For its part, Walgreens is willing to give up a bit of its profit margin to gain the market share that a big employer like Caterpillar can deliver. The pharmacy chain will base its discounts on the market share it stands to gain from its relationship with the company in the regions both operate in, according to Rosenbluth. Caterpillar will be motivated to steer more of its employees to Walgreens via incentives because the more drugs the employees buy at the stores, the cheaper the drugs will be for both the employer and the employee, he notes.
The price Caterpillar and its employees will pay, Bisping notes, is based on a "cost-plus pricing methodology." Asked what the "plus" consists of, Rosenbluth says it includes distribution cost (the cost of getting the drug from the manufacturer to Walgreens's 12 distribution centers and then finally to its drugstores), cost to fill prescriptions at the pharmacy or via mail order, and a profit. The pharmacy executive says he doesn't want to go into all of the factors "because I don't want to give our formula away for everybody to copy."
For other reasons, Bisping does not want to reveal what specific incentives Caterpillar will offer its employees to buy their prescription drugs at Walgreens, although Walgreens has said the program will include decreases in drug copayments. The program will go into effect on January 1, 2010, which coincides with the start of Caterpillar's benefit-plan year. "We're in the process of trying to communicate with members. We can't [publicly] share the incentive we're offering because I don't want them to read it in a newspaper before we can share it with them personally," he says.
Will the model mark a sea change in how employers provide drug benefits to their employees? While the arrangement is Walgreens's first, it's in "active discussions" with 20 client companies and 25 noncustomers about such direct-buying deals, according to Rosenbluth, who notes that most are Fortune 100 companies and the rest are in the Fortune 1,000-size range.
Such arrangements "will be disruptive" to the current PBM business model, contends Bisping. "Now that we've developed a way for companies to be able to influence the price they pay for prescription drugs, that takes away the need of PBMs to do that."
No one, however, will say that the middleman is completely on the way out. "I think [direct-purchasing] deals, in essence, are supplementing a PBM base," says Michael Taggert, a senior vice president in Aon Consulting's health and benefits practice. He notes that employees at plants in places where Walgreens doesn't have stores must get their medications from local stores or regionally managed chains, which are unlikely to have the resources to strike direct-purchasing arrangements with employers. "There's a place for PBMs," he adds.
Not unexpectedly, Mark Merritt, president of the Pharmaceutical Care Management Assn., which represents PBMs, goes further, contending that such an arrangement is useful to an employer like Caterpillar that operates in largely rural settings, but not to many others. At companies with locations in big cities and other well-populated areas with many competing pharmacy chains, employees would resist driving 10 miles to find a Walgreens when there's a Duane Reade or a CVS around the corner.
The Walgreens-Caterpillar deal, he adds, "is one of many niche plays and experiments. It's not one that would be applicable for the vast majority of employers."
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