Thursday, January 17, 2013

Costco Unveils Its Own PBM

Here's something we hope you'll really like.

Mass merchandiser Costco Wholesale has just started publicizing Costco Health Solutions (CHS), its very own pharmacy benefit manager (PBM). January’s Costco Connection magazine highlights the heretofore publicity-shy business in A Prescription for Success.

Below, I outline how Costco’s PBM strategy exemplifies six key dynamics facing the pharmacy and PBM industries. In this slow prescription growth environment, retail pharmacies are looking for new growth drivers. With its PBM, Costco is emulating CVS Caremark's tactics for driving prescription store traffic. Walmart has a robust narrow network strategy and Walgreen is funding RxAlly and Smart D (but sold its PBM). So, who's next?

Costco is a membership-warehouse club with 447 U.S. locations, most of which have a pharmacy. I estimate total 2012 prescription revenues to be about $1.6 billion, so it didn’t make our list of top pharmacies. Costco operates on lean margins. Gross margins were just 10.7% in its most recent fiscal quarter.

Fun fact: the company sells more than 1 billion rolls of toilet paper a year. (Drug Channels readers are encouraged to insert their own semi-scatological joke here.)

Here are six observations about the Costco Health Solutions (CHS) strategy:

Get Big, Get Focused, or Get Out—Winning in the consolidating PBM industry requires scale or differentiation. Otherwise, cash out gracefully. Believe it or not, starting a PBM is easier than you might think, especially when, like CHS, you can outsource claims processing. If you’re curious about the smaller and regional players, check out this list from the Pharmacy Benefit Management Institute.

Use Brand Equity—Would you like insurance with your 18-roll toilet paper jumbo pak? Costco’s PBM targets self-insured employers located near a Costco warehouse store. Costco is going after the mid-market, i.e., plans with fewer than 20,000 covered lives. Costco has 6.4 million business members. While CHS does not require its clients to be Costco members, it surely helps.

Become Transparent—CHS provides all discounts, rebates, and other revenues back to the employers. Thus, there is no spread between (a) the amount charged by Costco to a plan sponsor and (b) the amount paid by Costco to the retail network pharmacy that dispenses the drug to a consumer. Such pass-through pricing arrangements are often called “transparent,” because the plan sponsor has visibility to prescription costs at the pharmacy.

Embrace Narrow Networks—CHS claims 64,000 retail pharmacies in its network. Plan sponsors, however, are encouraged to set up a preferred network model, in which the consumer has a financial incentive to choose a Costco pharmacy to reduces the payer's costs. Reminds me of how Maintenance Choice boosted CVS Caremark's retail pharmacy business. See Chapter 8 of 2012–13 Economic Report on Retail, Mail, and Specialty Pharmacies for a full update on the narrow networks revolution.

Lead with Generics—Retail pharmacy is becoming dominated by low-cost generic prescriptions, which are increasingly marketed like other consumer products. Costco’s low-cost philosophy fits this new model, so they can build a PBM business with generics.

Partner for Specialty—To compete for the business of dispensing specialty drugs, CHS partners with a larger specialty pharmacy that can provide back-end clinical services and care management. Costco maintain its consumer relationships, while its partner handles such specialty pharmacy services as prior authorization, adherence calls, copay assistance, injection training coordination, and pharmacist consultations. (Sorry, the partner’s name is not public info.)

Prepare for Obamacare—This is not Costco’s first foray into healthcare. Last April, Costco began offering its members Aetna individual insurance policies. (Click here to buy a policy.) The Costco Personal Health Insurance program is currently available in 10 states. Who else will leverage their customers into the brave new world of health insurance?

Now, watch me pull a PBM out of my hat! (Again?)

13 comments:

  1. Who do you think they partner with on adjudication and specialty? And how long has this been around? Is it new or just now being publicized? Much thanks

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  2. The PBM has been operating in near-stealth mode for a few years.

    Unfortunately, I can't share the name of their partners, because the information is not public. I will double-check with the companies to see if they will reconsider.

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  3. This move by Costco is a good one and one that I have advocated that independent pharmacist should do for over a decade.  Independent Pharmacy must see and accept that the PBM business model is here to stay and that independent pharmacist must offer their PBM business model alternatives to existing PBM model. If Costco, with all its monetary might, thinks it needs proportional control of a PBM how can an independent with 1 store or even 25 stores think they have a viable business future.
    I am also very curious as to the name of the backbone adjudicator.

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  4. What is their mail order strategy? Is it only for costco stores?

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  5. Sorry, forgot to mention mail in the post.

    Costco has an in-house mail pharmacy. I believe that the benefit design is voluntary (not mandatory) mail. Click here for Costco's mail pharmacy webpage.

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  6. My best hypothesis (without any inside information) would be either Argus (DST Solutions) or SXC.

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  7. This is interesting.  On the one hand, the PBM market is so commoditized that there's no way I'd want to go into this market unless I had some significantly unique value proposition (which I don't see here).  Additionally, specialty is the big focus area which they outsource. 

    That being said, I agree with Jim's comment that the retailers need to continue to evolve and find a way to deal with the PBMs.  That being said, I'd look at a Blue Ocean approach versus going head-to-head. 

    Given that Walgreens sold their PBM and Walmart said they don't want to be a PBM (http://georgevanantwerp.com/2011/05/23/walmart-good-or-bad-for-the-pbms/), it seems that this is a risky investment. 

    It will be a good test of their brand equity and relationships with employers.

    And, on the positive side, there's lots of PBM talent in the marketplace right now.

    www.georgevanantwerp.com

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  8. Blue Ocean vs. head to head
    The first step for the pharmacy retailers via the PBM model is into the commodity market of Rx distribution, the second step is to move from pharmacist retailer to pharmacist health care provider. Using pharmacist more productively and using the great locations as familiar pathways to health for the patient consumer.  Skipping directly to the second step which is most logical has not been successful even after years of effort by insiders like me and national organizations like NCPA. The end goal with the PBM retail model is not to compete head to head nor go Blue Ocean but to eventually create a new wellness/prevention model using the 20,000 independent locations as the provider of wellness and prevention, including accessing the PPACA through ACOs.

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  9. Any thoughts on how health care reform will impact Costco and their own PBM? It seems like bad timing.  Many employers are considering sending their employees to he exchanges, which are tied to their own PBM (Aetna/CVS Caremark, BCBS/Prime, etc...) and in turn will result in less of a need for smaller PBM's.

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  10. I think sending employees to the exchanges will likely drive consumers to "shop" their drug benefit programs. Costco is in a good spot for employers who want to pull together a set of "options for employees" as they seek to move from a defined benefit plan to a defined contribution plan.

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