What happened to Rite Aid?

As consumers in Ohio and Michigan scramble to change their shopping habits and transfer their prescriptions in the wake of Rite Aid’s plan to close numerous stores in both states, many are asking, “What happened?”

The drugstore chain that once had more outlets than any other in the country is now in bankruptcy and scrambling to find a way forward. No single blow knocked Rite Aid out of the highly competitive drugstore market. Rather, the company’s demise can be traced to three factors. Any one of these would have been a painful blow; together, they were fatal.

Corruption and mismanagement cripple the company’s finances

On Jan. 8, 1999, Rite Aid’s stock hit its record price of $993.49.

The company was flying high. It operated 4,000 drugstores coast to coast. The company was in the midst of a period of aggressive acquisition of other drugstore chains and a pharmacy benefit management company. It had announced a partnership with General Nutrition that permitted Rite Aid to set up small pharmacies inside GNC stores. The company’s earnings seemed solid, although it was piling up debt at a rapid rate.

The fall to Earth was terrible.

By that November, the company’s CEO had resigned under the pressure of a widening accounting scandal. The company was forced to announce that it would be restating three years of earnings reports, which cut over $500 million from its reported profits. It had been sued by the state of Florida for price fixing and by the state of Washington for selling expired baby formula. By the end of the year, Rite Aid’s stock price had collapsed to $222.40.

The bad news was unrelenting. In May, 2004, the company’s former CEO was convicted of defrauding the company, its stockholders, creditors, and vendors and was sentenced to eight years in prison. The company’s stock slumped to under $1 a share, which triggered a threat by the New York Stock Exchange to de-list it.

The company has tried at various times to merge with or be acquired by Walgreens or Albertsons, but in each case the proposed merger fell through, largely due to the weakness of Rite Aid’s balance sheet. It never really recovered from the crushing debt it took on to fund its expansion and the criminal mismanagement that wiped half a billion dollars off its profit and loss statement.

Overbuilding reduces store profitability and increases costs

Former Toledo Mayor Carty Finkbeiner may have been right about drugstore construction, even though his timeline was off.

“Rite Aid is just an irresponsible corporate citizen,” he said in December, 1998. “They have given up on mid-street locations and absolutely like piranhas are going after corner locations.”

Mr. Finkbeiner predicted that half of the drug stores that were being built in Toledo at that time would be vacant in five years and “these big box hulks will be standing at prime locations.”

The former mayor was also sharply critical of the way that the spate of drug store construction in the late 1990s required the demolition of older, more accessible neighborhood buildings to make way for ugly stores surrounded by parking lots.

Between 1984 and 1994, the number of Rite Aid stores in the city of Toledo increased from five to 19.

Today, it is widely expected that Rite Aid will close all of its stores in Ohio and Michigan, though the company has not confirmed this.

“Rite Aid got greedy and now the chickens have come home to roost,” the former mayor said. “I feel bad for the people in those neighborhoods Rite Aid came into.”

Pharmacy benefit managers force pharmacies to sell at a loss

Pharmacy benefit managers run the prescription benefit portions of health insurance policies. In a perfect world, they would use their purchasing power to negotiate substantial discounts from the drug companies, help patients find the most effective medications at the lowest price, and pay pharmacies a fair price for dispensing them.

In the real world, however, the system frequently works to raise prices for consumers, make generic drugs unavailable, and force pharmacies to dispense medications at a loss.

Steve Dolin, the owner of Monroe Pharmacy, gave an example of the kinds of losses he can incur by filling prescriptions when a pharmacy benefit manager gets in the middle of the transaction.

Mr. Dolin had a customer with a prescription for Paxlovid, an antiviral medication used to treat coronavirus. Upon submitting the customer’s information to the pharmacy benefit manager, Mr. Dolin discovered that his cost to purchase the prescription would be $1,348.30, of which the PBM would pay only $1,229.32. Mr. Dolin is prohibited from charging the customer the difference and thus would be forced to swallow a $118.98 loss.

“I had to back that transaction out of the system and send the customer to one of the big chain drugstores,” Mr. Dolin said.

David E. Burke, the executive director of the Ohio Pharmacists Association, uses an analogy to explain how PBMs work.

“Suppose every time you went to the store and bought something with your credit or debit card, you couldn’t see the prices on the product you wanted and the merchant couldn’t set the product’s price to ensure that it covered its costs and made a reasonable profit. Imagine that all that was controlled by the credit and debit card companies. This is the role that pharmacy benefit managers play.”

One critic of the pharmacy benefit management industry is Ohio Attorney General Dave Yost, who has sued two PBMs on behalf of the state over their business practices. According to the announcement of the lawsuit on the attorney general’s website, pharmacies are being “strangled” by PBMs.

“In order to stay in insurance networks,” the statement says, “[pharmacies] often are forced to not only accept drug reimbursement rates far below what they have to pay for those drugs — with little, if any, of the cost savings passed on to employers or insured consumers — but also pay exorbitant ‘administrative’ fees. And pharmacies don’t know how much a PBM will reimburse it for a drug until long after the medication has been picked up by the customer, resulting in financial losses for the pharmacies.”

Ohio state Rep. Tim Barhorst (R., Fort Loramie) has introduced a bill that would require PBMs to report the actual cost of each drug from claims they process.

“PBMs became very greedy when they got control of the supply chain,” Mr. Barhorst said. “They control so many aspects of the market through vertical integration and expect pharmacies to dispense drugs many times at a loss.”

When pharmacies are repeatedly forced to sell prescription drugs at a loss, it’s not surprising that economically troubled companies such as Rite Aid can’t afford to stay in business and are forced to close stores in economically depressed areas like Toledo.