The only state without a Walgreens pharmacy

Many independent pharmacies are in turmoil throughout the US. But a unique law has made North Dakota a haven for mom-and-pop operators.

Over the phone from his business at Main Street and Antelope Avenue, Nathan Schlecht gives me the rundown on Forman, a zero-stoplight town of ~500 in southeastern North Dakota. 

Located 90 miles from Fargo, the town has a bank, a grocery store, a hair salon, and a high school where nine seniors graduated this spring. As we talk, there’s a small explosion — at least for a few weeks in June and July it has a fireworks stand, too.

And, on a corner next to a law office, there’s Schlecht’s business, Forman Drug: an independent pharmacy that opened decades ago.

Across the country, many small pharmacies like this are fading. Corporate operators like Walgreens, CVS, and Walmart have snatched up the lion’s share of the market, and state legislatures are trying to rein in large chains and their healthcare industry affiliates. But North Dakota has bucked the trend.

The state is teeming with independent pharmacies like Forman Drug in its cities and small towns. Add them all up, and it’s among the US leaders in pharmacies per capita. It also had the lowest rate of pharmacy closures of any state between 2010 to 2021, according to a study published in Health Affairs last year.

How does a sparsely-populated state known for oil, hockey, and snow stand out as a model for these small businesses?

The law that blocked corporate pharmacies

On a Friday in late June, Schlecht helped a steady stream of people picking up prescriptions, while the store’s other pharmacist gave an immunization to a customer and did a medication review.

They’ll see up to 80 people on a busy day, many coming from other towns in the county and some from nearby towns in South Dakota. Customers often rely on the pharmacy for medical questions they can’t ask elsewhere.

“We get a lot of people that come to us for their primary healthcare, looking for advice, looking for over-the-counter treatments, trying to find out when it’s time to go to the larger city to the doctor or whether they can get by a little longer on their own,” he says.

Nathan and Barb Schlecht, co-owners of Forman Drug. (Courtesy of Nathan Schlecht)

Schlecht was born on a farm ~40 miles from Forman. After graduating from pharmacy school at North Dakota State University, he worked at chains in Washington and Iowa before he and his wife, Barb, a pharmacy technician, purchased Forman Drug in 1998.

Forman Drug still exists today in part thanks to a unique state law that requires all pharmacies to be majority-owned by a pharmacist or group of pharmacists who are active in a store’s operations.

Enacted in 1963, the legislation halted both: 1) physician-owned pharmacies, which led to potential conflicts of interest from doctors who could profit off their own prescriptions; and 2) chain stores that were entering the pharmacy market.

These chains, like Walgreens, Snyder Drug, and Osco, were just starting to take over the Midwest. They have consistently opposed the law: 

• Snyder Drug filed a lawsuit to overturn the law that reached the US Supreme Court in 1973, with the justices ruling against chains.
• Walmart and Walgreens lobbied in North Dakota in the 2000s to overturn the law, but legislators twice voted to keep it on the books.
• In 2014, North Dakota voters upheld the pharmacy ownership law in a referendum vote.

Terry Dick, owner of Dakota Drug Co. in Stanley, ND (pop. ~2k), was once an opponent of the ownership law. But then he worked at a chain pharmacy in the Minneapolis area, filling as many as 150 prescriptions a shift while spending almost no time consulting with customers, who’d wait hours for their drugs.

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North Dakota isn’t entirely free of chains. CVS has six locations grandfathered in from its purchase of Jewel-Osco, which had pharmacies before the passage of the 1963 law. An employee-owned regional chain, Thrifty White, which was co-founded as White Drug in the late 1800s by the state’s first woman pharmacist, Elizabeth White, has 21 stores.

And Walgreens opened a store in Fargo in 2009, carving out space for a pharmacy in case the law changed.

That store remains open. But it doesn’t sell prescription drugs.

It’s a considerable advantage for indie pharmacies like Dakota Drug. Thinking about independents in other states, Dick says, “I quite honestly don’t know how them guys do it.”

Independents vs pharmacy benefit managers

The competition between independent pharmacies and chains is far stiffer elsewhere.

In Salt Lake City, Utah, Benjamin Jolley’s family owns Jolley’s Pharmacy. His grandfather started it in the early 1950s, and they’ve had the same phone number since 1957. Jolley’s Pharmacy survived a period, from 1950 to 2000, in which independent pharmacies declined by nearly half.

Since the early 2000s, though, the economics for Jolley’s have changed. The pharmacy is doing less business and filling fewer prescriptions. And Jolley says a major reason why are pharmacy benefit managers (PBMs) connected to chains and mail-order pharmacies.

PBMs build formularies (essentially a listing of drugs allowed on health plans) and negotiate with drug manufacturers, wholesalers, pharmacies, insurers, and insurance plan sponsors. 

Because of healthcare industry consolidation over the last ~20 years, the biggest PBMs are now vertically and horizontally integrated across the prescription drug supply chain. According to the Federal Trade Commission, three PBMs with ties to insurers and pharmacies, control ~80% of US drug prescriptions: 

• CVS Caremark, a subsidiary of CVS Health, which owns CVS stores and the insurer Aetna.
• Express Scripts, a subsidiary of insurer Cigna that has a mail-order affiliate Express Scripts Pharmacy.
• Optum Rx, a subsidiary of UnitedHealth (which operates insurer UnitedHealthcare) with mail-order pharmacy Optum Rx.

Olivia Heller/The Hustle

Last year, the FTC sued the Big Three PBMs, saying their rebating practices led to inflated prices of insulin drugs.

PBMs, though, have denied the allegations and claim their influence has allowed them to keep prices down for consumers.

“We should not automatically think that integration is a bad thing,” says Harvard Business School professor Alex Chan. To negotiate a good price with Pfizer, “you’d rather send one big guy than 20 small guys.”

One way PBMs receive payment is in the form of a rebate from manufacturers. Chan says insurers often lack transparency on the proportion of a rebate that is kicked back to them from a PBM. And because major PBMs are integrated with insurance companies there’s less incentive for their affiliated insurers to seek the lowest prices for drugs due to the margins they can receive from their PBM business.

Pharmacies get paid for the drugs they acquire from wholesalers and dispense to customers through reimbursements from PBMs. The FTC, in an analysis of 51 generic specialty drugs, found PBMs billed insurance plan sponsors a higher amount than they reimbursed pharmacies and pocketed the difference.

And the FTC has accused PBMs of setting up their pharmacy affiliates with preferred network access for certain plans, in part by steering prescriptions to their affiliates or offering reimbursement rates that independents can’t sustain. Being preferred leads to a lower co-pay and likely more customers than at a non-preferred pharmacy.

At Jolley’s Pharmacy, Jolley says they can’t sell some highly-profitable specialty drugs because PBMs made them exclusively available to their affiliated specialty pharmacies. Due to low reimbursement rates, they also lose money on most brand-name drug prescriptions they dispense to customers via the major PBMs, he adds.

“It puts us in a position where we have to weigh what's best for the patient, which is to obtain their medication, and what actually makes sense for our pharmacy, which is to not give them their medicine, because every time we do so, we will lose money,” Jolley says.

This leaves Jolley’s dependent on customers who pay out-of-pocket or buy generics, which comprise the vast majority of prescriptions. Generics have higher margins but are vulnerable to pricing shifts and require considerable volume to drive profits.

But here’s where it gets complicated: For massive chains, the story isn’t entirely different. They typically lose money on brand-name drugs, too. It’s an example of how the American healthcare system is wildly convoluted.

And within that system PBMs say they aren’t the villain that independent pharmacists describe.

Olivia Heller/The Hustle

In a study commissioned by CVS Caremark, Optum Rx, and Express Scripts, researchers found:

• The FTC analysis of 51 drugs wasn’t representative of the market as a whole.
• Profit margins of the PBMs were ~5%.
• Rebates received by the PBMs from drug manufacturers were passed through to plan sponsors at rates ranging from 92%-98% in recent years.
• Reimbursement rates for independent pharmacies were higher than rates for chain pharmacies unaffiliated with PBMs.

That’s also true for at least one PBM affiliated with a chain. David Whitrap, a CVS Health spokesperson, says average reimbursements from CVS Caremark are higher for independents than CVS pharmacies in every state.

Independents, though, point out that chains are larger. They can make up the difference in volume. They have better pricing power for acquiring drugs, so it can be easier for them to profit off a relatively low reimbursement than an independent.

Plus, when a PBM makes a deal with its affiliated pharmacy owned by the same parent company — like CVS Caremark with CVS Pharmacy — it’s akin to a person moving money from one pocket of their jeans to the other, instead of paying a separate party. (CVS Health’s overall profit last year totaled $4.6B.)

Jolley likens the integration within the industry to a Realtor acting as a double agent.

“You wouldn’t trust your buyer’s agent,” he says, “if they were also trying to be the seller’s agent.”

The death of the small and large pharmacy 

For many pharmacies in recent years, profits haven’t been enough. 

According to a Health Affairs study, 29.8% of all US pharmacies closed between 2010 to 2021. The rate of closure was higher for independents (38.9%) than chains (21.9%), though there were more independent pharmacies in 2021 than 2010 because of new stores opening.

Population shifts, the rise of Amazon, and mail-order drugs have harmed all pharmacies. CVS and Walgreens have each announced plans to close hundreds of stores this year.

As for independents, University of Southern California pharmacy professor Dima Qato, a co-author of the study, says PBMs setting untenable reimbursement rates and boxing out independents from preferred networks on certain plans are underlying causes for the higher rate of closure.

Olivia Heller/The Hustle

In North Dakota, though, just 17.7% of pharmacies closed.

“We weren’t surprised,” Qato says. “Because the competition is different. It’s really among independents.”

There, Schlecht says his margins are still shrinking, and the negotiations with PBMs are still difficult. He says PBMs aren’t transparent about reimbursements and rebates, leaving it unclear whether their reimbursements match what’s billed to insurance plan sponsors.

But Schlecht says North Dakota independents have “a little bit of leverage” with PBMs. With a relatively small number of chains, PBMs must include North Dakota’s independents in preferred networks, particularly with Medicare plans, or give up on serving parts of the state.

“They kind of need us,” Schlecht says.

Whitrap, the CVS spokesperson, echoes this sentiment, noting that, in many ways, CVS Caremark is a “price-accepter” for independent pharmacies in places like rural North Dakota. On average, CVS Caremark reimburses North Dakota independents 78% higher on brand-name drugs and 37% higher on generics than it does the state’s CVS pharmacies.

Olivia Heller/The Hustle

Dennis Carlton, senior managing director of the economic consulting firm Compass Lexecon and the economist who co-authored the study commissioned by the PBMs, says he understands how difficult it can be for independent pharmacists to make a living, given that they may lack the efficiencies of larger chains.

“On the other hand, if you mandate higher reimbursement rates it would lead to higher drug prices,” he says.

‘They don’t want a Walmart coming in’

Across the economy for the last few years, whether related to tariffs or the influence of mega businesses like Amazon or the power of chain pharmacies, people have questioned the benefit of low prices: Are they worth it for consumers if they put small businesses and good local jobs in jeopardy?

Schlecht doesn’t deny that his prices can be higher than what customers would find at a CVS in Fargo.

That’s because of a rural rate dispensing fee available to pharmacies like his, he says, and because he sometimes chooses not to contract with PBMs to be a preferred pharmacy on certain plans, if the PBM terms are too “aggressive.”

Whatever North Dakota loses, at times, in competitive pricing, he believes that residents gain in the long run with access to independent stores. If chains dominated the state, independents might close, leaving communities without a pharmacy.

“We know that Walmart is not going to open up in Sargent County, in Forman, North Dakota. We know that they’re not going to put a CVS even in some of the larger small towns,” Schlecht says.

Forman Drug in Forman, North Dakota. (Courtesy of Nathan Schlecht)

Dick, the pharmacy owner in Stanley, believes most North Dakotans feel the same way, given how that referendum vote went in 2014.

Back then, proponents angling to overturn the law labeled themselves North Dakotans for Lower Pharmacy Prices. Still, the outcome wasn’t close: 59% of North Dakota residents voted to uphold the law.

“Here,” Dick says, “pretty much everybody knows each other, and we kind of take care of each other. If so-and-so breaks their leg and they can't pull their crop off, we jump on the combine and help them…

“I think that's part of what caused the vote to go the way it did…They don’t want a Walmart coming in and doing their drug business.”

Now, states are attempting to regulate PBMs and boost independent pharmacies by passing laws related to transparency and pricing. Arkansas banned PBMs from owning pharmacies this spring, a move that CVS and Express Scripts have sued to block.

But none of them have gone as far as North Dakota in halting the power of big pharmacies. Reining them in, Dick says, is like putting “the toothpaste back in the tube.”

In North Dakota, not nearly as much got out.