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The conflict between Express Scripts and Walgreen just might lead to lower drug-benefit costs for companies.
David McCann, CFO Magazine
March 1, 2012
An epic pricing battle between Walgreen, the nation's largest drugstore chain, and Express Scripts, among the country's largest pharmacy benefit managers (PBMs), has narrowed the pharmacy-network options available to thousands of corporate health-plan sponsors. Even as they grapple with the implications of that fight, companies must also keep an eye on other pending developments in the notoriously nontransparent world of PBMs. The good news is that all this tumult might just result in lower drug-benefit costs.
Since January 1, plan participants at most firms that contract with Express Scripts for PBM services have no longer been able to get prescriptions filled at any of Walgreen's approximately 8,000 locations. The parties couldn't reach an agreement to renew the contract under which Express Scripts paid Walgreen to fill its clients' prescriptions. That three-year deal expired on December 31, 2011. Walgreen had a similar dispute with CVS Caremark that was resolved in mid-2010.
The two companies have been publicly clawing at each other for the past year. Express Scripts says the rates Walgreen was charging were higher than those charged by other pharmacies. Walgreen makes the opposite claim. "The truth is that we don't ask for any more from Express Scripts than anyone else, but they want to pay us far below market rates," says the chain's CFO, Wade Miquelon.
The mutual finger-pointing hardly stops there. Among other disagreements, the warring parties have opposite viewpoints on how important it is for a health plan to include Walgreen in its pharmacy network.
Express Scripts is portraying itself as something of a savior for the legions of health-plan sponsors and participants that are dismayed by the continuous upward spiral in prescription-drug costs. Walgreen offered to keep its rate flat in a new contract with Express Scripts, but at a recent conference Express Scripts CFO Jeff Hall said "flat isn't good enough."
Hall insists that with price inflation for brand-name drugs running at 10%, and with billions of dollars' worth of generic drugs arriving over the next couple of years as patents expire on many popular brand-name drugs, "everyone else understands that there is more than enough incremental profit here to get the cost coming down."
Most people familiar with the Walgreen–Express Scripts dispute think the blood between the two is so bad that they are unlikely to come to terms anytime soon. "It's done," says Sean Brandle, vice president of the national pharmacy practice at consulting firm The Segal Co.
Tracking the Savings
A key question is what Express Scripts would do with the extra cash it would have if it did succeed in negotiating lower payments to pharmacies. A PBM's profit comes from the difference between what it charges clients for its services and what it pays to pharmacies for filling prescriptions. It can, of course, choose to narrow or widen that spread, either upping its profits by not passing along some achieved savings, or attempting to gain market share by passing some (or even all) of its savings to its plan-sponsor clients.
Express Scripts spokesperson Brian Henry says savings would be passed on to clients, but Walgreen's Miquelon and many observers claim Express Scripts will line its own pockets. Miquelon suggests that CFOs of Express Scripts clients ask their human-resources managers whether any savings are showing up now that Walgreen is out of the PBM's network.
While Brandle says that some companies may be unhappy to see Walgreen depart the Express Scripts fold, he ultimately agrees with Express Scripts that the loss of one participating pharmacy, even one as large as Walgreen, is not a disaster. More than one retail-pharmacy option is available in the vast majority of areas nationwide, he points out. "Many of our clients are Express Scripts clients, and I haven't been hearing a lot of noise about this."
In fact, Brandle suggests that one side effect of this brouhaha might be a reduction in prescription-drug costs. "I think this case points toward more plan sponsors looking at limiting retail networks. The lightbulb goes on: if a major PBM can exclude a major retailer, then why couldn't a company decide on its own that it doesn't want certain pharmacies in its network?" The company's PBM could then go to the network's remaining pharmacies and negotiate better pricing based on the volume boost they would get from a big pharmacy's removal from a network. "Hopefully, the PBM would pass those savings on to its clients," Brandle says.
Is that looking at the prescription vial through rose-tinted glasses? The PBM industry is enormously profitable, largely because a vast share of the market is controlled by a few major competitors. And, says Dan Ross, president and founder of Med-Vision, a vision-care provider, "a magician's act is more open and transparent than the PBM business."
But that doesn't mean there is no price competition in the market. What if a plan sponsor told its PBM that it wanted to give all of its prescription business to just one pharmacy chain? Setting aside the inconvenience they might experience, participants in that plan would surely see their drug costs decline. Having two chains in the network would be cheaper than three, which would be cheaper than four, and so on. Plan sponsors get the same effect when they reduce the number of physicians available to participants.
But another factor is in play that could ratchet drug costs much higher. At press time, the Federal Trade Commission was reviewing Express Scripts's proposed $29 billion acquisition of larger rival Medco. Medco is the country's largest PBM, followed by CVS Caremark Rx, while Express Scripts is a very close third, according to Business Insurance magazine. The merging of the two PBMs would create a new top dog that would be more than twice as big as CVS Caremark, presumably giving it volume-pricing advantages with drug manufacturers and greatly enhanced leverage with both pharmacies and plan sponsors.
The merger would probably hurt Walgreen as well, but at press time the deal seemed unlikely to succeed. Many in Congress, at least 25 state attorneys general, and a bevy of consumer, trade, and advocacy groups are loudly against it. Says Sen. Tom Harkin (D–Iowa), "The proposed merger could threaten the market fairness of an industry that already has a poor track record of anticompetitive behavior and unfair business practices."
David McCann is a deputy editor, online/mobile, at CFO.