An epic pricing battle between Walgreen, the nation’s largest drugstore chain, and Express Scripts, arguably the second-biggest pharmacy benefits manager (PBM), has narrowed the size of pharmacy networks for thousands of corporate health-plan sponsors. And it could set the stage for more such winnowing, with lower-cost drug benefits being one possible result.

Starting this month, plan participants at most companies that contract with Express Scripts for PBM services can no longer get prescriptions filled at any of Walgreen’s approximately 8,000 locations. The two companies were unable to 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. Walgreen had a similar dispute with CVS Caremark — which is a PBM as well as a pharmacy — that was resolved in mid-2010.

Walgreen and Express Scripts have been publicly clawing at each other for the past year. Express Scripts says the rates Walgreen was charging for its services were higher than the PBM was paying other pharmacies. Walgreen makes the opposite claim. “The truth is that we don’t ask for any more from Express Scripts than we do from 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 who urgently hope the ongoing upward spiral in prescription-drug costs can be slowed, stalled, or even reversed. Walgreen offered to keep its rate flat in a new contract with Express Scripts, but at a JPMorgan health-care conference on January 9, the PBM’s CFO, Jeff Hall, said “flat isn’t good enough.”

Hall insisted that with price inflation for brand-name drugs at 10%, and with billions of dollars worth of new generic drugs scheduled to become available during 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.” PBM’s own forecast, however, is for prescription drug costs to keep rising 3% to 5% for the next few years.

A key question is what Express Scripts would do with the extra cash if it did succeed in winning contracts carrying lower reimbursements to pharmacies. Spokesman Brian Henry says savings would be passed on to its clients. Walgreen’s Miquelon contends that Express Scripts would merely line its own pockets. In fact, he suggests, CFOs of Express Scripts clients should ask their human-resources managers whether any savings are showing up now that Walgreen is out of the PBM’s network.

For any particular plan sponsor, the degree of impact from Walgreen’s exit from the network depends on how many participants use Walgreen, how much loyalty they feel toward the chain, and the opinions of the HR people administering the drug-benefits program, says Sean Brandle, vice president of the national pharmacy practice at The Segal Co., a consulting firm.

But overall, Brandle takes Express Scripts’s side on the matter of whether plan participants are handicapped by not having access to Walgreen. More than one retail-pharmacy option is available in the vast majority of areas nationwide, he points out. “A lot of our clients are Express Scripts clients, and I haven’t been hearing a lot of noise about this.”

That doesn’t mean there won’t be other effects. In fact, Brandle suggests one that he says could lower prescription-drug costs. “I think this case points toward more plan sponsors looking at limiting retail networks. The light bulb goes on: if a major PBM can exclude a major retailer, then why couldn’t a company that doesn’t use Express Scripts decide 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’d get from a big pharmacy’s removal from a network. “Hopefully the PBM would pass those savings on to its clients,” Brandle says.

Meanwhile, most people familiar with the Walgreen-Express Scripts dispute think the two are unlikely to come to terms anytime soon. “It’s done,” says Brandle. Walgreen has already lost significant business, but its situation could get much worse if the Federal Trade Commission allows Express Scripts’s proposed $29 billion acquisition of larger rival Medco to proceed.