Wednesday, June 22, 2011

Walgreen and Express Scripts Play Chicken

Ah, summer! The weather is warm, the birds are chirping, the sun is shining, and Walgreen (NYSE:WAG) is playing chicken with a major PBM.

Yup. Walgreen announced its intention to drop out of Express Scripts’ (NASDAQ:ESRX) retail pharmacy network, citing a “breakdown in contract renewal negotiations” in this announcement: Walgreens Planning to Move Forward Without Express Scripts, Inc. Pharmacy Provider Network in 2012

Express Scripts responded coolly in Express Scripts Strives to Make Prescription Drugs Affordable and Accessible to American Families. Kudos for not escalating the battle.

This isn't a rerun of last year’s CVS Caremark (NYSE:CVS)-Walgreen Brouhaha. Express Scripts has less to lose than CVS Caremark did last summer, especially because there's no need for Express to "prove" the value of its business model. However, the outcome is likely to be similar. Express Scripts can’t live without Walgreen, and vice-versa. Cluck!

Read on for more on the dispute and my best guess at the likely outcome.


I recommend the earnings call for lots of Q&A with Walgreen's management about their move.

Walgreen still likes to play hardball. Express Scripts' chairman and CEO George Paz said: "It is shocking to us that Walgreens would back away from the table with six months to go in the current agreement.” Actually, it’s not too shocking given Walgreen’s penchant for pushing back against payers when it feels undercompensated. Examples (in the public domain) include Washington’s Medicaid program, Michigan HMO Midwest Health Plan, Caremark (in 2007), and Caremark again in 2010. Walgreen still has the unusual habit of negotiating by press release. Is Charlie Sheen giving them PR advice?

Walgreen has a lot to lose. Walgreen disclosed that Express Scripts represents $5.3 billion in annual sales and about 90 million annual prescriptions. See chart below from yesterday’s earnings call. I wonder about credibility here. Walgreen pulled this same stunt with Caremark last year. How many times can they do it? Tune in June 2012 for my post on the Walgreen-Medco dispute?

Express Scripts will be hurt without Walgreen. EXRS stated: “On average, another pharmacy within the Express Scripts network is within one-half mile of a Walgreens pharmacy. Even without Walgreens in our network, we meet all client guarantees for access.” While perhaps technically true, Walgreens has 40%+ market share in many major cities—Chicago, St. Louis, Milwaukee, Houston, Phoenix, Manhattan, Denver, etc. Note the qualifier in the sentence. (“On average, an American child is a boygirl.”) And how could Express Scripts service a client where Walgreens has a work-site pharmacy? Assuming that Walgreen remains in the networks of other PBMs, then Express Scripts would be at a competitive disadvantage in the upcoming selling season.

Another vote for narrower networks? The growth of preferred pharmacy networks is one of the four major trends in The 2010-11 Economic Report on Retail and Specialty Pharmacies. Express Scripts has not really pushed hard for preferred or restricted network models despite the conceptual and economic advantages. However, I note the following prescient comment on page 5 of April's Express Scripts Drug Trend report:

“However, as retail chains consolidate, plan sponsors cannot count on achieving pricing concessions from pharmacies without tightening the network they use. To achieve maximum savings, retail networks must be organized and carefully managed over time.”
HANDICAPPING THE OUTCOME

Despite Express Script's somewhat better negotiating position, I still expect a resolution within a month. My current prediction:

  • Reconciliation with no financially meaningful changes: 75%
  • No Agreement—Walgreen leaves the Express Scripts network: 15%
  • Express Scripts meets Walgreen's demand for better reimbursement: 10%
Stay tuned for more drama!

13 comments:

  1. What's the trickle down from these "fights"?

    What does Walgreens want long-term? To absorb a PBM? To spin-off? Where's "pharmacy" in all of this?

    I thought (originally) PBMs were designed to simplify transactions between pharmacies and health-plan sponsors for prescription-drug claims. Shouldn't medication management be between the patient, doctor, and the local pharmacy to ensure better patient care through a transparent and simple pharmacy benefits model?

    ReplyDelete
  2. AnonymousJune 22, 2011

    I own two pharmacies. I'm glad Walgreens is standing up to PBM bullying. Can I get the same deal that they will cut? I doubt it. That's why we need a law so that independents can do the same thing!

    ReplyDelete
  3. Annonymous, Why wait for a law? Let's kick-butt today.

    How long have you been in your community? Know anyone? Know any small business owners? Are you their employee-Pharmacy-of-Choice? Do you provide them with a PBM Plan that could save 8-60% annually?

    I know your customer service is a lot better than Walgreens so - why not go get the business? Better yet, tell me who those employers are in your community and I will go get them for you. It's the Next-Gen PBM Movement. Don't wait for a law. FIGHT! I'm in your corner.

    The existing PBM Model is going to be ripped to pieces by schools of Independent Pharmacy Piranha. ONE COW AT A TIME!!!

    Medco Meat anyone?

    ReplyDelete
  4. AnonymousJune 22, 2011

    Interesting that a reader can "know" that the customer service at an anonymous pharmacy is better than that at Walgreens. I enjoy Drug Channels for thoughtful debate, not rhetoric.

    Interesting question about the long-term strategy behind threatening to leave PBM networks. Seems like they're creating a bit of a childish corporate persona -- oh yeah, well I don't want to play with you anymore! -- which doesn't seem like it would serve anyone well.

    ReplyDelete
  5. AnonymousJune 23, 2011

    Mandatory mail order is now history in NY!! good luck

    ReplyDelete
  6. Mr Anonymous Person: The "Reader's" comments came from me. Todd Eury - Pharmacy Technology Resource. My reference about Independent Pharmacy customer service being better than national chains is based on facts not rhetoric.

    Ever heard of Consumer Reports? http://www.drugstorenews.com/article/independent-pharmacies-show-why-they-top-customer-service

    ReplyDelete
  7. AnonymousJune 23, 2011

    The problem is that once pharmacies indicate they will not accept low reimbursement (on their own so there is no impropriety or collusion), there is always another pharmacy that has no problem stepping in and accepting the low rate. This usually occurs with entities that operate pharmacies as a secondary business.

    ReplyDelete
  8. AnonymousJune 24, 2011

    In regards to Walgreens having a work-site pharmacy, why couldn't ESRX put up a pharmacy?

    Any independent may want that business.

    If ESRX and WAG walk away, will Caremark d/c WAG contracts. I am sure CVS would prefer it that way.

    ReplyDelete
  9. AnonymousJune 24, 2011

    well to the poster above, i think this is the time that independants and chains should hold the line since these issues affect both.The retail reimbursement is so low that if your not doing a tremendous volume theres no way to make it.With the States enacting laws to prevent PBM abuses Pbms may have to find a new ave to line their pockets!!

    ReplyDelete
  10. AnonymousJune 29, 2011

    Interesting that a reader can "know" that the customer service at an anonymous pharmacy is better than that at Walgreens. I enjoy Drug Channels for thoughtful debate, not rhetoric.

    Interesting question about the long-term strategy behind threatening to leave PBM networks. Seems like they're creating a bit of a childish corporate persona -- oh yeah, well I don't want to play with you anymore! -- which doesn't seem like it would serve anyone well.

    ReplyDelete
  11. Annonymous, Why wait for a law? Let's kick-butt today.

    How long have you been in your community? Know anyone? Know any small business owners? Are you their employee-Pharmacy-of-Choice? Do you provide them with a PBM Plan that could save 8-60% annually?

    I know your customer service is a lot better than Walgreens so - why not go get the business? Better yet, tell me who those employers are in your community and I will go get them for you. It's the Next-Gen PBM Movement. Don't wait for a law. FIGHT! I'm in your corner.

    The existing PBM Model is going to be ripped to pieces by schools of Independent Pharmacy Piranha. ONE COW AT A TIME!!!

    Medco Meat anyone?

    ReplyDelete
  12. What's the trickle down from these "fights"?

    What does Walgreens want long-term? To absorb a PBM? To spin-off? Where's "pharmacy" in all of this?

    I thought (originally) PBMs were designed to simplify transactions between pharmacies and health-plan sponsors for prescription-drug claims. Shouldn't medication management be between the patient, doctor, and the local pharmacy to ensure better patient care through a transparent and simple pharmacy benefits model?

    ReplyDelete

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