Thursday, February 11, 2010

Maintenance Choice Update: CVS Gain, Caremark Same

A key theme in my Pharmacy Industry Economic Report and Outlook is the trend toward more restrictive preferred pharmacy networks. CVS Caremark’s (NYSE:CVS) Maintenance Choice program is an example. A consumer can obtain maintenance medications and choose the channel—brick-and-mortar pharmacy or mail pharmacy—but must use either a CVS retail pharmacy or a Caremark mail-order pharmacy.

On Monday, we learned Maintenance Choice is growing rapidly as a benefit design option, demonstrating that payers are willing to accept more restricted pharmacy networks in exchange for savings and control. The Caterpillar-Walgreens-Walmart arrangement provides another compelling data point. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network. The outcome for the pharmacy industry will be more rapid consolidation, especially as these programs increase market share for the “preferred” providers of pharmacy services.

At the same time, I still wonder if Maintenance Choice provides enough competitive differentiation to help Caremark win new Pharmacy Benefit Manager (PBM) business. See Per Lofberg's comments on this point at the bottom of this post.

As always, Pembroke Consulting retainer clients and Gerson Lehrman Group clients can schedule phone calls with me for additional comments beyond what I discuss in this post.

CHOOSING CHOICE

CVS Caremark provided a lot of detail about its Maintenance Choice offering during Monday’s earning conference call. Listen to the call or read the transcript.

Here’s what CEO Tom Ryan told us about the program’s rapid growth:
  • Currently 412 PBM clients (5.1 million lives) vs. 130 clients at the start of 2009
  • 70 PBM clients (400,000 lives) are in the process of being implemented
Another interesting factoid: 41% of the lives adopting MC in 2010 came from voluntary mail plans. This a key area where MC provides hard dollar savings because CVS receives the mail reimbursement for 90-day scripts dispensed from a CVS retail pharmacy. Thus, the PBM client and consumer both save money when the consumer fills a 90-day prescription at CVS pharmacy instead of three 30-day scripts at a non-CVS pharmacy.

RETAIL GAIN

CVS’ same store pharmacy sales grew by 7.3% in the fourth quarter. Maintenance Choice again helped CVS’ retail pharmacies achieve this above-market growth.

In fact, MC’s impact on same store sales grew throughout 2009 as 282 PBM clients (412 minus 130) adopted the program. Here’s the impact of Maintenance Choice on CVS Caremark’s retail same-store pharmacy sales by quarter:
  • 2009:Q1 +120 basis points
  • 2009:Q2 +190 basis points
  • 2009:Q3 +250 basis points
  • 2009:Q4 +270 basis points
The chart below updates my ongoing measurement of how important the Caremark PBM business has become to the brick-and-mortar CVS pharmacies. My last update was in November’s CVS Caremark: Pharmacy Gain, PBM Pain.

As you can see, CVS retail pharmacies are getting an increasing share of prescription revenues from claims processed by Caremark’s PBM business. In the fourth quarter of 2009, 22% of prescription revenue at CVS pharmacies came from Caremark, up from 16.2% in the fourth quarter of 2008.

Unknown: Will Caremark's contract losses hurt this growth?

PBM GAIN?

I’m still sorta skeptical on the long-term ability of Maintenance Choice to be a deal-winner for the Caremark PBM. Nonetheless, the program is clearly benefiting the pharmacy while likely also saving money for Caremark’s PBM clients (because of the mail/retail reimbursement structure).

So, it’s a “win” in that sense, but doesn’t logically provide an overwhelming advantage for Caremark versus other PBMs. Looking forward, other areas have bigger potential benefits for PBM clients, particularly specialty drug management and (over time) pharmacogenomics.

The new head of Caremark, Per Lofberg, seemed to reinforce this view during Monday’s call:
“I don’t think there’s any issue that customers have with the integrated model per se. I think customers are first and foremost interested in how can they save money on their benefits programs, how can they get good service for their members. And they don’t really care that much if we are also a retail pharmacy chain in addition to being a PBM. Obviously if we can add value, if we can save them money or improve member experience through the combination, that’s sort of gravy or icing on the cake if you will. First and foremost, they’re really interested in the core PBM functionality and that’s really where the company is centered at this point.” (emphasis added)
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So, what do you think?

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Check out the view from my office yesterday afternoon at 4 PM. Downtown Philly is deserted!


18 comments:

  1. Dr. Fein,

    I know you are trying to be objective, but let me explain what's wrong with this program. I run an independent pharmacy. What if I agree to accept the same reimbursement as CVS? I could keep my customer and there would be no money lost but mine. By controlling the pbm, CVS gets to steer people to their stores AS YOUR DATA SHOWS! This doesn't save money - it just makes CVS a little richer. What do you say to that?

    ReplyDelete
  2. Great photo! Why were you at your office? Drug Channels never sleeps!

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  3. Looks nasty. The picture at the top is your house of course. :-)

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  4. Ed,

    While I may appear to work all the time, I do not actually live in my office. The pic shows the view from the worldwide headquarters of Drug Channels. You can see the famous Clothespin by Claes Oldenburg.

    Adam

    ReplyDelete
  5. When the pbm is also the pharmacy, isn't that a conflict of intrest? Who polices the pbm when it comes to price, especially of generics where they set the price?

    ReplyDelete
  6. ...and what about the Bell? Adam, did the tours come to a halt?

    ReplyDelete
  7. Is important to reform health care as indicate findrxonline appropriate and capable people should take a position as important as this, remember that previous governments failed to put disabled people who can solve the health problems that are in this country.

    ReplyDelete
  8. Dr. Fein,
    I find it quite interesting to look at which questions you feel are relevant to give feedback. I work for an independent pharmacy and would love to hear your thoughts on the big issue at hand which would be the conflict of interest of owning a pbm and retail stores.

    ReplyDelete
  9. I have discussed the so-called 'conflict' issue in many previous posts. For example, see Debate Over CVS Caremark’s Tactics Heats Up in which I wrote:

    "While preferred networks are a certainly a competitive challenge for an independent pharmacy, it's not clear that CVS Caremark's actions are anti-competitive in the sense of raising costs for consumers or payers – the customers of a Pharmacy Benefit Manager (PBM). The criticism seems to be more about profit levels at independent pharmacies."

    I'm guessing that you will not agree with me.

    FWIW, I have no financial or business relationship with CVS Caremark.

    Adam

    P.S. BTW, my wife gently pointed out that I misunderstood the comment above in my previous response. The commenter was apparently asking if I live in a gated community. Actually, we live in a rowhouse in downtown Philly--the only gate is my front door!

    ReplyDelete
  10. It is most definitely a conflict. Would a cvs pharmacist question price gouging of plan? I would guess not if he/she wants a job. By controlling the retail, the pbm/pharmacy can print what ever they wish on the receipt. How can you talk about "competitive challenge" when refering to independents, and not see the conflict with a plan administrator setting the price it will pay itself?

    Who protects the puchasers of these services? Are they supposed to monitor cvs/caremark's pricing? Who will stand up and question the plan if they start charging 10 dollars a pill for a cheap generic?

    ReplyDelete
  11. From the "cvs windfall link":
    "Drug stores pay as much as 90 percent less for generic drugs than for the branded equivalent, said Adam J. Fein, president of Philadelphia-based Pembroke Consulting, a health- care consulting firm. The pharmacies don’t reduce prices to customers and third-party payers such as insurance companies by as much, which adds to profit, he said"

    Your logic is flawed, pharmacies do not set the price for third-party payers. The pbm sets the MAC price, which can actually be set below the price of the product available. You are blind to the deceptive practices of the pbms. They can play number games to provide "facts" and show saving that are not real.

    ReplyDelete
  12. My quote in the article about generic acquisition costs applies to any pharmacy--independent, chains, supermarket, mail, etc.

    Note that the statement is a paraphrase by the reporter, not a verbatim quote. Yes, Virginia, I understand how pharmacy reimbursement works.

    Looks like I'm going to have to write another post about generic profits b/c everyone here seems to deny that pharmacies earn anything at all!

    Adam

    ReplyDelete
  13. Adam, of course "Anonymous" is a relative term when used on the web, but the tone of your comment above is really out of line.

    You have a very loyal following because people like to learn and you have a lot to offer. In addition, most folks like to engage in a little turf debate...especially when dealing with their bread'n butter. It's only natural.

    For certain you are correct in that independent druggists complain and moan, loud and often. Yet many other owners of a small business would clearly do the same when their entire lives and assets are tied up in fixtures, technology, and PhRMA inventory.

    There is a reason that the WAG stock has remained flat to down over the past three years. It is not the company, but the industry. And there is a very astute reason why Ryan at CVS felt a need to merge with a high margin PBM player. There are many worried people out there with real concerns about margin slippage on both the percent and dollar sides.

    Adam, I don't expect you to post this...and actually prefer that you don't. But as the world-wide administrator and CEO of Drug Channels, you must take the good with the bad. We do it everyday in our lives.

    Please don't leak our anonymity.

    And of course, feel free to contact me directly if you'd like.

    ReplyDelete
  14. FWIW, "anonymous" really means "anonymous" for blog comments. I have no idea who you are, so I can't reply directly. I only filter spam comments.

    My reply above was an attempt at humorous word play on "Yes, Virginia, there is a Santa Claus." Apparently, lost in translation. Sorry for the misunderstanding. I have no idea what the person's real name or gender is.

    I'd be pleased to talk to you, but you'll have to email me directly. Link above on right hand side.

    Adam

    ReplyDelete
  15. "A consumer can obtain maintenance medications and choose the channel—brick-and-mortar pharmacy or mail pharmacy—but must use either a CVS retail pharmacy or a Caremark mail-order pharmacy."

    This is a lie. I am being forced to buy my maintenance medications from Caremark only! My HMO has denied my refills at CVS store. I must buy them through their mail-order pharmacy. "

    "Maintenance Choice" is an oxymoron!!! I have no choice. What's next?

    ReplyDelete
  16. It sounds like your employer or health plan has chosen a "mandatory mail" benefit, not maintenance choice. You should complain to your plan sponsor. See Pepsi, CVS Caremark, and the FTC for some commentary on this issue.

    Adam

    ReplyDelete
  17. At Shoprite pharmacy it costs me 250.00 to fill 4 perscriptions for 30 days. At CVS it cost me 225.00 to fill the same 4 perscriptions. It appears to be working for me.

    ReplyDelete
  18. AnonymousJune 29, 2011

    At Shoprite pharmacy it costs me 250.00 to fill 4 perscriptions for 30 days. At CVS it cost me 225.00 to fill the same 4 perscriptions. It appears to be working for me.

    ReplyDelete

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