Is there a Principal-Agent problem between large retail-chain pharmacy corporations and community pharmacists?
Date: 31 October 2025
(This is part of a working paper. Updates are expected.)
The principal-agent problem is a type of market failure involving a misalignment of incentives between the owners of a company or firm (principals) and the employees that they hire (agents).[1] The conflict arises when the agents (or employees) do not act in accordance with the interest or expectation of the principals (firm). Principals delegate the agents to represent their interest, oftentimes providing them with decision-making capabilities. However, the principals cannot control the agents, nor do they have the same level of information as the agents (asymmetric information). This conflict can lead to non-Pareto optimal conditions, which would result in inefficiency and harm to both the principals and agents.
Misalignment of incentives is a central issue between large retail-chain pharmacy corporations and community pharmacists. Using the principal-agent problem framework, large retail-chain pharmacies (principals) hire community pharmacists (agents) to represent their interest to maximize their shareholder value (e.g., increased profits). However, community pharmacists are not interested in maximizing profits for the large retail-chain pharmacy corporations. Rather, they are interested in providing high-quality care to their patients and community, which is in direct conflict with the expectations of the large retail-chain pharmacy corporations. This misalignment of interests between the large retail-chain pharmacy corporations and community pharmacists has been responsible for unsafe working conditions, increased medication errors, pharmacist burnout and retention issues, and corporate bankruptcy.
This article will attempt to establish the misalignment between the large retail-chain pharmacy corporations and community pharmacists and offer some recommendations to address this principal-agent problem.
Misalignment of Incentives
A substantial number of licensed pharmacists work in the community pharmacy setting, which includes independent pharmacies, small and large retail chain pharmacies, supermarkets, mass merchandizers, and health-system retail pharmacies. In a 2024 work survey of pharmacists in the United States (US), 59.1% of pharmacists were working in the community setting, and, among those, 22.4% were working in large chain pharmacies.[2]
Large-chain retail pharmacy corporate leaderships are focused on maximizing shareholder value and downplaying the professional and ethical responsibilities of the pharmacist working in the community setting. Community pharmacists, on the other hand, often are not interested in these corporate incentives (e.g., increased earnings per share) and are focused on upholding their professional and ethical responsibilities to providing the highest quality care to their patients and community. Large retail chain pharmacy corporations expect their pharmacists to not only perform their duties as community pharmacists but also expect them to meet productivity performance measures such as filling and dispensing quotas. According to the California Code, Business and Professions Code, a “quota” is defined as a fixed number or formula related to prescriptions filled, services rendered to patients, programs offered to patients, and revenue obtained as a means to evaluate or measure the performance of the pharmacy staff.[3] This practice of using quotas to evaluate the productivity performance of community pharmacists has resulted in unsafe working conditions, increased medication errors, and increased burnout and retention issues.[4] According to a 2020 survey conducted among community pharmacist in Ohio, 82% of respondents reported either “agreed” or “strongly agreed” with the statement, “I feel pressure by my employer or supervisor to meet standards or metrics that may interfere with safe patient care.”[5]
The burden of meeting productivity performance-based measures such as prescription quotas contribute to an unsafe work environment where medication errors can occur. Compound this with an increased workload and lack of proper staffing and resources, and the conditions for a serious medication error increase the probability of a serious event. In a 2024 workload report, 91% of pharmacists working at chain pharmacies reported having “high” or “excessively high” workload compared to 55% of pharmacists working at independent pharmacies.[2] Similar findings were reported in 2019, suggesting that this practice and culture has been normalized for many years. Additionally, 54.9% of community pharmacists responded that they “disagreed” or “strongly disagreed” with the statement that “My organization is willing to extend resources to help me perform my job to the best of my ability,” and 56.3% of community pharmacists reported that they “disagreed” or “strongly disagreed” with the statement, “My organization is committed to employee health and well-being.”
Another factor that complicates the principal-agent problem is the involvement of the pharmacy benefits management (PBM) that do not provide pharmacies with enough compensation for filling prescriptions.[6] The reimbursement rate for each prescription fill is often less than the cost of supply (e.g., label and bottle), which means that the community pharmacies are losing revenue with each fill. This has dangerous consequences as the large, chain retail pharmacy corporations will try to maximize profits by imposing unreasonable prescription fill quotas and decreasing staffing levels, thereby creating an unsafe work environment and causing pharmacist burnout.[7,8] Moreover, the lack of proper reimbursements for prescription fills has led to many pharmacies closing their doors. According Guadamuz and colleagues, 29.4% of pharmacies that were opened between 2010-2020 closed their doors in 2021.[9] Further, Rite-Aid, one of the largest retail-chain pharmacies in the US filed for bankruptcy in October 2025, partly due to poor reimbursements from PBMs.[10]
Recommendations
Given the market failure associated with this principal-agent problem, governmental action in the form of legal policy may be needed. For instance, California passed a law prohibiting chain community pharmacies from using quotas to measure the performance of pharmacy staff to address the concerns of rising medication errors due to unsafe work environments in 2021.[3,11] Shortly afterwards in October 2022, Walgreens, one of the largest retail-chain pharmacies in the US announced that they would abandon the use of quotas for productivity performance-based evaluations of pharmacy staff.[12] However, these changes have not eliminated the use of these productivity performance-based metrics, and misaligned incentives between large retail-chain pharmacy corporations and community pharmacists have continued to result in unsafe environments, increased medication errors, and increased burnout and retention issues.
To address unsafe working conditions due to understaffing and resulting in increased medication errors, California Governor Gavin Newsom signed into law the “Stop Dangerous Pharmacies Act” (AB 1286) in 2024.[13] This bill, the first of its kind, requires large retail-chain pharmacies to staff their pharmacies with at least one pharmacy technician or clerk to assist with pharmacy-related services and to report all medication errors. Although current California law requires that pharmacies include a pharmacy staff to assist the pharmacist, this had not been enforced. The new bill will empower pharmacists to make staffing decisions instead of the large retail-chain pharmacy corporations thereby improving working conditions and reducing medication errors.
In October 2025, California Governor Gavin Newsom signed into law Senate Bill 41 (SB-41) that impose upon pharmacy benefits managements (PBMs) a fiduciary duty to their clients, ban spread pricing (profiting from the difference in costs between health plans and pharmacies), and providing fair reimbursement to pharmacies.[14] This bill has important implications for pharmacies by improving their reimbursement rates for each prescription filled thereby allowing for improved a profit margin. For community pharmacists, this could lead to reduced burden from the large retail-chain pharmacy corporations to increase revenue through unreasonable prescription fill quotas. However, future evaluation will need to assess the effectiveness of this policy on the principal-agent problem between large retail-chain pharmacies and community pharmacists.
Conclusions
In this brief article about the principal-agent problem between large retail-chain pharmacy corporations and pharmacists, I try to establish the framework for potential misaligned incentives leading to negative consequences. Pharmacists (agents) are delegated to represent the interests of the large retail-chain pharmacy corporations (principals), but their incentive to their professional oath and service to community are in direct conflict with the rent-seeking behaviors of large retail-chain pharmacy corporations. This conflict inevitably led to unsafe working conditions, increased medication errors, and increased burnout and retention issues. Recently legislation has been developed to address the issues of staffing, medication errors, and quotas to improve patient and community safety. However, the impact of these legal interventions has yet to be determined.
References
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