Wednesday, June 21, 2006

One more thing on Walgreen's

Today’s WSJ has a fascinating article about Walgreen’s success with Part D called “Getting an ‘A’ in Part D.”

My dead canaries post speculated on merger possibilities between chains and PBMs. This article provides some further supporting evidence. The WSJ article states:

“Part D reimbursement rates -- which are set by insurance companies but reviewed by the government -- vary widely but are usually so low that many independent pharmacies worry they will be put out of business. . . .Some small pharmacies, unable to pay their employees, already have closed their doors. Others are refusing to honor insurance plans with the lowest reimbursement rates.”

In other words, independents and small chain have to (a) play ball at lower rates, (b) lose business by turning away customers, or (c) shut down.

However, the tables are turned for a chain with strong store loyalty and a high share of outlets in a given geographic market. Leveraging countervailing power against payers allows the channel to extract adequate compensation for access to customers, creating another advantage under Part D for larger players.

These battles can continue indefinitely, as happens in many U.S. distribution channels. Walgreen’s role as PBM for UnitedHealth’s plan illustrates the alternative approach of vertical consolidation between channel and payer. No mandatory mail order here!

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