Monday, October 31, 2011

Boo! Catalyst Says Walgreens is Cheaper

Here’s a Halloween scare for the pharmacy industry.

Last Friday, Catalyst RX (NASDAQ:CHSI) placed a full-page Wall Street Journal ad touting the value of having Walgreens (NYSE:WAG) in its pharmacy network. Catalyst simultaneously released a case study explaining the “value of Walgreens to a large client.” Download the case study here.

One spooky disclosure: Walgreens receives lower average reimbursement rates vs. other pharmacies. The case study attributes the gap to superior generic utilization.

Catalyst is clearly trying to give goosebumps to plan sponsors looking at Walgreens’ still-unresolved dispute with Express Scripts (NASDAQ:ESRX). But the data will surely spark more shrieking about the economics of preferred vs. open networks.


The chart below caught my eye in the case study. As you can see, Walgreens reportedly has an aggregate Average Wholesale Price (AWP) discount that is 3.8% greater than other pharmacies. (Bigger discount = lower reimbursement)

Note that the chart does *not* say Walgreens has negotiated bigger discounts for a given prescription. Instead, the brand/generic mix appears to be driving the difference, although we can’t really say more from the reported information. Hmmm.

Catalyst’s embrace of Walgreens is not surprising. As I note in ESRX-MHS: Wholesalers, Other PBMs, and Walgreens, mid-market PBMs such as CatalystRx or SXC’s InformedRx (NASDAQ:SXCI) will benefit if Express Scripts is successful in its merger with Medco Health Solutions (NYSE:MHS). Plus, in March, Catalyst RX acquired Walgreens Health Initiatives (WHI), Walgreen’s PBM subsidiary. See SOLD! Thoughts on the Catalyst-Walgreen Deal.

Catalyst is clearly positioning itself against Express Scripts, which reportedly is still far from an agreement to keep Walgreens in its network. As the Journal reported last week in Express Scripts CEO: Walgreen Pact 'Less Likely':
An agreement would be "better for everyone," Express Scripts Chief Executive George Paz said during a conference call. But "it looks less and less likely that's going to occur," he said. Express Scripts said it expects more than 95% of clients' prescription volume will move forward into 2012 without Walgreen in the network.
So, trick or treat for plan sponsors?

6 comments:

  1. RxdisclosureOctober 31, 2011

    Catalyst has an interesting business model. They have the MOST aggressive (and least responsive to generic manufacturer prices increases) pharmacy MAC table, and traditionally a smaller spread (yes, they have generic spread, even in their so called "pass through" model). In short, they screw the employers a bit less than the big 3, and screw the pharmacies often more than the big 3. That being said, they have least aggressive mail order program, which is why most pharmacies dislike them less over the others.

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  2. The study reads to me that the 3.8% AWP discount relative to other pharmacies is due to the higher generic penetration rate, not because CHSI gets a better deal from WAG.  In other words, the 3.8% discount of for all drugs, not just generics.

    I may be wrong, but that is how I read it.

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  3. Yes, that's how I read it. However, it's possible that Catalyst pays Walgreen a higher reimbursement rate, but the generic/brand mix tilts the overall weighted average downward to make Walgreen's overall rate lower. The case study doesn't provide enough information to assess this issue.

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  4. NotbuyingitOctober 31, 2011

    Is there any real data behind this study! I can make up a couple charts that says I am cheaper than everyone else, but without the data, is it really accurate! I find it hard to believe that Walgreens keeps their cash prices at an over-inflated level, but accepts contracts that reimburse them below a level of other chains/independents in a market that is 90% insurance. If they are willing to accept less from the ins. why wouldn't they lower cash prices to be competitive with Walmart. 

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  5. Adam, out of curiosity, at what do you peg the chances of Walgreens and ESI making up this year? Do you think ESI will try to drag things out until the FTC weighs in on the merger (giving them considerably more leverage but likely not until early 2012) or do you think Walgreen's will get panicky as the end of their contract approaches?

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  6. Walgreens chooses generic products with a higher AWP than other products within the GPI, thus making their discounts appear greater than what they really are.

    Fuzzy Math!

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