Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Squeezing Independent Pharmacies
Transcript
- Lucas: So I want to start today with a number that stopped me cold: independent pharmacies in the U.S. are seeing gross margins on generic drugs shrink from around 22 percent to just 11 percent over the last eighteen months. That's a direct stagflation story — costs keep climbing, but their revenue per prescription is basically flat. Luna: Eleven percent — that's razor thin. Most retail businesses can't survive on that. What's driving the squeeze? Lucas: Two things happening at once. First, the drugs themselves cost more. The CPI for prescription drugs was up 3.1 percent year-over-year in May — that's the core inflation number you see in every headline. Second, the reimbursement rates from pharmacy benefit managers — the PBMs that sit between the pharmacy and your insurance — they're actually getting tighter. So the pharmacy buys the drug at a higher price, but the PBM pays them the same or less than they did a year ago. Luna: So the PBM is effectively pocketing the difference. That's the classic middleman squeeze, but with stagflation making the inputs more expensive. Lucas: Exactly. I talked to the owner of a family-run pharmacy in rural Ohio — let's call it Main Street Pharmacy — and she walked me through the math on a common blood pressure medication. The acquisition cost went up 8 percent year-over-year. Her reimbursement rate from the largest PBM in her network went up zero. She's now dispensing that drug at a loss. Luna: At a loss. So she's essentially paying patients to take their medication. How long can that last? Lucas: She's been dipping into reserves for about six months. But the bigger issue is that her foot traffic is down 8 percent year-over-year. Patients are skipping refills because their copays are higher or they're just trying to stretch prescriptions. So there's this double bind: each transaction is less profitable, and there are fewer transactions. Luna: That's the 'slow growth' part of stagflation in action. People are cutting back on non-essential spending, and apparently, for some families, even essential meds are becoming negotiable. Lucas: Right. And this isn't just a small-town problem. The National Community Pharmacists Association did a survey earlier this year — 72 percent of independent pharmacies reported that reimbursement rates from PBMs don't cover their cost to acquire and dispense a generic drug. That's up from about half in 2023. Luna: Seventy-two percent — so the Ohio pharmacist is the rule, not the exception. What are PBMs saying in response? Lucas: Their argument is that they're negotiating on behalf of employers and insurers to keep overall drug costs down. And it's true that the growth in brand-name drug spending has moderated. But the way they do it — through clawbacks, direct and indirect remuneration fees, and spread pricing — it's almost invisible to the patient, and it puts the independent pharmacy in an impossible position. Luna: Spread pricing — that's when the PBM charges the insurer more than it pays the pharmacy and keeps the difference, right? Lucas: Exactly. A 2024 FTC report found that the three largest PBMs — which handle about 80 percent of all prescriptions — generated over $7 billion in spread pricing revenue in 2023. That's money that flows out of the pharmacy's pocket and into the PBM's bottom line. Luna: And in a stagflationary environment, those dollars matter more. The pharmacy has less ability to absorb losses because their other costs — rent, utilities, wages — are all rising. Lucas: The Ohio pharmacist told me her electricity bill is up 14 percent year-over-year. Her staff wages are up about 6 percent because she has to compete with the local Walmart and Amazon for workers. And she can't raise prices on the one thing she sells — the prescription — because the PBM sets the price. Luna: So she's a price-taker with cost-push inflation. That's a textbook definition of a margin squeeze. What's the endgame here? Are we going to see a wave of closures? Lucas: We're already seeing it. Since 2020, about 1,500 independent pharmacies have closed. The pace is accelerating. And this matters beyond the business owners themselves — because in rural areas, the independent pharmacy is often the only healthcare access point within 20 miles. When they close, patients lose not just their prescriptions but also immunizations, health screenings, and basic advice. Luna: That's a structural problem. When the only pharmacy in town closes, where do people go? Mail order? That assumes they have reliable internet and a credit card. Lucas: Exactly. And it assumes they're healthy enough to wait for a package. The Ohio pharmacist told me about an elderly patient with diabetes who used to walk in every month for his insulin. When the pharmacy closes, he'll have to arrange transportation 30 miles each way. That's a burden stagflation makes heavier — gas prices, time off work, the whole thing. Luna: Let's talk about what policy makers are doing. There's been some noise about PBM reform — any movement? Lucas: There are bills in both the House and Senate that would require PBMs to report more transparently and ban some of the spread-pricing practices. But the political will is uncertain. The PBM industry spends heavily on lobbying — over $30 million in 2025. And with the current administration focused on inflation and the debt ceiling, this isn't at the top of the agenda. Luna: So for now, the independent pharmacy is just expected to absorb the hit. That feels like a ticking clock. Lucas: It is. And here's one more data point: the number of independent pharmacies has already fallen by about 7 percent since 2020. At the current closure rate, we could see another 2,000 disappear in the next three years. That's not just a business story — it's a healthcare access story. Luna: If today's conversation was useful to you — if walking through the economy with us has made something click — the way these episodes stay ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. That's how we keep doing this without sponsors. Lucas: Yeah, and it genuinely makes a difference. Every contribution helps us dig into stories like this one — the local angles that get lost in the national headlines. So if you find value here, that's the way to keep it going. Luna: Alright, back to the squeeze. One thing I'm curious about — are any independents finding ways to adapt? Diversifying into compounding or selling over-the-counter health products? Lucas: Some are. The Ohio pharmacist started offering medication synchronization and adherence packaging — basically, pre-sorting pills into daily doses. It's a service the big chains don't always do well, and it creates a stickier relationship with patients. But it's not enough to offset the margin loss on generics. It buys time, but it's not a cure. Luna: So time is what they need — time for policy to catch up, or for inflation to moderate. But we're not seeing either of those things happening fast. Lucas: Right. And that's the unease of stagflation. You can't outgrow the problem. You can't cut costs fast enough. You just have to survive quarter by quarter. For the independent pharmacy — and for the communities that depend on them — that's a very precarious place to be. Luna: It's a reminder that macroeconomic conditions don't just move lines on a chart. They change who gets their medication, and how hard it is to get it. Lucas: Exactly. And that's the story we'll keep following. Thanks for listening.