Thursday, October 06, 2016

Walgreens’ TRICARE Win: Tracking WBA’s Aggressive Preferred Network Deal Strategy

ICYMI: Walgreens Boots Alliance (WBA) has been lining up a broad range of preferred network agreements. In its latest move, Walgreens will unexpectedly displace CVS this December in the retail network for TRICARE, the healthcare program for uniformed service members, retirees, and their families. Click here to read the announcement. I provide additional details below.

TRICARE is the latest in a string of deals engineered by Stefano Pessina, our global channels overlord and executive vice chairman and chief executive officer of WBA. In case you’ve lost track, I summarize Walgreens’ recent preferred pharmacy arrangements with Express Scripts, OptumRx, Prime Therapeutics, UnitedHealthcare, and Valeant.

WBA appears to be sacrificing profits for volume. The scope and diversity of the deals, however, clearly reflects WBA’s previously articulated industry-wide partnering strategy. It also provides an intriguing contrast with CVS Health’s closed system approach.

Read on and be impressed.

WHY CARE

The TRICARE network win gives Walgreens the chance to gain a larger share of TRICARE’s shrinking retail spending.

By way of background, TRICARE is the Department of Defense (DoD) healthcare program that serves 9.5 million Active Duty Service members (ADSMs), National Guard and Reserve members, retirees, their families, survivors, and certain former spouses worldwide.

Express Scripts provides pharmacy benefits management services for TRICARE. These services include administering a retail pharmacy network, mail order pharmacy operations, claims processing, and beneficiary support services. The contract began on May 1, 2015, and runs for seven years. TRICARE beneficiaries can fill prescription medications at military treatment facility (MTF) pharmacies, through home delivery (via Express Scripts’ mail pharmacy), at TRICARE retail network pharmacies, and at non-network pharmacies.

Per the chart below, TRICARE’s 2015 net spending was $9.2 billion, of which $3.1 billion (34%) came from retail pharmacy spending. These data come from the informative Evaluation of the TRICARE Program: Access, Cost, and Quality (Fiscal Year 2016 Report to Congress).

[Click to Enlarge]

Mail pharmacy has accounted for a growing share of TRICARE’s drug spending and prescription dispensing activity. Having considered all of TMOP’s costs, the DoD’s Inspector General found that TMOP cost 16.7% less than retail pharmacies. (source) Consequently, as of October 2015, all TRICARE beneficiaries except active duty service members have been required to get certain brand name maintenance drugs through either the TMOP program or from a military pharmacy. Otherwise, beneficiaries must pay the full cash-pay prescription cost at a retail pharmacy. TRICARE mail prescription volume has grown significantly as a share of total prescriptions dispensed, from 31% in October 2011 to 59% in September 2015.

[UPDATE: Note that TRICARE doesn’t technically have a preferred pharmacy network. See featured comment below from Express Scripts.]

SUPER DEALS

In alphabetical order, here are WBA’s five other key preferred pharmacy deals that have been announced over the past year:

1) Express Scripts: Last month, Express Scripts announced its new Diabetes Care Value Program, which guarantees per-patient drug spending caps for this therapeutic category. The program features a preferred pharmacy network from which patients can get 90-day supplies of diabetes maintenance medications from all Walgreens pharmacies and from more than 1,200 independent retail pharmacies. Here’s the press release: Express Scripts Launches Diabetes Care Value Program℠, Guaranteeing More Affordable, Higher-Quality Diabetes Care.

2) OptumRx: In January 2017, Walgreens will become the preferred retail pharmacy for OptumRx’s commercial clients. The relationship is focused on 90-day prescriptions at retail. See Walgreens Boots Alliance Gets Busy with OptumRx and AmerisourceBergen Deals.

3) Prime Therapeutics: In August, WBA announced an innovative deal with PBM Prime Therapeutics. Starting in January 2017, Walgreens will become the national preferred pharmacy for Prime’s plan sponsor clients. Unlike the OptumRx deal, this agreement includes all types of retail prescriptions—generic, brand-name, 30-day, 90-day, etc. Additionally, WBA and Prime will combine their respective central-fill mail and specialty pharmacies into a new business. Full details and analysis here: Why the Walgreens/Prime Deal Could Transform the PBM Industry.

4) UnitedHealthcare: For 2017, Walgreens is partnering with UnitedHealthcare for the AARP MedicareRx Walgreens Medicare Part D plan. The plan will include only the 8,000 Walgreens and Duane Reade stores as preferred pharmacies. See Preferred Pharmacy Networks Are Back in 85% of the 2017 Medicare Part D Plans.

5) Valeant: Last December, Walgreens became the preferred pharmacy network for Valeant’s branded products. Walgreens earns an “activity based fee” based on how much adjudication work it performs for each Valeant prescription. (Valeant apparently also agreed to pay a fee to Walgreens even if there was no third-party coverage.) Valeant sells these products on consignment to Walgreens, so Walgreens has no inventory investment or reimbursement risk. I reviewed the economics of this arrangement in Valeant Reveals the Bad News about Its Money-Losing Walgreens Relationship and Walgreens to Valeant: You’ve Got a Friend in Me (PLUS: A Rite Aid Deal Update).

THE BIG DEAL

In the context of WBA’s stated strategies, these preferred arrangements make sense. Consider my three top takeaways from WBA’s April 2015 investor presentation, as summarized in Walgreens Boots Alliance: Analysis of its New U.S. Pharmacy Strategy:
  • Walgreens will emphasize front-end beauty revenues and profits.
  • Walgreens is preparing for pharmacy hypercompetition.
  • Walgreens will emphasize the importance of payer relationships.
WBA’s preferred network partnerships will drive traffic to its stores, allowing it to leverage the fixed costs of retail pharmacy operations and cross-sell its front-end offerings. For example, Walgreens plans to roll out its “Beauty Differentiation” concept to 1,800 stores by the end of calendar 2016.

WBA’s broad ambitions extend include two other notable consolidations:
  • The Rite Aid deal will bring more scale and value to WBA's payer-partnership strategy. Despite rumors of trouble with the Federal Trade Commission’s review, I still think the deal will be completed in late 2016 or early 2017.
CVS Health successfully markets its pharmacy benefit manager with a diverse set of dispensing channels WBA is competing against CVS Health’s closed system by spinning an ever-wider web of partnerships and deals with every other non-CVS industry participant.

One thing seems clear: Mr. Pessina and WBA are not getting a raw deal from this ever-expanding network of drug channel relationships—especially since they never drink and bake.

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