possibly throw us a proverbial bone?

Yes, there was.?We were contracted with a local clinic to provide medications at reduced rates to their patients.?In a nutshell, the clinic was able to purchase drugs at a drastically reduced rate, the pharmacy dispensed them, and each shared in the spread between the cost of the drugs and the reimbursement rate of the insurance.?Sounds like a pretty sweet deal right??A great way to protect against low reimbursements??Except, the contract was signed years ago before DIR fees were a factor.?Now, the pharmacy had to bear 100% of the DIR fee cost, rather than having it factored into the reimbursement calculation at the point of sale.?We tried to renegotiate our contract last summer, but the clinic basically told us to pound salt.??We were accused of having a “certain amount of ignorance of the current economic situation and a bit of tone deafness if they are asking the clinic to provide additional funding so they can earn additional profit…”

No, we were just trying to work out a fair solution to the DIR problem and ensure that we were economically viable for years to come.?I guess that was too much to ask.?Also, while I’m at it, may I point out the fact that they were hiring away our employees and paying them higher wages and better benefits with the monies they earned from our pharmacies??Would that be an inconvenient truth?

But wait!?There’s more!?Another agency in town decided to move well over 100 of their patients to a mail-order program back in 2019.?Many of these patients had been Cloney’s customers for years before joining the agency.?We provided weekly compliance packaging and delivery for a large majority of their patients.?The agency was extremely demanding during the time we serviced their (or should I say “our”) patients, but considering they were the best payers we had with generous reimbursement terms, we went out of our way to please them.?When their patients were transferred to mail order, I feel this was where the “beginning of the end” occurred.?No longer would their reimbursements make up for the lackluster reimbursements of other third party payers.?In fact, the loss of business from this agency exposed the weakness of the payer mix at Red Cross Pharmacy.?Remember those MediCal and Partnership Health patients??The most vulnerable patient population we have in the State??The patient population that can be typically categorized as low or zero income, and have health issues such as HIV and psychiatric disorders??Those patients represented a majority of the prescriptions filled out of Red Cross Pharmacy, and their insurance coverage was paying us peanuts.?To say that Red Cross Pharmacy was operating in the red is an understatement.?It was operating in the red HUGE.

Shortly after losing those 100-plus patients to mail order, one of our key pharmacists resigned and moved out of the area.?We did an extensive search for a replacement, but could not get any pharmacist to sign on with us.?(At the time, our health insurance was still fairly robust (read: expensive) and our wages weren’t as high).?We had to rearrange the pharmacists we had to fill in gaps.?The inability to attract pharmacist talent also meant we were unable to find a replacement for my partner, Rich Spini, who after 35-plus years of working, wanted to transition into retirement (and he wasn't the only pharmacist we had in this situation.)?We tried reducing his hours, but found time and time again in his absence the store that he was in charge of suffered a myriad of employee problems.?It got so severe that in November of 2020, a number of staff from his store came to me threatening to quit.?This represented a major problem, not least because of the fact that this particular store was actually very profitable, and along with Cloney’s Long Term Care Pharmacy, helped keep the overall business in the black.?The collapse of this store would have meant certain doom.?As many business owners and managers know all too well, employees can be a company’s greatest asset…but they can also be a real pain in the ass.?The saying that "5% of your people will create 95% of your problems" is definitely true as far as I'm concerned. Since 2010, employee issues have aged me beyond my years.?They are the cause of my grey hairs and crow’s feet at the corners of my eyes.?When people find out how old I am, they usually say something along the lines of, “You’re young for an owner.”?I usually reply, “It’s not the age, it’s the mileage.”

So.?Yours truly came to Humboldt County, CA in 2010 and became a junior partner in Cloney’s Pharmacy Incorporated.?I moved my young family all the way from Florida, and spent nearly every single dime we had to relocate; and then again to buy out Patrick Cloney (the grandson of the original owner) in 2015.?I’ve missed the funerals of two grandparents, the weddings of numerous friends and family, and countless holiday family gatherings and life moments with those whom we love and care about back home in the Midwest over these past 11 years.?I have barely any memory of my kids as infants because I’ve easily put in 65+ hours of work per week at the pharmacies since 2010.?Vacations have been few and far between.?I long ago lost count of the number of times I was called into the pharmacy in the middle of the night to fill emergency prescriptions for Hospice patients or those in nursing homes.?The volume of business tripled in the time I’ve been here.?When I started in 2010, there were two pharmacies and 24 employees.?In 2021, there were four pharmacies and close to 60 employees.?I had business plans to open pharmacies in Garberville and Crescent City, and purchase independents that were for sale locally and in neighboring counties.?But with the current state of affairs of pharmacy reimbursements and DIR fees, the long-term outlook was grim. Never mind the fact that 40% of the pharmacists working for us were approaching retirement within the next two years, and our nearly two-year effort to recruit "new blood" to our remote area of California had produced zero results.?Do we sell now, or wait until the situation becomes truly dire and sell in a panic??At the very basic root of all this is that owning a business is an investment.?The current return on investment was trending downward, and no amount of appreciation or community love could make up for it.?Pharmacies don’t run on “thanks”.?That’s the harsh but brutally honest truth.

I wish my former employees and customers all the best.?I wish I could’ve done more, or that the efforts that I did put forth could’ve produced different outcomes, considering our business was so loved and appreciated by many in this County.?Then again, as the saying goes, “I gave at the office”.??