Thursday, March 11, 2010

Walgreen’s PBM Bypass Strategy

On Tuesday, Veronica Dagher at Dow Jones broke the story that Delta Air Lines Inc. (DAL) is talking with Walgreen Co. (NYSE:WAG) about a new direct-to-payer arrangement. See Walgreen, Delta In Talks Over Prescription Drug Plan. Such a deal would provide more momentum for cost-plus arrangements a la Caterpillar (NYSE:CAT)/Walmart (NYSE:WMT)/Walgreen.

A WAG-DAL arrangement signals a possible longer-term disintermediation threat to the Pharmacy Benefit Manager (PBM) business model in the large employer market. Walgreens has built the deepest, broadest multi-channel platform for pharmaceutical distribution and has an especially strong position for specialty drugs. An employer doesn’t need an intermediary (PBM) to assemble and manage a network that only has a single pharmacy provider. Notably, Walgreen recently restructured “to offer integrated ‘Pharmacy, Health and Wellness Solutions’ to employers, managed care organizations, pharmacy benefit managers and government clients.” (source)

A couple of years ago, Walmart was the first-mover bogeyman who was going to blow up the PBM industry. But Walmart is playing a much narrower game and may find itself poorly matched against Walgreens broader set of channel assets. The lack of new deals from Walmart makes me wonder they are having trouble closing deals for Employer Solutions, their name for direct-to-payer contracts.

Expect more disruptive moves as the drug channel ecosystem rearranges itself.

GEOGRAPHY IS NOT ENOUGH

Conventional wisdom suggests that a large retail network can provide countervailing negotiating power against a PBM. Translation: It’s impossible to assemble a network without a major chain.

Like CVS, Walgreens accelerated its growth by acquiring regional pharmacy chains. Duane Reade is only the latest in a long list that includes Happy Harry’s, Drug Fair, Snyder’s, and others. Walgreens has visibly used this leverage against state Medicaid programs, e.g., Walgreens to Washington: Make my day. However, any disputes with private payers rarely spill into public view.

CHANNEL DIVERSITY

Rather than making an ego-driven acquisition of a PBM, Walgreens has instead assembled an impressive roster of non-retail dispensing and provider channels. I’ve been tracking this evolution in Drug Channels posts (click links below):
Look at Walgreens drug distribution and dispensing footprint today compared with 10 years ago:
Compare Walgreens to the other big players in specialty pharmacy—CVS Caremark (CVS), Express Scripts (ESRX), and Medco Health Solutions (MHS). These companies primarily dispense self-injectable specialty drugs via a single channel (central-fill mail order), although CVS Caremark has retail capabilities. But none can offer the seamless trade-off between medical versus pharmacy benefit—a point of differentiation Walgreens touts in its marketing materials.

FULFILLING THE PROMISE

Walgreens can now credibly bring together benefit management with a broad diversity of dispensing formats and locations. In some sense, Walgreens is fulfilling the promise of the CVS Caremark combination. But unlike CVS Caremark, Walgreens is willing to disrupt the traditional PBM business model.

Another channel truism: You can remove an intermediary but not the services provided by that intermediary. Walgreens owns a smallish PBM (Walgreen Health Initiatives), so it can arguably offer a completely integrated, end-to-end solution. Recall that RESTAT, Caterpillar’s PBM, continues to perform claims adjudication, rebate negotiation, pharmacy network management, and other PBM services. RESTAT does not earn a spread on prescriptions filled within the retail network and passes all rebates back to Caterpillar. See CAT Rolls Out Preferred WAG-WMT Pharmacy Network.

As in the Caterpillar deal, Delta will presumably contract for pricing directly with Walgreens, eliminating opportunities for a third-party to earn spreads on prescriptions filled within the Walgreens network. The intrepid Ms. Dagher reports: “Caterpillar expects to see double-digit savings in its pharmacy costs this year, thanks in part to the direct prescription drug purchasing plan it inked with Walgreen Co. (WAG) last August.” (Caterpillar Sees 'Substantial' Pharmacy Cost Savings In 2010).

If the savings number are real (no proof yet), then Walgreens-Delta will add further momentum to more innovative contracting and network models.

7 comments:

  1. Articles like this are my favorite. I know you get no comments compared to your independent pharmacy stuff, but I learn more from your longer strategy articles like this one. More please!

    ReplyDelete
  2. Adam States: It’s impossible to assemble a network without a major chain.

    Jim at ApproRx says: False. ApproRx has put together over the last 14 months ~1,500 independent pharmacies with acquisition plus pricing (AqP) to do and doing direct to consumer contracting. No PBM, just adjudication and rebate management technologies.

    With a future expansion into the 23,000 remaining independent pharmacies this network has the potential to be larger than WAL + WAG + CVS in total. No chain is needed just a virtual network working thru a common server.

    Adam states: Another channel truism: You can remove an intermediary but not the services provided by that intermediary. Walgreens owns a smallish PBM (Walgreen Health Initiatives), so it can arguably offer a completely integrated, end-to-end solution. Recall that RESTAT, Caterpillar’s PBM, continues to perform claims adjudication, rebate negotiation, pharmacy network management, and other PBM services. RESTAT does not earn a spread on prescriptions filled within the retail network and passes all rebates back to

    Jim at ApproRx says: Absolutely true, and ApproRx's goal is to become the RESTAT of Independent pharmacist.

    Adam says: Walgreens has built the deepest, broadest multi-channel platform for pharmaceutical distribution and has an especially strong position for specialty drugs.

    Jim at ApproRx says: True

    Adams says: An employer doesn’t need an intermediary (PBM) to assemble and manage a network that only has a single pharmacy provider.

    Jim at ApproRx says: True and False. The employer does not need the PBM; they do need the PBM technology, at least adjudication. CAT and RESTAT.

    Adam States: Walgreen recently restructured “to offer integrated ‘Pharmacy, Health and Wellness Solutions’ to employers, managed care organizations, pharmacy benefit managers and government clients.” (source)

    Jim at ApproRx says: This is True but to date this is just a marketing package, effective but just marketing, their DSM and Wellness are just fluff similar to what Anthem and other large plans have putting out there over the last few years. Ask WAG for ROI numbers or health numbers improvements, you will only get estimates and projections same as the large plans.

    ApproRx and Staff

    ReplyDelete
  3. Jim,

    To clarify, I'm referring to pharmacy networks put together by a PBM on behalf of a payer, not a PSAO. A broad network is required for beneficiary access. The latest AIS survey data show most non-specialty networks have 55-60K pharmacies.

    Adam

    ReplyDelete
  4. ….now you’re scaring me….

    ReplyDelete
  5. To Clarify, the 1,500 network I was referring to is a sub network; of a larger 55,000 pharmacy traditional network, or a Center of Excellence network, using AcQ pricing and doing " dierct to consumer" sales.

    A sub network that enables local goverment and business to use local providers simailar to the CAT and RESTAT business model. The advantage here over the WAG model is that you avoid the one size fits all neccecity that a big chain must have.

    This flexibility avoids the pyscho social problems as well as local revenue conerns. Local independent network doing direct sales to local consumer but with the clout of volume equal or greater than WAG. Just like the good old days but with a computer.

    Jim

    ReplyDelete
  6. Is Delta still with Medco? How big is the Delta account? Could Medco keep a piece of the business by acting like Restat?

    ReplyDelete

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