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CVS urban expansion sparks tension with independent drug stores
The rebuilding of this CVS Health Corp. store on West North Avenue in Baltimore, which burned in the civil unrest that gripped the city after Freddie Gray's death, is part of the company's broader business plan that includes inner-city neighborhoods. CVS can afford to reopen the burned Baltimore store since its pharmacy services are booming, outpacing its retail business. Capital News Service photo.

BALTIMORE -- Under clouds of smoke, rioters torched cars and looters emptied and burned a CVS on West North Avenue at Pennsylvania Avenue after the death of Freddie Gray in police custody last April.

Just over a week later, CVS announced plans to reopen that store and another nearby store that sustained heavy fire damage.

While some companies may view poorer communities as unattractive business areas, CVS has a business plan that includes inner-city neighborhoods. And it didn't take persuasion from city officials to convince CVS to rebuild, says City Councilman Nick Mosby, a candidate for mayor.

 CVS was our WalMart, our Target because it was within walking distance.

—Tyrell Moyd, the director of Penn North's community resource center.

"Even during the unrest when we knew it caught on fire, a day or two after, we received word that they were going to rebuild," says Mosby, whose district includes most of Gray's Sandtown neighborhood.

CVS can afford to reopen the Baltimore stores since its pharmacy services are booming, outpacing its retail business, and this is driving much of the company's profits. But the company’s growth in pharmacy services has created tensions in Baltimore and throughout the country.

Independent pharmacies feel shut out, and they're fighting pharmacy chains such as CVS.

"Patients in underserved rural and inner-city areas rely on access to independent community pharmacies for prescription medication and counseling," Douglas Hoey, CEO of the National Community Pharmacists Association, says in a statement last June. "For these, and some other patients, national pharmacy chains are not a practical option."

The Rhode Island-based CVS, twice as large as Target Corp., with $106 billion in market capitalization, is one of the few major corporations willing to take a chance on hard-luck areas such as Freddie Gray's neighborhood.

Serving commercial deserts

With almost no other major retailers in the neighborhood, CVS allows residents to fill medical prescriptions and shop for groceries.

CVS "was our WalMart, our Target because it was within walking distance," says Tyrell Moyd, the director of nonprofit Penn North's community resource center. "They'd go to CVS to pick up regular household items, like toilet paper or soap and detergent, so not having that in the area affected more than just the medications."

One part of CVS' growth strategy involves urban cluster stores, located in urban neighborhoods with high foot traffic such as the Pennsylvania Avenue location in West Baltimore. CVS has 600 such urban cluster stores, which have specific formats including self-checkout stations and grab-and-go food sections, says Mike DeAngelis, a CVS spokesman.

Fifteen of the 50 CVS stores in Baltimore have the urban format, including the two that will re-open in early 2016, DeAngelis says in an email. The company had 450 urban cluster stores in 2012 and saw significant sales gains, according to the company's 2012 annual report.

"We're committed to those markets," DeAngelis says. "We've been part of the Baltimore market for a long time and we know that retail pharmacy services is critical to those neighborhoods so it's the right things to do. It wasn't a difficult decision at all."

CVS also has about 1,000 Minute Clinics, walk-in clinics that offer routine treatment, testing and vaccines. The West Baltimore stores will not have a Minute Clinics when they open, which DeAngelis says would be early this year.

DeAngelis declined to comment about whether CVS charged higher prices in urban markets than other markets, saying it would be competitive information. Pricing is determined by a number of factors, such as local competition and rent, and a store's prices vary based on the market, he says.

Pharmacy Manager

The fastest-growing part of CVS Health Corp. is not the standard retail — sales of items such as aspirin and cough medicine — but the pharmacy management business. As the company grows, it's snatching up independent pharmacies in the process. The company buys up about 200 independent pharmacies a year, DeAngelis says.

The growth in CVS' pharmacy business helped boost the company's overall profits 31 percent to $1.2 billion in the third quarter 2015 from the year earlier, the company says in a filing. The company recently completed its $12.7 billion merger with Omnicare, Inc. and acquired Target Corp.'s pharmacy and clinic business assets for $1.9 billion.

CVS' size gives it more leverage to negotiate with smaller firms over drug prices, putting independent pharmacies at a disadvantage, John Norton, of the National Community Pharmacists Association, says.

Medicare Part D, where the federal government subsidizes a portion of prescription costs for consumers, allows pharmacies such as CVS to offer discounts. This leaves independent pharmacies "on the outside looking in," Norton says.

Pharmacy benefit managers dictate the preferred pharmacy a Medicare customer can use. If a Medicare customer wants to use a different pharmacy, the copays would be higher.

"Those plans create a problem for independent pharmacies because they're essentially not allowed to compete on the same playing level," Norton says. "We don't want anything to change. We don't want those plans to be disbanded. We just want them to provide us the opportunity to participate."

Independent pharmacies are fighting CVS' expansion, particularly in the structure of prescription drug benefits through the Medicare Part D program.

The National Community Pharmacists Association argues existing rules put independent drug stores at a disadvantage. The association is sponsoring a bill that aims to give independent pharmacies the same opportunity to provide discounts through Medicare Part D as network pharmacies.

Rep. John Sarbanes (D-Md.) is a cosponsor of the House bill.

"I also believe that we must level the playing field for community and independent pharmacists who provide critical services in so many of our communities, but especially in underserved urban and rural areas," Sarbanes says in a statement.

"I feel strongly that Americans should have access to affordable prescription drugs, especially seniors who may often require several prescription medications and live on a fixed income."

Keystone Pharmacy has been in West Baltimore for more than 100 years and finds existing rules impede its ability to serve some of its customers, says Dwayne Weaver, the owner.

Although Weaver says he would like to serve all people who come through his door, government programs don't allow for it. Managed care organizations contract with various providers for Medicaid health care services and frequently, independent pharmacies are left out, Weaver says.

"I get patients in here everyday who want to use my pharmacy, who use my pharmacy for years, but they're now told that they have to go somewhere else because the state is mandating just that specific Medicaid MCO," Weaver says, referring to managed care organizations.

As it rebuilds in Baltimore, CVS has paid attention to both local and national community groups.

After the April riot, CVS Health Foundation made a $100,000 donation to the United Way of Central Maryland's Maryland Unites Fund and the Baltimore Community Foundation's Fund for Rebuilding Baltimore.

The funds are intended to provide both immediate and longer-term support to people in poorer areas.

The company also has many partnerships with Baltimore-based organizations such as the Mayor's Office of Employment Development, Goodwill Industries and Associated Black Charities, DeAngelis says in an email.

"Our goal with these partnerships is to help break the cycle of poverty and dependence through the support of education, training, healthy living and career opportunities," DeAngelis wrote.

CVS also gained considerable positive publicity, including recognition from President Barack Obama, with its 2014 decision to cut cigarettes from its stores.

 We must level the playing field for community and independent pharmacists who provide critical services...especially in underserved urban and rural areas.

—Rep. John Sarbanes (D-Md.)

CVS has built up other political connections that could be useful if the independent pharmacy legislation advances. These include relationships with the National Urban League. CVS has participated in the civil rights organization's annual conferences and has presented information on its diversity programs, health screenings and multicultural products, as well as its focus on urban communities.

As the company's stake in pharmacy markets increased, so did its profits and compensation for its top managers -- one of the few criticisms of the company's operations. CVS Health President and Chief Executive Officer Larry Merlo's total pay package was $32.4 million in 2014, up 3.26 percent from the year before.

CVS' CEO has one of the largest internal pay gaps of large companies, with Merlo making more than a thousand times more than a typical worker, according to a study released in August from Glassdoor Economic Research.

Other companies with large pay gaps include Discovery Communications and Chipotle Mexican Grill. DeAngelis, in an email, defended CVS' executive pay.

"Consistent with our pay-for-performance philosophy, annual compensation for our CEO and other executives is in line with industry standards and closely reflects the company's financial performance and success, taking into account the company's achievement of short-term strategic, operational and financial goals as well as progress toward our long-term objectives," DeAngelis wrote in an email

CNS reporters Brittany Britto and Lauren Burns contributed to this report.